Ireland’s housing market is now cooling rapidly

Ireland’s house price growth is decelerating dramatically, amidst falling demand due to rising interest rates, coupled with limited supply. In July 2023, the nationwide residential property price index rose by a meager 1.45% as compared to the same period last year, a sharp slowdown from a y-o-y increase of 13.17% in July 2022, according to the country’s Central Statistics Office (CSO).

When adjusted for inflation, residential prices actually declined 4.11% y-o-y in July 2023.

Ireland’s house price annual change

This is supported by the latest figures from Ireland’s largest property website Daft.ie, which showed that the nationwide average house price stood at €322,602 (US$339,135) in Q3 2023, up by 1.1% from the previous quarter and by modest 3.7% from the same period last year. This was a sharp slowdown from double-digit price increases seen in the previous years.

All of the country’s major countries experienced either a sharp slowdown in house price growth or falling prices during the year to Q3 2023.

• In Dublin City Centre, the average asking price rose by a minuscule 0.6% to €372,616 (US$391,713), according to Daft.ie’s Q3 2023 House Price Report.
• In North Dublin City’s average asking price rose by 3.5% y-o-y to €403,654 (US$424,341).
• In North County Dublin’s average asking price rose slightly by 1.5% y-o-y to €386,368 (US$406,169).
• In South Dublin City’s average asking price fell slightly by 0.1% y-o-y to €468,106 (US$492,096).
• In West County Dublin’s average asking price rose by a modest 3.9% y-o-y to €364,998 (US$383,704).
• In South County Dublin’s average asking price was up by a meager 0.5% y-o-y to €656,409 (US$690,050).

Outside Dublin, average residential prices increased by a modest 3.76% y-o-y in July 2023 but dropped by 1.93% in real terms, according to CSO.

• In Cork City, Ireland’s second-largest city (located in Munster, in Ireland’s south), the average asking price rose by just 1.3% y-o-y to €337,345 (US$354,634) in Q3 2023, based on figures from Daft.ie.
• In Limerick City, Ireland’s third most populous city, the average asking price rose by 4.2% y-o-y to €262,499 (US$275,952) in Q3 2023.
• 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 increased by a modest 3.9% to €367,283 (US$386,106) in Q3 2023 from a year earlier.
• In Waterford City, also one of Ireland’s bigger cities, the average asking price increased 4.7% y-o-y to €238,595 (US$250,823) over the same period.

Restricted supply remains a problem. In the year to August, the number of homes listed for sale in the market fell by 4% to 54,100 units as compared to the same period a year earlier, according to Ronan Lyons of Daft.ie.

“The lack of supply has been a relatively constant feature in the market throughout the five years,” said Daft.ie.

Demand is now falling. In the first seven months of 2023, the number of residential dwelling purchases in Ireland fell by 8.2% y-o-y, in contrast to the 7% growth during 2022. Likewise, transaction value also declined 2.5% over the same period, following a huge 18.8% increase last year.

With interest rates rising and high inflation sharply reducing the purchasing power of households, housing demand is expected to continue slowing in the coming months.

Despite this, the overall economy remains healthy. During 2022, Ireland’s economic growth accelerated by 12% from a year earlier, buoyed by the exceptional performance of multinational sectors, particularly information and communications technology firms, pharmaceutical, and med-tech manufacturing companies, which are attracted by the country’s very open economy and by its relatively low tax inversion rate of 12.5%. The economy grew by an annual average of nearly 10% from 2014 to 2021.

The Irish economy is projected to grow by a more moderate 5.5% this year and by another 5% in 2024, with net exports remaining the main driver of economic activity, according to the European Commission.

Ireland’s housing market has been highly cyclical

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

When the bubble burst in 2008 amidst the Global Financial Crisis, it was Europe’s biggest property bust. Ireland’s house prices fell by an average of 53% from their peak, compared to the typical OECD fall of 23%.

The 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 8.5% in 2014, up from growth of only 1.6% in 2013 and zero growth in 2012.

