Ireland’s housing market remains strong

Lalaine C. Delmendo | January 20, 2019

Ireland house prices Ireland’s house prices continue to rise strongly, mainly driven by strong demand as well as supply shortages. The national residential property price index rose by 8.44% (7.48% inflation-adjusted) during the year to October 2018, lower than last year’s 11.67% y-o-y rise, according to the Central Statistics Office (CSO) Ireland.

This is supported by figures released by Ireland’s largest property website Daft.ie, whose data had nationwide average house prices rose by 5.5% y-o-y in 2018 from a year earlier, to €254,000 (US$292,548).

Nationally, residential property prices were up about 55% from their lowest point reached in Q3 2013.

In Dublin, Ireland’s capital city, the residential property price index was up by 6.31% (5.36% inflation-adjusted) during the year to October 2018, according to the CSO.

During 2018:

  • In Dublin City Centre, the average asking price rose by 4.7% to €330,683 (US$380,869) during 2018.
  • North Dublin City’s average asking price rose by a modest 2.5% y-o-y to €337,594 (US$388,829).
  • North County Dublin’s average asking price rose slightly by 1.5% y-o-y to €311,916 (US$359,254).
  • South Dublin City’s average asking price rose by 3.2% y-o-y to €407,404 (US$469,234).
  • West County Dublin’s average asking price dropped 1.1% y-o-y to €300,842 (US$346,499).
  • South County Dublin’s average asking price rose by 4.8% y-o-y to €591,096 (US$680,804).

Local housing markets outside Dublin continue to experience more robust house price increases. Outside Dublin, average residential prices surged 10.62% (9.64% inflation-adjusted) during the year to October 2018, according to the CSO Ireland. Based on Daft.ie’s figures:

  • In Carlow (located in Leinster, eastern Ireland), the average residential asking price was up 9% y-o-y to €189,745 (US$218,542) in 2018.
  • In Cork County (located in Munster, in Ireland’s south), the average asking price rose by 6.3% y-o-y to €220,173 (US$253,588) in 2018.
  • In Galway County (located in Connacht, Ireland’s western region), the average asking price rose by 7.4% y-o-y to €197,791 (US$227,809) in 2018.
  • In Waterford City, the average asking price increased 8.6% y-o-y to €174,879 (US$201,420) in 2018.
  • In Limerick City, the average asking price rose by 9.8% y-o-y to €194,214 (US$223,689) in 2018.
  • In Monaghan (located in Ulster, in the Republic of Ireland’s north), the average asking price rose by 3.1% y-o-y to €169,305 (US$195,000) in 2018.

Apartment prices in Ireland rose by 9.74% during the year to October 2018 (8.77% inflation-adjusted); house prices rose by 8.57% y-o-y (7.61% inflation-adjusted) over the same period.

ANNUAL HOUSE PRICE CHANGE, OCTOBER 2018

  HOUSES APARTMENTS ALL RESIDENTIAL
  Nominal Real Nominal Real Nominal Real
Ireland 8.57 7.61 9.74 8.77 8.44 7.48
Dublin 6.55 5.61 5.74 4.80 6.31 5.36
Rest of Ireland 10.31 9.34 - - 10.62 9.64
Source: Central Statistics Office Ireland

House prices in Ireland are forecast to continue to rise strongly in the next three years until supply catches up with demand, which will occur around 2021, according to the ratings agency Standard & Poor’s. S&P expects Irish house prices to rise by 8% this year, 7% in 2020 and 6% in 2021, amidst a strong labour market and housing supply shortages in key areas, particularly in Dublin.

Ireland’s economy was estimated to have expanded by 7.5% in 2018, mainly buoyed by the activities of multinational companies, coupled with strong labour market and construction investment, according to the CSO. The Irish economy grew by 7.2% in 2017, after GDP growth of 5.1% in 2016, 25.5% in 2014 (obviously a statistical artefact), 8.3% in 2014, and 1.1% in 2013, according to the European Commission.

Ireland’s housing cycle

From 1996 to 2006 Ireland experienced a massive house price boom, with average used home prices up 383%, and new house prices up 284%. Ireland’s decade-long house price boom was one of the longest and biggest in Europe.

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.

