First-time buyers face spiralling crisis
This is despite the availability of 35-year mortgages, 100% loans and financial help from their parents.
AIB has forecast house prices could rise by 12% this year and by a further 7% in 2007 before slowing to more modest levels from 2008 onwards.
The 19% rise will price many potential first-time buyers out of the market, regardless of the financial help they get from their parents, according to AIB chief economist John Beggs.
He warned prices could not continue to rise at two to three times the average rise in wage incomes without eventually killing off a large number of potential first-time buyers.
First-time buyers, he said, may be forced into short-term borrowings in order to meet deposits and other costs associated with the purchase of property which would then exacerbate their debt repayment costs.
Mr Beggs said low interest rates and a solid rise in the level of employment had driven the housing market to “hot house” proportions with 85,000 additional houses to be built this year and next. Those figures could be higher if planning restrictions had not limited the construction’s sector access to suitable land, he said.
However, with bank interest rates set to rise by 1% to 3.5% by this time next year, the cost of borrowing will have gone up by 1.5% since December.
That 1.5% hike in rates will add a total of €230 per month to servicing an average 35-year mortgage of €250,000, putting significant additional pressure on those struggling to meet existing repayments, he said.
Mr Beggs ruled out a house price collapse. The AIB Economic Review and Housing Report said we are moving farther away from a soft landing in terms of price rises and that the situation needed careful monitoring.
It noted prices for second-hand properties were rising more sharply than new houses as supply bottlenecks were squeezing the market.
AIB forecast average house prices could rise by 12% this year, but even higher price increases are likely in many areas of the country.
The report stated: “Though we have growing concerns about the current pricing behaviour of the market, it has to be said that the downside risks, although rising, still remain limited.
“We do not foresee a sharp fall in house prices but a protracted period of stability could follow beyond 2007. Nevertheless, the risks to the sector require continued careful monitoring.”
In a separate report on the economy, Mr Beggs predicted GNP would grow by 5% this year, accelerating to 5.5% in 2007. He said this would be mainly driven by consumer spending, boosted by the maturing of SSIA funds.
AIB also warned that employment gains would continue, but not on the same scale as in 2005 where the construction sector added 26,000 new jobs.
