As a rule of thumb, when interest rates go up house prices go down or at least the housing market slows.
That was once an ironclad rule in economics. Not any more. Property markets globally have shrugged off the impact of higher borrowing costs. Many are back in boom mode.
Since the European Central Bank (ECB) began a cycle of 10 interest rate hikes in July 2022, Irish property values have surged by 10 per cent. In the Dublin, prices are up by an average of 7.5 per cent.
Property price inflation here has increased for 10 consecutive months (from 1.1 per cent in August last year to 8.6 per cent in June). The annual rate of increase in Dublin is even steeper (9.3 per cent).
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So why aren’t higher interest rates having more of a dampening effect? There are several reasons.
Since the 2008 financial crisis and the subsequent period of historically low interest rates, more homebuyers have opted for fixed-rate mortgage contracts, effectively shielding themselves (and the wider market) from interest rate variability.
Fixed-rate contracts encourage homeowners not to move as they would need to obtain a new mortgage, possibly at a higher rate, hence the very low level of churn in the Irish market.
Currently 50-55 per cent of mortgage holders here are on fixed-rate contracts. According to estate agent Sherry FitzGerald, 69 per cent of all new lending for house purchases in the first half of 2024 comprised fixed rates of over one year. The comparable figure for the first half of 2003 was 21 per cent.
Fixed-rate contracts encourage homeowners not to move as they would need to obtain a new mortgage, possibly at a higher rate, hence the very low level of churn in the Irish market.
From the ECB’s perspective, the higher percentage of people on fixed terms (not just here but across Europe) has muted the impact of monetary policy. That’s why Europe and Ireland experienced only minor technical recessions last year on the back of Frankfurt’s aggressive monetary tightening.
There are also several local Irish factors upsetting the traditional relationship between interest rates and house prices.
Last year there were 50,234 homes bought by households in the Republic but, according to the Banking and Payments Federation Ireland (BPFI) only 35,229 home purchase mortgages were drawn down, suggesting that approximately 30 per cent of homes were bought by cash buyers without recourse to a mortgage.
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Many of them are said to be using cash from previous sales or drawing on savings. Some are likely to be ex-pats returning from abroad. Either way, they’re not being hindered by the higher borrowing costs.
Perhaps the biggest elephant in the Irish property room relates to non-household purchases: those made by the State (local authorities and approved housing bodies (AHBs) and institutions or funds.
While higher interest rates have impacted institutional activity, State agencies are buying even more than before perhaps because of the political imperative placed on them by Government.
Last year, they purchased close to 6,000 new homes, shoring up demand and prices in the process. The figures don’t include the units bought the Land Development Agency.
When you remove State and institutional purchases and one-off builds, only a fraction of the new homes coming on stream make it into the estate agent’s window (fewer than 10,000 of last year’s 33,000 total).
Then there are the generous subsidies for home purchase being offered by Government in the form of the Help to Buy and First Home schemes, which keep getting expanded.
These incentives are designed to elicit more supply from builders and developers while bridging the affordability gap for potential buyers. On a macro level, they also support prices.
Predictions that the ECB’s 10 interest rate hikes would trigger a property market crash have proved well wide of the mark
Another factor is income. After a period of rapid disinflation, real wages are rising again offsetting the impact of higher rates on people’s ability to borrow. Looser credit conditions have also helped buyers. In 2022, the Central Bank lifted the upper limit on the loan-to-income ratio requirement for first-time buyers from 3.5 times to 4.
The Republic’s population is also growing faster than anyone predicted thanks in the main to immigration. According to property firm Savills 3.8 people were added to the population for every one new unit of housing delivered between 2015 and 2023, a ratio of nearly four to one.
This is by far the worst of the nine countries analysed, Savills director of research John Ring said. Ireland’s ratio was 80 per cent worse than the UK’s (2.1) and double that of Australia (1.9).
“While it is true that many countries across the world are facing housing shortages, it is important to recognise that the severity of Ireland’s is on a different level to others,” Mr Ring said.
Predictions that the ECB’s 10 interest rate hikes would trigger a property market crash have proved well wide of the mark. Property prices are driven by multiple factors but never have interest rates held so little sway.
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