HOUSE PRICE CHANGES

  1996-2006 2007-2012 2013-Q3 2018
  New Existing New Existing New Existing
IRELAND 284% 383% -33% -36% 157% 38%
Dublin 361% 453% -45% -38% 204% 40%
Cork 271% 403% -27% -43% 75% 27%
Galway 234% 291% -27% -39% 92% 46%
Limerick 252% 267% -19% -36% 71% 59%
Waterford 305% 365% -38% -44% 69% 49%
Others 271% 341% -29% -41% - -
Sources: DoECLG, CSO

When the bubble burst in 2008, it was Europe’s biggest property bust. The downturn began 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 added to the downturn.

Ireland Dublin property price index

Ireland’s house prices fell by an average of 53% from the peak, compared to the typical OECD fall of 23%. House prices plummeted by 12.4% (-13.4% inflation-adjusted) in 2008, followed by declines of 18.6% (-14.3% inflation-adjusted) in 2009, 10.5% (-11.6% inflation-adjusted) in 2010, and 16.7% (-18.7% inflation-adjusted in 2011. In 2012, house prices dropped by another 4.5% (-5.7% inflation-adjusted) from a year earlier.

The Irish housing market started to recover in 2013, with house prices rising by 6.4% (6.2% inflation-adjusted). The dramatic house price surge in 2014 of 16.3% (16.6% inflation-adjusted) was mainly due to the recovery of the Irish economy, which expanded by 8.7% in 2014, up from growth of only 1.3% in 2013 and 0.2% in 2012.

In an attempt to prevent another housing bubble from happening, the central bank implemented new rules in January 2015, which limited loan-to-value ratios on houses priced over €220,000 and on 2nd purchases to 80%, and 70% on buy-to-let purchases. Loans for private dwelling homes were also limited to 3.5 times gross income.

Despite this, house prices continued to increase strongly, supported by resilient demand as well as supply shortages. House prices increased 7.1% (7% inflation-adjusted) in 2015, by 9% (9% inflation-adjusted) in 2016 and by another 12.1% (11.7% inflation-adjusted) in 2017.

Demand continues to rise

Ireland dwellings transactions

Demand has been continuously rising in the past seven years. In 2017, the value of residential property transactions across Ireland rose by 19.7% to €14.37 billion (US$16.25 billion) from a year ago. This was after y-o-y increases of 13.9% in 2016, 15.5% in 2015, 57.4% in 2014, 19.1% in 2013, and 24.4% in 2012, according to the CSO. The total number of transactions also increased 9% y-o-y to 60,040 in 2017.

During the first nine months of 2018, the value of residential property transactions stood at €10.27 billion (US$11.62 billion), up 5% from a year earlier. Over the same period:

  • In Dublin, which accounts for more than half of all transactions, the total transaction value increased 5.4% y-o-y to €5.38 billion (US$6.09 billion).
  • In Carlow, the total transaction value surged by 34.8% y-o-y to €71.2 million (US$80.52 million).
  • In Cork County, the total transaction value rose by 3% y-o-y to €939.9 million (US$1.06 billion).
  • In Galway County, the total transaction value rose slightly by 0.3% y-o-y to €378.4 million (US$427.95 million).
  • In Waterford City, the total transaction value rose by 17% y-o-y to €174.4 million (US$197.24 million).
  • In Limerick City, the total transaction value rose by 14.3% y-o-y to €265.1 million (US$299.81 million).

Interest rates remain low

Mortgage interest rates in Ireland remain very low, fueling strong housing demand. In September 2018:

  • The average interest rate for housing loans with maturity of up to 1 year was 2.39%, up from 2.07% in the same period last year.
  • The average interest rate for housing loans with maturity of between 1 and 5 years was 3.41%, down from 3.55% a year ago.
  • The average interest rate for housing loans with maturity of over 5 years was 2.51%, slightly down from 2.6% a year ago.

Ireland interest rates housing loans

The European Central Bank (ECB)’s refinancing rate remained at zero in November 2018, unchanged since March 2016.

Interest rates on outstanding mortgages in Ireland have typically reflected movements in the ECB rate. However, during the past four years these rates have somewhat diverged, especially for housing loans with shorter maturity.