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

Despite this, house prices continued to rise – by 7.1% (7% inflation-adjusted) in 2015, by 9% (9% inflation-adjusted) in 2016 and by another 12.2% (11.8% inflation-adjusted) in 2017. House price growth slowed to an annual average of 3.3% (2.3% inflation-adjusted) in 2018-19, mainly due to lending restrictions and the uncertainty about Brexit.

Amidst the onset of the Covid-19 pandemic in 2020, Irish house prices rose by a modest 2.2% (3.2% inflation-adjusted). But with the easing of pandemic-related restrictions and improving the economy, house prices surged by 14.2% (8.2% inflation-adjusted) in 2021. During 2022, house prices continued to rise, albeit at a slower pace of 7.7% (but actually declined slightly by 0.5% when adjusted for inflation).

Demand weakens

During 2022, the total number of residential dwelling purchases in Ireland rose by 7% to 72,681 units from a year earlier, based on figures from CSO. Likewise, the value of residential dwelling purchases also increased by a huge 18.8% y-o-y to about €23.12 billion (US$24.3 billion) over the same period.

However, the housing market is now showing signs of slowdown, amidst rapidly rising interest rates. In the first seven months of 2023, both the number and value of residential dwelling purchases fell by 8.2% and 2.5% y-o-y, respectively.

In the first seven months of 2023:

• In Dublin, which accounts for almost a third of all transactions, the total number of transactions fell by 9.6% y-o-y to 11,122 units while transaction value dropped 6.5% to €5.23 billion (US$5.5 billion).
• In Cork County, the number of transactions fell slightly by 0.9% y-o-y to 3,924 units while transaction value increased by 5.3% to €1.14 billion (US$1.2 million).
• In Galway County, transactions fell by 3.6% y-o-y to 1,647 units while transaction value rose by 4.3% €450.1 million (US$473.2 million).
• In Waterford City, the number of transactions plunged 21.2% y-o-y to 943 units and the value of transactions dropped 15.1% to €223.3 million (US$234.7 million).
• In Limerick City, transactions were down by 13.6% y-o-y to 1,155 units and its value fell by 12.5% to €263.4 million (US$276.9 million).

Mortgage interest rates rising, amidst successive ECB rate hikes

In September 2023, the European Central Bank (ECB) raised its key rate by another 25 basis points to 4.50%, its tenth consecutive rate hike since June 2022 when the key rate was at a record low of 0%, in an effort to rein in inflationary pressures in the region.

As a result, mortgage interest rates in Ireland are noticeably rising. In August 2023, the average interest rate for new housing loans was 4.08%, sharply up from 2.7% in the same period last year.

For new housing loans:

• Floating rate and initial rate fixation (IRF) of up to 1 year: 4.48% in August 2023, up from 3.54% a year ago
• IRF of over 1 and up to 5 years: 3.98%, up from 2.57% in the previous year
• IRF of over 5 and up to 10 years: 4.27%, up from 2.86% in the same period last year

Similarly, the average interest rate for outstanding housing loans increased to 3.53% in August 2023, from 2.55% in the previous year.

For outstanding housing loans:

• Maturity of up to 1 year: 4.2% in August 2023, up from 2.78% in the previous year
• Maturity of over 1 and up to 5 years: 3.63%, up from 2.84% in the same period last year
• Maturity of over 5 years: 3.53%, up from 2.55% in August 2022

Central bank’s new mortgage measures took effect

On January 27, 2015, the central bank introduced new regulations to limit mortgage lending. A 2022 review conducted by the central bank found that the economic costs of the mortgage measures have increased since 2015, mainly due to structural developments that have resulted in persistently higher house prices relative to household incomes.

As such, the central bank deemed it appropriate to introduce new changes to the measures, which came into effect on January 1, 2023.

