Does the ‘soft landing’ narrative for house prices stand up to scrutiny?

The Covid-induced sugar rush in property markets is over. Headline inflation is decelerating or turning negative on the back of higher interest rates. Anecdotal evidence suggests buyers are being forced to pull out of sale-agreed arrangements because their lender has either given them less in the loan offer or withdrawn it completely.

Property website MyHome says it has 3,300 more properties for sale than it had this time last year and a higher percentage of sellers revising their asking prices downward. The Economic and Social Research Institute (ESRI) has also indicated that house prices here are overvalued by at least 7 per cent. And that calculation only goes up to the end of last year, suggesting the overvaluation may be higher.

Whichever way you look, there is evidence of a slowdown, but will this trend turn into price correction?

Industry professionals here say no. Most point to the mismatch between supply and demand, which has dogged the market for over a decade, as something that will underwrite prices at least in the medium term.

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According to Sherry FitzGerald, there were 15,300 second-hand properties for sale nationwide in July, representing an annual increase of 1,800 properties. Despite the improvement, the total volume of properties for sale in July represents just 0.8 per cent of the total housing stock.

In a normal, functioning market, you would expect to see about 2 per cent of existing stock being turned over at any one time. Similarly, while we’ve seen an uptick in new builds — new dwelling completions in the year to June stood at 24,929 — it doesn’t yet approximate the estimated level of demand at 35,000.

Others point to the relatively benign macroeconomic outlook. The Irish economy is expected to grow strongly this year and remain in growth next year when many other countries fall into recession. The two Government buyer-support schemes — the First Home scheme and the Help to Buy scheme — will also continue to support prices, they say.

So, according to the industry, we’ll get a slowdown in price growth but not a correction. Keith Lowe, chief executive of estate agent DNG, says he expects headline inflation to fall to between 5 and 7 per cent in the coming months, down from its current rate of 13 per cent, and to 2 per cent next year.

This soft landing narrative contrasts with sentiment abroad, however, which centres on the corrosive impact of higher borrowing costs, which are expected to trigger downturns in real estate markets across the world and a potential painful reset in some of the more over-priced markets.

“We will observe a globally synchronised housing market downturn in 2023 and 2024,” Hideaki Hirata of Hosei University, a former Bank of Japan economist who co-authored an International Monetary Fund paper on global house prices, recently told Bloomberg. He warned the full impact of this year’s aggressive rate hikes will take time to play out for households.

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. Prices are already falling in Canada, Australia and New Zealand on the back of strong interest rate increases.

The US, which is further down the road of rate hikes than us, is illustrative. The mortgage rates attached to 30-year fixed-rate contracts there have more than doubled to 6.7 per cent. In practice, that means paying $2,500 a month now buys a home worth about $480,000. This time last year, the same monthly repayment could have bought a property worth $760,000. In other words, home affordability is sinking fast.

The European Central Bank (ECB) is the last big central bank, outside the Bank of Japan, to begin monetary tightening, in part as it is typically less interventionist than the US Federal Reserve. It has raised rates by a combined 125 basis points over its last two meetings and markets are pricing in a further 175 basis points in hikes between now and next spring, bringing interest rates from zero to 3 per cent in less than a year. in short, we’ve yet to feel the full impact of higher rates.

A central question is whether the drag from higher interest rates overrides or proves more impactful than the supply shortfall that so bedevils the Irish market. Lorcan Sirr, a lecturer in housing studies at Technological University Dublin, insists “there is a greater correlation between interest rates and house price movements than supply and price movements”.

We also don’t know how high interest rates will go. That depends on the current inflationary spiral, the energy price shock underpinning it and Vladimir Putin’s war in Ukraine, a seemingly unknowable set of variables.

Another question is what impact higher interest rates will have on the funds that operate here. These entities are responsible for most of the apartments being built in Dublin and other urban centres. What happens when the return from safe-haven government bonds increases above the yield from real estate? Will they start to divest of their holdings here?

Nothing is ever certain when it comes to Ireland’s volatile real estate sector. The frenzied buying and bidding activity of the pandemic period might be over but what comes next is not yet clear.