Irish property market likely to slow down with house prices overvalued by 7%, ESRI says

Cost-of-living squeeze and higher interest rates likely to cool market, says think tank, but too early to say if prices will fall

Irish house prices are overvalued by at least 7 per cent, the Economic and Social Research Institute (ESRI) has said.

In its latest quarterly bulletin, the think tank warned the State’s property market was likely to experience a sharp slowdown in the coming months as wider inflationary pressures and higher interest rates weigh on demand.

However, it stopped short of saying whether this would result in a house price correction or a period of falling prices, suggesting it was too early to tell.

In its analysis, the ESRI modelled where house prices should be on the basis of various economic and demographic factors such as income, population, credit and interest rates.


It found that prices were about 7 per cent above their expected trend values as of the end of last year. Unlike the pre-2008 period, when the overvaluation of property was driven by excess credit, this time around prices have been inflated by pandemic-related factors such as increased savings and curtailed supply combined with “the increasing share” of institutional investors in the market, it said.

“The analysis is up to the end of 2021 so, given the pace of growth in house prices in 2022, the overvaluation right now is at least 7 per cent, possibly even a couple of percentage points higher,” the ESRI’s Kieran McQuinn said.

“That doesn’t necessarily mean that house prices are going to fall by that amount, but what it does suggest is that the substantial increases in house prices that we’ve witnessed cannot continue into the future and you’re likely to see a significant moderation in terms of house price growth in the coming quarters and over the next year.”

Mr McQuinn said it was too early to say “whether we see falls in house prices” but that it seemed certain the market would cool. This, he said, would be “aided and abetted” by a likely increase in policy rates signalled at the European Central Bank which would likely then follow through into the domestic market in terms of higher mortgage rates.

The rate of house price growth in the State fell to 13 per cent in July, down from 14 per cent in June, extending a pattern of deceleration seen in recent months, according to the Central Statistics Office.

Increasing borrowing costs are expected to trigger a rapid cool-down in real estate markets across the world and a potential painful correction in the some of the more over-priced markets. Turmoil on the UK’s financial markets has prompted analysts to predict that house prices there could fall by as much as 20 per cent.

In its latest report, the ESRI said the Irish economy continued to perform strongly despite the “considerable uncertainty” surrounding the international economic outlook. It forecast growth of 7.5 per cent this year in terms of modified domestic demand (MDD), the more accurate measure of domestic economic activity, and by 2.5 per cent next year.

However, it said the increasing probability of recession in the US, UK and the euro area and “the growing possibility of energy supplies being rationed across Europe in the winter of 2023″ posed big downside risks to the forecasts.

It also said inflationary pressures were set to continue, with price growth expected to average 8.1 per cent this year and 6.8 per cent next year, placing further downward pressure on real incomes.

Eoin Burke-Kennedy

Eoin Burke-Kennedy

Eoin Burke-Kennedy is Economics Correspondent of The Irish Times