Ireland: Price History

Country Rating  »

Home ›  Europe ›  Ireland ›  Price History

Irish property crashes

The Irish property crash is worsening. Prices paid for second-hand apartments in Dublin fell by as much as 17% in 2007, and house prices in Dublin dropped by an average of 10% on the year, according to a review by the Irish Auctioneers and Valuers Institute (IAVI) (However Sherry Fitzgerald, an agent, reports a more moderate fall of 6.8% in 2007 on second-hand Dublin properties).

In the new apartment market, developers have been giving away cars, bathroom and kitchen suites in a vain effort to hold up prices. That is now starting to crack, as in January, two developers dropped prices 20% on two different developments.

The IAVI says property prices began to fall last February, and it blames media comment on the economy for some of the lack of confidence in the market. It also blames uncertainty about stamp duty (now cleared up), excessive price expectations, and higher interest rates.

Falls across the rest of the country were less severe, but certainly wiped out all of the gains made in 2006.

Previously, house prices in Ireland had risen further and faster than those of any other country for which figures are reported, except Estonia, having risen for 17 years without a break.

Since 1996, when the surge began in earnest, national house prices rose from €75,000, to €287,664 (end-2006), i.e., a rise of 283% in nominal terms. House prices in Dublin rose even more during the same period, with a 366% rise from €82,400 (1996) to €384,247 (end-2006).

These price rises had one major explanation, the exceptional growth of the Irish economy. In 2006, Ireland experienced 5.6% real GDP growth, and 6.5% real GNP growth. Ireland’s economic growth has been way beyond EU average growth. Ireland experienced average GDP growth of 9.8% during the six years 1995-2000, with no less than 10.7% real GDP growth achieved in 1999, and 11.7% in 1997. Unemployment has fallen from 15% in the early 1990s, to around 4.4% today. There will be an estimated 4.75% GDP growth in 2007, with 3.25% growth forecast for 2008 (Central Bank Bulletin Q4 2007). Inflation is significant, at 4.9% for 2007.

There are two key causes of the slowdown:

1. Interest rates have risen in tandem with the rest of the Eurozone, moving from 2.25% in December 2005, to 4.0% in June 2007.
2. Yields across Ireland have averaged 3.1%, according to the most recently bi-annual Daft Report (update expected February). These yields are comparatively speaking very low.

There has also been significant overbuilding. The numbers of dwellings completed has risen very sharply, more than doubling from 30,000 in 1995 to nearly 81,000 in 2005. A third of current housing stock has been built since 1992. During 2007, the stock of houses for sale rose 62%, and transaction volumes fell drastically, according to the most recent Daft report.

The developers have responded, and in 2007 the number of new homes started fell 47% compared with last year. For December, only 925 new homes were registered, down 60% on the same month a year earlier - the lowest monthly figure since records began in 1995.

Gross yields in Dublin are somewhat higher than elsewhere in Ireland, at around 4%. Is this a crisis level?

Readers will know that the Guide gets uncomfortable when yields drop below 5%, significantly uneasy at 4%, and really worried by yields dropping to 3%.

In much of Ireland, current yields levels are at levels which worry us.

True, Ireland is a stable developed country (historical yield figures are unavailable, so it is hard to see whether there has been significant yield compression), its growth and stability justifies somewhat low yields. Central Dublin’s per square meter prices of €3,750 to €5,000 are also high, but arguably not perilously so.

But such low yields make a market very exposed when interest rates rise, especially when the market is largely floating rate. And interest rates have risen – and the market has responded.

Negative factors for the market

Risk factors for the housing market include the prevalence of variable- rate mortgages, and the large supply of new-build housing:

• Most mortgage loans are variable interest rate (78%). Most fixed-interest mortgages are for periods less than three years (60% of the total). Such high proportions of variable and short-term fixed rates are inherently dangerous.
• Pushed by mortgage market deregulation, de-mutualization of building societies, and the entry of the Bank of Scotland to the market, the value of mortgage lending has been growing rapidly.
• Slowing economic growth poses potential long-term risks to the Irish housing market. The boom of the late 1990s was partly fueled by inward foreign investment, which has slowed since the end of the information and communications technology bubble.
• The sub-prime crisis is likely to cause lenders to rethink their practices, as will declining house prices.

Positive factors for the market

Like all common currency area members, Ireland adjusts its current account to equilibrium (i.e., balances exports and imports) not by exchange rate policy (since its exchange rate is fixed), nor by interest rate policy (it is a passive taker of European Central Bank interest rates), but through price inflation or deflation of non-internationally tradable assets, such as wages and houses. This factor has been partly behind the strong surge of house prices. As the economy has boomed, prices have risen, without the boom being damped sufficiently by a rise in interest rates or by a currency appreciation.

The European Central Bank’s interest rates represent a compromise between the needs of its slow-growing members (who need relatively low rates) and its relatively fast-growing members (like Ireland and the new Eastern European members). European interest rates, in sum, tend never to be high enough to damp down prices in its rapidly growing outlying areas. The result has been dramatic house price appreciation in those rapidly growing economies (Ireland, Spain).

Ireland’s consumer price inflation (CPI) has shot up to 4.9% in the year to June, so the real cost of borrowing is still negative – supportive of house prices.

Ireland allows citizens from EU new member states to access its labor market. Since May 2004, population inflows have amounted to 4% of Ireland’s population or 8% of its labor force. Like immigrants everywhere, these immigrants are initially tenants, not buyers.

We expect rents to rise faster than house prices, and more normal yields levels are re-established. Rents rose 11.9% across Ireland between May 2006 and May 2007, according to the Daft Report, a positive sign. We would, however, expect Irish yields to stay somewhat below their equilibrium rate, if inflation were under full and proper control.

In other words, we would not be surprised to see recovery in the market in 2009. But the situation is very unpredictable, due to the sub-prime crisis. And as property buyers, we do not understand why anyone would want to enter the market now, with rental profits thin, and long-term price appreciation surely likely to be limited.

Background facts

Ireland has the highest average household size in the OECD. Most dwellings are landed (97%), though provision of apartments is rising (20% of newbuild dwellings). Land shortages are developing, and distances traveled are rising, which is arguably positive for city-centre house prices.

Home ownership is exceptionally prevalent in Ireland, with 77% of all households in owner-occupied dwellings. A further 9% live in social rented housing, and only 9% live in private rented housing. Rents were decontrolled in the 1990s, leading to increased buy-to-lets. The government’s reaction was to impose distortionary tax measures, now mostly abolished, to dampen this new activity.

In 2000, a 9% stamp duty was imposed on buy-to-lets, with the effect of exacerbating rental housing shortages and pushing rentals upwards (the law was repealed in 2002). In 2002 mortgage interest deductibility against rental income was also reintroduced. The withdrawal of these measures slightly boosted the market. The buy-to-let market represents less than 8% of the total housing stock but new buy-to-let mortgages have recently bee a significant portion of all mortgage loans.

The increase in supply of rental units had a tremendous effects on rents. The rent index produced by Daft.ie shows that rents fell by 18.17% from January 2002 to March 2004. This was in sharp contrast to the 60% growth in rents between 1998 and 2002. These developments in house prices and rents explain Ireland’s relatively low yields.

Ireland - more data and information

• Irish house prices, rents, and letting income - real data!
• How expensive are houses in Ireland, compared to the rest of Europe?
• How much rent can be earned from Irish property, compared to the rest of Europe?

Your Comments

Post a comment