IIB Bank/ESRI say SSIAs will boost Irish house prices by 10%; Up to €15 billion SSIA related investment including borrowing to go to Irish and foreign property

Irish
IIB Bank/ESRI say SSIAs will boost Irish house prices by 10%; Up to €15 billion SSIA related investment including borrowing to go to Irish and foreign property
By Finfacts Team
Apr 10, 2006, 14:05

· Consumers expect a steady increase in property values with far fewer now expecting prices to fall in the coming year

· Spending plans for SSIA’s vary widely but strong interest in property could boost house prices by up to 10 per cent and ensure borrowing continues to surge

· Most consumers are prepared for higher interest rates but for up to 50,000 borrowers, higher rates will have a significant impact on household spending

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Austin Hughes, IIB Bank

The outlook for the Irish housing market remains very healthy. Tom Foley, Chief Executive of IIB Homeloans told a briefing today on a new IIB Bank/ESRI study ‘Do Irish consumers think the housing market will stay strong?’ ‘It is very encouraging that consumers expect house prices to record a fairly steady rate of increase both in the next twelve months and indeed for the next five years. Clearly, they don’t regard the recent double digit pace of increase as sustainable but neither do they see prices collapsing’.

Foley also noted that property looked set to benefit considerably from maturing SSIA’s. ‘Although it is likely that the SSIA’s will be spent and saved in a wide variety of ways, bricks and mortar remain a very popular choice. When related borrowings are taken into account, the SSIA’s could add around €10 bio to housing demand in Ireland and just under half that to overseas demand’.

Foley added that the survey suggested higher interest rates shouldn’t threaten the property market. ‘It is important to note that a small number of borrowers will face some difficulties. This underscores the need for sensible borrowing by consumers and sensible lending by financial institutions. That said, the general picture is one of a fairly healthy market in which most people are adequately prepared for higher interest rates’.

David Duffy, ESRI

David Duffy, Economist at the ESRI noted: ‘The survey results suggest that consumers expect house price rises to continue with over 80 per cent of respondents expecting some increase over the coming 12 months’. He went on to say that there is a greater sense of agreement among borrowers that the market will be stable. ‘A greater consensus has emerged amongst consumers as to the outlook for prices over the coming year. Of those that expect an increase, over half anticipate that the increase in house prices will be between 5 and 10 per cent’.

Duffy outlined the main influences on the Irish housing market: ‘Consumers expect that fundamental factors, such as economic and demographic growth, will continue to be the most important drivers of the Irish housing market over the next 12 months. A third of respondents identified ‘affordability’ factors such as income trends and low mortgage interest rates’ as important drivers.

Austin Hughes, Chief Economist at IIB Bank noted that the spending plans of 1.1 million SSIA holders could be expected to vary widely. ‘The fact that nearly 40 per cent of SSIA holders intend to continue, saving is very encouraging for longer term health of the Irish economy’. Mr. Hughes suggested that the continuing allure of property represented a strong vote of confidence in property values ‘It is notable that SSIA holders intend to spend about three times as much on Irish property as on property overseas. This reflects continuing confidence in the Irish housing market as well as a wide range of housing related needs running from those of first time buyers and trading up to those purchasing holiday homes and providing for their children’s future housing needs’.

Hughes went on to suggest that the survey results showed most borrowers could cope with higher interest rates. ‘7 out of 10 consumers expect higher rates in coming months. So, the property market shouldn’t be under any serious threat. That said, it is clear that a small number of borrowers particularly those on low to middle incomes are likely to be stretched’.

Key Points of the study:

ON HOUSE PRICES:

H         Irish consumers expect house prices will rise by 6 per cent in the next year and by a similar amount in each of the next five years.

H         Notably fewer consumers expect house prices to fall or stagnate: Only 3 per cent of consumers expect prices falling in the next year. 14 per cent see price falling in the next five years

H         Low borrowing costs, a strong economy and migration are seen as the key drivers of a healthy housing market

H         The 2006 survey shows fewer consumers envisage ‘extreme’ movements in house prices; about 40 per cent of consumers expect increases of between 5 and 10 per cent.    The recent acceleration in house price inflation above 10 per cent hasn’t led consumers to anticipate higher inflation in the future. We feel this expectation of modest price increases augers well for the stability of the market.

ON SSIA’S:

€         The profile of SSIA holders is slightly older, wealthier, better educated and more likely to be householders than the adult population as a whole

€         1 in 4 consumers has not decided what to do with their SSIA’s.

€         Of those who have: 39 per cent will continue to save

·         24 per cent plan major spending

·         10 per cent will pay down debt

·         10 per cent will buy Irish property

·         3 per cent will buy overseas property

€         IIB Bank/ESRI reckon SSIA’s will boost Irish house prices by up to 10 per cent

€         The use of SSIA’s to purchase property makes it likely that very rapid borrowing growth will continue and may even accelerate through 2006.

ON HIGHER BORROWING COSTS:

Ý 7 out of 10 consumers expect interest rates to rise further in the coming year

Ý 1 in 5 consumers expects interest rates to remain steady, 1 in 10 consumers aren’t sure what direction interest rates will go

Ý The majority of consumers see ECB rates rising to around 3 per cent in the next twelve months – an expectation broadly in line with those of financial analysts

Ý Only 1 in 14 consumers expect a ‘significant’ impact on their household finances from higher rates

Ý 40 per cent see a ‘moderate’ adjustment to their spending when rates rise

Ý In general most borrowers are prepared for higher interest rates but a small minority perhaps something approaching 50,000 borrowers, could face a difficult time if ECB rates rise quickly above 3 per cent