Of the countries surveyed 12 had inflation at 7% or more, with seven of these above 10%. This buoyancy is in part due to mortgage lenders taking a more relaxed approach to loans criteria; a sign of growing acceptance of the probability of price growth across the continent. In The Netherlands, for example, 60% of all mortgages are where the loan to value ratio is above 100% (ie, where the amount lent is more than the value of the property).  Competition makes mortgage industries more efficient and open, increasing the availability of housing finance. Greater liberalisation of mortgage markets in the EU is currently being looked at by the European Commission so this trend may well gain pace.

With house price inflation at just above 10%, France remains the only one of Europe’s big four major economies whose market remains above this threshold. Germany’s long moribund house prices stayed flat, while an expected Italian recovery was short lived. The UK’s famously active market was quiet in 2005 after responding to Bank of England-led efforts to slow it down the previous year. Ireland’s prices increased by nearly 10% despite predictions of a slowdown.

The report’s author, professor Michael Ball, said:

‘Northern Europe saw some of the strongest house price rises last year, so the centre of gravity of Europe's house price inflation seems to be heading north. 2006 contains growing risks for housing investors with rising interest rates in the eurozone and fears of greater currency volatility to contend

with. Even so, the thirst for cross-border European residential investment is unlikely to be quenched in 2006.’

Milan Khatri, RICS chief economist, added:

‘We expect the European house price boom to run into its eighth year in 2006, with the market supported by a clear upturn in economic activity and income levels.  Further interest rate rises by the European Central bank (after the 0.25% increase last week) are certain, which will restrain but not prevent additional price rises. As mortgage interest rates are likely to remain at close to historically low levels, any talk of a real European housing market slowdown is premature.’

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Excerpt on Ireland

Despite significant falls in rent levels in recent years, many new homes built in the Greater Dublin area are still being sold to investors, who are obviously anticipating further price rises. However, housebuilding has now been at record levels for a long time and the demand-supply balance should now be coming into more into equilibrium. Even in the absence of an economic shock, therefore, prices are likely to stabilise in the near future. The interesting question then will be how much of the reportedly large scale residential investment holdings will be sold quickly or held onto. Rapid sales could be destabilising in core areas of the market.

Demographic factors and earnings growth, plus favourable tax breaks and interest rates, have all stimulated housing demand for many years now, particularly as the country had the smallest housing stock relative to its population in the EU in the early 1990s and still has the highest average household size – good indicator of housing shortages. The country had a major economic boom lasting for many years and weathered the 2000s  slowdown better than the rest of the Euro-zone with significantly faster growth than the euro-zone average. Growth is expected to remain strong over the next few years, sustaining housing demand and the desire of households to trade up to better accommodation.

Figure 6.1: New nominal house price annual % changes 1991-2004

Source: Housing Statistics

The Central Bank has undertaken a number of studies of the housing market and its evidence does not suggest a significant bubble exists; yet it still has concerns about the scale of mortgage indebtedness.33 The OECD towards the end of 2005 suggested that house price were 10-15% overvalued, a view which received some support amongst expert commentators in Ireland.

Ireland has one of the highest home ownership rates in the EU with 77% of households living in the tenure. A further 9% live in social rented housing, consisting of local authority housing and various forms of voluntary and co-operative housing, and another 9% are in the private rented sector. The country had the lowest number of dwellings per thousand inhabitants in the EU in 1980 and, despite the huge recent building boom, still has less than other countries with similar living standards. This is reflected in the relatively high average household size (2.9 persons in 2003), though this was far less than the 4 persons per dwelling in 1971.  This historic lack of dwellings is a root cause of current shortages and rising house prices.

The strength and extent of the property boom can be seen in the fact that almost a third of the current housing stock has been built since 1990, so the country has the youngest average age of dwellings in the EU. Annual completions are 3.5 times what they were a decade ago and the country has the highest per capita building rate in Europe (Figure 6.2). Output in 2005 is likely to be similar to that in 2004 at around 75,000 units. Strong demand is also expected to continue in years to come, so that high output is likely to be sustained, though probably at a somewhat lower level than current housebuilding numbers.

