Home truths: the residential property highs and lows of 2016

There are still not enough new homes

Incredibly, the widely flagged chronic shortage of housing persists both in the new homes and second-hand market. In a proper functioning market about 5 per cent of all housing stock is traded annually. In Ireland this figure stands at 2 per cent, and closer to 1.5per cent in Dublin. While the number of new homes built in the first eight months of the year (9,167 units) is up around 30 per cent on last year, in Dublin new homes under construction have actually fallen almost 3 per cent.

Without a greater supply of properties to trade prices will continue to rise and further pressure will be exerted on the already out of control rental market. The sluggish supply is mainly down to the stricter lending limits imposed last year by the Central Bank on buyers, homeowners stuck in negative equity and limited access to funding for developers who will not build until they are certain of their return. As a consequence new homes are costing an average of €43,000 more now than a year ago – a 20 per cent increase over the year. To achieve returns the builders are chasing higher margins on fewer properties.

We got a brand new “housing Csar”

The creation of a new Minister for Housing role, and Simon Coveney’s appointment in May created a focal point for the deafening white noise around the dysfunctional property market. With relative efficiency in July he unveiled a new €200 million “local infrastructure fund” designed to help build between 15,000 and 20,000 new houses or apartments nationally from 2017. So far he has applied himself fully to the brief liaising with agencies and vested interests to bring new homes on stream. The construction industry was disappointed that the Budget failed to introduce a reduction in VAT and high build costs remain a barrier to greater development. But on the demand side a 5 per cent “Help to Buy” tax rebate was unveiled for first-time buyers – essentially a grant to builders. A fast-track planning system is also in the pipeline that will allow developers to seek permission directly from An Bord Pleanala for estates of 100 units or more, though there is some concern within the industry as to how this can work practically.

The Central Bank loosened the purse strings

In November the Central Bank eased its mortgage lending restrictions by removing the ceiling on the 90 per cent loan to value ratio for all first-time buyers. This should prove a huge boon to first-time buyers who until last month needed to have saved a €58,000 deposit for a €400,000 new home. From January 1st that buyer will need a deposit of €40,000. The extension of the 90 per cent LTV to second-hand buyers and more discretion for banks around lending limits were also significant developments. The Central Bank also reserved the right to intervene if prices start overheating.

While reservations were expressed by vested interests that they didn’t go far enough and that the retention of the 3.5 times loan to income requirement is onerous particularly in Dublin, they have generally been welcomed. DNG has revised upwards its prediction that property prices in Dublin would rise by about 5per cent next year to somewhere between 7.5 per cent and 10 per cent. The start of 2017 should lead to a sharp increase in demand for new homes, and it’s likely that average prices at the lower end will rise quickly by about 10per cent.

Second-hand homes likely to increase at a faster rate

The latest easing in lending requirements should certainly boost activity in the second-hand homes market next year. Sherry FitzGerald research shows that owner occupiers account for nearly three quarters of all transactions, while investor activity has risen slightly (presumably to capitalise on soaring rents) to about 20 per cent. Further house price inflation seems likely as unemployment hits a new low and wage inflation is likely.

For those who bought first homes during the boom and are currently stuck in negative equity, there is cold comfort in the new lending rules, which only extend to first-time buyers. Many of these younger homeowners have started families and are stuck in accommodation unsuitable to their needs, or else they have moved to rental accommodation and in turn are renting out their own property to service hefty mortgages. They have nowhere to go, are unlikely to amass a 20 per cent deposit, and in the meantime occupy properties that might otherwise be available to first-time buyers.

At the upper end of the market period properties continue to sell well and, apart from a few aberrations, prices are coming in around the asking as opposed to the overheated activity that preceded the Central Bank lending regulations. DNG reports property sales on north side suburbs as “particularly strong” and with the new Luas line under construction it predicts that property price rises on the north side will exceed those on the south side in 2017.

At the very top end there was less evidence of the international investment trend in the “trophy” homes market, with most buyers n 2016 tending to be Irish families trading up. Brexit and Trump’s election in the US have contributed to uncertainty, though some would argue the currency fluctuations and Ireland’s position as an English speaking nation beside the UK but within the euro zone gives it an attractive competitive advantage for property investment.

Greater measures needed to curb soaring rents

Rents are currently higher than their previous height at the top of the boom in 2006. By mid year rents for apartments had increased on an annual basis by 9.8 per cent, while rents for houses increased by 7.5 per cent. The stock of rental properties is diminishing as individual landlords exit the sector citing punitive taxes or simply an inability to service payments on buy-to-let mortgages. They are not being replaced by other investors, but usually buyers who return them to family home use.

The latest Central Bank relaxation on lending may counter this inflationary market early next year, as renters realise they have sufficient deposit cash saved sooner than expected and move out of rental accommodation to buy. But this has yet to play out. Meanwhile, the emergence of a dedicated Build to Rent sector could ease pressure in the rental market for apartments and herald an era of more professional rental than heretofore. However, they are also likely to be more expensive than traditional “bedsit” accommodation that has all but exited the market completely.