Irish houses ‘not overvalued’ with prices driven by undersupply, says European Commission

Housing in Ireland is “not overvalued” as high prices are driven by an undersupply of homes, the European Commission has said, in contrast to other EU countries at risk of a painful correction as rising interest rates collide with inflated prices.

Analysis by commission officials released on Tuesday warned of economic risks from potential housing price corrections in the EU, finding that houses were more than 10 per cent overvalued in over half of EU member states, and more than 20 per cent overvalued in nine countries.

Ireland is not among these however, according to the commission’s Alert Mechanism Report. The metrics it used to evaluate Ireland’s housing market “do not show signs of potential overvaluation”, the report read, despite Ireland having one of the highest price-to-income ratios in the EU.

In the commission’s post-programme surveillance report, a snapshot of how Ireland’s economy is performing years on since its bailout, some risks were nevertheless flagged for the Irish housing market.

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It warned that though lending rules had been conservative, “risks are increasing in the housing market” and that “house price growth has been outpacing incomes, raising the risk of imbalances”.

“House price growth is expected to moderate in the second half of 2022 as real incomes decrease and mortgage interest rates increase,” it forecast.

[ Irish property market likely to slow down with house prices overvalued by 7%, ESRI says ]

A senior EU official said Ireland had seen steep rises in house prices and this was clearly becoming a “social problem”.

“In the case of Ireland, our indicators point that housing price increases are not as high as we have seen in other member states. Prices have been increasing, but the pace of increases have not been as high as elsewhere,” the senior official said.

“What we see in Ireland is there is very fast demographic growth. What we see is a shortage of supply compared to the demand.

“This is essentially translating into a social problem, but we don’t see this being a major economic imbalance that would affect the banking sector itself.”

In contrast, the report flagged risky growth in levels of household debt and the extension of credit elsewhere in the EU, with countries including Sweden particularly exposed to rising interest rates because a majority of its mortgages switch to variable rates after only one year.

Drops in purchasing power due to rising energy costs and inflation, stagnant or declining real incomes, and increases in mortgage rates have led to “risks associated with households’ abilities to meet mortgage payments” in various EU countries, the report warned.

The risk to the broader economy due to knock-on effects from a potential “substantial downward adjustment of house prices... cannot be discounted”, the report read.

It estimated that house prices were more than 20 per cent overvalued in countries including Belgium, Germany, Denmark and Sweden. A number of EU member states are “considered to be in a situation of macroeconomic imbalance” due to their housing markets, the official said.

They had seen “very significant rises in housing prices, in the absence of what we call fundamentals in the housing market”, he explained.

“The increase in housing prices in recent years has been driven by very low interest rates which prevailed for a very long time, and inflated asset prices,” he continued.

“There are some indications that the housing cycle is beginning to turn. If there were to be a rapid downturn in housing prices, that would have a big impact on households, but also the banking system.”