A leading economic consultant has forecast an early end to the recent housing boom as the factors driving property inflation such as low interest rates and population growth will provide less support for the property market in the future.
While the report by DKM economic consultants is not forecasting a property crash, it states that the longer the boom continues the more painful will be the correction.
The report is sceptical of the argument often put forward by many commentators that demographics will sustain the housing market into the future. The supply of new houses which is expected reach 67,000 units but DKM estimates demand will fall to around 45,000 per annum over the next number of years.
On the key issue of affordability —measured as the proportion of incomes required to meet mortgage repayments — has improved, reflecting the impact of falling mortgage rates and improving incomes.
But interest rates which feed into mortgage costs are likely to rise in the near term and could rise substantially if the euro zone economy enjoys a healthy recovery. Housing demand will be adversely affected as mortgage costs rise, DKM said.
Even if interest rates were to stay low, this would likely be associated with a protracted economic downturn in the eurozone, which would also have a negative impact on housing demand.
DKM maintains that the growth in the supply of houses driven by demographic factors may have been overdone. In recent years new house-building has increased at a much more rapid pace than household formation.
Over the most recent six-year period new household formation accounted for only 61 per cent of new house completions. This year it is likely to account for less than 50 per cent of house completions, the rest been made up of second homes and replacement of obsolete houses.
Despite the bulging of the number of people in the 25- to 34 year-old age bracket, the number of these setting up home has nor risen by a similar proportion, according to DKM.
DKM endorsed the recent recommendation by the ESRI that the policy treatment of second-home demand should be reviewed, given the pressure on house-building resources.