House prices in Dublin are 25 per cent overvalued against income, according to the Economist, which also finds in a new survey that property price growth in the city has outpaced growth in 22 other global cities over the past five years.
The finding from the influential newspaper comes on the back of continued price growth in Dublin and across the country, with prices nationally now up 79.6 per cent from their 2012 lows, with Dublin prices almost doubling, up 92.7 per cent.
Earlier this month the newspaper published its new house price index which covers 22 of the world’s “most vibrant” cities, including Sydney, London and San Francisco. It found buoyant price growth across these cities, noting that the average price of a home has risen 34 per cent in real terms over the past five years, while in seven cities (including Dublin) it rose by more than half.
Now it says that global house prices – which in 14 cities are above their pre-crisis peak by an average of 45 per cent – could be near a turning point. The average rate of house-price inflation across 22 cities has slowed, it found from 6.2 per cent annually 12 months ago to 4.7 per cent now, while in six cities prices have fallen from recent peaks.
But the prospects for the Dublin market may be less bearish than elsewhere.
Back in 2003 the newspaper made its famous pronouncement that Irish house prices would fall by 20 per cent to the disbelief of almost everyone; in fact they ultimately fell by a multiple of that.
This time around, however, the Economist is not suggesting that house prices in the capital are set to fall. Rather, in an effort to analyse whether market dynamics are being driven by "fundamentals or froth", the Economist has compared them with median household incomes. If prices rise faster in the long run than the earnings that service mortgages, they may be unsustainable – unless incomes rise also.
In comparing house prices to long-run median disposable household income, it finds that prices in Dublin are 25 per cent overvalued. This is considerably less than its estimates for other cities, which include Hong Kong (+94 per cent); Paris (+70 per cent); Vancouver (+65 per cent); and London (+50 per cent), but higher than Zurich and Madrid (+15 per cent). Just four cities in the survey have prices at or under fair value: Tokyo, Milan, New York and Singapore.
The newspaper says that prices across these cities may now be at a turning point, as the three reasons why cities have experienced a property boom – and why it may now be ending – are demand, supply and the cost of money.
“As demand weakens, supply strengthens and mortgage rates rise, the bull run in global cities’ housing may be drawing to an end,” it says.
The Economist points to potential falling demand, as the growth in globalised cities' population will soon start to slow – for example, London lost 100,000 people to the rest of Britain in the year to June 2017, while foreign capital – not so much an issue in Ireland – is also on the wane elsewhere. Secondly, supply – in Ireland as elsewhere – is finally ticking upwards, even if it still isn't sufficient.
Finally, the magazine cites an end to cheap mortgages, and bonds becoming attractive again, as interest rates advance.
Growth factors behind the Irish market may be slightly different, but with everyone describing the latest upturn in prices as a boom driven by lack of supply, it's still worth noting a point made by the Economist editor who made that famous prophecy back in 2003. Speaking in Dublin in 2005, then economics editor Pam Woodall noted that some economies rely on "common fallacies" to convince themselves that everything was going to be all right.
And one of these fallacies? Believing that a fixed supply of land and rising population mean house prices will always rise.