Market slowdown to linger on to new year

MarketAnalysis: Interest rate rises, uncertainty over stamp duty and buoyant supply have combined to create a pronounced slowdown in the market, writes Orna Mulcahy, Property Editor

The Dublin housing market has had a phenomenal 10-year run but, inevitably, the party had to end.

That's what's happening now, as house prices have stopped rising and, in some cases, are falling back to their level of 12 months ago, wiping out the gains made early this year.

A series of interest rate rises is prompting a more realistic valuation by both estate agents and buyers who are stepping back from the market and waiting for prices to drop further.

The prospect of stamp duty being cut in at least the bottom end of the market in December's budget has also slowed down sales, as buyers hold back in the expectation that they will have less to pay to the Government if they do move house. This stand-off has led to a fairly serious drop in activity since the PD leader Michael McDowell first raised the prospect of lower stamp duty.

The main estate agents in the Dublin housing market had been expecting the slowdown since earlier in year when, after a bumper spring season, the market seemed to run out of steam, leaving a large stock of property unsold.

However, it wasn't until a greater than expected supply hit the market in September - coinciding with a succession of interest rate hikes - that the public realised that the market was in trouble.

The first hint of a slowdown came in the auction rooms when an unusually large number of properties were withdrawn without attracting even a single bid.

Economic pundits were quick to put the boot in, many of them claiming that houses were clearly overvalued and that the market might not get the soft landing so widely anticipated.

The outcome may be that fewer houses will be put to auction in the coming months, but the reality is that the supply will be just as high, since many vendors have been persuaded to delay putting their property on the market until next spring. Unless estate agents manage to clear the current oversupply by the year's end, the overhang could slow things further early in 2007.

All this has brought a new realism to prices, which everyone agrees could not go on rising as if there is no tomorrow.

The banks have also played their part in the slow down, because of their heavy exposure to the property market. They are looking closely at affordability levels, paying greater attention to valuations, and reining in customers looking to borrow even more for either trade up homes or investment properties. The banks are also tightening up lending procedures for developers who previously had carte blanche to acquire almost any site they wished.

The new homes sector, which has been even more vibrant in recent years - and probably the fastest growing in Europe - is also showing signs of fatigue with supply this year expected to hit an all time high of 93,000 units (about 12,000 more than last year).

While well located developments are still selling strongly, and those with fast-disappearing tax breaks are being mopped up by investors, outlying developments are not doing particularly well, because there is too much choice in the market. Investors are still a force since rental prospects remain good while the Eastern European workers continue to flock here for jobs. First-time buyers are also a strong element, and developers are making sure to attract them with ever keener prices and good fitouts.

However, new homes agents used to selling out over a weekend are now having to send their staff back week-after-week to wrap up their sales campaigns.

Though estate agents may not want to admit a correction is taking place in terms of prices, homeowners who believed that their property could earn them a fortune have had to think again.

By any European standards, house prices in Dublin are still at a formidable level, having outstripped salary increases many times over. That will have to change. Economic forecasters are talking about growth rates of 3-5 per cent in 2007, but even these modest predictions may be on the optimistic side, particuarly in the middle section of the market.

A lot now depends on the budget and business could be brisk in December, once Minister Cowen has decided what concessions, if any, he's prepared to make to housebuyers.