Higher than expected house price rises and a delay in cutting mortgage interest rates resulted in a sharp decline in the affordability of housing during 1998, according to the Bacon Report.
The decline was most acute in Dublin, where new house prices rose by approximately 30 per cent during 1998, compared with an earlier estimate of 20 per cent.
The report says that a gap now exists between the price of starter homes and the level of debt financing which some income-earners can secure from mortgage lenders. House price affordability appears to have "fallen back close to previous 1990 lows". However, the full-year effect of lower interest rates in 1999 is expected to help bring prices within reach of many potential buyers.
For an average single-wage household, the level of income would have satisfied the mortgage criteria of 2.5 times the principal income for a 90 per cent mortgage in 1988. "However, the sharp rise in house prices has meant that it would be impossible for a worker on this multiple of the average industrial wage to satisfy the mortgage lending lending criteria by 1997. For most couples, two incomes are required to satisfy the mortgage lending criteria at current prices."
The wage levels assumed for a two-income household would allow for a 90 per cent mortgage at current house prices within the mortgage lending criteria of 2.5 times the principal income and once the second income.
Earlier estimates of afford ability for 1997 were based on estimated earnings and without final house prices figures for that year. However, the final earnings data showed stronger earnings growth and slightly higher house prices, according to the report.
In the case of the one-income household, the 1997 figures showed a slight fall in afford ability. But for the two-income buyers there was a modest rise in the affordability index.
However, revisions to the earlier estimates for 1998 are much larger. The booming domestic economy had seen a significant increase in wage levels, from 2.5 per cent in the earlier estimate to 6 per cent. But house price inflation has been considerably stronger than assumed in the earlier estimate, climbing from 15 per cent to 20 per cent for new houses in the Republic as a whole.
The cut in interest rates necessitated by Ireland's EMU participation was delayed until near the end of last year. As a result, the 1998 average mortgage rate of 7.2 per cent was much higher than the 6.5 per cent previously assumed.