Rising building costs 'could lower housing supply and increase prices'

Supply shortages – partly due to the disruption of construction activity during the Covid crisis – pent-up demand from buyers unable to purchase last year due to pandemic restrictions, and a build-up in household savings have driven house price growth, new report says

Bank of America has warned that new housing output may be stymied by rising construction costs, with property prices also potentially rising as a result.

Rising construction costs could hinder the supply of new houses and fuel a further increase in existing house prices, Bank of America has warned.

In a detailed report on the Irish housing market, Bank of America said current house price increases have been “stronger than expected”. It said it still expects Irish house prices to “maintain firm growth” across the remainder of this year.

Supply shortages – partly due to the disruption of construction activity during the Covid crisis – pent-up demand from buyers unable to purchase last year due to pandemic restrictions, and a build-up in household savings have driven house price growth, it said.

However, rising raw material costs and other issues – from increased timber prices and higher transport costs due to Brexit to shipping disruption – could have a negative effect on the market in numerous ways, it said.

This may mean either higher end prices of properties or lower profit margins, which – in turn – may have negative consequences for builders’ financing and, therefore, potential reduction in supply.”

Bank of America noted that while housebuilding starts were down 17% last year, the year-on-year drop was less than 5% by the last quarter of the year.

The bank also described the Central Bank’s mortgage borrowing rules, that were introduced six years ago, as being “relatively restrictive”, saying they “may have contributed to restraining net mortgage lending in the past few years”.

Meanwhile, the budgetary watchdog the Irish Fiscal Advisory Council (IFAC) has urged the Government to clarify how it would pay for the building of 40,000 houses a year while still being able to retain the €4bn investment in healthcare outlined in last October’s budget. 

IFAC was responding to Tánaiste Leo Varadkar telling the Fine Gael ard fheis at the weekend that Ireland needs to build 40,000 houses a year to help fix the housing crisis.

Earlier this year, industry group the Institute of Professional Auctioneers and Valuers said an overhaul of existing rental legislation and a speeding-up of the supply of new houses were the solutions needed to fix the rental and housing crisis.

Recent CSO figures showed the year-on-year rise in residential property prices reached 4.5% in April, up from 3.5% in March.