Fewer homes coming to the market, significant pent-up demand, Government incentives like Help to Buy... it’s no wonder that analysts are forecasting house prices will rise in 2021.
But in all the talk of the underlying fundamentals that may drive house prices this year, there has been one omission – the presence of cash buyers.
The dash to cash
Last week, two interesting statistics emerged. First, Davy estimated the size of the Irish residential market in 2020 to be about €15.6 billion, based on 48,300 house or apartment sales. Second, figures from the Banking and Payments Federation of Ireland (BPFI) indicated that the total mortgage market was worth €8.4 billion last year.
Both figures were ahead of expectations, with the former likely to top out at about €16 billion for the year, once all transactions are fully completed, indicating the robustness of the residential property market despite the impact of the pandemic.
But that is not what is intriguing; rather it’s how the figures show how significant cash buyers remain in the Irish market.
If the mortgage market was worth €8.4 billion, based on an average deposit of 15 per cent, we could expect mortgages to fund about €9.8 billion worth of residential properties last year. This leaves us with about €6.1 billion of property sales that must have been funded with cash.
In value terms, about 40 per cent of all sales in the Irish market last year were made with cash.
But what does this look like in a historical context? Historically, about one in five residential purchases would have been transacted with cash.
Back at the height of the boom, in 2006, cash buyers accounted for about 25 per cent of all sales. However, as the market collapsed in subsequent years, the proportion of cash buyers rose, reaching a peak of about 63 per cent in 2013. Since then, the proportion of cash buyers has eased, but as the figures for 2020 show, it remains significant.
And it’s not in line with international trends. In the UK, despite its booming property market, the proportion of cash buyers has fallen in recent years, down from an all-time high of about 36 per cent in 2009 to about 24 per cent in the three months to September, according to figures from estate agent Hamptons International.
In London, just 17 per cent of homes were bought with cash during this time – the lowest share on record. So what’s going on?
Who are the cash buyers?
When talking about cash buyers, investors are always going to be the largest cohort. And while not always “true” cash buyers, in that their acquisitions – particularly those by institutional investors – have likely been funded by debt, in terms of purchasing power, they can act like cash buyers.
These buyers were busy last year, despite the impact of the pandemic. Figures from CBRE, for example, show that the build to rent/private rental sector was active last year, with total investment of just over €1.75 billion, as investors like European property firm LRC Group scooped up assets such as 102 apartments at Herberton, Dublin 8 for about €36 million.
While the overall investment was down on 2019, when about €2.5 billion was invested, it was still a significant sum.
Cash-rich individual investors may also have been active. Given that Irish deposits are now at all-time highs, it may make sense for some to chase yields in property to invest for their pension fund, or to buy a home outright.
A certain proportion of properties coming to the market are only suitable for cash buyers, given that they may have issues due to the presence of pyrite, or issues with fire safety, as found in a number of boom time properties. Daft.ie, for example, is currently advertising a cash-only purchase in Chapel Farm Avenue in Lusk, because pyrite has been found.
The pandemic has also spurred many people living abroad to consider a full-time return to Ireland, potentially accelerating a trend that was already underway. CSO figures for the year to April 2020 (the latest available) show that 28,900 Irish nationals came home that year – the highest figure since 2007. Not all of them would have had bank accounts stuffed with cash to fund a property purchase but some would, potentially partly through the sale of a property in their former country of residence.
The mortgage rules
What does the influx of cash mean for a typical mortgage-funded buyer?
Cash can have a deflationary impact on markets – buying with “cash” can deliver a lower sales price on new cars; when it comes to buying a house, a vendor will sometimes accept a lower bid from a cash buyer due to the certainty/expediency with which they can complete the sale.
However, cash-rich buyers can also use their purchasing power to push up prices. Consider two bidders for a property, one who must buy with a mortgage, and the other who has the money in the bank. In a bidding war, the cash buyer has the flexibility to go higher, while the other buyer may need to get approval from their lender – and may be stymied by the Central Bank’s mortgage lending rules.
Introduced in 2015, the Central Bank’s macroprudential rules limit how much buyers can borrow to fund a house purchase. After the credit splurge in the Celtic Tiger years, the goal is to dampen the impact of too much available credit in the market and to ensure that a “damaging credit-house price spiral” doesn’t emerge.
However, much like a vaccine is only truly effective once a certain proportion of the population have had it, so too are the macroprudential rules. If only a certain proportion of buyers have to abide by them, and limit how much they can offer on a house, their ability to counter house price growth must also be limited.
In 2017, then Central Bank governor Philip Lane warned that cash buyers were playing havoc with its mortgage rules, because so many buyers were exempt.
Given the circumstances facing the property market this year, that situation might arise once more. The impact of cash buyers can be exaggerated at times of reduced transactions. In 2006, cash buyers only accounted for 25 per cent of the market, but there were a whopping 115,000 sales that year.
This year, buyers appear to be plentiful, based on pent-up demand and buoyant mortgage approvals, but supply looks set to be sorely lacking. The trump card again looks set to be held by those who can buy without the imprimatur of the regulator.