Irish house prices forecast to slow from end of 2006 as affordability deteriorates in wake of higher interest rates

Irish
Irish house prices forecast to slow from end of 2006 as affordability deteriorates in wake of higher interest rates
By Finfacts Team
Jul 31, 2006, 09:21

2006 on track to set new records for house prices, completions and mortgage lending
House price growth revised upwards to 12% for 2006, 3% envisaged for 2007
Price of average house in Dublin at €532,000 and nationally €395,000
House completions rising for the thirteenth consecutive year, with 90,000 units predicted in 2006 – an increase of 11% on 2005

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Bank of Ireland’s Irish Property Review, the quarterly analysis of the Irish property market, published today, has revealed that the Irish housing market is showing continuing strong levels of activity with indicators suggesting that 2006 will set new records in terms of house prices, completions and mortgage lending.

Towards the end of the year, however, the Review predicts that the market will slow in price terms as affordability deteriorates in the wake of higher interest rates, although it asserts that it will be 2007 before the full impact of tighter monetary policy is felt in house prices and turnover.

The Review attributes the current strong housing demand to the acceleration in employment growth (with 90,000 new jobs created in the twelve months to the first quarter of 2006), strong wage increases, and the rapid pace of population growth (preliminary data from the 2006 census show that the Irish population has grown by 8.1% in just four years – about ten times the average population growth in the EU).

Commenting on the market, Dr. Dan McLaughlin, Group Chief Economist, Bank of Ireland said: “Prices have certainly risen at a surprising pace of late, particularly as the market appeared to be stabilising twelve months ago. Price inflation re-accelerated towards the end of last year and in 2006. On that basis, our previous forecast of a 9% price rise this year is too low and we are revising that up to 12%. This would put the price of an average house nationally at around €395,000, from €352,000 at end-2005, with Dublin prices at €532,000.”

This price acceleration has occurred against a backdrop of buoyant supply, with completions in 2006 again likely to rise for the thirteenth consecutive year. Completions in 2006 are expected to be around 90,000, implying growth of 11% on last year’s outturn and a 5.7% addition to the total housing stock.

This continued strong demand for property has had a significant impact on mortgage lending in 2006. Lynda Carragher, Head of Credit and Risk Management, Bank of Ireland Mortgages said: “The pace of mortgage lending reflects the buoyant demand in the Irish housing market, with a record 108,000 mortgages paid out in 2005 and likely to rise to 120,000 this year. The size of new mortgages is also rising of course, averaging €200,000 last year with a figure of €220,000 likely in 2006. This would give total new mortgage lending of €26.5bn, up from €21.5bn last year.”

The Review notes that competition on the lending side has intensified, leading to a wider distribution of products such as interest only mortgages and 100% mortgages. Lenders have also facilitated customer demand by lengthening mortgage terms. Dr. McLaughlin comments: “These measures can offset the impact of higher rates for a time but we retain our view that affordability will become a more significant factor in the market, particularly in 2007 when the European Central Bank’s rate may rise to 3.5%. The average new mortgage on our affordability model will then cost 37% of average earnings to service, and so price inflation may well slow to 3%, implying zero growth in real house prices.”

In its analysis of the commercial property market, the Irish Property Review notes that it is enjoying a cyclical boom with annual returns of over 25% in the first quarter of 2006. The review predicts that this may prove to be the peak and that returns this year will slow to 20%, still above the average for the past twenty years.

The 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.

Irish Property Review