The latest figures on the housing market show that the rate of increase in prices slowed in the third quarter of the year. However, it is far too early to conclude that the housing market has stabilised. The recent fall in interest rates may well lead to a further surge in prices next year and, in any case, the Government still has much to do in following up on its initial response to the measures recommended in the Bacon report. The central issue, as identified by the Government itself in the medium-term economic programme published alongside the Budget, is that the supply of houses must be increased in the years ahead, if strong demand is not to keep upward pressure on prices.
The Government's response to the Bacon report is having some impact. The change in tax provisions is discouraging some investors from putting funds into property, although the low level of interest rates on savings means that bricks and mortar will remain an attractive investment for many. Meanwhile, the increase in local authority house building and the promise of new tax incentives for student accommodation are measures which will attack specific problems.
The Minister of State, Mr Bobby Molloy, has said that the latest figures show the Government policies are working. He pointed to a slower rate of increase in prices in the three months to last September, when compared to the previous quarter. For example, new house prices in the last three months were 1.8 per cent up on the previous three months, compared to a 4.7 per cent rise in the previous quarter. Meanwhile, 41,000 new homes will be built this year.
However, it remains to be seen whether the market is just pausing for breath. The Government would do well to remember that new house prices in September were still 20 per cent up on the same period last year and that second-hand house prices in Dublin were 36 per cent ahead. Meanwhile, more than £1 billion in home finance lending was extended by the banks and building societies during the third quarter, nearly 30 per cent up on the same period last year.
Falling interest rates, which will be fully reflected in the pockets of borrowers from early in the New Year, are likely to give the housing market a further boost. Encouraged by lower interest rates and by predictions that they are set to remain low, those anxious to enter the housing market or to trade up are bound to be tempted to borrow a little more. Anxious for market share, the financial institutions are unlikely to refuse to extend higher loans. The cycle of rising demand and increasing prices is thus likely to continue next year. The potential dangers are clear; rising house prices can feed into general inflation, particularly if the increased cost of buying a home becomes built in to wage demands. Also, many home-owners could be over-extending themselves in taking out large mortgages, and would be exposed if the economy hits a rocky patch.
There is no "quick fix" solution. However it is essential that the Government continues to examine ways of bringing more serviced building land on stream and ensuring that it is developed as quickly as possible. There is a particular housing shortage in the Dublin region, where a sharp rise in population and wealth is meeting with a relatively slow rise in available housing, leading to the inevitable rise in prices. Unless the Government addresses this problem, prices in the capital city will continue to spiral, even if the market elsewhere in the State stabilises.