After a five-year housing bust, Ireland’s house prices are now rising sharply. The national residential property price index skyrocketed by 16.2% (16.1% inflation-adjusted) y-o-y in November 2014, a sharp improvement from the annual rise of 5.6% a year earlier and a contraction of 5.7% in November 2012, according to Central Statistics Office Ireland. During the latest quarter, nationwide house prices rose sharply by 5.3% (6.2% inflation-adjusted).
House price rises in the capital city, Dublin, are accelerating. The residential property price index in Dublin skyrocketed by 22.4% (22.3% inflation-adjusted) during the year to November 2014. These double-digit property price rises are now raising concerns over an emerging property bubble and prompting government authorities to take action to cool the market.
Outside Dublin, average property prices rose 9.6% (9.5% inflation-adjusted) during the year to November 2014, according to Daft.ie:
Apartments located in Dublin saw the biggest annual price increase of 26.8% (26.7% inflation-adjusted) during the year to November 2014.
ANNUAL HOUSE PRICE CHANGE, OCTOBER 2014
|Rest of Ireland|
|Source: Central Statistics Office Ireland|
From 1997 to 2007 Ireland experienced a massive house price boom, with average used home prices up 268%, and prices of new houses up 216%. When the bubble burst in 2008, it was the world’s biggest property bust.
The housing market started to recover in 2013, with house prices rising by 6.4% (6.2% inflation-adjusted). The continued strong growth in the housing market in 2014 was mainly due to the recovery of the Irish economy. The Irish economy expanded by 3.6% in 2014, a sharp improvement from the meagre growth of 0.17% in 2013 and a contraction of 0.31% in 2012. The economy is projected to grow by another 3% this year.
Property prices, particularly Dublin, are expected to continue to rising in 2015, despite the central bank’s proposals to restrict mortgage lending, according to Sherry FitzGerald, one of the country’s leading property advisory firm.
In an effort to cool the housing market, the Central Bank of Ireland has unveiled plans to limit loan to value (LTV) and loan to income ratios in 2015. “The intention of the proposed Central Bank limits on mortgage lending is to limit increases in house prices by affecting both buyer expectations and the credit available to them,” said Ronan Lyons of Daft.ie.
Ireland’s decade-long house price boom was one of the longest and biggest in Europe.
HOUSE PRICE CHANGE 1996 - 2006
The Irish housing boom was fuelled by strong economic growth, immigration, and generous tax incentives and grants from the government, creating a virtuous cycle of economic growth and house price increases. Low interest rates and loose credit conditions provided financing.
The situation turned upside down in 2006 and 2007, when interest rate hikes left many borrowers in difficulty, causing a housing market crash. The 2006-2007 U.S. subprime mortgage crisis worsened the situation.
Ireland experienced one of the most severe property crashes among developed economies. House prices fell for more than five years, as opposed the typical housing bust duration of four and a half years, according to OECD research. Ireland also had a sharper price decline, with an average fall of 53% from the peak, compared to the typical OECD fall of 23%.
Some local property experts believe that Ireland is in danger of repeating the mistakes of the previous bubble.
"This property bubble being developed by vested interests needs bursting and bursting sooner rather than later," says David Hall, the founder of the Irish Mortgage Holders Organisation (IMHO). "The financial system owes a gratitude to the Irish citizen for keeping it afloat and now it needs to back off irresponsible promoting of a property bubble, which could land many citizens in deep financial trouble again."
Others argue that the problem is not speculation but a supply shortage, with high VAT rates on new homes and other taxes discouraging new home building.
"The reality is that the effective cost of bringing a new unit to market in most of Ireland is higher than the achievable sales price at this time,” said Philip O'Sullivan of Investec Ireland. “This is why completions are running at about a quarter of their long-term average, while many of the units finished in the recent past involved the completion of semi-built developments from the bubble era."
The government is under pressure to increase supply, especially in the capital. “Boosting supply is ultimately the key factor for sustainable price growth in the long-run,” said John McCartney of Savills Ireland.
The European Central Bank (ECB)’s refinancing rate remained at 0.05% in December 2014, after it was cut by 10 basis points in September 2014.
The variable interest rate for initial rate fixation (IRF) of up to 1 year was 3.29% in October 2014, slightly down from 3.32% in the previous year.
