Economics: For many Irish people, a house is no longer simply a home, it is part of a property investment portfolio. Personal investors purchasing buy-to-let residential properties now account for over one-quarter of all outstanding house mortgages in Ireland, writes Paul Tansey.

By September 2007, total mortgage lending to buy-to-let investors in the residential housing market had reached €31.4 billion.

At this level, personal investors accounted for 26.1 per cent of all outstanding house mortgage loans.

The emergence of personal investors buying houses to let or to hold in the expectation of a capital gain is a relatively new phenomenon in Ireland.

Yet, within a short space of time, such investors have become a key force in determining the level of activity in the Irish house-building industry.

As can be seen from the table, total house mortgages extended to the personal sector increased by 121 per cent between December 2003 and September 2007, rising from €54.66 billion to €120.5 billion over the period.

In less than four years, mortgages provided for the purchase of principal private residences almost doubled, rising from €44.8 billion in December 2003 to €87.7 billion at September 2007. A similar trend was evident in mortgages outstanding for the purchase of holiday homes.

However, the dynamic in the housing market has been provided by personal investors in recent years.

Housing mortgages proffered to buy-to-let investors have increased by 245 per cent since the end of 2003.

The stock of mortgage finance provided to investors in residential property rose from €9.1 billion in December 2003 to €31.4 billion by September 2007. As a result, private investors now account for 26.1 per cent of all outstanding residential mortgages compared to just 16.7 per cent at the end of 2003.

Moreover, even as homebuyers have lost their appetite for house purchase over the past year, personal investors were keeping the housing market's head above water until recently.

As shown in the table, mortgages outstanding to households buying principal private residences increased by just €7.1 billion or 8.8 per cent to €87.7 billion in the year to September 2007. Over the same period, outstanding house purchase loans advanced to buy-to-let investors rose by €5.3 billion or 20.3 per cent.

The importance of personal investors to a flagging housing market can be seen from the fact that they accounted for 42 per cent of the total increase in outstanding house mortgages in the year to September last. Yet, on the evidence of recent quarters, even the interest of investors in the Irish housing market is now waning.

The changes in stamp duties announced in Budget 2008 will not succeed in luring personal investors back into the residential property market in large numbers during the year ahead for two reasons.

First, the financial savings accruing from the stamp duty changes are too small to exert a material effect on investor behaviour in current market conditions.

The market price of the average Dublin house in the second quarter of 2007 stood at €473,749. An individual purchasing such a house for investment purposes previously would have paid €35,531 in stamp duty. The changes in Budget 2008 reduce the stamp duty charge to €24,412.

As a result of the budgetary adjustment, the duty-inclusive price of the average Dublin house has been marked down from €509,280 to €498,161, an overall price cut of 2.2 per cent. In a property market where prices are already tumbling, the stamp duty changes will cut little ice with personal investors.

Second, and much more importantly, in seeking to recruit new residential investors, the stamp duty cuts are swimming against the prevailing tide of market expectations.

Personal investment in residential property is motivated principally by the expectation of capital gains.

Investors reap large capital gains in residential housing when they borrow heavily to buy into a rapidly-rising market. Between 2003 and 2006, investors had it almost all their own way. Irish house prices powered ahead and borrowing costs remained remarkably low.

Between June 2003 and December 2005, core European interest rates remained unchanged at 2 per cent.

In consequence, personal investors flooded into the residential property market on a tsunami of cheap credit. Their urge to invest was not diminished one whit by the prevailing high rates of stamp duty.

Now, all has changed. The days of making easy money in the Irish property market are over. Residential house prices are declining. The Economic & Social Research Institute (ESRI) is forecasting that, when the numbers are finally counted, house prices will have fallen by 15 per cent in the year to December 2007. As a result of falling prices, expectations of short-term capital gains have evaporated. So, too, have investors.

Personal investors will only return to the housing market when they perceive the potential for making capital gains. This set of circumstances will not materialise until the current imbalances in the market are corrected.

Essentially, a market correction requires that supply and demand in the housing market are brought into broad balance by a decline in prices. The sooner this adjustment process is completed, the better for all concerned in the market, for only then will the pace of market transactions pick up. Until the market is corrected, investors will continue to sit on the sidelines.

Well-intentioned but misguided efforts to "stabilise" the market - that is, to inhibit the process of price adjustment in the market - merely prolong the agony of the inevitable correction.