Cost of building more houses could mean prices do not fall despite extra supply

Average home prices increased by 15.2 per cent in the year to March, and, while an expected increase in supply may ease this growth, “severe” cost pressures building up in construction input prices could offset this, according to a new report.

The Housing Market Monitor for the first quarter, published on Tuesday by Banking and Payments Federation Ireland (BPFI), shows the increase in average property prices has been much more prevalent outside of Dublin with March prices up by 17.3 per cent in the year.

This compares with 12.7 per cent increase in average prices in Dublin during the same period. Overall, by March, average national prices were 2.1 per cent lower than their highest level observed in 2007.

Property prices nationally have more than doubled from their low in early 2013. The increase has been higher in Dublin with average prices rising by 122.5 per cent since their February 2012 low.

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The rate of increase in average property prices on a monthly basis has been declining since the middle of last year, which may reflect increasing housing supply.

The most recent data show there were 32,456 units commenced in the 12 months to April, which is “a healthy sign of the pipeline for completions”, according to the report.

“Notwithstanding the fact that apartments account for an increasing share of housing output and these take longer than houses to complete, we should see a significant increase in the number of units completed in the second quarter of 2022,” it said.

At the same time, pressures building up in relation to input prices which could have a “knock-on effect” on housing prices.

The BNP Paribas Real Estate Construction Purchasing Managers Index for May shows that cost pressures were “severe” in April, the second-fastest rise in input prices since the survey began in June 2000, just behind the record posted in October 2021.

Annual inflation for building and construction materials was running at 18.2 per cent in April, whereas annual inflation for some materials such as metal and wood ranged between 50 per cent and 60 per cent.

In addition, average hourly total labour costs increased by 15.2 per cent in the construction sector during the first quarter of 2021 compared with a 4.9 per cent increase across all sectors during the same period.

In terms of housing output, there were 5,669 new completions in the first quarter of 2022, a 44.5 per cent increase from around 4,000 completions in the first quarter of 2021 when Covid-19 restrictions were in place.

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However, this level of completions is still 15 per cent higher than the levels observed in the first quarter of 2020 prior to the pandemic. This is the most completions seen in any first quarter since the data series started in 2011.

Apartments accounted for about one-third of all completions in the first quarter, compared with around 18 per cent in the same period in 2021.

The number of residential units granted planning permission rose by 41 per cent year-on-year in the last quarter of 2021 to 13,450, the highest quarterly volumes since the third quarter of 2008.

The annual rate of rental inflation was 9 per cent in the last quarter of 2021 with the national standardised rent level increasing to €1,415, according to the Residential Tenancies Board (RTB), based on new rental tenancies.

Half of all counties had standardised rent levels of more than €1,000, the most since the data series began, and led by Dublin at €1,916.

Westmeath joined the four Dublin commuter counties, plus Carlow, Cork, Galway, Kilkenny, Laois and Limerick and Waterford as the counties with average rents above €1,000.

Twelve counties reported their highest standardised rent level since the data series began in 2007, while in 10 other counties it was the second highest.