Interest rate hike unlikely until mid-2005
In its latest outlook on the Irish housing market, BoI says, given the continued poor performance of the European economy, it was not expecting the European Central Bank (ECB) to up rates until late next year.
BoI chief economist Dan McLoughlin said the markets had been anticipating an interest rate hike this year but “the ECB had clearly moved to a more hawkish stance” and he does not expect a rise for some time.
“The ECB is ... unlikely to tighten policy until growth picks up momentum and this points to a further period of unchanged rates; the market is now not expecting a rate increase until mid-2005.”
The report shows there has been no let-up in the growth of house prices, up 10% this year. And the bank expects prices to continue rising next year at a rate of 6%, despite fears that a slowdown was on the cards.
Mr McLaughlin said based on the level of housing completion - at least 75,000 this year - he had been assuming a marked slowdown in price growth.
Although institutions like the International Monetary Fund are concerned about Ireland’s property market, Mr McLaughlin said a crash or a serious slowdown in prices were unlikely.
“Firstly, the demographic impact has proven to be much stronger than we had anticipated with population growth of 1.6% in the year to April five times the EU norm. Net migration has accounted for half of this 65,000 increase in population. Secondly, employment is growing strongly with wage growth expected to exceed 5% this year. Finally, interest rates are still at 50-year lows and the limp growth performance of the eurozone economy allied to the relative strength of the euro currency means an upward rise in the next three or four months is unlikely. Consequently, affordability in this year and next is now less onerous than we had anticipated.”
He added that even with a record level of borrowing to fund mortgages, the Irish debt-to-income ratio has just now risen to the European average.
BoI predicts that lending this year will reach €17.5 billion, a 29% increase over 2003 with nearly 100,000 new mortgages issues.
