House prices set to grow by 6%

HOUSE values are expected to grow by 6% this year, fuelled by buyers taking out 87,500 new mortgages to borrow €15.4bn by year's end, according to Bank of Ireland's latest property review.

Yesterday, it reaffirmed its view that house prices will increase by close to 6% this year, having already clocked up a 2% increase in the first three months of 2004.

Bank of Ireland Group chief economist Dan McLaughlin said the property market will remain buoyant with yet another year of record supply. In the review, Mr McLaughlin revised his housing completions' forecast upwards to 70,000 for the year, which would result in a further 5% gain to Ireland's housing stock. The review's authors believe the pace of house price inflation is slowing for a number of reasons and point to the massive building programme which Bank of Ireland said is unprecedented in the western world. House price affordability, which has deteriorated, albeit not to unduly onerous levels, is also slowing inflation in the sector.

"The Irish public certainly shows no sign of flagging in its desire to acquire mortgage debt. The level of activity in the market including the number of mortgages, the scale of borrowing, the number of house completions, the flow of stamp duty remains extremely buoyant, pointing to 2004 as yet another record year for housing," said Mr McLaughlin.

Mortgage debt growth is showing no signs of slowing and is now growing by more than e1bn a month. Mortgage debt amounted to €62.4 billion at the end of March 2004, having risen by €3.2bn over the first quarter, resulting in year-over-year growth of 26.9%. Bank of Ireland Mortgages managing director Joe Larkin said: "With the average new mortgage last year at €160,000, there are no indications that individuals are borrowing excessive amounts. The fact that the average loan-to-value ratio continues to be around 60% backs this up. According to Central Bank data, debt levels relative to the size of the economy are in line with the EU norm, despite the extraordinary pace of growth in recent years. The implication is that debt levels were unusually low a decade ago due of course to our high unemployment and double digit interest rates."

The review authors believe that a near-term rise in ECB rates is not likely, but predict that a rate rise will occur by the end of 2004. Thereafter, the review predicts rate increases at a pace and scale that are unlikely to have a major impact on the property market.

The review also concludes that the price of new houses rose faster than existing houses, with a 3.9% gain in the price of new houses and 1.7% recorded for second hand houses in the first quarter.

There is a relative decline in the share of completions in both Dublin and surrounding counties. "Dublin accounted for only 20.99% of completions in 2003, down from 21.9% a year earlier."