Irish Property Prices – Q3 2019 Review

The MyHome Q3 Property Report arrived at our office last week; the report is always a trove of fascinating data and insights into the current state of the Irish property market. In this article, we look at some of the key highlights as well as adding some of our own views from the coalface.

The overarching narrative of the Irish property market at present is one of slowing price growth at best and negative growth emerging in some parts of Dublin for the first time since 2013. Our view is that we are now transitioning to a new normal where, after years of strong growth from the doldrums of the property crash, the market is finally reaching a sustainable equilibrium.

In this new environment, our expectation is that supply of homes available for purchase will broadly meet demand and prices will grow in line with wage inflation ie a few percentage points per annum. This does not mean that the demand for accommodation more broadly will be met; it's important not to confuse these two related but separate forms of demand. More on this below but suffice to say that a new development in South Dublin with units starting from €400k does nothing to solve the problems of an unemployed person living in emergency accommodation. This is a far healthier, more predictable market for all stakeholders as boom bust cycles serve no one well. In parts of Dublin, where prices have dipped a little of late, there is a bit of adjustment having to be done by vendors whose expectations were set based on transactions that closed in the early to mid part of the year. These transactions often originated in the latter part of last year/early this year and those prices are now no longer achievable as the market adjusts marginally downward.

MyHome Asking Price Graph showing house price inflation turning negative in Dublin for the first time since 2013. These are asking prices which tend to lag the actual market. We are seeing double digit pullbacks in actual prices achieved in certain parts of Dublin.

Those vendors coming to the market from now on are looking at more recent comparable sales and asking prices and as such their expectations are more tightly aligned with the lower prices being achieved of late compared to even six months ago. So what is driving the current slowdown?

Supply Demand Gap is Narrowing

"Vendors are having to compete to get offers. As the stock levels tick upward, asking prices go in the opposite direction. Vendors are having recalibrate their price expectations in light of the heightened competition for buyers."

Predicting demand for housing is quite a complex endeavour and is an inexact science. Estimates of household formation per annum in Ireland, which ultimately underpin demand for housing, involves assessing a whole host of metrics around net migration, birth and death rates as well as assumptions on household size. Estimates vary but are generally around 25,000 per annum.

To put this in context, there were 19,300 completions in the 12 months to June 2019. During this period, there were 24,226 commencements and planning permission granted for 31,800 units (12700 of which were apartments). While economists will argue about the precise number of formations and so long-term demand for housing into the future, one fact is unavoidable and that is that supply is getting far closer to demand than it was even a few short years ago. In 2013 for example, completions were just over 8301 (source CSO). Supply has grown every year since as the construction industry slowly ramped up again after the crash from which some developers never re-emerged.

The legacy of the last crash was that many of Ireland’s largest residential house builders were wiped out and getting them back up and running as well as supplementing them with new, large players like Glenveagh and Cairn Homes has taken many years. However, these large builders are now churning out new developments at a scale not seen since pre-crash levels and as this new supply hits the market, it of course has a dampening impact on price inflation.

Given the lag in getting properties to market, the market will never be in perfect short-term equilibrium (supply perfectly meeting demand) but over the longer term, equilibrium should be achievable. Rising prices entice developers in and as their supply comes on stream, it dampens prices down which deters commencement of new developments at the margin, which pushes prices upwards and on we go.

In the above graph, the stock of property for sale on MyHome (which would be an accurate indication of the general housing stock on the market) has started to drift upward of late with stock for sale in Dublin at levels not seen since 2015. Vendors are having to compete to get offers; so as the stock levels tick up, asking prices go in the opposite direction. Vendors are having recalibrate their price expectations in light of the heightened competition for buyers – the invisible hand at work.

Help to Buy Scheme Makes Second-Hand Houses Less Attractive

“With so many new developments coming on-stream, those selling second-hand properties are having to tighten their asking prices to get offers coming in.”

After months of uncertainty, the Government has confirmed the retention of the Help to Buy Scheme. The scheme offers a rebate to of 5% of the purchase price of a new property to first-time buyers. In a buoyant market, one could make an argument that this 5% gets added to the price of new houses and so it is a developer subsidy as opposed to a first-time buyer rebate. However, as more supply comes on stream and developers compete with each-other to sell their inventory, prices tighten and so the 5% becomes a genuine discount.

Alas, the scheme doesn’t extend to second-hand property which puts vendors of such property at a comparative disadvantage. A new, Help to Buy eligible, property brought to the market at €400,000 costs the purchaser €380,000 once the rebate is factored in. A comparable second-hand property needs to be significantly below €380,000 in order to attract first-time buyers who will naturally prefer new builds. With so many new developments coming on-stream, those selling second-hand properties are having to tighten their asking prices to get offers coming in.

Brexit

Markets hate uncertainty and Brexit has delivered that in spades. On again off again deals, hard or soft border, musical chair prime ministers in the UK, backstop or no backstop, we leave on October 31st or we die in a ditch…………but the Benn Act legally requires an extension to be sought…………unless a clever legal workaround can be managed etc. etc. Most commentators have given up predicting what will happen tomorrow let alone next week. We have had vendors tell us to remove properties from the market “until Brexit is sorted”. Likewise, there is anecdotal evidence that many would-be buyers have sat on the fence “to see what way Brexit plays out.” At the time of writing, we appear to be close to a deal albeit nothing is every straight-forward with Brexit. The DUP isn’t supporting the deal but the ERG is; will the erstwhile Tories currently banished by Johnson to the wilderness be welcomed back into the fold in return for their support of this “new” deal. Here we go again!

