Prices to rise as equilibrium is miles away

Talking Property:  It is amazing that people will go to jail over bin taxes (only a few hundredeuro), when thousands of euro are sought from house-buyers in exorbitantlevels of stamp duty, writes Eunan O'Carroll

Nine months ago The Economist predicted a housing crash in Ireland with house prices to fall by as much as 20 per cent. A lot of financial institutions and other commentators jumped on the doom-and-gloom bandwagon predicting the end of the so-called property bubble. Does this property bubble really exist?

This agency is the first to recognise that house price inflation has stabilised in recent years and in our opinion there is absolutely no sign of house prices decreasing in the short to medium term.

Last year was another landmark for Ireland's residential property market with prices increasing by approximately 12 per cent in the year, matching our forecasts in The Gunne Report published in February 2003. Considering current market conditions, we expect price increases of between 6-8 per cent for second-hand properties in the greater Dublin area in 2004 and a more modest 4-6 per cent growth for house prices for locations outside Dublin.

This flies in the face of the advice given by many of the banks and other commentators, in particular The Economist, which in my opinion relies on unrealistic assumptions such as a significant increase in interest rates, a major unemployment shock or significant oversupply of housing units to drive a housing crash.

All of these factors, while not inconceivable, are unlikely to occur and making assumptions on this basis in our opinion is unnecessary scare mongering.

The problem is that banks, stockbrokers and other financial institutions treat houses solely as investment assets. This cold clinical approach, regarding residential property as investment vehicles only, focuses on the buy-to-let segment of the market which only accounts for 15 per cent of the second-hand homes market and ignores the other 85 per cent of the market who buy property, not to see a return, but to live in.

When financial institutions see rental levels decreasing, as they undoubtedly have done over the last two years, they take this as justification for their forecasts of a residential market crash. However, they ignore the built-up demand that still exists and will continue to exist from Ireland's growing population of first-time buyers. Many of these first-time buyers are supported by significant parental equity. Considering the massive increase in houses prices over the last number of years, this parental support is set to drive demand and enhance affordability for this segment of the market for some time to come.

Many have said over the last number of months in particular that there is now greater equilibrium between supply and demand in the Irish housing market. Yes, undoubtedly the supply of new homes has increased significantly but when you consider that only 21 per cent of the 68,000 house completions last year were built in the greater Dublin area, where demand is greatest, one realises that the supply and demand equilibrium is far from solved. While we are now producing a level of housing to match demand, one must remember the backlog from the years in the last decade when an insufficient level of houses were developed. For this reason, we will be playing catch-up for many years to come.

The housing crisis remains the number one issue for many of Ireland's young population today. It is amazing that people are willing to protest and TDs are willing to go to jail over the imposition of bin taxes (which amount to only a few hundred euro) when thousands of euro are being sought from Ireland's house buying public in the form of exorbitant high levels of stamp duty. This is an area where Ireland and in particular Dublin is significantly out of kilter with its European neighbours. We now also have development levies brought in by the Government as a tax on development land. This double taxation, which will ultimately end up coming out of the pockets of the consumer, has been receiving less attention than it should have by many of the market commentators. While many developers will seek to absorb this levy, the reality is they will simply be passed on to the consumer via increased prices for housing units.

While the outlook for the residential market in Ireland for 2004 is positive from a business point of view, the fact remains that there are still a number of key issues that need to be addressed by Government if the notion of home ownership is once again going to be an achievable goal for Ireland's young population.

Eunan O'Carroll is managing director, Gunne Residential.