A return to a 'normal' housing market is still some way off

New house building activity continues to increase. CSO data on new dwelling completions show they rose by 23% in year-on-year terms in the first quarter of the year. This followed a 25% increase in 2018.

On the current trajectory, completions should rise to over 22,000 units in 2019, up from 18,000 last year.

Forward-looking indicators of activity point to further increases in supply, although some of these metrics indicate that the pace of improvement may slow. The annual rate of increase in housing starts - as measured by commencement notices - slowed to 15% in the three months to April, having risen by 28% in 2018.

At the same time, growth in housing registrations - proxy for developer activity - appears to have stalled in the opening four months of this year. Planning permission data for the first quarter of the year also exhibited a slower pace of growth.

Employment growth in the construction sector, as a whole, has also slowed in the past couple of quarters. In terms of timelier activity updates, though, the May and June readings of the housing sub-component of the construction PMI continue to point to a strong pace of expansion.

Overall, supply remains well below housing demand, which is estimated at around 35,000 units per annum. Therefore, the recent softening trend in some lead indicators of housing supply is a concern, as if sustained, new house building activity may not remain on its current strong upward trajectory after 2019.

Meanwhile, the CSO’s most recent data on residential property prices show that house price inflation continues to ease. In April, the year-on-year rate of increase slowed to 3.1%. This compares to 13.3% in April 2018.

Looking at the geographic breakdown, it is clear that the Dublin market is the main driver of the decelerating trend in house prices. Prices in the capital have fallen on a monthly basis in five of the last six months, and were down by 1.4% in April compared to their end 2018 levels. In year-on-year terms, prices in the capital were up just 0.5% in April, down from a recent high of 13% in April of last year.

The pattern of non-Dublin house price inflation outpacing the Dublin market continues.

However, it is noticeable that the pace of increase in prices outside the capital has also moderated. In April, non-Dublin prices were up 5.6% year-on-year. This is a significant slowdown versus the 14% rate seen in May 2018.

Indeed, prices rose by just 1% outside Dublin in the first four months of the year. Two of the main factors behind the moderation in house price growth are the tight Central Bank mortgage lending rules, especially the relatively restrictive loan-to-income multiple of 3.5, and affordability issues. These factors would seem to be having the greatest influence on the Dublin market where prices are far higher.

It is also noticeable that the weakening trend in Dublin prices has been accompanied by a rise in unsold stock on the market.

Meanwhile, after increasing by 20% in value terms in 2018, new mortgage lending growth slowed to 11% in the first quarter of this year. However, encouragingly, mortgage approvals have picked up in recent months.

Overall, looking at some of the key metrics of the housing market - supply, prices and lending - all three can be described as exhibiting a softening trend. For a sector that is still in recovery mode, this suggests that a return to a more "normal" residential property market is still some way off.

Indeed, based on some recent trends, it could take longer than expected for supply and demand to move into balance in the Irish housing market.

Oliver Mangan is chief economist at AIB

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