Prices in the Irish housing market will go on growing in 2006, but by a more moderate 10 per cent, says economist Marian Finnegan.
It would be fair to say that when the history books are written, the story of the 1990s and even the noughties in Ireland will be a property one. The saga which has been the property boom is probably even more notable for the number of its detractors than for the rude pace of price growth achieved in the decade.
Each year some new reliable source has predicted the demise of this market, gained the headlines only to be quietly proven wrong by the zealous growth rates. 2005 was no different. If anything, it was one of the more profound years for the Irish, and perhaps in particular, the Dublin property market.
At the time of writing, the evidence suggests that the Irish second-hand property market will have expanded in capital value terms by approximately 15 per cent, while the Dublin market will have achieved growth rates of in excess of 20 per cent. Bearing in mind that the Celtic Tiger and its close relation, the Irish property boom, supposedly went into retirement after 2001, such growth rates are phenomenal.
This exceptional performance of the property market in 2005 reflects a variety of somewhat unique factors, notably the stamp duty amendments in the 2005 Budget; exceptional immigration figures, the highest ever on record; stronger than anticipated employment growth; and perhaps the feelgood factor brought about by the stability of the interest rate environment, despite predictions in late 2004 that rates would be increasing in 2005.
Because of the influencing factors, the pace of price growth varied somewhat between different property types and indeed locations. Perhaps as a direct result of the heightened consumer confidence and wealth levels in Ireland and most notably Dublin, the stability and strength of demand at the upper end of market fuelled exceptionally strong price inflation. This is perhaps best illustrated by the performance of the auction market.
An analysis of the auction market in the greater Dublin area, for example, reveals that a total 486 houses achieved in excess of €1 million during the year. This compares to only 185 houses in the same period just two years ago and 320 in 2004.
This increase in million euro sales was perhaps particularly notable this year as it started during the opening quarter of the year before the auction season had really opened. The strong auction market typically takes place in spring and early summer rather than the early weeks of the year.
The starter home end of the market also enjoyed above trend rates of price inflation in 2005. This was a direct consequence of changes in treatment of stamp duty for first-time buyers in the second-hand market in Budget 2005. The immediate impact of this change was that first-time buyers who had contemplated purchasing a second-hand property now had up to €11,000 additional income to spend. Not surprisingly this money was invested in the property, fuelling price inflation in the opening weeks of the year. Indeed the above trend price growth in the starter home market was evident throughout the first half of the year before slowing somewhat in the latter months.
A location analysis shows that Dublin was the clear winner in terms of price growth, closely followed by the other regional centres of Galway and Cork and counties surrounding Dublin, particularly Louth, Meath and Kildare. Within the capital it is clear that time travelling to and from the workplace is not surprisingly an important factor in location choice - which is why Clontarf, Drumcondra and Glasnevin on the northside and Sandymount, Ranelagh and the South Circular Road on the southside have performed so well.
The Luas and Dart lines continue to add value to homes with evidence that locations such as Dundrum and Sandyford have continued to benefit from the improved infrastructure and reduced commute times brought about by the addition of the Luas.
The new homes market also enjoyed a very buoyant period of activity in 2005 with supply levels likely to reach 80,000 units, therefore exceeding the historical high of 2004. That said, such strength of supply will more than likely represent a peak in the market with output levels moderating in 2006.
This strength of supply has resulted in a more moderate rate of price growth in the new homes market with evidence to date suggesting that price growth for both the Irish and Dublin markets likely to approach 10 per cent rather than the 20 per cent achieved in the second-hand market.
First-time buyers remained a key ingredient of demand in both the new homes and second-hand markets in 2005 representing approximately 41 per cent and 36 per cent of purchasers respectively. Investors were also very active purchasing approximately 32 per cent of all new homes and 17 per cent of all second-hand properties in the year.
Indeed, the continued strength of investor demand had led to some concerns in recent years regarding oversupply. However, interestingly, an analysis of vendors in the year to date suggests that 29 per cent of vendors were selling investment properties, a trend that has contributed to the stabilisation of the market which is evident in the return to positive rental inflation in the private rented market 2005 - the CPI index of privately owned rents rose by 4.3 per cent in the 11 months to November 2005 after two consecutive years of depreciation.
The strength of activity and in particular price inflation is probably music to the ears of existing property owners. However, such activity in itself does beg the question, how much longer can this last?
To address this one needs to look at the factors driving property demand, principally population growth. Taking into consideration trends in fertility and migration, current forecasts would suggest that the population of Ireland will increase from 3.9 million in 2002 to 4.81 million in 2016.
Further considering rising living standards, falling household sizes and the need to replace obsolete stock, this forecast suggests that the total housing stock in Ireland would rise by over 800,000 in the 15-year period, which is equivalent to 56,500 units per annum.
Such a forecast, which is high by either historical or international comparisons, bodes well for the future performance of the industry overall.
That said, I don't believe it will be a case of more of the same please ; rather we should expect some marked changes in demand during the coming decade.
Ireland's birth rate peaked in 1980, meaning that the children born in that final year of the "baby boom" are now aged about 25 and entering the housing market for the first time. In the coming years, the number of new entrants to the market will decline.
This will lead to some slight slackening in demand for smaller units such as apartments and two-bedroom homes. However, this will be more than balanced by an increased demand for larger units. Those first-time buyers who entered the market over the past few years and are entering it now will, over the next 10 years, become the next generation of buyers looking to trade up.
They will be looking for larger homes - three, four or five-beds with extra space for growing families, home working and so on. This will mean that the property market will undergo a significant change with demand for larger homes increasing. This will require a change in emphasis on the part of homebuilders with new developments featuring a higher proportion of larger homes than heretofore.
This is not to say that there will not be continued strong demand for apartments and smaller homes - the market for these should remain healthy, particularly for well-located units that are well served with good infrastructure.
All in all, the evidence appears to point in one direction - strong steady demand for the foreseeable future. Our young population, overall population growth, and strong economic performance will mean that demand for homes and thevalue of those homes will be sustained for many years to come.
That said, the combination of a reduction in the gap between demand and supply and some upward movement in interest rates in 2006 will facilitate a moderation of house price growth in the year ahead with current estimates suggesting price inflation will slow towards 10 per cent in 2006 and 2007.
Such growth rates may be far from the giddy days of the late 1990s when price growth of 10 per cent was achieved in a quarter but they still underwrite a view that residential property offers investors of all types a safe and stable vehicle to invest a relatively small quantity of money and enjoy a very satisfying rate of return.
Marian Finnegan is chief economist, Sherry FitzGerald Group