Irish property crash
The Irish property crash is worsening.
House prices in Ireland fell by 7% nationally in 2007, according to Permanent TSB/ESRI monthly figures, or 11.5% in inflation-adjusted terms.
Over the 12-month period to end-May 2008, prices have fallen by 9.5%, or 13.6% in inflation-adjusted terms.
Average house prices have fallen by €35,902 since the peak in January 2007, from €311,078 to €275,176.
The downturn may still be hastening. Property prices fell 1.2% in May from the previous month, after falls of 1.1% in April, and 0.7% in March.
In the new apartment market, developers have been giving away cars, bathroom and kitchen suites in a vain effort to hold up prices. Developers are now dropping prices – but probably not by as much as they need to.
Rents are also suffering a downturn. The stock of rental properties available nationally has increased from over 5,000 in May 2007, to almost 12,000 in May 2008, according to Daft.ie, largely because developers are beginning to despair of selling and are adding their properties to the pool of rental property.
The housing market crash began in February 2007 when property prices began to fall. During 2006 prices rose by 11.8% nationally, and over the five-year period 2001-2006 national prices rose 71% (44.8%).
How bad will the slowdown be?
The following are key causes of the slowdown:
Interest rates have risen inline with the rest of the Eurozone, moving from 2.25% in December 2005, to 4.25% in June 2008. The European Central Bank is widely expected to raise rates again. 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 grew rapidly.
- Yields across Ireland average a very low 3.2%, according to the most recent bi-annual Daft Report. Gross yields in Dublin are somewhat higher than elsewhere in Ireland, at around 4.1%. 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 are at levels which worry us. Such low yields left the market very exposed when interest rates rose, especially as the market is largely floating rate.
There has been significant overbuilding. The numbers of dwellings completed has risen very sharply, more than doubling from 30,000 in 1995 to over 78,000 in 2007. A third of current housing stock has been built since 1993. During 2007, the stock of houses for sale rose 62%, and transaction volumes fell drastically, according to the most recent Daft report.
17 years of continuous boom
House prices in Ireland over the past decade have been in the top 4 of the European price-rise league, just behind Estonia and Spain (see 10-year house price changes, Ireland) and had 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 2007 Ireland experienced 5.3% GDP growth, after 5.6% GDP growth in 2006, 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.
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 2002 mortgage interest deductibility against rental income was reintroduced, slightly boosting the market. In 2004 the Residential Tenancies Act introduced stronger protection for tenants, but without any obvious negative effects on the buy-to-let market.
The buy-to-let market represents less than 8% of the total housing stock, but new buy-to-let mortgages have recently been a significant portion of all mortgage loans.
The increase in supply of rental units had 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.
In late June, the Economics and Social Research Institute (ESRI) forecast that GDP growth in Ireland will be negative in 2008 at -0.4%, down on 5.3% growth in 2007. In addition, worsening terms of trade mean that the reduction in real incomes will be -2.6% in 2008. Due to the growth slowdown, tax revenues have declined, and by 2009 the EU’s 3% budget deficit limit is likely to be breached.
In summary the picture is not rosy.