Central bank’s lending cap

On January 27, 2015, the central bank introduced new regulations to limit mortgage lending in the country, in order to "increase the resilience of the banking and household sectors to the property market and to reduce the risk of bank credit and house price spirals from developing in the future". The measures were subsequently reviewed annually. Based on the review conducted by the central bank in November 2018, the following rules will be effective January 2019:

  • Loan to Value (LTV) limits for principal dwelling houses (PDH):
    • 90% LTV limit on PDH mortgages of first time buyers
    • 80% LTV limit on PDH mortgages of second and subsequent buyers
    • The limit can go beyond by only up to 5% of the euro value of the mortgage lending to first time buyers and up to 20% to second and subsequent buyers
  • LTV for Buy to Let mortgages (BLTs):
    • 70% LTV limit on BTL mortgages
    • The limit can go beyond by only up to 10% of the euro value of all non PDH mortgages on an annual basis
  • Loan to Income (LTI) for PDH mortgages:
    • A limit of 3.5 times loan to gross income on PDH mortgage loans
    • The limit should not extend by over 20% of the euro value of all PDH mortgage loans during an annual period
    • Up to 20% of the value of new mortgages to first time buyers can be above the LTI cap; and up to 10% of the value of new mortgages to second and subsequent buyers can be above the LTI cap.

According to the central bank, these mortgage measures are now firmly established as a permanent feature of Ireland’s mortgage market to raise bank and borrower resilience and to ensure that the wider financial system can better withstand future economic shocks.

Mortgage market continues to shrink

Ireland loans house purchase

Ireland’s mortgage market continues to shrink, amidst the central bank’s mortgage lending measures. Residential mortgage lending fell to just 25.4% of GDP in 2017, from 26.8% in 2016, 29.3% in 2015, 40% in 2014 and 46.2% in 2013 and way below the peak of 64.5% of GDP in 2009.

In 2018, the size of the mortgage market is expected to contract further to about 24.8% of GDP, based on the Global Property Guide’s estimates.

Loans outstanding for house purchase fell slightly by 0.5% y-o-y to €76.5 billion (US$86.5 billion) in September 2018, according to the Central Bank of Ireland.

New housing loans with floating rate and up to one-year fixation fell by 25.3% y-o-y €357 million (US$403.75 million) in October 2018. In contrast, new housing loans with over one-year fixation rose by 25.1% to €743 million (US$840.29 million) over the same period.

Rents surging, amidst limited supply

Ireland’s rent index surged 11.3% during the year to Q3 2018 to an average monthly rent of €1,334 (US$1,509), according to Daft.ie. Rents rose by 2.3% q-o-q in Q3 2018, the 25th consecutive quarter of quarterly rent increases. The average nationwide rent has now risen by 80% since bottoming out in late 2011. In fact, it is already 30% higher than its 2008 peak.

In the country’s capital Dublin, rents rose by 10.9% y-o-y in Q3 2018 and are now about 36% above their previous peak.

  • In Dublin City Centre, the average rent was €2,016 (US$2,280), up by 10.8% during the year to Q3 2018.
  • In South County Dublin, the average rent increased 10.3% y-o-y to €2,156 (US$2,438).
  • In South Dublin City, the average rent rose by 10.8% y-o-y to €2,094 (US$2,368).
  • In West County Dublin, the average rent was up by 12.5% y-o-y to €1,745 (US$1,974).
  • In North County Dublin, the average rent rose by 10.7% y-o-y to €1,637 (US$1,851).
  • In North Dublin City, the average rent increased by 11.3% y-o-y to €1,847 (US$2,089).

Outside Dublin, rents rose by 15.8% during the year to Q3 2018, according to Daft.ie. Over the same period:

  • In Cork City, average rents were up by 13.7% y-o-y to €1,301 (US$1,471).
  • In Galway City, average rents rose by 16.1% y-o-y to €1,226 (US$1,389).
  • In Limerick City, average rents increased by 20.3% y-o-y to €1,151 (US$1,302).
  • In Waterford City, average rents rose by 19.7% y-o-y to €955 (US$1,080).
  • In Carlow, average rents rose by 9.5% y-o-y to €898 (US$1,016).

Addressing the surge in rents (which have increased strongly for the past 25 consecutive quarters), Ronan Lyons of Daft.ie argued that the only viable solution is to increase the supply.