However, if a deal can be pushed through the UK parliament, as the DUP shouts from under the bus, then finally the market will have the certainty that it has craved for over three years at this point. That can only be good for confidence both for vendors considering listing (supply) and buyers considering purchasing (demand). It could be argued that the additional supply of emboldened, “discretionary vendors” (eg those with profitable buy to lets that they want to sell), now confident enough to put their properties on the market will merely be met by the new demand of the invigorated buyers who were waiting for certainty to be restored, with one cancelling out the other.

As with all things related to Brexit, it remains to be seen what, if any, impact a deal has on the market. Our prediction is that those waiting for Brexit to be sorted for prices to start going upwards again will be disappointed. Transaction volume this year has been ahead of last year and look set to be around 60,000 or so for the full year, which is in line with previous years. This doesn’t point to a market paralysed by Brexit and one that will move into a new gear once it’s finally resolved. On the contrary, those who have to sell are selling and those who have to buy are buying. Brexit may be deterring some marginal buyers and sellers from entering the market but even so, we think one cohort will cancel out the other so don’t envisage any reversal of recent cooling price trends once Brexit is finally sorted.

But There’s a Housing Shortage – How Can Prices Be Going Down?

The Irish housing crisis is very well documented at this point. The constant reference to it in the media often leads vendors to believe that there will be a feeding frenzy for their property the moment it hits Daft & MyHome. That’s a logical view on the surface but when you dig a little deeper, you’ll see it doesn’t quite work like that.

There is for sure strong demand for housing as is evidenced by the upward trend in mortgage approvals and drawdowns since 2012; the banks are lending to viable borrowers. However, Central Bank macro-prudential rules limit the amount that house-hunters can borrow to 3.5 times their combined salaries and insist on maximum LTV of 90% for first time buyers and 80% for non-first-time buyers. With salaries growing at around 3% per annum, house prices in the long run can’t exceed this, unless the borrowing caps are removed.

Banks are doing their bit by providing more credit to the market each year since 2012

After many years of growth, prices have started to exceed the maximum mortgages that borrowers can access and as such this has acted as a hand-break on growth – people can’t pay more for a property than the bank is allowed to lend to them after all.

While estate agents, and more recently the chief executive of AIB, will often bemoan these rules and call for their relaxation, the reality is that they are serving precisely their desired purpose ie to stop rampant property price inflation driven by people borrowing money they can’t afford and servicing mortgages with unsustainable percentages of their monthly disposable income. The days of 110% mortgages to allow the borrower a sum for property fit out, thankfully are long gone. In our view, the hand-break should stay firmly in place to protect borrowers from themselves. The market will reach an equilibrium and grow from there at in or around the rate of wage inflation. This is what a normal, functioning property market feels like. Participants in it are long-term oriented as short term windfalls from flipping off the plans and other forms of speculation don’t work in a slow moving, stable, “boring” market. Boring is good when you’re dealing with people’s homes!

Despite the outcry against institutional financial houses buying up property largely in Dublin en masse, their outlook is very much long-term. They are attracted by the steady stream of incomes that flow from owning Irish residential rental properties. They are not here for short-term capital appreciation but rather as a much-needed provider of capital to builders looking to get projects completed and further add to much needed supply.

Another point to make here is that not all demand is relevant demand. In H1 2019, the average mortgage was €230,000. A young couple, with mortgage approval for €230k, living with their parents desperate to get on the housing ladder constitute demand for housing. A worker earning €1600/month who joins the back of a queue for a rental property in Dublin only to be told that the property has been let before he even gets to the front door is demand. A single, non-working mother on social welfare benefit relying on HAP to cover monthly rental payments is part of the demand side of the housing equation. But if you are selling a 3-bed semi in Lucan with a guide price of €300k, this demand is irrelevant to you. These people would love to buy the Lucan property but can’t afford it so they have no impact at all on pushing prices upwards. So a housing crisis and falling prices, counterintuitively, can coexist and these two dynamics are very much at play in the Irish property market at present.

Conclusion

Supply is increasing, prices are slowing nationwide and dropping in Dublin so is this the start of another crash? Whenever someone referring to economic matters says “this time it’s different” you should be wary but we’re going to say it anyway. The 2008 property crash was a result of large-scale debt fuelled speculation unrestricted by the nuisance of macro-prudential rules. This time round, there is sustainable long-term demand underpinned by strong household formation which is driven by net inward migration, high employment levels, population trends and shrinking household size. Even in a disastrous no-deal scenario, domestic growth forecasts are still positive. If a deal can be cobbled together, growth is predicted to be even stronger & we now have pretty much full employment.

Our ability to attract and retain multi-nationals looking to access our skilled, well-educated, young work-force while paying low corporation tax in the context of a pro-business government isn’t diminishing. On the contrary, Google, Sales Force, Facebook et al. are expanding their operations here, recruiting more high paid workers as they do; real people who need places to live, not speculators with “no money down”. These competitive advantages that Ireland Inc enjoys are sustainable and will see the country in good stead into the future despite the inevitable erosion of our corporate tax rate advantage by Europe over time. Prices will tighten and even contract marginally as supply overshoots demand from time to time but our view is that the long-term prospects remain sound. By sound, we mean slow single-digit, steady growth in line with wage inflation over the long run. After many years of boom and bust, this would offer all market participants a very welcome boring predictability!

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