No data exist on second homes, so it is not clear precisely how much of new building relates to it, though NCB Stockbrokers have estimated it at over 10,000 units a year, almost 15% of new output. Kerry in the West, an important location for second homes, saw in one year a 45% rise in its housing output between 2002 and 2003; whereas in Dublin during that apparently boom housebuilding year, completions actually fell by 18%. Put another way, Kerry’s housing output was only 44% of that of Dublin in 2002, yet it was 80% of it in 2003! Such developments, moreover, were not freak events but illustrate underlying trends and suggest that the apparent commendable elasticity of supply in relation to house prices is actually far worse than national data would indicate in the areas of strong primary residence housing demand and far larger in areas where second homes are desirable consumption items.

Housing shortages in such areas as Dublin, therefore, may well be fuelling the second home demand of the fortunate in other parts of the country via equity withdrawal.

The structure of dwelling types is unusual for the EU in that there are very few flats and multi-occupancy structures. A large number of dwellings (45%) are detached houses (frequently single storey); a further 29% are semi-detached and 23% terraced. Only around 3% of dwellings, consequently, are flats.

However, in Dublin a far higher ratio of 14% of dwellings are bed-sits or flats. The general type of housing built, therefore, is highly land intensive and leads to spread-out suburbs, both in the Greater Dublin area and other growth areas further a field, which have often come to act as dormitory settlements for local agglomerations.

This urban form also gives rise to long commuting journeys on a frequently overstretched infrastructure network. Residential densities may well increase in the future in response to rising land prices, infrastructure costs, congestion and planning constraints. Housebuilders complain of delays in the planning system. Further more reports have suggested that urban development is not proceeding in the most desirable ways. The National Economic Social Council’s 2004 report on housing argued that supply constraints near the major cities were inducing a low density-long commute type of development and that several factors generating this negative urban form need to be overcome to create a more economically and environmentally sustainable living pattern. Criticism of the pattern of development has come from elsewhere as well. A recent report by the UK’s Policy Exchange think tank argued that the Irish planning system was creating too many, ‘starter homes’ of often mediocre quality on monotonous estates and was allowing insufficient larger, better quality properties. The lack of better properties was fuelling house price inflation, it argued, so that the high headline housebuilding figures give a misleading picture of the true supply situation.

Social housing includes both the local authority housing and voluntary nonprofit housing sectors and it has played an important social function since the 1920s, when a programme of local authority-provided housing commenced. The sector is dominated by local authorities with 8% of the total housing stock, while the voluntary sector has only 2%. Social housing programmes traditionally concentrated on slum clearance and newly built estates on the peripheries of towns and cities, similar to policies in the UK. During the early 1950s, social housing accounted for over 50% of all housing units built, reflecting its important role and the weakness of private housing and the economy generally. During the 1960s and 1970s, there was a rapid expansion of private housing; even so, annual completions of social housing still accounted for around 20-25% of total building.

Social housing was then sharply curtailed, so that by the early 1990s social housing completions accounted for less than 10% of all new building. The amount of social housing built continued to decline in relative importance throughout the 1990s. A marked revival took place in the early 2000s and 10% of new dwellings in 2002 were in the social sector (Figure 6.2). Higher private output and lower social output has since seen the share decline to under 7% in 2004. Local authorities, in particular, have been building less homes. There are long waiting lists to enter this type of accommodation as the subsidised rents are far lower than in the private sector.

Local authorities also run affordable housing and shared-ownership housing schemes – though the aggregate impact on new supply is relatively small: 2,260 dwellings in 2004, only 3% of total completions. Affordable housing schemes involve local authorities in partnership arrangements with private developers, whereby the developer constructs a number of dwellings for sale at below the market price and is subsidised by the local authority. 860 homes were made available in this way in 2004.