House prices to fall 45% from 06

HOUSE prices in Ireland are set to fall by 45% from their 2006 peak as the banking crisis and rising interest rates continue to undermine the market.

In the period ahead, credit agency Fitch expects all lenders to increase mortgage rates. It said tax increases, high unemployment, wage deflation and an oversupply of properties “continue to undermine the country’s property market”.

It looks certain also that with economic sentiment staying negative for Ireland mortgage affordability “will suffer against a backdrop of a generally higher tax burden, increasing unemployment and negative to zero wage inflation,” said Michael

Greaney, associate director in Fitch’s RMBS group.

On the basis of that tougher outlook, Fitch “expects further house price declines and late stage mortgage arrears to rise”.

The agency said Ireland was undergoing “one of the deepest recessions of all advanced economies”.

As a result, it expects real GDP to contract by 7%-8% in 2009 while the poor state of public finances has left the Government “no room to use fiscal measures to support the economy”.

Unemployment will rise to 12.5% in 2009 and peak at 15% in 2011.

The ESRI in its quarterly economic bulletin said last week unemployment would peak at close to 15% next year with a gradual turnaround in the economy expected by the end of 2010.

On housing, the agency says prices are still too high, given the current pressures on the national finances and on the banks.

The banks will benefit from a €57bn bailout by the Irish taxpayer following the property crash while December’s budget should see €4bn in government cuts to ease the pressure on the mounting debt burden.

“Despite almost three years of house price declines, prices have yet to reach a sustainable level of affordability,” Fitch said.

People’s ability to afford homes will be further undermined by an expected increase in the cost of funding to Irish financial institutions, it said.

House prices started to fall in January 2007 and have fallen month on month since then. Irish house prices rose approximately 100% from the start of the decade to the peak in December 2006.

Fitch said the current average house price is 7.5 times the average income.

As the market is forced to continue to adapt to the tougher economic environment that ratio should revert to nearer 5.5 times average individual income, which would implies an expected 45% fall from peak house prices, the agency said.

A fall of 45% would take house prices to levels seen in Q4 2000, it said.