Slowdown in house-price growth a sign buyers priced-out

Slowdown in house-price growth a sign buyers priced-out

The latest data on house prices from the CSO show a further acceleration in the rate of growth at the start of the year, writes Oliver Mangan.

Nationally, prices rose by 12.5% in January, in year-on-year terms. This compares to an 8.8% rate of growth in January, 2017.

Looking at the picture over the last two to three years, after slowing to a 5.5% rate in mid-2016, the pace of increase has been accelerating since then, rising to an 11% to 12.5% range since mid-2017.

An important feature of the quickening in price growth has been a re-acceleration in Dublin, with its annual growth rate reaching 12.1% in January. This is more than double the growth rate of 5.7% in the capital in the same month a year earlier.

Non-Dublin prices continue to register a higher rate of growth, rising by 13% year-on-year in the first month of 2018, and were in double-digit territory for all of last year. There is some degree of a catch-up element to the non-Dublin performance, with the start of the recovery in prices lagging behind the capital.

More recently, increasing demand for housing in the Dublin commuter-belt counties is also likely to have been a factor in the very strong pace of growth in prices outside of Dublin.

Nationally, prices are now 73% above their low point of five years ago, in March 2013. Prices on a national basis, though, are still 22% below their high point of early 2007.

They would need to rise by a further 30% to get back to their previous high.

In contrast, rents are now 20% above their previous peak, according to CSO data. But the rate of increase in rents has moderated significantly over the past year, from 10% to 6%.

The key factor behind the ongoing high level of house-price inflation remains a shortfall in supply. This is highlighted by the very low level of stock on the market.

The latest figures show that at end-2017, the number of properties available for sale was at just over 21,000, down from a peak of 63,000 at the end of the last decade.

Meanwhile, house-building also remains at low levels, although it is continuing to pick up.

Using ESB connections data, compiled by the Department of Housing, as an imperfect proxy of new supply, connections increased by 29% in 2017 to 19,271. Housing starts, as measured by commencement notices, rose by 33% last year to 17,572.

Housing registrations, which are a barometer of developer activity, rose by 68% in 2017, but have levelled-off in recent months.

Meanwhile, the latest housing sub-component of the construction-purchasing managers’ index survey has increased in the first two months of this year, indicating a further strengthening in activity.

While most of the house-building data are consistent with rising supply, the level of building activity remains well below the projected 33,000 units that are required per annum to meet estimated housing demand.

Even if the current growth trend is maintained, it will be 2020, at the earliest, before new house-building gets close to the level of estimated annual demand.

However, this does not take account of the pent-up demand that has been accumulating in recent years.

Therefore, it could be well into the next decade before supply and demand levels become closely aligned in the Irish residential property market.

This suggests that both property prices and rents will continue to rise, especially against a backdrop of a strong economy with rising employment and incomes, as well as the return of significant, net inward migration.

However, the rate of increase in rents has already moderated and we expect the same trend to become evident in house prices this year, especially Dublin prices, which have reached very high levels in parts of the city.

Buyers in Dublin may struggle to get sufficient mortgage finance, especially given the relatively low loan-to-income ratio of 3.5 times in the Central Bank’s mortgage-lending regulations.

A moderation in house-price inflation this year would most likely signal buyers being priced out of the market, rather than supply and demand coming into balance.

Oliver Mangan is chief economist at AIB

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