CENTRAL BANK governor John Hurley has offered home buyers and home owners some much needed reassurance by stating that domestic house prices are returning to realistic levels. In saying so, he has rejected claims in a recent International Monetary Fund (IMF) report that Irish house prices may still be significantly overvalued: more than 30 per cent higher than market fundamentals can justify.
But as Mr Hurley pointed out, the sharp real (inflation adjusted) fall in house prices in the past year has greatly reduced the overvaluation gap. And Mr Hurley expects this differential to close within the next year. The IMF may well have underestimated the sharp correction in the domestic housing market that has occurred, particularly over recent months.
Nevertheless by the IMF's own measure Irish house prices remain the most overvalued of the 18 national markets surveyed. Its report also highlights some interesting national differences, closer scrutiny of some of which should help to allay concerns about the vulnerability of domestic borrowers to the housing market correction now under way.
In Ireland, a typical house loan is for 70 per cent of the value of the property. That compares favourably either with a typical 90 per cent loan to value ratio by a mortgage borrower in the Netherlands or with a typical 75 per cent ratio in the UK. The housing markets in both countries and in Ireland are, according to the IMF, the most overvalued of those surveyed. Mortgage equity withdrawal, where consumers borrow money against the real value of their homes, is a limited feature of the Irish loan market - again quite unlike the Netherlands and Britain. And in Ireland, the average mortgage loan term is 20 years, a shorter period than in many other countries. In the Netherlands and the UK, the typical house loan term is 30 and 25 years respectively.
These key mortgage indicators do suggest that Irish borrowers have taken - on average and on a comparative basis - a generally prudent approach to financing home ownership. The 70 per cent loan to value ratio helps to reduce the risk of negative equity where the value of the home falls below the value of the loan. And the 20-year duration of the average house loan offers scope to lengthen the loan term should the borrower's personal circumstances or rising interest rates demand it.
A positive effect of the decline in house prices has been to make home ownership more affordable, notably for first-time buyers. Lower house prices lighten the financing burden on first home owners as loan repayments account for a smaller slice of their household income. The latest edition of the EBS/DKM affordability index provides confirmation, suggesting that first-time house purchasers of an averagely priced house will spend 21.9 per cent of their disposable incomes on mortgage repayments this year, down from 26 per cent in December 2006. A declining housing market has also seen a rise in rents as nervous potential house purchasers opted to rent rather than buy. The reversal of that trend may well be close, as property prices become more realistic and homes become more affordable.