The Economic and Social Research Institute (ESRI) has suggested that the Irish housing market is not a bubble and that house price levels across the country do not display signs of being unsustainable and are actually broadly in line with fundamentals.
Such fundamentals would include wage growth, employment, and household spending.
Even more significant is the conclusion that — in general — the Irish housing market does not currently display unsustainable house prices, when viewed from a macro-financial perspective.
In other words, the trajectory of Irish house price growth in recent years has not been driven by a credit bubble and has not created a position of financial vulnerability for the economy.
As reassuring as this message is, it is important to point out that this is just the view of some researchers in the ESRI and, as we all should realise by now, economic forecasting is an extremely inexact science where events can blow the most complex and scientific forecasts out of the water.
Such events are often driven by irrational political actions or human behaviour.
Users and observers of economic forecasts should never forget that economics is a social science and not an exact physical science.
Hence, there is no such thing as certainty, and anybody who believes that there is would be guilty of extreme naivety, to put it charitably.
Having said that, the ESRI is extremely reputable and its views are always worth taking on board.
The growth in Irish house prices since 2012/13 has been driven by a strong economic recovery, a very impressive labour market performance that has seen record levels of employment being achieved and the lowest unemployment rate since before the economic crash, a gradual improvement in wage growth, and a generally supportive economic background.
In addition, following the collapse in house prices, house building, and transaction levels from 2007 onwards, the market has very definitely been driven by lots of pent-up demand coming back into the market, driven by both demographics and improved confidence about the future.
Excessive credit growth has very definitely not been a feature of the housing market recovery in recent years.
On the contrary, the mortgage market has been restrained by awful bank balance sheets and the Central Bank’s mortgage lending restrictions.
In the first nine months of this year, data from the Banking and Payments Federation showed that mortgage drawdowns totalled €6.7bn, which is 11.3% ahead of the first nine months of 2018.
However, to put this in context, the value of the Irish mortgage market peaked at €39.8bn in 2006, before falling precipitously to a low of €2.4bn in 2011.
So, while mortgage credit availability is improving, the level of credit being handed out is nowhere near levels that should give cause for concern.
Between the low point of the national housing market in March 2013 and August 2018, average residential property prices have increased by 85.2%; prices outside of Dublin increased by 83.5% between May 2013 and August 2018; and Dublin prices increased by 97.8% between February 2012 and the recent peak of the Dublin market in October 2018.
Between October 2018 and August of this year, Dublin prices have declined by 1.4%.
Despite the recovery of recent years, the National House Price Index is 17% lower than its highest level in 2007.
Dublin prices are 21.3% lower than their February 2007 peak, and prices in the rest of Ireland are 20.3% lower than their May 2007 peak.
Over the past year, the vibrancy of the housing market has definitely decelerated.
The most recent data shows that in the year to August, national average residential property prices increased by just 2%, and Dublin prices declined by 0.3%.
Outside of Dublin, prices increased by 4.4%.
This is a positive development, but as well as affordability issues as a result of the Central Bank’s mortgage lending restrictions and increased supply, there is undoubtedly a sense of Brexit-related fear and uncertainty impacting on house-buyer behaviour.
From the perspective of the future sustainability of the property market, the deceleration of the market over the past year is certainly to be welcomed.
However, developers may yet struggle to deal with the economics of house delivery in the current environment.