House price bubble hovering on the horizon

Business Correspondent

"The recent decline in rents suggests there is currently an excess supply of buy-to-let properties in the market," says Don Walshe, head of research at Goodbody Stockbrokers.

In a report into the future of the housing market, Mr Walshe says the overall market outlook is favourable up to 2006. But certain tell-tale signs have emerged of a property price bubble that could deflate, if not burst.

He warned the buy-to-let market would be vulnerable were the economy not to perform to expectations.

Mr Walshe said several factors are driving house price inflation at present. Investors are selling shares to buy property. And up to 70% of first-time buyers are purchasing homes with financial help from parents releasing equity by re-mortgaging family homes.

Other serious signs of "potential overheating" are reports of investors buying apartments off-plan and long queues forming to buy investment properties around the country.

Mr Walshe stresses that, in his view, the housing market will be underpinned by demand until 2006. But he is concerned too many people are rushing to buy for the wrong reasons.

"Fear is driving people to buy houses because they think the massive historic rise is set to continue."

Others are buying because the housing market looks like a secure future income source, given the collapse of stock markets.

In his report Walshe notes the release of existing equity into the market, both by investors and by first-time buyers via parents who re-mortgage family homes to give their children a foothold in the property market.

"This increases the risk of house price inflation feeding on itself, irrespective of fundamentals."

Walshe said it is not overly dramatic to suggest the potential exists for a house price bubble over the next few years. Overall Walshe regards the market as reasonably balanced, with record construction in recent years.

Over the next five years he expects the market to deliver 38,000 houses per year to meet continuing buoyant market demand.

Also with loan to home values holding at 60% he regards the overall financial picture as pretty secure. "We cannot blame the banks if anything does go wrong," he said.

While the bubble is a potential threat, Walshe expects the market to remain robust.

However, he expects the 20% growth in mortgage lending in recent years to drop to 10% from next year onwards.

By 2006 a slow-down based on demographics will likely lead to a "ferocious battle" for market share among the big lending institutions, primarily the banks and Irish Life and Permanent. Between them they have close to 60% of the home loan sector.