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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%