Irish house prices running 40% above long-term link to income

Home prices rose a further 2.2 per cent between December and the end of April

Irish house prices were running at 40 per cent above the long-term link to household income at the end of last year, a level last seen at the start of the property crash, according to figures from the Central Bank, which warned last week about housing market risks as borrowing costs rise.

The Central Bank said in a report last week that “higher positive deviations from long-run averages of price-to-income ratios have historically been associated with higher probabilities of house price declines in the future, especially when shocks occur”.

The semi-annual Financial Stability Report (FSR) highlighted “evidence of emerging cyclical vulnerabilities in the housing market against a backdrop of expected increased interest rates internationally”.

The average Irish home price of €318,000 in the fourth quarter of last year equated to about 4.8 times average household disposable income of €66,600, according to data subsequently provided by a spokeswoman for the Central Bank in response to questions from The Irish Times. This is about 40 per cent above the average ratio of about 3.4 per cent since 2018, she said.

The last time the gap was so wide was in early 2008, while the all-time peak was at the end of 2006, when the ratio reached 5.5 times.

Irish home prices rose a further 2.2 per cent between December and the end of April, according to Central Statistics Office data.

Central Bank governor Gabriel Makhlouf refused to comment during a press briefing last week on where Irish house prices were headed.

“I refrain from indulging in everyone’s favourite pastime,” he said.

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However, he noted demand for housing continues to outstrip supply. While interest rates are also on the way up – with a number of nonbank lenders having announced rate increases in recent months as their own market borrowing costs rose in anticipation of European Central Bank hikes – Mr Makhlouf said that a lot of mortgage holders are currently on fixed-rate terms.

The annual rate of Irish residential property price growth slowed to 14.2 per cent in April from 15.1 per cent recorded in each of the two previous months, marking the first easing in inflation in almost two years.

The average home price in the State is just 2.1 per cent below the 2007 peak. Economists such as Goodbody Stockbrokers’ Dermot O’Leary and Austin Hughes at KBC Bank Ireland estimate that the pace of price growth has passed its peak for the current cycle, as households grapple with rising living costs and an expected series of interest rate increases.

The Financial Stability Report said the rate of growth in household incomes has been considerably slower than both house prices and rents since the financial crisis, adding to housing affordability pressures.

“This contrasts with developments before the financial crisis, when house prices – but not rents – increased much faster than incomes, pointing to an important role of credit conditions in explaining housing dynamics at the time,” the bank said.

The regulator introduced rules in 2015 to limit most new mortgages to 3.5 times borrowers’ income, as well as capping loans relative to property values.

Joe Brennan

Joe Brennan

Joe Brennan is Markets Correspondent of The Irish Times