Latest figures show the importance of staying the course on lending rules

Ronan Lyons, Economist

6th Oct 2015

Ronan Lyons, Daft's in-house economist, commenting on the latest Daft research on the Irish property market.

The last twelve months have seen a remarkable turnaround in the Irish housing market. A little over a year ago, house prices in Dublin were rising at a rate of over 20% a year while elsewhere in the country, they were for all intents and purposes static — rising at a rate of 2.1% a year. Indeed in counties such as Longford, Westmeath and Donegal, house prices only bottomed out in early 2014 — and in Limerick, both city and county, they did not bottom out until the end of 2014.

Q3 2015 House Price Map

This, then, was the market in mid-2014: Dublin prices rising unsustainably fast, while prices elsewhere were treading water. Fast forward to September 2015 and the difference is profound. Over the last 12 months, inflation in Dublin house prices has fallen from 24.5% to just 2.4% Outside Dublin, inflation has jumped from 2.1% in mid-2014 to over 13% now. At a time when urban house prices in Cork, Galway and Limerick are rising at a rate of almost 20% a year, they are now falling — both quarter-on-quarter and year-on-year — in some of Dublin's most desirable postal districts.

The graph below shows the annual change in average asking prices in all major urban areas in Ireland. With the exception of Dublin 17 and Dublin 10, two of Dublin's most affordable postal districts, there has been very moderate growth in prices across Dublin. And in key areas, such as Dublin 6, Dublin 14 and Dublin 18, house prices are now falling in year-on-year terms.

Q3 2015 Intro Commentary Graph

What explains such a change in market trends in such a short space of time? On the face of it, sustained economic growth would be expected to have upward pressure on house prices country-wide, as it signals both rising incomes and improved expectations about the future. The fact that Ireland's economic fortunes have improved so dramatically and rapidly is likely to be at the heart of recent increases in prices in many parts of the country, including the cities outside of Dublin.

In Dublin, however, house prices had already risen substantially in the two years to 2014 and were high relative to incomes when the new Central Bank rules were suggested this time last year. Those rules have effectively tied house prices to incomes, preventing the possibility of another credit-fueled bubble in the capital. This shows the importance of those Central Bank rules and thus why it is so worrying that early election kite-flying has included suggestions to water down the very rules that have maintained housing affordability in the capital.

The reason that there have been these suggestions has been down not to worsening affordability in Dublin, but to a lack of availability. The capital is growing by perhaps 10,000 households a year, meaning that 100,000 new homes are needed in Dublin over the course of the 2010s. Halfway through the decade, fewer than 10,000 of those have been built.

Q3 2015 Intro Least Most

As stated in this commentary a year ago, you do not tackle a shortage of supply in housing by increasing the supply of credit and thus create even more demand. The analogy used last year was of responding to a fire: do you call the fire brigade? Or do you throw more fuel on in the hope that a bigger fire might catch the fire brigade's attention?

To increase the supply of homes in and around the capital and Ireland's other cities, we need to understand why, when demand exceeds supply, the value of a home does not exceed the cost. Again, as stated before in this commentary, this is likely to be a consequence of "cost-blind" regulations — none of the significant range of new regulations imposed on building in the last ten years have ever been analysed in terms of how they affect the 'break-even' rent. Minimum standards are not paid for by the developers, they are paid for by the occupants, and thus they need to reflect real incomes in the economy currently.

Q3 2015 Intro Prices Up 18%

Discuss This Article

  • Re: The Daft House Price Report Q3 2015

    Posted By: kneejerkpolicies Date: Tuesday October 6, 2015 @07:26AM

    Maintaining a 20% deposit rule for non first time buyers while rents are rising just makes the rich richer i.e. REIT's and cash rich buyers.
    Fair enough having some macroprudential polices to kerb Dublin prices rising unsustainably fast, but these rules are missing the mark. First time home buyers need some protection but what about a family that needs to upgrade their home if they had more kids etc?

    • Reply to this message
  • Re: The Daft House Price Report Q3 2015

    Posted By: Anonymous Poster Date: Tuesday October 6, 2015 @10:20AM

    Crazy the real victims of the bubble who bought apartments at the peak and now can't sell them are stuck paying ridiculous rents for their increasing family and have to save a 20% deposit all at the same time. They will be renting for the rest of their lives if this policy remains

    • Reply to this message
  • Re: The Daft House Price Report Q3 2015

    Posted By: Daniel Sutt Date: Tuesday October 6, 2015 @12:59PM

    Or they can live in their apartments

    • Reply to this message
  • Re: The Daft House Price Report Q3 2015

    Posted By: Ftb Date: Tuesday October 6, 2015 @06:39PM

    The LTV restrictions do not apply to people in negative equity. Therefore they can apply for a mortgage without saving 20% provided of course they can afford to buy a property and service any residual debt. If they are not in negative equity then they should sell and use any surplus towards a deposit. In that scenario they are in pretty much the same position as a first time buyer who is renting - they need a higher % deposit but have a lump sum the FTB doesn't have.

