Ireland's housing market has lost steam
Lalaine C. Delmendo | January 20, 2020
The national residential property price index rose by a minuscule 0.93% (0.24% inflation-adjusted) during the year to October 2019, sharply down from last year's 8.34% y-o-y rise, according to the Central Statistics Office (CSO) Ireland. It was the lowest growth recorded since May 2013 when house prices declined 1.67%.
This is supported by figures from Ireland's largest property website Daft.ie, which saw nationwide average house prices rising only marginally (by 0.1%) during the year to Q3 2019, to €257,114 (US$286,528).
Nationally, residential property prices are up 56.5% from the lowest post-crash point in Q3 2013.
In Dublin, Ireland's capital city, the residential property price index was down by 1.48% (-2.16% inflation-adjusted) during the year to October 2019, in contrast to a 6.31% y-o-y rise in October 2018, according to the CSO. This is not surprising given that Dublin has recently seen a large increase in residential construction.
During the year to Q3 2019:
- In Dublin City Centre, the average asking price fell by 2.4% to €328,551 (US$365,924), in stark contrast to a 9.9% y-o-y increase the previous year.
- North Dublin City's average asking price rose by a meagre 0.1% y-o-y to €344,113 (US$383,256), a sharp slowdown from a 5% annual rise in Q3 2018.
- North County Dublin's average asking price rose slightly by 0.3% y-o-y to €316,261 (US$352,236), a slowdown from an annual rise of 3.9% a year earlier.
- South Dublin City's average asking price fell by 0.3% y-o-y to €411,098 (US$457,860), in contrast to a 6.1% growth a year earlier.
- West County Dublin's average asking price dropped slightly by 0.1% y-o-y to €305,980 (US$340,785), a slowdown from a 2.2% growth a year ago.
- South County Dublin's average asking price fell by 3.6% y-o-y to €580,971 (US$647,056), a sharp turnaround from a y-o-y growth of 7.9% a year earlier.
Outside Dublin, average residential prices rose by a modest 3.3% (2.59% inflation-adjusted) during the year to October 2019, far lower than the previous year's 10.62% growth, according to the CSO Ireland.
In some of Ireland's biggest cities (based on Daft.ie's figures):
- In Cork, Ireland's second largest city (located in Munster, in Ireland's south), the average asking price rose by 2.8% y-o-y to €281,251 (US$313,243) in Q3 2019, lower than the previous year's 5.1% growth.
- In Limerick City, Ireland's third most populous city, the average asking price rose by 5.5% y-o-y to €201,865 (US$224,827) in Q3 2019, a slowdown from a 7.6% growth in Q3 2018.
- In Galway, one of the country's biggest cities and known as the “cultural heart of Ireland” (located in Connacht, Ireland's western region), the average asking price fell slightly by 0.3% y-o-y to €198,850 (US$221,469) in Q3 2019, in contrast to a 6.7% y-o-y rise in the same period last year.
- In Waterford City, also one of Ireland's bigger cities, the average asking price increased 4.7% y-o-y to €181,395 (US$202,029) in Q3 2019, a slowdown from an 8.3% growth a year ago.
Apartment prices in Ireland rose by a meagre 0.56% during the year to October 2019 (-0.13% inflation-adjusted), a sharp slowdown from a 9.74% growth a year earlier. Likewise, house prices increased by just 0.81% (0.12% inflation-adjusted), down from the previous year's 8.57% y-o-y rise.
“The current slowdown in price inflation is largely due to the Central Bank's lending rules and stretched affordability,” said ConallMacCoille, chief economist at Davy, Ireland's largest stockbroker. “These factors are preventing the latent housing demand from translating into rampant house price inflation fuelled by rising leverage on mortgage loans.”
Recently, Davy revised down its house price growth forecast for Ireland to just 1% this year and to 2% in 2020.
Ireland's economy is expected to grow by 5.6% this year and by another 3.5% in 2020, after expansions of 8.3% in 2018, 8.1% in 2017, 3.7% in 2016, and 25.1% in 2014 (obviously a statistical artefact), based on the European Commission estimates.
Excellent yields on small apartments in Dublin
Gross rental yields on apartments remain excellent in Dublin, in certain areas and for certain sizes. Across the range of apartment and house sizes, Dublin 1 earns the best returns. However, Dublin yields are falling as prices rise.
How much will you earn? One-bedroom apartments will earn relatively more than two-bedroom houses (in terms of return-on-investment), and those in turn will earn relatively more than 3-bedroom houses, etcetera. To earn higher returns, buy smaller units.
As is perhaps to be expected, the highest yielding apartments are those in the lowest-cost areas. It was ever thus! These areas also tend to be those where prices are least volatile, thus least exposed to a downturn.
- In Dublin 1 a 1-bedroom apartment bought for around €215,000 can rent for around €1,530 per month, earning a yield of 8.6%. Please remember that these yields are gross; net yields will be less.
- In Dublin 7 a 1-bedroom apartment bought for around €211,000 can rent for around can rent for around €1,470 per month, earning a yield of 8.4%
- Large houses (4 and 5 bedrooms) tend to earn relatively low yields.
