Rapid growth in incomes and employment, historically low interest rates and an inflow of 44,000 people to the Republic last year are among the factors that have contributed to the dramatic rise in house prices, according to a major report on house prices published yesterday. The 131-page report, commissioned by the Government from economic consultants Peter Bacon and Associates, includes a detailed analysis of social and spending patterns that have resulted in the most sustained property boom in the Republic. According to the report, the upward trend in house prices goes hand in hand with Ireland's increased prosperity and "convergence with European living standards".
It also highlights the sharp increase in the number of new households being created. It finds that the number of houses being built has not kept pace with the demand, partially because of the low densities favoured by the planning authorities. This policy is in contrast with the practice on the Continent. Ireland, and particularly Dublin, is now set to introduce strategic change in densities, the report says.
The long-awaited report, which drew on submissions from estate agents, planners, mortgage-lenders and builders, did not come up with any major surprises in its analysis of the housing market.
Mr Bacon identifies the reasons for the current price boom.
The easy availability of mortgages at historically low rates has encouraged people to invest heavily in acquiring homes and residential investments, says the report.
Much of the new demand for houses is coming from young workers returning to Ireland. The report shows that gross immigration is now running at an annual rate of 44,000, with most immigrants in the age category of 25 to 44 years - the crucial house-buying stage. This has accentuated the demand for both new and second-hand homes at a time when the shortage of housing sites is most acute.
Increased investment demand and significant tax shelters have also contributed to escalating prices, says the report.
It examines the way in which investors have become the dominant force in the Dublin apartment market, buying up to 80 per cent of the flats in some of the schemes put up for sale during the last year, according to estate agents. Investors have also been gaining ground in the second-hand house market, where they are frequently able to outbid home-buyers, agents have acknowledged.
Ironically, Mr Bacon says it is desirable that investors should continue to enter the rental market and provide a range of rental accommodation. But he warns that buying in the expectation of continued strong capital appreciation could lead to a speculative bubble that is in danger of bursting.
Mr Bacon also highlights the practice of builders releasing houses on a phased basis, with the potential to increase the prices in each new phase. This practice is particularly prevalent in Dublin, where buyers have had to queue overnight on a number of occasions to buy homes in an early phase of a development before prices went up.
The report found that first-time buyers are being squeezed out of the market in Dublin, because of the sharp price increases and the intense competition. It found that while in 1994 first-time buyers accounted for around 11,000 of over 18,000 homes sold in the city - 61 per cent of sales - this had dropped to only 8,500 out of 20,000 sales in 1997. This accounts for 42.5 per cent of sales in Dublin last year.
Clearly, young buyers were being excluded from the market, while further up the price scale, mobility and turnover in the second-hand market were impeded by the high rates of stamp duty. Simple calculations of stamp duty showed that someone trading up from a £150,000 home to one costing £200,000 would have total costs - stamp duty, legal fees and so on - of about £28,750, of which more than £20,000 went to the Government.
The report says that as house prices have risen, pressures have grown on "affordability" for some categories of income earners in meeting mortgage lending criteria. It says the "affordability" of new houses has been in a down-trend since 1994.
An Economic Assessment of Recent House Price Developments was prepared by Peter Bacon & Associates, economic consultants, in association with Fergal MacCabe, architect and town planner, and Anthony Murphy of the economics department at University College, Dublin. It is available from Government Publications at £15.