• Survey finds 70% of consumers expect price gains while 12% see price drops

• 53% of consumers see prices rising faster in next three years than in past three

• Results suggest positive momentum in prices may persist and imply policy interventions should calm rather than create demand

• Consumers more upbeat on Connacht/Ulster/Border price trends and slightly more nervous regarding Dublin

• Older and higher income consumers more inclined to see persistent increases in property prices while 25-34 year olds less upbeat

The recent accelerating trend in Irish house price inflation, that pushed the annual rate of increase to a 31 month high of  6.9% in June 2020, gives a strong sense of the heat being generated in the Irish residential property market at present.

Unfortunately, this hasn’t translated into any significant light as to when or how the market might move onto a path that might be described as sustainable in terms of the speed of price increases or satisfactory in terms of the scale of housing activity adequate to meet the Irish economy’s dynamic and diverse accommodation needs.

Most recent commentary understandably focusses on a persistent shortfall in supply but property prices are determined by the interaction of demand and supply, and, in the past couple of decades most of the major changes in the temperature of the Irish property markets have been prompted by shifts in demand rather than supply.

In that context, with supply conditions unlikely to transform in the short term, it may be worth focussing on emerging demand trends to get some sense of near term market prospects. If demand were to strengthen much more, it could risk pushing house price inflation onto a notably more threatening trajectory.

Indeed, as the diagram below illustrates, marked changes in demand conditions, as reflected in the circumstances and confidence of Irish consumers through the past twenty five years, tend to be associated with key turning points in the property market.

The diagram shows a strong positive correlation between the KBC Bank consumer sentiment index and the trend in Irish house price inflation. One notable divergence that occurred in in the second half of 2002 owed much to the decision to reinstate rental interest relief on investment properties at that time, That episode emphasises the extent to which policy interventions can affect property price trends.

The recent trend in Irish consumer sentiment has been notably more uneven than that in property prices but both are pointing clearly upwards at present.  One risk in this regard is that price expectations might build in a manner that would anticipate persistently rapid increases in coming years. Such expectations could further boost demand by encouraging some degree of panic buying as well as creating a purely speculative element in purchases. For these reasons, it may be useful to look at consumers judgements as to where Irish property prices might go in coming years.  

As part of the KBC Bank consumer sentiment survey for July, we asked consumers how they expected Irish residential property prices to change through the next three years. We chose a three year timeframe to move beyond the immediate post-pandemic environment and to allow for some promised improvement in supply.

As the diagram at the top of this piece shows, most consumers see Irish house prices continuing to increase in coming years. Some 70% of consumers expect property prices to continue to increase while just 12% envisage a drop in prices. It may say something about the rollercoaster nature of the Irish property market that only 5% of consumers see prices being broadly flat. Equally, the fact that only 12% of consumers opted to say they were unsure as to the future trend in Irish property prices probably speaks to the degree of interest and opinion on this topic.

As the survey question began by informing respondents that the average annual increase in Irish property prices in the past three years was 2.7%, these results suggest that one in two Irish consumers expects Irish house prices to rise faster in the next three years than in the past three. One in four consumers expects a slower pace of increase while one in five sees flat or falling prices.

The most common expectation was that prices would rise by between 4 and 5% and the weighted average of all expectations was an increase of 4.0%. Perhaps, this  suggests consumers expect the recent pace of price increases to persist. Data for May showing a 4.7% increase were the latest official figures available when the survey was conducted (but were not mentioned in the survey question).     

By and large, the survey responses suggest a broadly based view among Irish consumers that coming years will see solid increases in property prices. The 4% average annual increase envisaged is likely only modestly above expectations for average earnings growth and, as such, appears broadly sustainable. Encouragingly, the results don’t suggest expectations of an ever increasing rate of property price increases.

The distribution of the responses as illustrated in the diagram above suggests more ‘extreme’ views in terms of expectations of double digit movements in property prices appear relatively limited. While the survey results would not suggest Irish consumers see property prices as a ‘one-way’ bet at present, the broad tone implies that consumers remain positive about market prospects.

This suggests homebuyer demand is likely to remain well underpinned in the year ahead. It may also hint that the balance of risks in terms of property price inflation could be clearly weighted towards the upside. In turn, this might suggest the thrust of upcoming housing market policy interventions should be to calm rather than create additional demand.  In this context, it should be noted that measures that credibly boost future supply should serve to calm demand but measures that materially augment purchasing power are likely to act in the opposite direction.

Looking at the details of the survey responses, higher expectations of property price increases were slightly more evident in Connacht, Ulster and the border region-likely reflecting comparatively strong recent price trends in these areas. While the share of Dublin respondents expecting price increases was broadly similar to the national average, the distribution favoured somewhat smaller increases and there was also a larger number of responses from consumers in the capital envisaging price declines in coming years.

There were notable differences in property price expectations by age group. Younger cohorts, particularly those in the 25-34 age group, were less likely to expect property prices to increase and the number of 25-34 year-olds that expect prices to fall was twice the survey average. This likely reflects affordability considerations that are seen curbing the scope for further price gains. It may also reflect some element of ‘scarring’ from the crisis of just over a decade ago that has fuelled the belief in this group that periods of significant price appreciation give way to price declines.  

In stark contrast, older age groups were more likely to indicate further price gains. Those aged over 65 were materially more inclined to suggest that prices will continue to rise while the number envisaging price falls was about a third of the survey average (and, consequently, the share of 25-34 year olds that expect price declines is about 7 times as great as the number of over-65’s). Property price expectations were also positively correlated with income.

These results suggest those in age or income groups more likely to be property owners are more inclined to expect persistent increases in property prices.  The basis for what might be seen as significant differences between ‘insider’ and ‘outsider’ views on property market prospects isn’t immediately clear from the survey results.