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Beggs says that we are moving further and further away from the soft landing that we had hoped for in 2006 and which we saw as important to the longer term sustainability of the market. He says that "it may well be that we have totally underestimated the short term level of demand and activity in housing and that a soft landing will occur beyond 2007. We certainly hope so and are forecasting a slowdown in average house price inflation to 7% by the end of next year." Outside bodies and several domestic institutions have expressed concerns for some time about the sustainability of output and price trends in Irish residential construction. Many regard the Irish market as overvalued. We see little purpose to these model based estimates but believe that current price trends cannot be sustained. We expect average house prices to rise by at least 20% between end 2005 and end 2007. The rise in wage incomes will be less than half this amount. Though we have growing concerns about the current pricing behaviour of the market, it has to be said that the downside risks, although rising, still remain limited. There is still no sign of a major correction in the labour market and projected increases in interest rates will be manageable for the majority of borrowers. We do not foresee a sharp fall in house prices but a protracted period of stability could follow beyond 2007. Nevertheless, the risks to the sector require continued careful monitoring. Supply and demand for residential properties are both at unprecedently high levels. While prices are being driven higher by site and other development costs, the scale of demand is in excess of the industry's ability to supply at this point, thus driving prices higher. The industry itself blames the planners for supply limitations but others would blame the irrational behaviour of too many buyers for ever rising prices.
Beggs says that there is a real danger in this spiral that key players in the market will be given wrong signals about its longer term sustainability. This is particularly so in relation to investors. If ultimately, rents in the future have to keep some relationship with house prices increases, particularly in the light of the current very low rental yields, rents may also become too expensive for a growing number of people. The upshot will be a fall off in rental demand. This could also have a serious negative impact on net immigration and on the demand for housing from this group. Furthermore, prices cannot continue to rise at two to three times the average rise in wage incomes without eventually killing off a large number of potential first time buyers, irrespective of the support they may receive from parents and other sources. They may also be forced into short term borrowings in order to meet deposits and other costs associated with the purchase of property which would then exacerbate their debt repayment burdens. It is clear from the strength of our demographic statistics, the almost certain future inflow of people from poorer EU countries, changes in Irish society, our tradition of home ownership, a fall in the size of household units and the sharp rise in Irish wealth and income that there is a healthy longer term underlying demand for housing which lies in excess of 60,000 per annum. Beggs says that the release of SSIA funds from May 2006 onwards may add to these supportive factors over the next twelve months. However, we are currently 20-25,000 units per annum in excess of that figure because of the large scale net inward migration and rising headship rates at the present time. Nonetheless, a number of the factors which have helped boost housing activity in recent years are about to change or become less supportive. Interest rates are on the rise and, though the ECB may continue to raise rates at a moderate pace, it is expected that the refinancing rate will reach 3.5% by this time next year. This will result in some worsening of affordability. Financial institutions have extended the life of many loans out to 35 years and beyond in order to improve affordability. This becomes less effective at higher interest rates. Furthermore, the arrival of 100% mortgages and interest only mortgages also point to a market that has become more stretched. Beggs says that it is also interesting to observe the significant flow of funds to property markets outside Ireland which could be indicative of the perceived reduction in value of the Irish market. Employment gains will not continue on the same scale as in 2005. Last year, the construction sector added 26,000 new jobs. This rate of growth cannot continue. Overall employment growth, however, may remain strong at about 65,000 per annum on average over the next two years, with over half of these comprising foreign nationals. The sector has contributed in three ways:
The report says that this contribution from residential property has come at a time when other parts of the economy, particularly manufacturing, have been weak. Thus, it is vital that the housing sector does not falter at this juncture. A return to more moderate price behaviour at this stage would be a welcome sign that serious mis-pricing risks will be avoided. For this to happen, there needs to be an increase in the supply of serviced land and less delay in the planning process. Meanwhile, for their part, buyers must not behave as though strong house price increases are a given.
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