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Irish House Price Report Q1 2020 | Daft.ie

Ronan Lyons, Economist

3rd Apr 2020

COVID-19 and the new reality for the housing market

The last few weeks have seen the spread of COVID-19 across the world. This pandemic has uprooted lives and livelihoods in almost every country, with Ireland closing its schools, universities and childcare facilities on March 13 and closing all non-essential services barely ten days later. This is an extraordinary and arguably unprecedented economic shock.

One of the downsides of density, living closer, and international integration, having closer links in trade and migration, is greater potential for disruption through disease. Examples abound from the Antonine Plague at the height of the Roman and Han Empires to the Black Death, which travelled in the wake of the brutal peace established across Eurasia by the Mongolians.

But this pandemic takes place at a time when international travel is almost instant - it takes less than 24 hours to travel halfway around the world - and ubiquitous. This, combined with the unusual characteristics of the disease itself, with a long period when people infected can be both asymptomatic and infections, has created something of a perfect storm.

The figures published in this report are, by and large, blissfully unaffected by the COVID-19 economic crisis, but only due to the timespan covered. The analysis covers the first three months of 2020 but only in the final two weeks of March could it have had any real impact on outcomes. Before I discuss what those might be, it is no harm briefly reviewing what the usual measures reveal.

As is now customary, the first quarter of the year saw a bump up in prices. With the introduction of the Central Bank's mortgage rules, the calendar year and the associated exemptions for loan-to-value and loan-to-income restrictions mean that the final quarter of each year sees prices fall and the first quarter of the next year sees them rise again. However, the rise seen this year is the smallest in this market cycle. Compared to an average Q1 rise of 3.7% between 2014 and 2019, the rise this year was just 2.2%.

Combined with falls in both Q3 and Q4, it means that year-on-year, prices are now 1.7% lower than at the end of Q1 2019. In Dublin, the annual decline is slightly larger, at 2.6%, similar to the fall seen elsewhere in Leinster. In Connacht-Ulster, prices are still higher than a year ago (by 1.6%). The transition from sharply rising prices in mid-2017 to slightly falling prices by early 2020 was a gradual one and related to ever-improving supply on the market, in particular of newly built family homes in the Greater Dublin Area.

That seems likely to all change and change utterly now. Obviously, economic considerations must - while the disease spreads for the first time - take second place to human considerations and the need to look after the most vulnerable in society. But this does not mean that the economic costs are not there or are insignificant. The first and second quarters of 2020 are likely to represent astonishing outliers for a range of economic indicators in Ireland and elsewhere. It would not be surprising to learn in due course that at least as many people became unemployed in Ireland in the second half of March alone as during the entire Great Recession downturn from 2007 to 2010.

These extraordinary real economic consequences will, of course, translate into housing market effects. COVID-19 represents an extraordinary shock to housing demand and we should expect to see significant falls in housing prices - both sale and rental - as the economic effects unwind. There are important differences between sale and rental segments, though. While rental listings are up year-on-year, especially in central Dublin, the sales market has frozen somewhat. As the first graph below shows, there were just 1,300 sale listings in the two weeks starting March 15 - compared to almost 2,600 in the same period last year. This is a fall of almost one half and is relatively evenly spread across the country and across segments.

Number of sale listings

As of yet, though, there is only limited evidence of a price effect. This is shown in the second graph below, which shows an index of national average listed sale price for housing for the first three months of the year, but splits March into before and after the first wave of COVID-19 measures. While it does point to a change within the month of March, with average listed prices 2.1% lower in the second half of the month than in the first, they were on average still higher than in January or February. At first glance, this may seem bizarre but this is on reflection less surprising. As shown above, the first reaction in the sales segment of a housing market is not to cut prices but withdraw if possible. Those going on the market in late March 2020 were, almost by definition, more confident about the future or perhaps less aware of just how serious the health and economic consequences were forecast to be.

Percentage change of sale listings price

Despite all its complexities, housing is still a case of supply and demand. It is clear that COVID-19 represents a dramatic contraction in demand for owner-occupied properties. Households will be far less likely to enter into a 30-year mortgage contract, for example, if they are unsure what their 3-, 6- and 12-month prospects are for being employed and for what they'll earn. Things may be different for rental properties. Clearly, unemployment will soar - but if government steps in to guarantee incomes and prevent evictions, then there may be far less change in the rental market than on the sales side.

One of the great unknowns is how this all gets resolved. The optimistic version is that of a quick rebound once the crisis passes. Whether demand rebounds depends, of course, on how the COVID-19 crisis ends. If it ends with a bang, for example with a widely deployed vaccine, then there could easily be a rebound of pent-up demand. If COVID-19 ends slowly, with gradual relaxation of restrictions, then a quick rebound seems much less likely.

The other part of the equation is supply. Active supply on the sales market is, as outlined earlier, likely to dry up over the coming weeks. But the threat to Ireland's nascent housing market recovery is that COVID-19 disrupts the construction of new supply. Talk of COVID-19 somehow "proving" that Ireland was wrong to rely on build-to-rent to address its housing shortages is wide of the market. Indeed, nothing could be further from the truth: now, more than ever, Ireland needs to tap into long-term and therefore cheaper capital to build a long-lived asset.

But as Ireland locks down for weeks and maybe months, it seems very likely that new housing completions will dry up. The full effect of this may only be realised, once demand picks back up... whenever that is.