House prices overvalued by at least 7%, says the ESRI    

ESRI not predicting sharp fall in house prices as supply still lagging behind demand

Household savings built up during the pandemic had helped push property prices to levels that are now out of kilter with fundamental prices, according to the ESRI.

House prices are at least 7% overvalued and property price inflation will likely slow sharply, the Economic and Social Research Institute has predicted.               

In its latest economic assessment, the leading think tank said the unwinding of some of the household savings built up during the pandemic had helped push property prices to levels that are now out of kilter with fundamental prices, even after taking into account the shortages of new homes. 

Kieran McQuinn, research professor at the ESRI, said that built-up savings that have boosted house prices will unwind over time. We are "likely to see a significant moderation in house price growth, or a reduction in house price growth, but it is still unclear whether you will likely see actual falls in annual house prices at this stage", Mr McQuinn told reporters.       

House prices

The ESRI said it was not predicting a sharp fall in house prices as supply of new homes was still lagging behind underlying demand, but that the pressure on rental prices would likely continue, despite the fall in house price inflation.        

House price inflation rose by 13% in the State and grew even faster outside Dublin in July from a year earlier, according to the latest Central Statistics Office figures.    

The economy was growing very strongly until recent months, and despite evidence of a slowdown in consumption and in trade, "we still think there is enough of a dynamic there to continue to grow" despite the cost-of-living crisis, Mr McQuinn said.  

Economic activity will slow at the end of the year, but consumption will have grown across the full year, and will continue to expand next year, according to the ESRI forecasts.  

Cost-of-living initiatives

Despite considerable risks to the outlook because of the nature of the energy crisis, the ESRI said that the healthy nature of the public finances means there would be room for the Government to fund further cost-of-living initiatives if needed over the winter months. 

In its budget, the Government set aside €4.1bn of temporary measures to subsidise some of the huge increases in household and business utility bills next year.         

The economy will avoid recession and grow 7.5% this year and by 2.5%, under the modified domestic demand measure that best reflects activity in the domestic economy, the ESRI projects. GDP will expand by over 8% this year and 4.4% in 2023, reflecting the huge activity of the multinationals.   

The ESRI also forecasts inflation of just over 8% this year and 6.8% in 2023. The Government in its budget last week forecast inflation of over 7% in 2023. 

Mr McQuinn said there were large levels of uncertainty surrounding the energy crisis and that the Irish economy will grow this year and in 2013, helped by growing levels of employment and the exports of multinationals. 

Associate research professor Conor O'Toole said Government tax revenues were "super" concentrated on the corporation tax revenues from the IT and pharma multinationals. However, the shake up in the global tax regime under which the minimum corporate tax level is set at 15%, will leave Government tax receipts little changed, the ESRI said.