House prices set to surge due to slump in new builds

The Central Bank could cap mortgage lending if prices continue to rise due to housing shortages and potential increasing demand

The ESRI forecasts that the number of new home completions will drop back to 2017 levels, with just 15,000 homes completed this year and 16,000 next year due to the construction shutdown. File picture: Sam Boal/RollingNews.ie

House prices are set to surge due to a slump in new builds and and billions of euros in household savings accumulated due to the pandemic.

That, in turn, could see the Central Bank clamping down on mortgage lending, the Economic and Social Research Institute (ESRI) has warned.

In its latest quarterly report, the think tank has forecast that the number of new home completions will drop back to 2017 levels, with just 15,000 homes completed this year and 16,000 next year due to the construction shutdown. 

Acute housing crisis

This will add further pressure amid an acute housing crisis as the ESRI predicts that some of the €14bn in additional savings accumulated by households in the last year will lead to a strong rebound in consumption in the coming months and into next year.

ESRI research professor Kieran McQuinn said although it is too early to predict where and how much of these savings will be spent, a surge in house purchases over the next six to nine months, combined with the shortages of housing supply, "could fuel house price inflation”.

If there is a very large rise in house prices, “it may require a policy intervention for the Central Bank to tweak some of their policy levers", Prof McQuinn said.

ESRI research professor Kieran McQuinn said although it is too early to predict where and how much of these savings will be spent, a surge in house purchases over the next six to nine months, combined with the shortages of housing supply, 'could fuel house price inflation'.

The housebuilding numbers compare with the 26,000 homes that would likely have been completed this year, if there had been no Covid restrictions, and fall far short of the more than 30,000 new units many economists believe are needed each year over many years to start making inroads into housing demand.

Underscoring the emerging long-term economic effect of the Covid-19 crisis, the last time Ireland built as few as 15,000 new homes was four years ago, Prof McQuinn said.

In its main economic forecasts, the ESRI predicts that the tougher-for-longer level 5 restrictions will mean the strong recovery this year won’t be as robust as previously signalled.

The think tank assumes no early withdrawal of Government supports and that the level 5 lockdown will last to at least April 5, but that some sort of restrictions could extend to the end of May and probably longer.

Era of austerity

Nonetheless, the ESRI sees no need for the Government to embark on a new era of austerity to pay for the debts accumulated during the Covid years.

Ultra-low sovereign interest rates “change the game” in financing the national debt for Ireland, which needs to invest in infrastructure and prepare for climate change, Prof McQuinn said.

The ESRI also joined with other European economists in saying that the Covid crisis has exposed the inflexibility of the EU’s debt and spending rules, which can work against stability and require bouts of austerity following economic crises, such as the Covid-19 pandemic.

It predicts the Government will post a budget deficit of €7.8bn, or just below 2% of GDP, in 2022. That is on top of the €18.5bn and €19.7bn in budget deficits for the Covid-hit years of 2020 and 2021.

The additional household savings will provide “a platform” to lift the economy, with GDP expanding 4.4% this year, the ESRI said, despite the prolonged lockdown. In 2022, it predicts the economy will surge by 5.2%.

Unemployment will fall back from 25% this spring to about 10% by the end of the year, and will, for some time to come, still be above the pre-pandemic rate of about 5%.

Rental legislation

Meanwhile, the Government has been urged to overhaul rental legislation and do more to speed up the supply of new houses as residential rental costs continue to rise.

Residential rents rose by 2.7% in the final three months of 2020, the Residential Tenancies Board (RTB) said. Average rents in Dublin were up 2.1% to €1,745, and in Cork by 4.5% to €1,252.

“The answer to the rental crisis is to build more homes,” said Pat Davitt, head of the Institute of Professional Auctioneers and Valuers.