Houses ‘to become more affordable’

HOUSES are set to become significantly more affordable as the rate of house price inflation begins to fall below the overall inflation rate for the first time in years, according to new research from AIB.

The bank’s quarterly economic outlook, which was published yesterday, said house prices could rise by less than 5% this year and just 3% in 2006. This puts house price inflation on a collision course with the Consumer Price Index (CPI), which will rise by more than 2% this year and almost 3% next year.

The cost of housing will fall in real terms if the CPI exceeds the rate of house price inflation. AIB chief economist John Beggs ruled out the prospect of a price crash but said the rate of real house price growth could fall to zero within 12 to 18 months. Mr Beggs added this was to be expected after the laws of supply and demand finally caught up with the property market.

“The reduction in house price inflation has reduced the threat of a market crash,” said Mr Beggs, who added that supply would remain strong in the year ahead, with 75,000 new units due to hit the market during 2005. But this would fall to 65,000 next year and 60,000 in subsequent years as builders reined in activity to cope with lower demand.

Mr Beggs said risks to the housing market remained. The bank’s price predictions were based on builders responding to lower demand quickly by reducing output. Failure to do so would result in prices suffering as a result of supply exceeding demand. Mr Beggs also said the growing pattern of homeowners buying a second home meant the market had become more reliant on this source of demand to keep prices strong. “Any significant downturn in this sector could have consequences for the whole housing market,” he said. The market could also suffer if investors sold up on the back of falling rents.

Proposals for a new tax on second homes should also be shot down because of their potentially damaging effect on prices. “The return to price stability in the housing market would be derailed if the Government were to entertain any notions of taxes on second homes. The impact of such a move would be very damaging for the sector and risk undermining the strong growth performance of the economy.”

The bank maintained an upbeat assessment of the economy, predicting GDP growth of 6% this year and 6.5% in 2006. Unemployment would remain low and consumer spending would grow to become one of the key drivers of the economy.