Irish property is overvalued, says a leading economic think-tank, and is moving away from economic fundamentals, amid worsening affordability, rising mortgage rates and a persistent lack of supply.
So, are price drops likely and could this be good news for putative home buyers?
Prices keep rising
After bottoming out in mid-2013, house prices have been steadily increasing ever since. It means that nominal house prices are almost 28 per cent above their peak in April 2007, and median house prices have become increasingly unaffordable. Eurostat figures show that house prices in Ireland have more than doubled (103 per cent) between 2015 and 2025 – one of the highest growth rates in the European Union.
Nationally, the median house price stood at €399,000 in July of this year. Dún Laoghaire Rathdown had the highest prices, with a median of €684,411, while Longford had the lowest, at €200,000. In May 2020, the median national price was just €260,000.
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Incomes required to finance a home purchase in Ireland are becoming ever higher, based on Central Bank of Ireland rules, of four times income, you would now need an income (joint or single) of €89,750 to fund the median national property, based on a 10 per cent deposit. Or an income of about €154,000 in Dún Laoghaire Rathdown.
What does the ESRI say?
The ESRI now argues that there is a “significant degree of overvaluation in the Irish residential property market”.
What is overvaluation? According to the ESRI, it’s when actual prices are above what’s expected given incomes, interest rates, demographics and housing supply. One caveat – the ESRI does acknowledge that estimating this is “inherently uncertain”.
The current level of overvaluation is of the order of about 17 per cent, the ESRI says, highlighting worsening affordability, rising mortgage rates and a persistent lack of supply.
[ Irish house price inflation slows to new two-and-a-half-year lowOpens in new window ]
The ESRI analysis shows an overvaluation peak of more than 40 per cent in 2006, while property prices were undervalued by as much as 33 per cent in 2013, and were fairly priced around 2018. But the level of overvaluation has been growing since 2021.
Genevieve McGuirk, chief executive of the Institute of Professional Auctioneers & Valuers (IPAV), says she wasn’t surprised at the ESRI’s finding, pointing to the fact that property prices have been rising faster than people’s incomes.
Crucially however, today’s overvaluation level is both lower, and structurally different, to what happened in the aftermath of the global financial crisis, which led property prices to collapse.
As the ESRI notes, our financial system is much stronger today – household debt is lower, credit growth is more contained, “although higher interest rates have placed some upward pressure on debt service burdens and affordability metrics”.
Consider our graphs. In the Celtic Tiger years, debt to income (the amount of debt a household owes compared to the amount of disposable income it generates) rose to more than 200 per cent, before falling off as the financial crisis hit. It has continued to fall since, and remains considerably below this now, at about 83 per cent in 2025.
And price to income, which measures the ratio of nominal house prices to disposable incomes, rose to 170 per cent back in 2006, and declined in the recession. However, one note of caution here; it has been rising once more in recent years, to 129 per cent in 2025.
European trends
Ireland is not the only European market where house prices are deemed to be overvalued. Research from the European Commission suggests that “house prices are overvalued in several EU countries, entailing a risk of house price corrections.”
Property in Portugal is the most overvalued, according to the Commission, at around 25 per cent in the second half of 2025, followed by Greece (about 23 per cent); Sweden (20 per cent) and Netherlands (about 18 per cent).
Interestingly perhaps, for the second quarter of 2025, the commission says that Irish property prices were undervalued, by about 5 per cent.
The commission also posits another view as to why property prices are deviating from economic fundamentals – financialisation of the property market.
Citing Ireland as one country impacted by this in its Understanding the Housing Crisis research, from the end of 2025, it points to institutional investors increasingly investing in property in the search for yield in a low interest rate environment, while also benefiting from low funding costs, thus “weakening the link between local housing markets and the underlying economic and demographic fundamentals”.
However, it notes that it is difficult to establish the direction of causality, “if prices increase because of these investments or if these investments flow into these markets due to the expectation of house price increases”.
Who does it hit most
Unsurprisingly perhaps, the ESRI finds that current levels of over-valuation “disproportionately” hit middle-income households. Those on lower incomes may avail of social housing, while those on higher incomes are deemed to be less affected, as their incomes have risen at a similar rate as house prices.
It is those in the middle that struggle the most with affordability. Latest figures from the CSO show that house prices rose by 5.6 per cent in the year to June 2026 but this makes a €400,000 house about €22,400 more expensive.
Will house prices fall?
The big question then, perhaps, is will such overvaluation feed into a reduction in house prices?
Not so fast, perhaps.
Remember when The Economist warned that Irish property prices would fall by 20 per cent back in 2003 amid a credit boom? At the time, the pronouncement was shrugged off – even though prices eventually fell by much more than that.
The ESRI stresses however, that this time around, overvaluation is driven by different factors. Critically, the level of overvaluation is significantly lower than back in 2006 (40 per cent according to the ESRI) and we don’t have excessive levels of debt.
It’s more about a mismatch between supply and demand, rather than a credit driven boom.
[ Irish house prices overvalued by 17% ‘with middle-income households hit hardest’Opens in new window ]
“As always, the biggest issue is the lack of supply, not just properties for sale but for rent also, which has a knock-on effect,” IPAV’s McGuirk says. And this isn’t likely to improve just yet. The Central Bank has just downgraded its forecasts for new home completions for this year and next on the back of a slowdown in housing commencements.
Another factor in affordability is the uptick in bidders, which now includes housing bodies and county councils, as well as first time buyers and downsizers, who are all competing for a limited supply of homes.
“Unlike the pre-crisis period, which was driven by excessive credit growth and loose lending standards, the current episode of overvaluation appears to be primarily an affordability issue,” it says in the report.
It also points out that the wider credit market is in a much better position today, “suggesting the financial system is in a considerably stronger position than it was in 2007–2008.”
So there are still a lot of factors underpinning strong prices.
The European Commission also notes in its Understanding the Housing Crisis report, that “overvalued house prices are not a guarantee that they will decline – and if so, how quickly – if there is a structural gap between housing demand and supply”. It does, however, point out that prices did recently decline “most strongly in countries where they were most overvalued such as Luxembourg or Sweden”.
However, if prices don’t fall, the pace of growth has certainly already fallen off. Figures from the CSO show that prices were rising at a rate of 7.5 per cent in July 2025; but by July 2026 this had fallen to 5.5 per cent.
“The market has lost some heat,” says McGuirk. Where there were four to six bidders on a property, there are now only two or three, she says. And if there were 16 people viewing a property, now there might only be three. This is particularly true in certain areas which may not be that popular, or for homes which need work.
Other buyers – such as those with cash – are behaving more cautiously. “They’re not necessarily bidding as high as they could,” says McGuirk.
