What’s going on with house prices?
Not for the first time, they’re barrelling forward again and at a rate that few predicted. When interest rates are elevated (remember the European Central Bank (ECB) lifted rates 10 times between 2022 and 2023 to counteract inflation), activity in housing markets should be subdued. However, the latest official figures here indicate that prices nationally rose at an annual rate of 10.1 per cent in August and at a rate of 10.8 per cent in Dublin. August was also the 12th consecutive month to see an increase in property price inflation, a worrying trend for prospective buyers. In real money terms, it means that a property you might have paid €350,000 for last year will now cost you €385,000. That’s an increase of almost €3,000 a month.
Why are prices rising so rapidly?
Well, there’s a combination of reasons. First and foremost the market is undersupplied. Residential construction effectively ground to a halt in the wake of the 2008 financial crisis. We’re still on the rebound from that period. And while new home completions rose to a post-Celtic Tiger record of 33,000 last year, the level of demand annually is thought to be 50,000 and above. We have a bigger population now and that means more people looking for homes. Another factor in the equation is the Government. The State is buying up a lot of the new supply for badly needed social housing. It is also providing incentives to prospective buyers through its Help to Buy and First Home initiatives. These factors, and others including rising wages, are underscoring prices. They seem to be outweighing the increase in supply, which should in theory lessen the upward pressure on prices.
What will the ECB’s latest interest rate reduction do?
The cost of finance (interest rates) is a key determinant of house prices so the ECB’s latest move to lower its main lending rates in the face of a faster-than-expected slowdown in inflation will inevitably result in higher house prices. If people can borrow more, they can pay more and this ultimately translates into higher prices. John McCartney, director and head of research at BNP Paribas Real Estate Ireland, says the latest ECB move will “add somewhat to the heat as it may encourage those who are not maxed out on their loan-to-value and loan-to-income limits to take on more debt for home purchase”.
So what’s the outlook?
Unfortunately more of the same. Young people, even those on good salaries, are increasingly being priced out of the market and it’s not obvious that a massive jump in supply is going to cure that corrosive price dynamic.