    If they cannot afford to rent and save they are no more "victims" than any other renter. In fact, if the lending criteria causes a fall in property prices they will be better off- their property will fall into negative equity so they will be except from the LTV deposit requirements, and lower property prices mean their LTI will get them more property for their money

    • Reply to this message
  • Re: The Daft House Price Report Q3 2015

    Posted By: First time buyer Date: Tuesday October 6, 2015 @10:53AM

    I hope the rules are finally working. Lending more and more money to people doesn't help them buy a property - it simply drives up the prices. We need affordable housing so encouraging building by rising prices puts the burden of providing same on the shoulders of buyers. If the government wants to encourage building they can do so via other means than simply encouraging monopoly money mortgages.

    • Reply to this message
  • Re: The Daft House Price Report Q3 2015

    Posted By: oldfella Date: Tuesday October 6, 2015 @12:29PM

    Why do we expect sensible solutions to the housing problem when we have a dysfunctional building/planning regulatory system that has absolutely no regard to cost-benefit?

    How is it that millions of unfortunate Syrian refugees can be basically "housed" by remarkably efficient agencies in months, yet a comparative handful of Irish "homeless"are left to fend for themselves?

    Once we establish that total "costs" must relate to house prices and rents people "can afford", maybe some political will to change things will begin!

    • Reply to this message
  • Re: The Daft House Price Report Q3 2015

    Posted By: Paul Ryan Date: Tuesday October 6, 2015 @02:45PM

    Given that actual prices paid for most houses are readily available why do Daft.ie still use asking prices? Is it in an effort to predict prices?272

    • Reply to this message
  • Re: The Daft House Price Report Q3 2015

    Posted By: Paul Date: Tuesday October 6, 2015 @06:55PM

    I am a developer.

    Is it only me that finds Ronan's views on the income ratio overtly subjected by CB policy? Does the Trinity School preach the same social economic mantra to its students? I am worried.

    Overly rigorous income: mortgage ratios have certainly subdued house price growth in Dublin. It fits a political agenda but this is NOT a good thing when it subdues the market too greatly.

    In this climate, strong economic growth should be the primary focus of policy. When inflation unnaturally hovers around the 0% mark, we have significant room to encourage economic growth, of which housing growth is a significant member of the basket. Some inflation after all, is a good thing.

    Loosening credit in the money market is perhaps the greatest factor that will increase the short-term building supply. The fact is that unless house prices continue to rise, there is very little development work that is viable both in and outside of Dublin. The costs are simply too high and cannot be recouped in sales.

    Secondary factors that will have a positive effect on short - medium term supply include tax incentives for developers and removing barriers to the cumbersome and costly planning phases, as Ronan alludes towards.

    Any suggestion of the government building social housing will be inefficient, cost the tax payer more, be of poorer living quality and indelibly inhibit growth associated with increasing spending ability.

    Artificially curbing house growth too greatly in what is still a fragile economy is just as dangerous as the Celtic Tiger games we played with lack of regulation and financial accountability. Allowing young people, families and businesses access to more reasonable credit on the other hand will spur building, job creation, expenditure and growth. Incomes will rise in tow and and we can all get on with a higher living standard.

    Historically, house prices double every 7.5 years throughout the world. Most developed economies are well in excess of 2007 house price levels yet we remain around 30% below that point. Irish policy that is too tight on credit ratios will serve to weaken the economy and make us less competitive than our developed counterparts. The role of the government is to promote economic growth so that we call all earn and afford relatively more and continue to spend. This focus on restricting prices suits very few people; it creates an artificial price control and if Keynes taught us anything, that is not good.

    • Reply to this message
  • Re: The Daft House Price Report Q3 2015

    Posted By: George Date: Wednesday October 7, 2015 @01:14AM

    Yes, it is only you and the other parties looking to profit from increased house prices that are of that view. A view that does not benefit the common citizen one bit. Pretending it's different is not only shortsighted, but greedy and manipulative as well.

    Decreased affordability ( which is what higher house prices causes) hits the consumer wallets significantly and decreases overall spending in the economy, further impending recovery. FDI becomes increasingly more difficult to attract due to higher costs as well as the location itself becoming less attractive to talent looking at relocation into the region.

    Loose credit is the greatest factor in driving unaffordability and thus forcing people to work for many more years to pay for ever smaller houses that they can barely afford (or worse - buying houses that their incomes would suggest they can't afford !). That's how you end up with 6 figures mortgages in arrears and thousands of repossessions a couple of years down the road, while the people who overpaid for their houses (and those who didn't) end up paying even more through increased taxation to cover the resulting bailouts.

