Irish banks to be stress-tested for up to 11.1% home price drop over three years

Central prediction is that Irish home prices will rise 7.4% this year, followed by 2.5% growth in 2024, before dipping in 2025

Irish banks are set to be stress-tested in the coming months for an adverse case of home prices dropping 11.1 per cent and commercial property prices slumping more than 28 per cent over three years, as part of a European exercise to assess ability of the lenders to withstand an economic shock.

However, the central prediction – or baseline case – is that Irish home prices will rise 7.4 per cent this year, followed by 2.5 per cent growth in 2024, before dipping 0.3 per cent in 2025, according to economic scenarios outlined on Tuesday by EU authorities as they launched the stress tests.

The 2023 forecast for the Republic is the second-highest across the bloc, after Hungary. At the other end of spectrum, Swedish home prices are seen slumping 11.1 per cent in 2023.

Irish residential price inflation was running at 8.6 per cent as of November, according to the Central Statistics Office.


Irish commercial real estate prices are projected to expand by about 2.4 per cent in each of the three years under the baseline case, compared to an EU average of 1.1 per cent, even as the sector deals with the impact of rising interest rates.

The European Banking Authority (EBA) said the adverse assumptions – deemed to be hypothetical but plausible – being used for pan-EU stress tests this year are the “most severe” used since it was set up in 2011 in the wake of the financial crash. It is based on the potential for heightened geopolitical tensions, high inflation and rising interest rates hitting private consumption and investments.

“The severe nature of the adverse scenario reflects a deliberate choice and reflects the purpose of the stress test exercise, which is to assess the resilience of the European banking system to a hypothetically severely deteriorated macro-environment,” the EBA said, adding that it expects to publish the results at the end of July.

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While the baseline case sees Irish gross domestic product (GDP) expanding by 4.9 per cent this year, the adverse scenario is for a 1.3 per cent contraction. EU GDP is seen rising 0.5 per cent in the main case for 2023, but falling by 3.4 per cent in the adverse one.

The Irish unemployment rate is forecast to rise from 4.7 per cent in 2022 to 5.3 per cent this year, before declining again to 4.6 per cent by 2025.

However, the country’s lenders will be stress-tested for a potential spike in the jobless rate to 12.4 per cent by the end of the period.

While analysts say domestic Irish banks are well capitalised to deal with even an adverse shock, the outcome of the stress tests will have a bearing on discussions with regulators on plans to return excess reserves to shareholders. AIB and Bank of Ireland are the only domestic lenders being stress-tested.

AIB executives signalled in early December they plan to pay out as much as 100 per cent of the profits generating both this year and next to investors in an effort to return excess capital on the bank’s balance sheet.

Analysts expect AIB’s net profits to comfortably top €1 billion in each of the two years.

Bank of Ireland investors are awaiting details on capital return plans when its new chief executive, Myles O’Grady, outlines his strategy in early March, as the bank publishes its latest set of annual results.

Irish-based units of Bank of America, Citigroup and Barclays are also among a total of 70 EU banks that are subject to this year’s EBA assessment. The authority typically carries out pan-EU stress tests every two years.

The EBA said that the baseline scenario for EU countries is based on the projections from the national central banks as of the end of December. The adverse scenario assumes the materialisation of risks that have been identified by the European Systemic Risk Board (ESRB), it said.

Joe Brennan

Joe Brennan

Joe Brennan is Markets Correspondent of The Irish Times