Irish house prices, which defied expectations by holding firm during the Covid-19 crisis, are set to fall by 2-4 per cent in each of the next two years as the effects of the pandemic and Brexit weigh on economic growth, according to Fitch Ratings.
The debt ratings agency said it is assuming a no-deal Brexit, resulting in World Trade Organisation tariffs on goods moving between the UK and the European Union, in its forecasts. It comes as the prospects of an agreement hang in the balance, ahead of the expiry of transition arrangements at the end of this month.
Fitch predicts that Irish mortgage arrears of at least 90 days, which stood at 5.6 per cent at the end of June, will spike at 14-16 per cent of home loans next year before dipping “marginally” the following year.
“We expect to see a pattern observed after the financial crisis, as servicers will apply extensive forbearance measures leading to a build-up in late-stage arrears and little or no repossession,” Fitch said.
“While the low interest rate environment will help the performance of seasoned loans, many first-time buyers from recent years borrowed at their serviceability limit and may be more vulnerable to changes in the labour market.”
Fitch added: “The resolution of the Brexit negotiations and the length of the Government [economic] support measures leave a high level of uncertainty around the severity of the impact of the pandemic on the Irish labour market and mortgage loans’ performance.”
Irish home prices fell at an annual rate of 0.8 per cent in September, defying estimates by some economists and banks earlier this year of a 12 per cent slump. The market has been supported as house completions remain far below demand.
Banking & Payments Federation Ireland (BPFI) economist Ali Ugur estimates that 19,000 to 20,000 new homes will be completed this year, well off of the 35,000 units required annually to meet demand. Housing supply is unlikely to meet demand until at least the end of 2023, as Covid-19 has disrupted commencement activity this year, according to BPFI.
Fitch said it expects the Irish gross domestic product (GDP) to expand by 0.7 per cent this year, as a strong performance by the multinational sector offsets a drop in the underlying domestic economy. It sees GDP growing by 3 per cent in each of the next two years, though unemployment will remain high, negatively affecting affordability and demand for housing.
The Republic's unemployment rate stood at 21 per cent in November, after the Government introduced temporary Level 5 restrictions to curb the spread of coronavirus, according to the Central Statistics Office. The figure included those in receipt of pandemic unemployment payments.
“We believe government support will play a key role in the medium term, supporting the economic recovery and cushioning the effects of the pandemic on home prices,” Fitch said.
The ratings agency expects house prices to be broadly stable across nine of the 16 countries it has assessed globally for its report. Spain and the UK face the greatest downside risk, it said, estimating that both countries will see price drops of between 4 per cent and 6 per cent next year.