The Irish housing market, bedevilled by lack of supply, is showing increasing signs of dysfunction. While there has been a lot of focus on new housing, there is also a supply crunch in the second-hand market. There were just 15,140 second-hand properties for sale in January, according to new figures from Sherry FitzGerald. Lack of supply is supporting prices in this sector of the market – and may continue to do so – but higher interest rates are also starting to have some impact on demand.
Mortgage figures show demand for loans was strong in January, with approvals up for both first-time and mover purchasers. First-time buyers face higher borrowing costs, but are benefiting from new Central Bank lending rules as well as support under the Help-to-Buy and the new State shared equity scheme. So while the first-time buyer market remains strong, mortgage brokers report a slowdown in enquiries from movers, with low supply cutting opportunities and higher interest rates cutting through. Sherry FitzGerald estimates that residential properties for sale across the State represent just 0.8 per cent of the housing stock, with huge shortages right across the country.
1. Historic undersupply
A collapse in construction after the financial crisis left the Republic in a backward position from which it never caught up. Construction activity increased after 2015 but so did population growth. The latest CSO figures estimate that the population grew by 1.2 per cent a year from 2016 to 2022 but housing output rose by 1 per cent at the same time.
A recent report from the UK Centre for Cities, looking at supply trends across Europe, gives this a longer term context. The Celtic Tiger building boom came after years of long-term undersupply of housing. Despite local authority building, the net increase in housing here per person from 1955 to 1979 was the lowest in western Europe. Ireland never caught up in terms of providing enough houses for its population – and even some of the massive supply in the Celtic Tiger years was in the wrong places, due to the impact of tax incentives.
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On top of this historic undersupply came a massive increase in demand as employment and the population rose strongly in recent years. And with the economy continuing to grow through Covid-19 and the cost-of-living crisis, demand has remained strong. Now forecasts that interest rates are going to rise further – and quickly – are likely to slow demand, though with supply so tight there may still be buyers for what is available. But at what price?
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2. The supply squeeze
The Sherry FitzGerald figures show a supply squeeze across the State. In the cities, supply lags demand caused by rising population and economic activity. In rural Ireland, chronic lack of building has meant supply levels have collapsed. The CSO data from 2016 to 2022 shows that the commuter countries around Dublin – Meath, Kildare and Wicklow – were the only ones in which supply kept pace with rising population.
The Sherry FitzGerald data shows that the total of 15,140 second-hand houses listed for sale in January was 26 per cent down from January 2020. When this set of figures began to be compiled, after the financial crash in January 2010, there were 53,909 listings. Commenting on the numbers, Marian Finnegan, managing director of Sherry FitzGerald said the fact that they represented just 0.8 per cent of the housing stock available for sale across the State and only 0.75 per cent in Dublin “will inevitably put further upward pressure on prices in the months ahead”.
The figures show stock is particularly tight at lower price categories, with just 3,850 houses worth under €200,000 on the market, a fall of 49 per cent in three years. This points to a major shortage of second-hand properties in large parts of rural Ireland, where prices are generally lower. New building in much of rural Ireland in recent years has been particularly low since the financial crash – and much of the building in rural towns during the Celtic Tiger building boom was tax-driven rather than based on what the market actually wanted.
This chronic shortage may support prices, but in a very dysfunctional market. The Sherry FitzGerald figures point to some parts of the country where supply has fallen particularly sharply – with supply in Roscommon now 50 per cent below pre-Covid levels and Kerry down 45 per cent.
In city markets, supply is more in line with pre-Covid levels – and is up 7 per cent in Dublin – but is still low by historical standards, leading to a scramble for properties on the market and over recent years many homes selling for above the prices at which they went on the market, as buyers often have no viable alternatives.
3. Where is the second-hand market going?
In the short term, it looks like more of the same. Mortgage approvals remained strong for movers in January, suggesting that demand will stay solid at least for the next few months, despite rising interest rates. With supply so constrained, prices will remain supported at current levels or higher. Remember cash buyers, without the constraint of higher interest rates, remain a factor in the market too.
However, higher borrowing costs are going to have an impact on the mover market, as well as on first-time buyers, with mortgage brokers reporting a fall-off in enquiries from potential movers in the early part of this year. Unlike first-time buyers, they do not qualify for the range of incentives include Help-to-Buy and the First Home Scheme, in which the State takes an equity stake of up to 30 per cent. The soaring cost of renovating properties may also be a factor for some potential movers. New buyers, meanwhile, are also benefiting from a loosening of Central Bank lending rules, which means they can now borrow up to four times’ income.
Mortgage broker Michael Dowling confirms that demand from first-time buyers remains strong – particularly boosted by the Central Bank rule changes which released some pent-up demand – but says higher interest rates are now having some impact on second-time buyer demand, where affordability concerns are now becoming an issue. In turn this may be starting to have some impact on the prices at which houses are being put on the market. Non first-time buyers can normally only borrow 3.5 times’ income, though banks can make some exceptions to go as high as four times.
A key factor as the year goes on will be rising interest rates. Expectations of how high interest rates will rise are, unfortunately, worsening. Another half point rise in ECB rates is expected in March and now another half point may fellow in early May. The ECB deposit rate is now 2.5 per cent – having already risen by three points – and could now rise as high as 4 per cent in the months ahead, market analysts believe. This worsening of the outlook has not yet fed through to the market, where rates on offer are still generally catching up with ECB rises to date (tracker rate rises have, of course, matched ECB increases). When banks “stress test” borrowers for new loans as rates rise, many are going to fail.
In a recent report, the Joseph Rowntree Foundation in the UK wrote about the market there and the emerging “stagnant, low-transaction” picture offering few opportunities for first-time buyers or those seeking to move. The Irish market is different in some respects, with mortgage demand rising – it is falling in the UK – and a particularly strong jobs market. But the lack of supply here in the second-hand market and the affordability issues facing those wanting to move has inevitable knock-ons – for example leaving fewer smaller, second-hand properties which would suit first-time buyers, or indeed those wanting to trade down after family has left. The normal market flow is undermined, with big economic and social consequences.
As ever, the fundamental issue is low supply, a problem which has built up over many years, pushing house prices into territory where affordability is a real issue. It will take years to solve – a key issue for a political system which always looks for quick fixes.
