Housing pipeline ‘encouraging’ but downside risks to supply remain

Rising interest rates and elevated construction costs are the biggest threats to housing supply in 2023, but the recovery in the pipeline of new units post-Covid coupled with “robust” mortgage demand will help to buttress the market this year, according to the the Banking and Payments Federation of Ireland (BPFI).

More than 9,100 dwellings were completed in the final three months of 2022, an increase of 31.4 per cent on the same period in 2021, bringing to almost 30,000 the total number of units finished last year, the BPFI said in a report on Tuesday.

But while the 2022 total represented a 45 per cent jump from 2021, when the construction sector was still constrained by Covid-related public health restrictions, the number of completions is expected to slip back towards 2019 levels this year.

Based on housing commencement figures for 2022, the BPFI said some 27,000 new units are expected to be finished this year, below the Government’s expected completions target for the year.

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There have, however, been some “encouraging” signs at the start of the year, the BPFI said. Work began on some 2,108 units in January, “the highest level observed in any January period since 2008″, said BPFI chief executive Brian Hayes.

Meanwhile, he said the substantial recovery in the supply of housing from the Covid years “is also reflected in the mortgage market activity we have seen” with 15,888 mortgages drawn down in the final quarter of last year, a more than 19 per cent increase on the same period in 2020. Overall, some 52,634 mortgages were drawn down in 2022 at a value of €14.1 billion, the highest level since 2008.

Mr Hayes said that mortgage approvals activity, “which is useful as a forward-looking indicator”, also indicates that demand remains strong, with approvals valued at €1 billion last year

Amid rising interest rates, there was also a notable increase in switching activity in 2022, the BPFI said, accounting for nearly 28 per cent of all drawdowns compared with just 14 per cent in 2021 in terms of volumes. However, the volume of non-purchase mortgages – both switching and loan top-ups – increased by just 2.1 per cent, “a significant slowdown from previous periods”, he said.

Looking ahead, Mr Hayes said that mortgage approvals activity, “which is useful as a forward-looking indicator”, also indicates that demand remains strong with approvals valued at €1 billion last year, for which first-time buyers accounted for more than half.

[ 2022: Housing supply to fall further behind demand as rising costs hit investment, Goodbody warns ]

Meanwhile, the number of applications from first-time buyers for the Help to Buy scheme ballooned to 7,000 in January, the BPFI said, an annual increase of 36 per cent and the most observed in any January since the scheme was launched.

But while the industry body said it expects both mortgage demand and the pipeline of housing to remain “steady” this year, economic headwinds could negatively impact supply, particularly around rising interest rates and construction costs.

Building cost pressures and further ECB rate increases may pose some risk to the housing supply outlook and mortgage demand in the short to medium term

“In terms of demand for mortgages, we expect the growth in non-purchase mortgages (switching and top-ups) to continue to slow and the first-time buyer segment to drive activity, especially for new builds, with the continuation of support measures like the Help-to-buy scheme and the First Home Scheme, as well as the revised loan-to-income ratios under the Central Bank’s mortgage lending rules,” said Mr Hayes.

“And while the slowdown in residential property price inflation should help to alleviate affordability concerns somewhat, especially for first-time buyers, building cost pressures and further ECB rate increases may pose some risk to the housing supply outlook and mortgage demand in the short to medium term.”

In a separate note published on Monday, analysts from Goodbody Stockbrokers warned that while the supply of housing is expected to remain “stable” this year, housing starts are “flatlining”, with the housing sector, in particular, dragging on the headline figure.

Forecasting a decline in output compared with last year, they said the level output remains “substantially below Ireland’s estimated housing need”.