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Irish house prices increase 2.3% y/y in July, the first pick-up in the annual rate in fifteen months…
Irish house price inflation edged marginally higher in July for the first time in fifteen months. The 2.3% increase compared to July 2018, marks a slight uptick compared to the 2.0% annual growth recorded in June. While the July figure is preliminary and could be revised, it appears consistent with the view that Irish property prices are adjusting to what appears to be a more sustainable pace of growth.
In broad terms, a healthy Irish economy characterised by significant population growth, solid job gains and significant increases in real wages and accompanied by historically low borrowing costs might be expected to see property prices rising at a more rapid pace but important behavioural and structural changes appear to be prompting a shift to a slower path (after a sustained period of rapid increases in recent years)
Expectations in relation to the outlook for the Irish property market have altered markedly in the past couple of years. In marked contrast to the property cycle of the previous decade, prospective buyers may be focussing now on a range of factors that could slow rather than speed up property price increases. These include expectations of increased supply in the future and, possibly, of greater significance of late of, constraints on borrowing and concerns about Brexit.
As prices increased 0.9% between June and July, the fifth consecutive month on month rise, these data seem consistent with the idea that residential property prices are moving onto a slower and more sustainable path rather than a marked correction. We would also downplay the significance the 0.9% monthly increase in July being the largest monthly gain since September 2018. Increased uncertainty in recent months about Brexit and, to a lesser extent, a number of other risk factors for the global economy, suggests that path could be quite bumpy in the near term.
The small bounce in Irish property price inflation in July reflected a pick-up in prices outside Dublin that was particularly notable in Border counties ( driven, in turn, by significant improvements in Sligo and Cavan that may reflect specific transactions rather than long term trends) and there was also some acceleration in property price inflation in the South East and South West.
As has been the case for some time, Dublin property prices showed a softer trend than elsewhere with prices in the capital falling year-on-year (albeit a marginal 0.2%) for the first time since October 2012. However, property prices in the capital did rise 0.6% between June and July, the largest monthly increase since September 2018 and the third monthly gain in a row. So, it could be argued that the underlying trend in Dublin housing prices has been broadly flat overall since last Autumn. Within the capital, there are also notable divergences with Dun Laoghaire-Rathdown prices performing notably more poorly and South Dublin prices performing somewhat better than elsewhere.
Three distinct influences must be taken into account in attempting to explain the substantial slowdown in Irish property price inflation since the three year peak of 13.3% seen in April 2018. These are
New housing completions are now running at about four times the level seen when the Irish property market began to turn in late 2013. However, we reckon current completions are still only about two-thirds of the level needed to satisfy underlying demographic demand. Arguably, the key influence that sustained if modest increases in new building is now having is to remove fears that homeownership will become even more difficult in the future. Expectations of greater future availability of new builds mean that, unlike the early to mid 2000’s, there is no frenzy to get on the property ladder for shelter or investment reasons.
Additional supply is an important influence but, on its own, offers an inadequate explanation of the slowing trend in Irish property price inflation. If increased new supply were the dominant factor, one would expect slower house price growth of late to be accompanied by a substantial increase in property transactions but since a recent peak increase of 13.7% in April 2018, the volume of market transactions by consumers has trended lower to a growth rate of just 5.2% in July 2019.
The combination of slower increases in both prices and transaction volumes of late suggests changes in demand rather than changes in supply have been the dominant influence in the cooler property market climate of late.
In the five years that followed the bottoming out in Irish property prices in mid-2013, property price inflation 11%, some nine times the 1.2% average increase in wages over the same period.
Three factors have contributed to an affordability -driven adjustment in demand growth underpinning a step-down in Property price inflation to a more sustainable pace of late. These are the painful recent memory of the property crash that has altered lender and borrower behaviour, the particular constraint imposed by the Central Bank’s mortgage lending rules and the worldwide phenomenon of low inflation generally and subdued wage growth in particular that has limited any capacity for Irish wages to chase property prices ever higher.
In the past year (between Q2 2018 and 2019), Irish wage growth has picked up to 3.4% while property price inflation eased to 2.5%. Consequently, we may now be seeing a bumpy adjustment to more consistent paths for wages and property prices in Ireland.
In a world of ‘known unknowns’, prospective homebuyers are very conscious of varied risks to the Irish economic outlook, most notably those posed by Brexit. At the margin, we think a ‘Brexit bump’ is now weighing on the Irish property market, by introducing increased uncertainty and nervousness about future income and employment prospects. Unfortunately, it could be some time before this influence fades and the increased recent risk of a ‘hard Brexit’ may prove to be an even greater drag on housing market activity through the autumn.