Oliver Mangan: Increase in housing supply may not dent property prices

While demand has been bolstered by improvements in the help-to-buy scheme, remote working and an increase in household savings, the market is still well short of meeting that demand
Oliver Mangan: Increase in housing supply may not dent property prices

House prices will likely rise further despite increases in supply. File picture. 

Despite a very severe recession hitting the Irish economy in 2020, the residential property market has held up remarkably well this year.

The impact of the Covid-19 crisis on the market did not turn out to be as severe as had been feared back in the early months of the pandemic. 

This is evident across a number of price, demand, supply and lending metrics.

The most recent CSO figures on residential property prices show a 0.5% monthly increase in October. 

This was the fifth consecutive month of rising prices.

However, in annual terms, prices were 0.4% lower than a year ago. 

It should be noted that CSO figures are a lagging measure as they are compiled from data on sales that were agreed a number of months earlier.

daft.ie data, which are based on asking prices, are more indicative of current market conditions. They show that prices recovered over the summer after declining during the first lockdown period and have moved above their levels of a year ago.

Overall, assessing the various indicators, prices have performed much better than was anticipated earlier in the year.

One reason behind this is that demand has been bolstered by improvements in the help-to-buy scheme and possibly, changes brought about by Covid-19, such as remote working.

The big increase in household savings in 2020 may also be helping to underpin housing demand. At the same time, new supply this year is running below its 2019 levels.

The latest mortgage approvals data show growing strength in the homebuyer segment of the market. The October and November approval figures were the highest since 2011.

The total number of approvals is now running 24% ahead of a year ago, with an even stronger performance in the first-time-buyer part of the market.

On the supply side, CSO new dwelling data show a fall of 9% in housing completions in the year to September. Given that the construction sector was shut down for almost two months earlier in the year, the fall is less than was originally envisaged.

Indeed, the full year total could be above 19,000 units.

While this would still represent a decline compared to the 21,000 units of new supply in 2019, it is still better than the projections of 15,000-16,000 new units made in the first half of the year when the Covid crisis first struck.

Oliver Mangan: October and November mortgage approval figures were the highest since 2011. 
Oliver Mangan: October and November mortgage approval figures were the highest since 2011. 

In terms of leading supply indicators, the activity metrics offer mixed signals. 

Housing starts, as measured by commencement notices, were 30% lower in the year to October, with the 12-month aggregate total falling below 21,000 units. 

This compares to a commencements total of 26,000 units in 2019. However, planning permissions were up by a very strong 25% in the year to September, with a big jump in apartments.

The marked fall in housing starts this year suggests that new completions may rise only modestly to around 21,000 units in 2021. 

However, the sharp rise in planning permissions in both 2019 and 2020 is a pointer that significantly higher new supply could come on stream in the next two to three years, once economic uncertainty fades.

This is required as the market is still well short of meeting annual demand, which is estimated to be 30,000 units. 

In terms of prices, the ongoing shortfall in supply, combined with strong demand from institutional investors and public authorities, as well as first-time buyers, should continue to help underpin the market.

The enhancements in the help-to-buy scheme, along with the Government’s proposed new home equity sharing scheme, are likely to act as supports to prices also.

Therefore, despite rising supply, we could see some upward pressure on residential property prices emerge over the course of the next couple of years as the economy recovers.

• Oliver Mangan is chief economist at AIB

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