Supply shortage will keep house prices rising

The housing market continues to exhibit signs of improvement.

House prices and rents have maintained their upward trajectory, transaction levels are also on an improving path, while building activity appears to have started to pick up, albeit from very low levels.

The expected improvement in the domestic economy next year, as well as much- improved labour market conditions should help to sustain the upward momentum that is nowevident in the housing market.

CSO data show that house prices recorded their seventh consecutive monthly increase in October.

Having registered a total cumulative peak to trough decline of 51%, prices are now up just over 8% from their low, which was recorded in March of this year.

The recovery in prices is very much a two-speed story, with a rural-urban dynamic. House prices in Dublin are now up 17.6% from their low point, whereas, excluding Dublin, prices are higher by 3.5% from their trough.

The dichotomy in the rural-urban performance is also evident in year-on-year comparisons. As of the October data, Dublin property prices were up 15%, while prices outside of Dublin were virtually unchanged from a year ago.

On the demand side, prices are being supported by improved employment dynamics and a rise in consumer confidence. From a supply perspective, there is increasing evidence of stock shortages (in terms of houses in particular) to meet demand for well-located, family-type accommodation in Dublin and some other larger urban areas. This is putting upward pressure on prices.

Furthermore, the overhang from vacant properties in unfinished developments has been eroded, falling by 72% since 2010, to 6,370 units this year.

This relative scarcity of stock is also reflected in rents, which have risen strongly this year andare now 13% off their lows.

Transactions, as measured by the Residential Property Price Register, were up by some 20% in October based on a three-month average yearly comparison.

Likewise, mortgage approvals and draw-downs have recorded solid increases lately, with approvals up by 13% in the three months to September.

Leading indicators of construction activity, such as registrations for new house building, are pointing to not only a stabilisation in housing output, but also tentatively indicate some increased activity levels.

In this regard, the construction PMI has risen strongly in the second half of this year, again indicating a pick-up in residential construction.

Employment levels in the industry have started to rise also.

The pick-up in activity will take some time, though, to translate into higher numbers for housing completions. As of October, the total number of completions year-to-date stood at 6,507. This was 4.5% lower than at the same period in 2012. For the full year 2013, completions are likely to amount to just above 8,000 units, down from 8,500 in 2012, the lowest numbers on record.

Recent price developments have been influenced by the emergence of supply shortages and there are compelling reasons to suggest that this trend will continue in 2014. We estimate potential housing demand at around 23,000 new units per annum.

However, while residential building activity should pick up next year, completions are still likely to remain at a very subdued level, possibly at around 10,000 units in 2014.

At the same time, there has been a significant erosion of vacant stock. Therefore, the mismatch between demand and supply has the potential to keep upward pressure on prices and rents next year. Thus, it is imperative that the supply of new housing increases considerably. Nama could yet play a key role in this regard.

* Oliver Mangan is chief economist with AIB.


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