Why the easing in house price inflation is unambiguously a good thing

Why the easing in house price inflation is unambiguously a good thing

The housing market has long been correctly identified as one of the most important economic and social issues that Irish policymakers need to get on top of.

The housing problem manifests itself in spiralling rents, high house prices, difficulties for first-time buyers to get on to the housing ladder, and homelessness.

The social impact of these issues is pretty self-evident, with student rents set to be highlighted as a serious issue undermining and influencing participation in third-level education over the coming weeks.

It was ever thus. I remember coming to Dublin in 1979, and getting rental accommodation was a nightmare back then, just as it is today.

From an economic perspective, house prices and rents influence the ability to attract employers and jobs into an area and also create upward pressure on wage demands.

In short, housing from both an owner-occupier and a rental perspective is an important element of economic competitiveness.

The latest house price data from the CSO show that the process of moderation in house price inflation that commenced around April of last year continues apace.

In the 12-month period to June, national average house price inflation declined to 2%, which is the lowest annual rate of price increase since June 2013.

The annual rate of increase outside of Dublin decelerated to 3.9%, the lowest rate since February 2014.

And the annual rate in Dublin has decelerated to just 0.1%, which is effectively the lowest annual rate since October 2012 (it was flat in May).

It is important to point out that what we are experiencing is a price stabilisation rather than a significant price correction.

Between October of last year and June of this year, national average prices have fallen by just 0.4%.

Within this national average, prices outside of Dublin have increased by 1.8% but average Dublin prices have declined by 2.6%.

In Dun Laoghaire-Rathdown, which boasts some of the highest house prices in the country, prices declined by 4% on a year-on-year basis.

In the context of what prices have done since 2013, I would describe this as a stabilisation, rather than a significant correction.

The moderation in house price inflation is unambiguously positive in my personal view.

It is happening for a variety of reasons.

The supply of new housing is gradually ratcheting up, which is good, but there is still a distance to go, as increased supply of housing in the right areas is the only real way that the housing problem will ultimately be solved.

The second factor is undoubtedly the lending restrictions imposed by the Central Bank.

Its restrictions were sensibly and prudently put in place to prevent people from borrowing too much and prevent the banks from lending too much.

Nothing remotely wrong with any of that and I suspect ex-Central Bank governor Philip Lane will be smiling contentedly to himself.

The third factor causing the market to moderate is undoubtedly the growing economic uncertainty that now abounds.

Consumer confidence data published by KBC Bank this week show that consumer confidence in Ireland fell to the lowest level in July since November 2014.

Brexit is clearly having a significant impact here, because the appointment of Boris Johnson as prime minister has definitely increased the odds of a disorderly Brexit on October 31.

Irish consumers should be very concerned at that prospect.

President Donald Trump and China, Hong Kong, and many other geopolitical uncertainties are also feeding into the negative psyche.

On the international growth front, the latest data from Germany also give cause for concern.

Growth in the eurozone’s largest economy contacted by 0.1% during the second quarter and the year-on-year growth rate has fallen to an alarmingly low 0.4%.

Germany is now on the brink of technical recession, which is not good news for Ireland or any other eurozone economy.

Mind you, the ECB will have to loosen monetary policy further over the coming months.

The Irish house buying public is obviously being impacted by a combination of these factors and further moderation in Irish house prices looks inevitable over the coming months.

This is a good thing.

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