The measures include the following:

• First-time buyers
  • The loan-to-income (LTI) for first-time buyers was raised from 3.5 to 4 times income.
  • The loan-to-value (LTV) limit for first-time buyers remained unchanged at 90%.
• Second and subsequent buyers
  • The LTI for second and subsequent buyers was kept at 3.5 times income.
  • The LTV limit was increased from 80% to 90%.
• Buy-to-let borrowers
  • No changes were made to buy-to-let lending measures, where a 70% LTV limit continues to apply.
• Proportionate allowances
  • The proportion of lending permitted above the limits now applies at the level of the borrower type (e.g. first-time buyer) rather than the individual limit (e.g. first-time buyer LTI).- 15% of first-time buyer lending can take place above the limits.- 15% of second and subsequent buyer lending can take place above the limits.- 10% of buy-to-let lending can take place above the limits.

“The mortgage measures limit the size of mortgage debt to buy residential property. These limits are based on the income of the borrower (loan-to-income limit), and the value of the property (loan-to-value limit). The measures were introduced by the Central Bank of Ireland in 2015 and are a permanent feature of the Irish mortgage market,” said the central bank.

The mortgage market slowing

Due to the central bank’s measures, exacerbated by the COVID-19 pandemic and ongoing global economic slowdown, Ireland’s mortgage market has been continuously shrinking in recent years. Residential mortgage lending fell to just 16.4% of GDP in 2022, from 19.6% in 2020, 23.3% in 2018, 27.1% in 2016, 40% in 2014, and nearly 65% in 2009.

The weakness of the mortgage market continues this year. In Q2 2023, loans outstanding for house purchases fell slightly by 0.8% y-o-y to €82.78 billion (US$87.02 billion), according to the Central Bank of Ireland. About 95.3% are drawn for principal dwelling houses, 4.4% are for buy-to-let properties, and the remaining 0.3% are for second/holiday homes.

By interest rate fixation, for principal dwelling houses (Q2 2023):

• Housing loans with floating rates and up to one-year fixation fell by a huge 25% y-o-y €27.11 billion (US$28.50 billion).
• Housing loans with over 1 and up to 3 years IRF plummeted by 23.5% y-o-y to €8.64 billion (US$9.08 billion).
• Housing loans with over 3 and up to 5 years IRF surged 30.9% y-o-y to €35.51 billion (US$37.33 billion).
• Housing loans with over 5 years of IRF rose strongly by 134.2% y-o-y to €7.64 billion (US$8.04 billion).

Construction activity still rising nationwide, but declining in Dublin City

Dwelling completions in Ireland were up by 5.8% to 14,017 units in the first half of 2023 as compared to the same period last year, following an almost 36% surge during the full year of 2022, based on figures from the CSO. In Dublin City, in contrast, new dwelling completions plummeted 46.4% y-o-y to 1,069 units in H1 2023.

During the boom, completions nationwide tripled to more than 93,000 units in 2006, up from 30,000 units in 1995. However, by 2011 completions had fallen to only 10,289 units. The decline continued for two more years, with only 8,345 dwelling completions in 2012, and 8,207 units in 2013.

Completions rose by 33.2% to 10,929 units in 2014, by 15.5% to 12,623 units in 2015, by 18.2% to 14,923 units in 2016, by 28.6% to 19,185 units in 2017, by 16.7% to 22,385 units in 2018, and by another 13.4% to 25,389 units in 2019.

Then from 2020 to 2021, new dwelling completions remained more or less steady, at an annual average of 24,800 units, amidst the COVID-19 pandemic. During 2022, residential construction activity bounced back, with completions rising strongly by nearly 36% y-o-y to 33,756 units.

Currently, the country’s total housing stock is more than 2.12 million units, according to the 2022 Census.  Of these, 87.5% are occupied.

Rents rising strongly amidst tight supply

Ireland’s rent index rose strongly 10.7% y-o-y to an average monthly rent of €1,792 (US$1,884) in Q2 2023, its tenth consecutive quarter of annual rent increase, according to Daft.ie’s Rental Price Report Q2 2023.

All markets experienced rent increases, though there were wide regional variations.

“Across the 54 markets covered in each Daft.ie Rental Report, market rents were on average 10.7% higher in the second quarter than a year previously. While still a high rate of inflation, it marks a slight cooling in the rate of increase, compared to the 14.1% seen in mid-2022,” said Daft.ie.