Modest monthly rise sees annual property price growth drop to 3.1%, the slowest in 6 years

Irish property price inflation now below wage inflation for first time since 2013

House price to earnings ratios around 6 nationally and 9 in Dublin appear to be broad upper limits

Affordability constraints and increased supply putting house price inflation onto sustainable path

Healthy Irish economic outlook still supportive of modest property price gains

Irish house prices rose modestly between March and April but as the monthly increase was notably smaller than a year earlier (+0.3% against +1.0%), the annual rate of inflation slipped to 3.1% in April compared to a March reading that was revised up marginally to 3.9%.

The April house price data continue a now twelve month long slowdown In Irish residential property price inflation from the three year peak rate of 13.3% was seen in April 2018. Today’s data for April 2019 show the slowest year on year increase in almost six years—since the 2.5% pace recorded in July 2013 at the beginning of the recovery in Irish house prices.    

There are tentative signs of a bottoming out of the recent softness in Irish property prices. April saw prices rise nationally (month on month) for a second month following four months of decline while Dublin property prices flat-lined following five month on month drops.

The likelihood is that Irish house price inflation could fall slightly further in coming months as monthly gains may be smaller than those recorded in 2018, but the April data appear consistent with a bumpy bottoming process towards a more sustainable rate of house price inflation.

Our sense that house price inflation may be close to normalising reflects a wide range of factors that remain supportive of modest gains in Irish property prices. These include:

• Property price increases are now broadly in line with wage increases (+3.4% in Q1 2019)
• Numbers at work are still increasing solidly (+3.7% y/y in Q1 2019)
• Borrowing costs are unlikely to rise for some considerable time
• New housing supply at an expected 22k units in 2019 while improved is still well short of ‘natural’ demand for around 35k units 
• CBI loan to value or loan to income limits haven’t changed for 2019 (unlike the modest tightening of exemption limits for 2018)
• ECB metrics suggest that on average Irish property prices were about 5% undervalued at the end of 2018

The slowdown in Irish house price inflation through the past year is partly a reflection of increased supply but the primary driver of late is the growing importance of affordability constraints amplified by CBI loan to income limits. In the first quarter of 2019, the average loan drawn down for house purchase was 1.6% larger than a year earlier while in the first quarter of 2018 the increase was 8.3%.

As the diagram below indicates, the pent-up home buying demand released by the Irish economic recovery has persistently run ahead of new supply and, as a result, the median home price nationally has increased from about 4 times average annual earnings in 2013 to over 6 times earnings in 2018. For Dublin home prices, the ratio increased from around 6 times average earnings to just over 9 times earnings.

As the diagram indicates, these house price to earnings ratios while choppy on a monthly basis but have remained within an identifiable range since mid-2017. As affordability constraints increasingly bit, this ‘tree-line’ for property price inflation has seen the rate of property price increase gradually ease, a trend that has been cushioned by modestly rising wage inflation.

The house price increase of 3.1% reported for April is the first time property price inflation has fallen below wage inflation since the first half of 2013. This re-balancing might be expected to put Irish property price inflation on a more sustainable trajectory that is consistent with generally healthy economic conditions as 2019 progresses.      




This non-exhaustive information is based on short-term forecasts for expected developments in the economy and financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalised investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a judgment as of the date of the report and are subject to change without notice.