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2006 will be another record year in terms of house completions and mortgage numbers
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Average price of a home rises to €400,000 nationally and €540,000 in Dublin by year end
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Extraordinarily robust demand for housing due to strong employment growth and a surge in population
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Property price inflation to slow in 2007
Bank of Ireland’s Irish Property Review*, the quarterly analysis of the Irish property market, published today, has revealed that the Irish housing market continues to defy commentators predictions of a sharp correction and 2006 looks set to become another record year for completions, house prices and mortgage take up. However, the Review predicts that 2007 is likely to see sluggish price inflation due to further deterioration of affordability on the back of higher interest rates.
According to the Review the consensus estimate for house completions in 2006 (85,000 – 90,000) is now too low. Completions in the first half of the year amounted to a 24% advance on the same period of 2005 and the conservative estimate for the year as a whole now looks set to reach 95,000, but could go as high as 100,000. The latter figure would represent around 24 completions per 1000 people, an astonishing figure given that the EU norm is around 5 per head of population. It seems likely that total completions will decline somewhat in 2007.
Commenting on house completions, Dr. Dan McLaughlin, Group Chief Economist, Bank of Ireland Group said: “Despite the growth in completions, it is true that the Irish housing ‘stock per head’ is still below the EU average, implying a catch-up period might be expected, but few if any envisaged annual house completions of this magnitude, even given the recent surge in immigration and related growth in total population. Clearly, there are no appreciable constraints on Irish housing supply, and although many may quibble with the planning process, and whether the distribution of new housing is optimal from a social perspective, the aggregate supply response hardly suggests market failure.”
The implication is that demand too has been extraordinarily robust, underpinned by another year of strong employment growth (88,000 new jobs created in the year to May) and a surge in the population, in turn augmented by unprecedented levels of immigration (an inflow of 90,000 in the 12 months to April).
The Review highlights that house price inflation nationally has been in excess of 10% a year since the summer of 2002. The latest reading for Q2 2006 shows an annual rise of 14.1% in the price of existing homes across the country and puts the average price of an existing home in Ireland at €379,000. In Dublin, house price inflation has been stronger at over 17%, and the average price of an existing home in the capital is €516,000. New houses tend to be cheaper (nationwide €308,000 and Dublin €397,000) but again show double digit annual inflation of 11.9% nationally and 14.6% in the capital. By the close of 2006 the Review predicts a 14% increase but forecasts a slower pace of growth in 2007 and a 3% rise in house prices.
Commenting on the Review, Mr. Joe Larkin, Managing Director, Bank of Ireland Mortgages said: “Mortgage lending growth is set to remain strong in 2007 however, given forecast house completions of 85,000. As a result, we expect gross new mortgage lending to rise to €27.8bn, up from €26.5bn this year. This implies a mild deceleration in the pace of mortgage growth, reflecting a marginal fall in the number of new mortgages, to just under 120,000, and a slower pace of growth in the average mortgage size. This level of growth in mortgage lending would suggest a 22% rise in the stock of mortgage debt, down from over 26% in 2006.”
The Review notes that rents have also picked up this year, rising by 6% in the twelve months to September, which also points to very strong housing demand. Dr. McLaughlin comments: “The latter no doubt reflects both the pace of employment growth (some 88,000 new jobs were created in the twelve months to May) and the sheer weight of population growth – inward migration alone amounted to 90,000 in the year to April 2006. A third factor relates to competition in the mortgage market, which has intensified significantly since the summer of 2005 according to the Central Bank’s quarterly survey of credit conditions.”
In its analysis of the commercial property market, the Irish Property Review notes that a 28% return is now expected this year given the strength of the market to date. However, this may represent a cyclical peak in the light of low yields now prevalent in the marketplace, so lower returns are expected in 2007, with a forecast of 12%.
Bank of Ireland’s Irish Property Review is published by Bank of Ireland Mortgages and the Economic Research Unit of Bank of Ireland Global Markets and is led by Dr. Dan McLaughlin.
*The November report had not been added online, at our time of posting