Interest rates on outstanding mortgages in Ireland have typically reflected movements in the ECB rate. However, the past two years have seen a slight divergence among the Ireland and ECB rates.
The Irish mortgage market continues to shrink, despite low interest rates. It contracted to about 43.2% of GDP in 2014, down from 47.7% of GDP in 2013 and from the peak levels of 65.6% of GDP in 2009.
Loans outstanding for house purchase dropped 5.9% to €78.49 billion in November 2014 from the same period last year, according to the Central Bank of Ireland, compared to €125.1 billion of outstanding housing loans in Q1 2008.
The mortgage market is expected to shrink further when the central bank’s mortgage lending cap takes effect.
The housing crash initially resulted in a huge expansion of rental offers. From 6,200 units in August 2007, the number of properties for rent rose to more than 23,400 in August 2009. However by early November 2014 there were fewer than 5,400 properties to rent nationwide, the lowest level since May 2007. In Dublin, rental listings have fallen about 43% since 2011, and across the four other cities they have fallen 25%.
Ireland’s rent index was up 10.8% during the year to October 2014. The national average rent rose to €933 per month between July and September 2014, compared to €842 the previous year.
In the capital Dublin, rents soared 14.5% y-o-y to October 2014—almost 30% above their lowest level in 2012, and only 1o% below peak levels in 2007. This is particularly worrying given that the capital’s population is increasing by about 10,000 households every year.
Rents outside Dublin also rose during the year to October 2014, but at a slower pace than in the capital.
Rental yields have fallen slightly across the country, to an average of 5.7% in October 2014. Waterford City has the highest gross yields at 7.4%, followed by Dublin City Centre (7.3%) and Limerick City (7.3%). South Dublin County recorded the lowest yield of 5.2% in October 2014.
During the first ten months of 2014, dwelling completions climbed 35.2% to 8,796 units from the same period last year.
During the boom, completions tripled to 93,000 units in 2006, up from 30,000 units in 1995. However, by 2011 completions had fallen to 10,480 units, and in 2012 only 8,488 units were completed. In 2013, dwelling completions dropped again to 8,301 units.
The total housing stock in the country was estimated at about 2,019,000 units in 2013, up slightly by 0.4% from a year earlier, according to the Environment, Community and Local Government.
In order to save the banking sector from collapse, in November 2010 Ireland had no choice but to seek a €67.5 billion ($82 billion) bailout from the European Union (EU) and the International Monetary Fund (IMF).
In exchange, Ireland committed to a harsh austerity program. Ireland’s budget deficit had become the euro zone’s highest deficit in 2010, at 31.2% of GDP.
The country spent around €80 billion to establish the National Asset Management Agency (NAMA) to buy toxic loans, primarily with a view to improving the availability of credit in the Irish economy, and to remove uncertainty non-performing from bank balance sheets.
In June 2012, 60.29% of Irish voters agreed to the European fiscal compact of May 31, 2012. The ratification of this treaty allowed Ireland to have an access at the European Stability Mechanism, euro zone’s permanent €500 billion ($618 billion) bailout fund.
In 2011 the Irish budget deficit had fallen to 13.1%, and to 8.2% in 2012, comfortably within the 8.6% target set by the troika, Ireland’s international creditors from the EU, ECB and IMF. The budget deficit declined again to 7.2% of GDP in 2013, according to the Central Statistics Office. Nevertheless by 2013 Ireland's gross government debt increased to €202.92 billion, equivalent to 123.7% of GDP.
By end-2013, Ireland became the first country to exit the eurozone bailout programme. In 2014, the budget deficit had shrunk to between 3.5% and 4% of GDP.
In an effort to maintain sustainable growth, the government announced in end-2014 small cuts in income tax rates as the first step in a three-year program to guarantee that workers hold on to more of their earnings while also increasing their spending.
The economy expanded by 3.6% in 2014, a sharp improvement from the meagre growth of 0.17% in 2013 and a contraction of 0.31% in 2012. The Irish economy is projected to grow by another 3% this year. In December 2014, the country experienced deflation of 0.3%.
Unemployment stood at 10.6%, down from 12.2% in a year earlier, and an average of 13.6% from 2009 to 2013. Between 2000 and 2007, Ireland’s unemployment rate had averaged only 4.4%.
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