Two-tier property market as activity picks up

Housing data point to a pick-up in building activity in the first half of 2014.

The housing completions figures, which cover up to April, show completions at 2,856, a 19% increase on completions in the same period in 2013.

Meanwhile, leading indicators of activity show signs of further improvement in residential construction. House guarantee registrations, which tend to reflect developer activity, were 52% higher in the year to May, compared to the same five-month period last year.

Likewise, commencement notices saw a very big jump in the opening two months of 2014. However, it would appear that the introduction of new building regulations in March played a role in the surge, so commencements may fall back again.

Survey data, such as the construction PMI, are also consistent with an upturn. In particular, the residential component of the PMI has performed strongly in recent months.

However, while there are signs of an upturn in residential building, the current level of output is still a long way from meeting demand. Based on household formation dynamics in the economy, potential housing demand is estimated to be 23,000 units per annum.

We expect increased levels of completions in 2014, possibly of around 10,000 units, compared to circa 8,500 in the past couple of years. This is still well below the level required to satisfy housing demand.

The shortfall in housing supply is putting upward pressure on property prices. The latest CSO data show that on a national basis in May, house prices were up 10.6% compared to a year earlier. Thus, after suffering a total peak-to-trough decline of 51%, which was reached in March 2013, prices are now up by some 12% from their low point.

The two-tier recovery in property prices remains very much in place. The uptrend in prices continues to be driven by Dublin. Prices there were up 22% on a yearly basis in May and are now 26% off their lows. Outside of Dublin, prices have started to see some modest improvement, but still lag well behind the recovery in the capital city.

As of May, residential property prices excluding Dublin were up 1.8% compared to a year earlier, and up 3.2% from their trough.

In terms of the Dublin market, positive labour dynamics, including robust jobs growth, is helping to underpin demand. In this context, a severe shortage in supply, particularly of houses, is pushing prices higher. It’s a much more mixed picture outside of Dublin. While some parts of the country are seeing a pick-up in prices, other areas are still saddled with a large overhang of unsold housing and thus a continuing depressed property market.

It is important that there is a marked rise in house building activity in Dublin and other major urban centres where supply shortages are putting upward pressure on property prices.

The shortage in supply also means that the number of transactions in the market and mortgage lending activity remain at very subdued levels. The inadequate level of housing supply is also reflected in the rental market.

The shortfall in available properties to buy is resulting in more people having to rent. Rental demand is also being boosted by renewed net inward migration by foreigners as the economy improves. Rents have risen strongly over the past couple of years, and nationally are now up 20% from their lows.

The continued improvement in the economy, particularly the labour market, should provide a supportive backdrop for activity in the property market. However, until the supply shortfall is addressed in Dublin and elsewhere, the improving economic environment will simply result in further upward pressure on house prices and rents.


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