    "Historically, house prices double every 7.5 years throughout the world." - false. Simply untrue - but not totally surprising that a developer would claim that.
    Over the long term, house prices track inflation (~ 3% / year). See the work of Nobel Laureate Robert Shiller that confirms that with studies based off data going back over a hundred years. Thus, a sustainable house price doubling happens every 23 to 24 years on average.

    Lower house prices benefit the economy the most and allow families access to better housing and more disposable income. (The solution here is to decrease the cost of building - the ways of doing that is a whole other discussion).

    Vested interests of the banks (higher mortgage loans = higher profits as a percentage of that), real estate agents (higher commission amounts of higher base house prices) & developers (higher profits as the profit margin % is applied to a higher amount) run counter to the people trying to buy houses to live in.

    Regards,
    George

    • Reply to this message
  • Re: The Daft House Price Report Q3 2015

    Posted By: John Date: Wednesday October 7, 2015 @01:30PM

    "Historically, house prices double every 7.5 years throughout the world. Most developed economies are well in excess of 2007 house price levels yet we remain around 30% below that point."

    The average house price in Dublin in 2007 was 431,000euros so by your reasoning we should now be paying 862,000euros for an average house in Dublin?

    The average salary in Ireland is now 32,500euros which if house prices were at 2007 levels this would be 13 times the average wage (completely unsustainable).
    Without the central banks regulation prices would continue to rises and rise, lending by banks would again get out of control as wages would not increase to match house prices. This would be great for a developer like yourself but would be an absolute disaster for anyone earning a living and trying to buy a house just to live in.

    It sometimes baffles me how short sighted and how peoples opinions can be formed from whatever hymn sheet they are singing from. Unrealistically high house prices are a bad thing, we need the central banks regulation to give people the opportunity to work and live in their native country. These regulations should have been there all along, if people cannot save an initial deposit then what hope do they have of paying off a much larger unregulated mortgage which will just serve developers pockets.

    • Reply to this message
  • Re: The Daft House Price Report Q3 2015

    Posted By: Seller Date: Tuesday November 17, 2015 @05:55PM

    Couldn't agree with you more. Left the UK to move home and buy here. The house I had in the UK has gone up by a multiple of 4. My house here is 50% below peak. Maybe some of our elite should roll up there selves and see what it takes to build a house or maybe they just want to talk and talk and talk

    • Reply to this message
  • Re: The Daft House Price Report Q3 2015

    Posted By: john maynard Date: Tuesday October 6, 2015 @10:16PM

    Keynes was against boom and bust economics, favoring government intervention to a private market when necessary in a recession,. Pity there aren't more economists like him. More houses does not equate to economic growth either.
    Build upwards in dublin and introduce rent controls. Councils to buy up a small number of houses on estates. Rent Allowance favours parasitic tendencies of the 'landlord class'..Developers need to retrain to be useful to society. House prices do not double every seven and a half years.

    • Reply to this message
  • Re: The Daft House Price Report Q3 2015

    Posted By: Anonymous Poster Date: Saturday October 10, 2015 @12:04AM

    Interfering in market by imposing deposit ratios and imposing rent controls is like putting a lid on a pressure cooker. It will restrict house supply as fewer buyers will buy and developers will not build. Its crazy reactionary government interference! In the longer run prices will be forced up with shortage of supply and pent up demand. I heard talk about greedy landlords. I rented out my house and emigrated and the rent does not cover my repayments so I am being asked to subsidise renters by imposing rent controls. None of this makes sense. On top of that investors will not invest in house to increase rental stock if market rents are not there.

    • Reply to this message
  • Re: The Daft House Price Report Q3 2015

    Posted By: John M Date: Saturday October 10, 2015 @02:30PM

    Pressure cookers work well with the lid on as long as the temperature is regulated. Pre - deposit rules, there was no regulation at all. Adherence to the system as it was with no deposit rules would have ensured another crash. The accidental landlords and their ilk cannot expect society to pay for their arguably unwise investment decisions.

    And what is so right with a landlord raising the rent by 10% per year 'because he can'? It's a broken system, but because a portion of landlords are not currently making a profit, this does not make a good argument for not bringing stability to the rental sector.

    The developers incentive argument works only in a functioning market. If I ran a business selling something, and for years it cost me more to produce than I could sell it for I would go out of business. I wouldn't expect someone to 'compensate' me for my choice to continue to try and sell a product which is not affordable to nearly everyone because I can't find a way of making it for any less, and to remain in an industry that is broken.

    Smaller 'investors' who don't make a profit off the back of their tenant will have to sell up- it won't be a bad thing for the long term economic stability of the country. There is a housing shortage in many parts of the country, whilst there is a surplus in others. Remember, rental control or no rental control, the tenant isn't being subsidized by the landlord , the bank is.

