Foundations of housing recovery are still shaky

The Irish housing market has shown clear signs of recovery over the past year. The pick-up in the domestic economy, including the improvement in the labour market has helped to provide a supportive environment.

In terms of house building, various indicators display an upturn in activity levels, albeit from a very low base. The most recent housing completions data showed a 35% rise in the year to October.

Completions are on course to come in around 11,000 units for the full year. This would represent their best year since 2011, although in absolute terms, it is still a very low figure.

House guarantee registrations, which tend to reflect developer activity and are regarded as a lead indicator, were over 80% higher in the year to October compared to the same period last year.

Meanwhile, survey data, such as the construction PMI, where the residential component has been performing strongly in recent months, are also consistent with an upturn in activity. However, while indicators on residential building are showing increased activity, the current level of output is still very low and remains well below what is required to meet demand. Furthermore, the overhang of unsold properties has been virtually eliminated in many parts of the country, most notably in some of the main urban centres.

Based on Irish population and household formation dynamics, potential housing demand is estimated to be in the region of 25,000 units per annum. However, over the three-year period 2011-2013, a cumulative total of just 27,300 residential units were completed.

The evolving supply-demand mismatch is evident in trends on the amount of housing available to buy or rent.

According to the most recent Daft data, the number of residential units for sale fell by 23% in the year to October, while the rental stock was down 41% in November compared to year-earlier levels.

Against this backdrop of an ongoing shortfall in supply, it is not surprising that prices continue to rise strongly.

Nationally, the latest CSO data show that prices rose by 2.9% in October, with the yearly growth rate accelerating to 16.3%, its fastest pace since the third quarter of 2006.

The recovery in prices continues to be led by Dublin, where they were up 24% on a year-on-year basis in October. The strong recovery in Dublin means prices there are now up 46% from their low point.

However, it is also noticeable in recent months that prices outside of Dublin are starting to see a pick-up.

Excluding Dublin, prices rose by c.9% in the last six months. The impact of the scarcity in stock is also reflected in rents, which were up 9% in October versus a year ago.

Given the strong growth rates being recorded in residential prices, it is important to put this performance in context.

While nationally, prices are up 26% from their trough, prices are still 38% below their peak and are currently at levels that pertained in 2002.

Prices in Dublin are also 38% below previous highs, while prices outside of Dublin are 43% lower than their peak.

Data on mortgage approvals, drawdowns and transactions show that mortgage lending is also picking up. However, in absolute terms, it remains at very low levels and is still some way from what a ‘normal’ market might look like.

The recent Central Bank proposals in relation to limiting the loan to value (LTV) and loan to income (LTI) ratios could have a significant impact on the mortgage market, but also on house-building, house prices and rents.

Thus, the housing market will require close monitoring over the course of next year. In particular, it is important that new regulations do not hold back a badly needed increase in housing supply.

John Fahey is a senior economist at AIB