Too many buyers, too few homes: what’s the story?

Latest figures indicate a marked increase in those seeking and securing mortgages, while property prices have also risen sharply over the same periodIt may be worthwhile to consider just how significant this demand pressure is.

More people looking to buy

Latest mortgage approvals from the Banking and Payments Federation of Ireland (BPFI) show a sharp rise in the number of people seeking mortgage approval. In February 2017, 2,840 would-be home buyers received mortgage approval, up from 1,996 a year earlier.

While the mortgage approval figures in themselves aren’t excessive – in 2006 drawdowns were running at a rate of about 12,500 a month – they represent a significant take-up in interest in the housing market. In February 2014, for example, approvals were running at 1,500 a month.

There are likely to be a number of key factors behind this trend – and the main one appears to be the return of the first-time buyer (FTB).

FTBs are coming back into the market in greater numbers, accounting for one in two out of every approval in February. The reasons for this are varied, firstly, the Central Bank loosened mortgage lending rules last year, which means that FTBs now only need a deposit of 10 per cent, regardless of the value of a property. Secondly, the Help to Buy scheme, which gives FTBs a 5 per cent tax back of up to €20,000 on the purchase of a new home, is gaining pace, with official figures showing that some 3,000 people have already applied for it.

Finally, continued price pressures in the rental market, particularly in the capital and other urban areas, means that for many people, buying a home is currently cheaper than renting.

If we go back to the approval figures, it’s clear that a greater number of people are now in a position to buy. If you consider a mortgage approval lasts for six months, and there are of the order of about 3,000 approvals each month, then over a six-month period you could have 18,000 people actively searching for a property.

What about cash buyers?

But these figures only take into account those looking to buy a property with a mortgage – according to figures for 2016, about 47 per cent of all sales last year were by cash buyers.

So, with 44,700 transactions in 2016, there were some 21,009 cash buyers active in the market last year. On a six months’ basis then, we could factor in another 10,500 or so additional potential buyers.

This means that over a six-month period, there could be about 28,500 buyers (mortgage approvals and cash buyers) chasing properties around the country.

Not all will buy

Of course, not all those approved for a mortgage, or even the Help-to-Buy scheme, will go ahead and purchase a property; but many will.

If we consider mortgage drawdown figures from the BPFI, we can see that some 9,115 mortgages were drawn down in the fourth quarter of 2016 (latest available), or about 3,000 a month. But if we look at mortgage approvals in the preceding quarter, ie July, August, September, we will see some 10,196 mortgages were approved. While this figure is just a guide, it does suggest however, that many of those seeking approval will go ahead and purchase a property.

There were more than 21,000 cash buyers active in the market in 2016, however this doesn’t mean there will be a similar amount active this year. However, the trend has been steady in recent years, with no apparent signs of a slowdown.

Supply of properties

How will all these property buyers find a home? With difficulty, it would appear. Supply constraints continue to be a major issue. Latest figures from Sherry Fitzgerald show that the number of housing units for sale fell by 17 per cent to 22,100 year-on-year in January – a new low for the state, equating to just 1.2 per cent of total private housing stock. It’s generally considered that in a properly functioning market, about 4-5 per cent of housing stock should turn over each year.

Figures from MyHome.ie also show that the volume of second-hand stock in the capital continues to tighten. In March 2017 there were 3,478 properties for sale in Dublin, down 20 per cent on 2016, and by 26 per cent on the same month in 2015. And despite the introduction of the Help-to-Buy scheme, it has yet to make a meaningful impact on the number of new homes being built. Yes, development of new properties is on the increase; figures from the Department of Housing show that in the 12 months to January 2017, construction on 13,334 new homes commenced, up by 44 per cent on 2016.

Rising prices?

The consequence then of an increased number of buyers chasing a limited number of homes is further house price growth. Davy Stockbrokers has said there is a “significant possibility” that house price inflation will exceed 10 per cent this year. Until more new homes come on stream – and as prices rise it will begin to look more attractive for developers to break ground – this looks like the interim scenario that buyers face.