Ireland national rental index

"And extra supply is quite simply the only solution. The country needs close to 50,000 homes a year to cater to underlying housing demand - both market and social. More than 15,000 rental homes are needed each year," said Lyons.

The housing crash initially resulted in a huge expansion of the number of rental properties on the market, which rose dramatically to more than 23,400 in August 2009, from only 6,200 units in August 2007. However supply is not keeping up with strong demand in recent years. By end-October 2018, the number of properties available for rent in Ireland fell by 4.5% to 3,214 units as compared to the same period last year, according to Daft.ie. In Dublin, almost 1,400 properties were available for rent over the same period, up only nearly 100 units from a year ago.

Excellent yields on small apartments in Dublin

Gross rental yields on apartments remain excellent in Ireland, in certain areas and for certain sizes. But in general, smaller units earn higher returns.

In Dublin centre, gross rental yields range from 2.9% to 11.1% in Q3 2018, according to Daft.ie. One-bedroom apartments earn yields of 5.9% to 11.1% while five-bedroom houses offer yields of just 2.9% to 5.6%. Dublin 22 has the highest rental yields nationwide, followed by Dublin 10, 17 and 24.

In other areas:

  • West County Dublin gross rental yields range from 4.7% to 9.5% in Q3 2018.
  • North County Dublin yields range from 4.3% to 8.7%.
  • South County Dublin yields range from 3.1% to 6.3%.
  • Cork City yields range from 3.9% to 9.1%.
  • Galway City yields range from 3.7% to 8.6%.
  • Limerick City gross rental yields range from 4.6% to 10.8%.
  • Waterford City gross rental yields range from 4.4% to 10.4%.

House building increasing, but still far below peak levels

Dwelling completions rose strongly by 16.3% to 15,656 units during the first three quarters of 2018, as compared to the same period last year, according to the CSO. On the other hand, dwelling permits rose by just 1.7% to 7,771 units over the same period, according to the Department of Housing, Planning and Local Government. Despite these increases, housing construction is still unable to meet the huge demand.

Ireland housing construction

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 only 10,480 units. The decline continued for two more years, with only 8,488 dwelling completions in 2012, and 8,301 units in 2013.

Completions rose by 32.7% to 11,016 units in 2014, by 15% to 12,666 units in 2015, by 17.9% to 14,932 units in 2016, and by another 28.5% to 19,185 units in 2017. The country’s total housing stock was more than 2 million units last year.

Tax inversions artificially inflate Ireland’s economic growth

Ireland gdp unemployment

Ireland’s stellar economic growth for 2018 has confounded expectations again, with official estimates showing that real GDP expanded by 7.5% 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.

However, these growth numbers have downside risks. First, tax inversions only artificially inflate the size of Ireland’s economy. 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 growth figures are also misleading and will 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 7.2% in 2017, after GDP growth of 5.1% in 2016, 25.5% in 2014 (obviously a statistical artefact), 8.3% in 2014, and 1.1% in 2013, according to the European Commission. The economy is expected to expand by a more modest 4.5% this year.

Overall inflation was 0.6% in November 2018, slightly up from 0.5% in the same period last year, according to CSO. Nationwide inflation rate was estimated at 0.7% last year, an acceleration from 0.3% in 2017, -0.2% in 2016, -0.04% in 2015, and 0.3% in 2014, according to the IMF.

Unemployment dropped to 5.3% in December 2018, from 6.2% in the previous year, according to the CSO. This is also substantially lower than the 12.8% average from 2009 to 2016. Ireland’s average unemployment rate was 4.4% between 2000 and 2007.

Budget deficit falling continuously

Ireland government budget balance

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 ($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 ($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 2017, the budget deficit shrunk to 0.2% of GDP, down from 0.5% in 2016, 2% in 2015 and 3.7% in 2014, amidst strong economic growth and robust corporation tax payments.

The deficit was estimated to have fallen further to 0.1% of GDP in 2018, according to the European Commission. Ireland is expected to register a budget surplus in the next two years.

Likewise, gross public debt is expected to fall to 61.1% of GDP this year, from 63.9% in 2018 and 68.4% in 2017, based on European Commission estimates.

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