Do not listen to estate agents – house prices will go down, not up

The medium-term trend for house prices is not up, it's down, and we should be wary of estate agents telling us otherwise. We had our fill of self-serving, industry-based reports back in the 2000s and look where that got us.

When Covid hit back in March last year, it seemed like the bottom had fallen out of the property market. Estate agents prepared for an annus horribilis. But the market proved more resilient than anyone expected.

A pick-up in property transactions in the latter part of 2020 – particularly in the premium segment of the market – has given the industry an almost euphoric sense of relief.

Now all the talk is about pent-up demand while the dire forecasts of just a few months ago have been replaced with a series of “Jump in, the future looks bright again” reports.

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DNG is leading the charge, suggesting prices will rise 5 per cent this year once the yoke of lockdown is removed. Sherry FitzGerald thinks prices will increase by 1-3 per cent, but warns the ongoing imbalance between supply and demand will lead to another sharp acceleration in rents.

Estate agents are good at delivering an instant snapshot of the market. They’re well networked on the ground and get a live feed on transactions. But they’re less proficient at divining the trend over time. None of them predicted the crash in 2008, none of them predicted the rapid acceleration prices from 2013 onward, and none forecast the recent deceleration in price growth, a trend that has resulted in deflation in Dublin.

Covid and Brexit may have proved less damaging to Ireland’s housing market than initially predicted – that’s self-evident – and may even lead to a temporary bump in prices, but the outlook for housing demand and prices is down, and here’s why.

Population growth

The main driver of housing demand is population growth, and while the Republic still has a growing population, the rate of growth has begun to slow. In the year to April 2019, population growth was 64,500, according to the Central Statistics Office (CSO). The following year this slowed to 55,900, and it's likely to slow again in 2021.

Several factors are driving this trend. The birth rate is falling – it was 58,300 in 2020, down from 77,200 back in 2010 – which is a reflection of having fewer women of child-bearing age.

At the same time, the death rate has gone up, the natural consequence of having an older population. And this unfortunately is likely to accelerate under Covid.

Another big driver of population is inward migration, and this is also tapering. Net inward migration peaked at 34,000 in 2018, falling to 33,700 in 2019 and to 28,900 in 2020. It is also likely to diminish further under Covid.

Prior to the pandemic, Ireland had a booming economy and employment-rich growth, something that should entice economic migrants.

If anything, we are likely to see price declines in 2021 and 2022

What really drives economic migration, however, is an asymmetry in the performance of economies, and while Ireland has performed well, so has the global economy. The high cost of living here is also a limiting factor.

So while our population continues to rise, it is doing so at a diminishing rate, and therefore demand for housing will continue but at a diminishing rate. The proof that this trend has already taken hold is best seen through the prism of price.

House prices

Annual house price inflation has fallen from more than 13 per cent in 2018 – the year net inward migration peaked – to just 0.2 per cent currently and to -0.9 per cent in Dublin. That’s a pronounced decline and it’s not related to Covid. We’ll get the full-year numbers for 2020 from the CSO on Friday.

A search on Myhome.ie, which is owned by The Irish Times, shows there were 206 price changes related to the properties listed for sale in south Dublin over the past three months, 76 increases and 130 decreases. In north Dublin there were 132 price changes, 41 increases and 91 decreases.

Rent inflation has also fizzled out , falling from 9.2 per cent in the third quarter of 2017 to 1.4 per cent in the third quarter of 2020, according to the Residential Tenancies Board.

Builders tend to react to these shrinking price gauges by paring back output. So while we’re likely to see a pick-up in supply in the short term, that reflects development decisions taken two years ago. Builders looking at the current price trends, and considering the relatively high cost of construction, are likely to tread more cautiously. And we’re already seeing signs of this via a fall-off in commencement notices, a trend that predates Covid.

This is not to say housing here is affordable or slowly becoming affordable. It’s patently not. You need big increases in income combined with a prolonged period of low inflation for that.

The average sales price for a property in Dublin is now just under €450,000, nine times the average full-time income. And remember the Central Bank’s borrowing rules allow for a loan-to-income ratio of just 3½.

However, if prices and rents are moving sideways, albeit at a high level, and population growth is easing, the likelihood of strong inflation in the near term is low or negligible. If anything, we’re likely to see price declines in 2021 and 2022, which is only a continuation of the pre-Covid trend, but perhaps not what the industry wants to hear.