This time last year nearly every stakeholder in the property market – banks, regulators, estate agents – predicted property prices would crash. The slam-dunk assumption was that when the economy hits a wall and unemployment spikes, housing demand contracts and prices fall.
They didn’t, however, anticipate the idiosyncratic nature of the crisis; how it would hit certain sectors and not others; how it would usher in a home working boom and a demand for better living spaces; how Government supports would preserve incomes and drive savings. Who did? It was a unique event and hindsight is a cheap commodity.
Now we’re on a different tack. The assumption – held by the same stakeholders and with the same surety – is that property prices can only go in one direction: up.
We're now betrothed to the narrative of ever-accelerating house price inflation: buyers scrambling to get on the ladder; foreign investment funds buying up stock
Estate agents talk of pent-up demand. The Central Bank says "significant house price growth" will continue this year and next. "One paradox of the pandemic is that, while job losses are at a scale never seen before, the strength of economic activity in unaffected sectors combined with the level of additional savings owing to a lack of spending opportunities, precautionary behaviour and direct fiscal support, mean that there is ample scope for a liquidity-driven growth in house prices coinciding with never-seen-before economic disruption in some sectors," Central Bank governor Gabriel Makhlouf said last week at the publication of the regulator's latest Financial Stability Review.
The fact that these same institutions – just 12 months ago – couldn’t see outside the parameters of a house price slump tells you something intrinsic about forecasting.
We tend to extrapolate forward on the basis of what’s just happened. And while that’s sensible to a point, it fails when a new dynamic presents. That’s why most economic forecasts tend to say the same thing and why most tend to be wrong.
We’re now betrothed to the narrative of ever-accelerating house price inflation: buyers scrambling to get on the ladder; foreign investment funds buying up stock for the rental market.
Estate agency Savills got into hot water last week for seeking detailed financial data from people just to view properties at a new development in Lucan in west Dublin.
The company said it had been reduced to such a hard-nosed policy because it had received more than 5,000 expressions of interest in the scheme, which contains just 44 housing units in the current phase.
It’s these titbits of information that drive near-panic in the market and the perception that if people don’t buy now, they’ll be left behind. Perception is a strong factor in housing demand.
The most limiting factor is affordability, which is also the biggest problem with housing here – the reason why young people are increasingly locked out and forced to rent
The Covid-related uplift in property prices here is, however, modest by international standards. Bloomberg had a report last week which ranked the world's "bubbliest housing markets". Ireland was ranked second-last, well behind most other countries and significantly behind the likes of New Zealand, the US and the UK.
Property prices globally are being fuelled by pandemic-related factors – remote working and savings – and local factors: in the case of the US, a massive fiscal stimulus; in the case of the UK, stamp duty cuts; in the case of New Zealand, the temporary suspension of macroprudential rules.
Don’t get me wrong, there’s a demand bubble in the housing market here – one that’s likely to persist for several months – but it won’t last.
Cooling the growth
There are several forces coming that will cool the current level of price growth. The first is supply, which is picking up, albeit from a low base. It’s expected to be 21,000 units this year despite a four-month hiatus in construction at the start of the year, lifting to about 23,500 in 2022. While these totals are still below the estimated level of demand, the gap is narrowing. The lift in local property tax will also have a dampening effect as will the retention of strict mortgage lending rules.
However, the most limiting factor of all is affordability, which is also the biggest problem with housing here – the reason why young people of a prime working age are increasingly locked out and forced to rent.
An estimated 12 per cent of 25-39 year olds own their own homes in Ireland compared to 85 per cent of 65-year-olds.
Affordability constraints were a factor in the easing of house price growth prior to the pandemic. Annual house price inflation fell from more than 13 per cent in 2018 to just 0.2 per cent in 2020 prior to the current uplift, and to minus 0.9 per cent in Dublin. And remember the same supply problem – which is presented as the reason why prices are rising now – existed in equal measure back then.
According to the Central Statistics Office (CSO), the average sales price for a property in Dublin in the 12 months to the end of April was €466,211, nine times the average full-time income. The Central Bank's borrowing rules allow for a loan-to-income ratio of just 3½. These metrics don't work for most people and they're likely to put a brake on the current price trend.