Round trip transaction costs are moderate for buyers of residential property in Ireland. See our Ireland residential property transaction costs analysis and our Residential property transaction costs in Ireland compared to other countries.
Taxes on rental income and capital gains are moderate
Rental Income: Gross rental income is taxed at 20%, withheld by the tenant. The taxpayer may file a return and claim relief for expenses related to his property.
Capital Gains: Capital gains is imposed at a flat rate of 33%. Taxable capital gains are generally computed as selling price less acquisition costs, adjusted for inflation, and improvement costs.
Inheritance: Inheritance is taxed at a flat rate of 33%, with certain non-taxable amounts deductible before the tax is levied.
Residents: Residents are taxed on their worldwide income. Numerous tax credits and deductions are available to residents; of which the actual values depend on the taxpayer’s personal circumstances.
Buying costs are moderate in Ireland
Round-trip transaction costs are around 4.94% to 13.205% of the property price. The buyer pays the stamp duty (1% to 2%), legal fee (1% to 1.5%, plus 25% VAT), and registration fee.
Strong but fair tenant protection in Ireland
Ireland has strong tenant protection laws.
Rents. The parties are free to negotiate rents, but the amount must not exceed the open market rate. The rent may be reviewed and can only be adjusted once a year. Rent disputes go to the Private Residential Tenancy Board (PRTB).
Tenure Security. Security of tenure is effective for four years; during the first six months, the landlord can terminate the leasing contract without specifying grounds but once a tenancy has lasted six months, the landlord can only terminate the tenancy for the next 3 1/2 years citing just causes.
Tax inversions artificially inflate Ireland’s economic growthIreland’s stellar economic growth for 2018 has confounded expectations again, with official estimates showing that real GDP expanded by 8.3% from a year earlier. This was mainly driven by companies nominally relocating in the country, such as Perrigo Co. and Jazz Pharmaceuticals Plc. They are attracted by the country’s very open economy and by its relatively low tax inversion rate of 12.5%. These corporate inversions result in little real change in output, just a change in where the legal ownership of the output is located.
When a corporation’s headquarters become resident in Ireland, all of its profits (including profits generated abroad) are counted as part of the country’s gross national income - which dramatically increases the country’s economic growth without corresponding increases in employment. Also, this increases Ireland’s contribution to the EU budget, which is based on the size of a member’s economy. The also create confusion about the real condition of the Irish economy, and increase people’s skepticism with regards to the reliability of economic figures.
Nobel Prize award-winning economist Paul Krugman described a similar phenomenon as "Leprechaun economics".
The Irish economy grew by 8.1% in 2017, after GDP growth of 3.7% in 2016, 25.1% in 2014 (obviously a statistical artefact), 8.5% in 2014, and 1.4% in 2013, according to the International Monetary Fund (IMF). The economy is expected to expand by a more modest 5.6% this year and 3.5% in 2020, based on the European Commission estimates.
Overall inflation was 1.1% in November 2019, up from 0.6% in the same period last year, according to CSO. Nationwide inflation rate was estimated at 0.5% last year, an acceleration from 0.4% in 2017, 0% in 2016, -0.3% in 2015, and 0.2% in 2014.
Unemployment dropped to 4.8% in November 2019, down from 5.6% a year earlier, according to the CSO. This is also substantially lower than the 12.1% average unemployment from 2009 to 2017, but still higher than the average of 4.4% between 2000 and 2007.
There were about 117,800 unemployed persons in November 2019 – a decrease of 17,600 from a year earlier.
Ireland posts first budget surplus in 11 years
Ireland’s economy has been on an unusual journey over the past 7 years.
Ireland had the euro zone’s highest budget deficit in 2010, at 31.2% of GDP. In November 2010 it had no choice but to seek a €67.5 billion (US$82 billion) bailout from the European Union (EU) and the International Monetary Fund (IMF). In exchange, Ireland committed to a harsh austerity program.
The country spent around €80 billion to establish the National Asset Management Agency (NAMA) to buy toxic loans, primarily to improve the availability of credit to the Irish economy, and to remove non-performing loans from bank balance sheets.
In June 2012, 60.29% of Irish voters agreed to the European fiscal compact of May 31, 2012, allowing Ireland to access to the European Stability Mechanism, a €500 billion (US$618 billion) bailout fund.
By 2011 the Irish budget deficit had fallen to 12.5%, and to 8% in 2012, comfortably within the 8.6% target set by Ireland’s international creditors: the EU, ECB and IMF. The budget deficit declined again to 5.7% of GDP in 2013. At end-2013 Ireland became the first country to exit the eurozone bailout programme.
In 2018, Ireland recorded a budget surplus equivalent to 0.1% of GDP, from deficits of 0.3% of GDP in 2017, 0.7% in 2016, 1.9% in 2015, and 3.6% in 2014, amidst strong economic growth and robust corporation tax payments. It was the first surplus since 2007.
The country is expected to post surpluses equal to 0.2% of GDP this year, and 0.3% of GDP in 2020, according to the European Commission.
Likewise, gross public debt is expected to fall to 59% of GDP this year, from 63.6% in 2018 and 68.4% in 2017, based on European Commission estimates.