What Irish house prices say about the regional economic divide

Data about the spread of economic growth across the State is hard to find – and tends to be well out of date. Now new research from the ESRI uses home price and rental data to look at how much different parts of the State have gained from the recent period of strong growth.

It also looks at what different house price and income trends mean for first-time buyers in different parts of the State – including new estimates on average income for under-40s.

With Dublin becoming clogged up and much of rural Ireland lagging behind, it also carries key messages from policy makers.

1. House prices and what they tell us about regional growth: One thing which is hard to estimate from Irish economic data is the spread of growth across the State. We do get regular data for the jobs market – which shows that employment has risen and unemployment has fallen, with Dublin the biggest gainer in terms of new jobs. Beyond that, however, data is limited.

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Research in the latest ESRI quarterly bulletin provides some new insights. It uses movements in home price and rents as an indicator of economic growth – the faster they rise in any particular region, the more rapid growth is in that area. The key outcome from this is that, over the last few years, all parts of the State have gained but those parts of the State which started off with the highest home prices and rents have seen faster growth than the average.

This suggests that, as economic growth has revived, the regions that were already better off have been doing better. In other words, strong growth has led to the gap growing between the better off – largely urban – parts of the State and the less well-off – largely rural. The Dublin region has been gaining particularly.

As other data have shown, prices of homes have been higher in Dublin, notably in some parts of south Dublin and the city centre, followed by Cork and the other cities and then rural counties.

The time trend is interesting. Between 2007 and 2010, there was convergence in economic activity between richer and poor counties and local electoral areas, judging by the home price and rental trends. Between 2010 and 2014 there was significant divergence – with the rich getting relatively richer.

The gap has remained relatively constant since, with perhaps some narrowing last year. However, the research notes that the presence of rent pressure zones and the impact of Central Bank lending rules have stopped rents and prices rising as fast as they might have over the past couple of years, particularly in urban areas. For this reason the housing data may have become a bit less reliable as a guide in areas where the rules have had the biggest impact.

2. Are house prices vulnerable?: The ESRI view is that it does not believe they are – or at least finds that they are not overvalued in terms of the current state of the economy. We have heard this assessment before, but now it has been done on a regional level.

In a research paper published on Thursday with the latest quarterly commentary – Irish House Price Sustainability: A County-Level Analysis – ESRI researchers look at the relationship between price of buying a home and rents at a regional level to assess which markets are most “ hot” – in other words fully valued – and which are not. Not surprisingly the “ hottest” markets are in urban Ireland, while slower price recovery in much of rural Ireland means these markets are significantly cooler.

The rental yield – rents as a percentage of house prices – increased from around 4 per cent in 2010 to 6 per cent in 2014. This was because prices fell faster than rents as the collapse set in. There followed a period of stability and then a fall in yields as rent price inflation outpaced home price growth. Towards the end of last year the rental price yield was around 4.7 per cent.

In general, the yield in different parts of the market moved roughly in tandem. However, by the end of the period, the highest yields are in the Midlands and Border region, where home price declines were steep and prices have not recovered as quickly as in Dublin and other urban markets. Rents in the more rural markets have risen more recently. The county with the highest yield in 2018 was Roscommon at 6.7 per cent, followed by Offaly at 6.2 per cent and Monaghan at 6 per cent. (See table)

The lowest yields were in the southeast, where home price growth has exceeded rental growth. Wexford was lowest at 3.4 per cent, with Kilkenny and Wicklow at 3.6 per cent. This does not necessarily suggest the markets in these countries are overheating, the research says, or that they are out of sync. But they do look more fully valued.

Yields in Dublin fell from 5.3 per cent in 2013 to 4.3 per cent last year while, in Cork, they dropped from 5.3 per cent to 3.8 per cent. The Central Bank lending rules are likely to have had more of an impact in Dublin in particular, slowing the rise in prices – significantly, according to recent Central Bank research – and affecting yields.

Overall, the conclusion that markets are not overvalued is striking, given the affordability problems in some markets for first-time buyers.

3. Affordability and first-time buyers – the regional story: Extending the regional analysis, a separate paper with Thursday's quarterly bulletin looks at regional trends in affordability. The paper, A County-Level Perspective on Housing Affordability in Ireland, develops regional estimates of income and home prices to see where the squeeze is tightest for first-time buyers.

First-time buyer prices bottomed out in 2013 and have risen since then year on year. The research shows that prices for first-time buyers surpassed 2010 levels by 2016.

However, there are huge regional differences. In Dublin the first-time buyer price had exceeded 2010 levels by 2014 and have continued to rise ever since. But in lower priced parts of rural Ireland the price paid by first-time buyers remains well below 2010 levels. By 2018 the average first-time buyer home in Dublin cost €375,000,three times more than the average price in Longford (€116,000). (See table)

In fact, only Dublin, Wicklow and Kildare are above the national average of €283,000 and the average remains below €200,000 in 18 of the 26 counties. After Dublin, the next highest are Cork, Galway, Limerick and Louth. On average, the price of first-time buyer homes rose by 56.4 per cent between 2013 and 2018.

In terms of income, the ESRI researchers looked at households aged 40 or under, and found that gross incomes averaged €56,825 with household disposable (after-tax) income averaging €43,250 in 2018. Dublin had the highest disposable income figure at €48,900, with Donegal the lowest at €33,900. (See table)

Homebuyers are likely to be, on average, wealthier than the norm. Banking data show the average gross (before tax) income of first-time buyers in 2018 at just over €73,500, compared to gross income of €58,825 estimated by the ESRI for all under-40s. Previous research has shown that more than nine out of every 10 mortgages goes to those in the top 60 per cent of income distribution. However, the ESRI sticks with the global figure for its affordability estimates as the point is to highlight the affordability crux facing many.

Measuring repayments against income shows the affordability problem. Around one third of income is seen as the advisable limit.

In Dublin and Wicklow, repayments would, on average, require 35 per cent of income, while Wicklow and Meath also come in at over 30 per cent. In Galway and Cork, the figures are also close to 30 per cent. In poorer counties, the figure falls to 20 per cent.

Despite low mortgage rates, rising prices have pushed up the figure and left it close to or above the 30 per cent range overall.

The researchers point out that affordability is even worse in some parts of the market – for example Dublin city, where repayments would take 40 per cent of income on average, Dún Laoghaire Rathdown (43 per cent) and South Dublin and Cork ( both 33 per cent). And they are assuming two incomes in all cases.

Singe-income households would be priced out – and in many cases borrowers would struggle to get a mortgage.

4. The policy messages: The data confirm the affordability crisis in many areas. If the ESRI is correct that homes are not overvalued compared to economic activity, it suggests the affordability squeeze will continue in many areas. If the repayment as a proportion of gross income figure can be squeezed back below 30 per cent, it will help many.

In terms of regional spread, the data – and other employment figures – suggest that, while growth has benefited all regions, much has been concentrated in Dublin, which is increasingly congested. A big challenge is to achieve a better spread, first by getting more investment in the other big cities.