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August increase of 8.6% the slowest in 23 months
Positive momentum persists but trend easing in property price inflation seems to be emerging
Softening particularly pronounced in Dublin in spite of stronger economic momentum in the capital than elsewhere
Affordability constraints important but extra supply increasingly influential
Path to more sustainable market will be significantly shaped by policy interventions. What will Budget 2019 do?
Irish residential property price inflation edged lower in August for a fourth successive month. Property prices were 8.6% higher in August 2018 than a year earlier compared to an increase of 10% in July. Some sense of the extent of the slowdown of late is given by a comparison of the August increase of 8.6%, which was the slowest since October 2016, with that of April which at 13.3% was the fastest since May 2015.
The Increase in Irish property price inflation is now running at about twice the EU norm (+4.3% in Q2 according to Eurostat data published yesterday) and is still well above a sustainable pace of property price increase over the long term which we estimate to lie somewhere in a low to mid-single digit range.
While the gap between property demand and supply appears to be narrowing of late, resulting in a gradual easing in Irish property price inflation, there is still some distance to go before price trends are indicative of a balanced Irish property market. How bumpy that path might be depends not only on the general economic environment but, critically, on the nature and extent of future policy interventions. While measures to boost supply somewhat might be warranted in Budget 2019, the market would likely be hurt rather than helped by "shock and awe" measures or policies which materially boost demand.
As diagram 1 indicates, the slowdown in price growth in recent months has been most pronounced in Dublin. This slowdown in Dublin house price inflation relative to that in the remainder of the country goes against the current intensity of economic momentum as the first half of 2018 saw employment in the capital grow 6.2%, more than three times the 1.9% increase recorded elsewhere.
There is little question that affordability constraints formalised by the Central Bank’s Loan-To-Income limits have played a significant role in slowing the pace of property price inflation in Dublin but there should be some offset from the stronger economic momentum in the capital.
However, if constraints on demand were the overarching influence, it might be expected that this would cause a slowdown in property transactions in the capital relative to the rest of the country. In fact, both new supply and transactions growth in Dublin has outpaced activity across the rest of the country for most of the past two years and the gap has widened somewhat in 2018 with Dublin property transactions up just under 6% year to date and transactions elsewhere up just 2% (broadly mirroring the gap in jobs growth).
Overall, the August property price data appear consistent with an Irish housing market that is beginning to reflect a notable increase in supply of late. As diagram 2 below illustrates, we are still some distance from a position of balance. The sharp increase in new building is coming from an extremely low base (the year 2013 in the diagram) and it remains the case that the pace of increase in property prices is still outpacing the increase in transactions.
Importantly, however, signs of slower property price inflation and improving supply of late should ensure expectations of future prices don’t run away providing any upcoming policy interventions prioritise delivering supply rather than stoking demand.
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.