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The ‘squeeze is getting squeezier’ for house buyers

The Central Bank’s lending rules will be crucial to avoiding a repeat of old mistakes

New year, same old story. The latest predictions are for the housing squeeze to intensify during 2018, with prices rising further, well ahead of likely increases in income. You would think that affordability constraints might be starting to kick in more significantly – particularly in Dublin – and slowing price growth. But, so far, prices just keep heading up.

Davy stockbrokers economist Conall Mac Coille, in an analysis based on figures from property website myhome.ie, predicts house price growth of 8 per cent this year. Most other forecasters expect something similar. Sherry FitzGerald estate agents peg the likely 2018 increase at 6-8 per cent.

Affordability is becoming an issue, particularly in Dublin, where Mac Coille believes house price growth this year may be somewhere around the 6.6 per cent recorded in 2016, compared with the double-digit rises seen as likely outside the capital.

As prices move out of the reach of more and more buyers, and a recent tweak to Central Bank lending rules means fewer mortgage loans can breach the 3½-times-income limit, house price growth in Dublin will be slower than elsewhere, he predicts.

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In a separate report for daft.ie, another property website, economist Ronan Lyons argues that the Central Bank rules do make a difference. The loosening of the deposit rules in early 2017, meaning all first-time buyers needed only a 10 per cent deposit, was a key factor in increasing prices in the first half of last year, he says. However, this was a once-off and the wider impact of the rules was to slow price growth later in 2017, in a "year of two halves" for the market.

Double-edged sword

For those wanting to buy, rising house prices are something of a double-edged sword. They make it more difficult for those currently renting, living at home or returning from abroad to buy. But rising prices do give a financial boost to those who bought as the boom inflated. Numbers in negative equity have fallen from more than one in three of all mortgage loans in 2014 to a still hefty figure of just below one in 10 now.

However, for many of those looking to buy a property, the squeeze is getting tighter. Mac Coille points out that there were just 18,900 houses on the market according to MyHome’s analysis at the end of last year, a record low and down 9.4 per cent on a year earlier.

There are signs that housing transactions are picking up and, over the whole of 2017, were about 10 per cent higher last year, though that is from a very low base. Sherry FitzGerald points out that the volume of new home sales was up 27 per cent in 2017, as some new supply came on stream.

But we are a long way off building the number of houses we need. With supply still below what is needed, prices will continue to drift up – albeit held back by affordability – unless there is some kind of economic shock that hits demand. Rents will also keep rising, pushing more families into homelessness.

The young lose

There are economis risks. Brexit – if the talks collapse – is a threat. And signs of strong growth in the euro zone economy could pull forward the likely timing of higher interest rates to some time into 2019.

Against this backdrop, it is vital that a flood of new credit does not push prices yet higher, as happened in the mid-2000s, and leave households vulnerable. Overall household debt has fallen sharply in recent years but remains high by international standards.

This is why the Central Bank rules are now vital. This is all the more important as the Daft analysis shows that while, on average, house prices remain below the 2007 peak, they are not far off those highs in some areas. In the seaside borough of Sandycove, beside Dún Laoghaire in south Dublin, prices are less than 10 per cent off peak. Across other Dublin suburbs and in parts of Limerick and Cork, the gap has closed to about 20 per cent. When you consider how out of line prices were before the bust, this is a clear warning signal.

The younger generation always seem to lose in this housing lottery. Many were lured in to take unsustainable mortgages in the boom. They have been dragging their way out of arrears and negative equity. Rising prices will help them to an extent, but many are now seeking to trade up just in time to be greeted by another house price surge.

In turn these rising prices are pushing many of the next generation of potential first-time buyers out of the market. And official policy now – inevitably – is to limit mortgage loans to this group, for fear that they will follow the boomtime buyers into unsustainable mortgage debt. They will be told there is for their own protection, but that will be scant consolation.