    • Reply to this message
  • Re: The Daft House Price Report Q3 2015

    Posted By: Anonymous Poster Date: Wednesday October 14, 2015 @02:51AM

    Exactly. Crazy reactionary government interference sums up the political milieu. Houses will not be built because developers cannot make money, investors will not experience upside which is unfair on the population that invested. John M...the investor has the right to anticipate a fair marketplace - the real question is what right does the government have to change this? Only in Ireland do we see this same embarrassing policy tautology. It is sickening and embarrassing.

    First time buyers might think they benefit, until their houses don't rise much in value, their wages do not rise much, and they go overseas for a holiday and everything is twice as expensive.Interest rates rise because of the rest of world growth whilst Irish people as a whole will be worth less and less compared to everyone else. Mortgage rules will eventually relax when the government bows to pressure - but it will be very late. I dearly wish the EU CB would intervene and help us regulate this point. I am ashamed of our policy regarding mortgage rules and possible rent controls.

    • Reply to this message
  • Re: The Daft House Price Report Q3 2015

    Posted By: Anonymous Poster Date: Wednesday October 14, 2015 @03:03AM

    If the issue is a housing shortage, how do we address it:

    Lending restrictions, rent control, deposit rules, increased building regulation, increased taxes, social housing, depress our house prices while the rest of the world inflates

    Really?

    • Reply to this message
  • Re: The Daft House Price Report Q3 2015

    Posted By: Keynes Date: Sunday October 25, 2015 @02:22PM

    "...The issue is a housing shortage''. No.The issue with the national housing market is caused by a myriad of factors which 'developers' and 'landlords' and other vested interests, don't want to hear about, one of these factors is the inability of vested interests to view housing market as an integral part of society and not a casino.


    "Lending restrictions, rent control, deposit rules, increased building regulation, increased taxes, social housing"

    Yes. Good ideas here.


    "depress our house prices while the rest of the world inflates"

    Like Germany for instance with its rental controls and relatively healthy property market or Try looking at switzerland with its rental controls and healthy property market....

    For those landlords who want to play cigar smoking mini investor, they can always sell up and go to the casino if they want to continue to gamble. At least tenants don't have to pay towards their 'gambling debts' that way. If social housing were stepped up (in those areas that need it) then building can be encouraged, jobs can be created and tax long term will be able to be reduced, as the tax take will be higher.

    • Reply to this message
  • Re: The Daft House Price Report Q3 2015

    Posted By: Anonymous Poster Date: Monday November 2, 2015 @06:26PM

    At the moment house prices are to high. The Central Bank\\\'s 3.5 times earnings and 20% deposit are there to ensure we don\\\'t have another horrorfest.
    The average wage in Ireland for 2015 is 32,500 x 3.5 = 113,750 with a 20% deposit the average house needs to be priced at 142,000 and not 193,000 as it is at the moment.

    Sell house to people who can afford them and the economy will flourish

    • Reply to this message
  • Re: The Daft House Price Report Q3 2015

    Posted By: Anonymous Poster Date: Tuesday November 3, 2015 @08:29PM

    Yes, but the average house, would in today's world, be repaid with a mortgage from two average incomes. So 32,500 x 2 x 3 + 20,000 = 215,000.00. Am I right, or am I right. So nearly there. The question is where will demand/supply ratio be at that stage, to determine where it goes from there, assuming the economy is still growing.

    • Reply to this message
  • Re: The Daft House Price Report Q3 2015

    Posted By: Trapped Date: Tuesday November 17, 2015 @05:48PM

    Waited years to sell and just as market was about to move that 20% deposit rule pulled the rug again. Shameful and it should have been obvious that the market needed to start moving again around the country. A pity everybody feels they have to intervene in the market.

    • Reply to this message
  • Re: The Daft House Price Report Q3 2015

    Posted By: Mary Date: Thursday December 17, 2015 @05:38PM

    Has anyone gone through an exercise of costing how much it actually costs to build a property, from site purchase to opening the door with your key and tooth brush for the first time? Rural Ireland will see a severe property shortage for many years as it costs more to build than a property it will sell for. I put a new room onto my house earlier this year and it has cost me 40K for 17 sq, mtrs. All utilities were already connected, land paid for, all I had to do was build 3 walls, put on the roof, a little electrics and plumbing, decoration. Job done!
    Property prices plummeted by approximately 60% in my part of the world but materials and labour costs did not. The divide is huge now and will continue for many, many years to come.

    • Reply to this message

Respond to Article

Your Name: (Optional)

Subject:

Message:

We ask you to keep your comments on-topic and suitable for a general audience. The article you are commenting on is entitled: The Daft House Price Report Q3 2015

Please Note: Your message will not be displayed on the website until its contents have been checked by a member of staff.