Strong current momentum suggests hot summer for Property prices in Ireland (and elsewhere)

Improving economic outlook and underpinning Irish housing market but….

...Blockage in supply and Bubble in demand are aggravating influences at present.

So, risks in policy interventions that go too far too fast

Any increase in Public investment in housing must emphasise physical rather than fiscal capacity constraints

Policy should seek to boost supply expectations and ‘calm’ demand

Analysis by Austin Hughes

Irish house price inflation accelerated for the ninth month in a row reaching 5.5% y/y in May following an upwardly revised 4.6% outturn for April (previously+4.4%). The May reading represents the fastest increase in two and a half years (December 2018 +6.3%). With strong momentum in monthly changes at present, the annual rate of increase in Irish house prices could continue to move higher through the summer. As the diagram below illustrates, Ireland is far from unique in relation to accelerating increases in property prices of late.

While the current rate of inflation remains somewhat early calmer for Dublin properties than elsewhere in Ireland, monthly changes in Dublin have matched or exceeded those elsewhere for the past three months and the acceleration in the annual rate was more marked in Dublin (May 4.9% v April 3.7%) than outside the capital (May 6.2% v April 5.4%).  So, these data confirm a very broadly based pick-up in Irish property prices of late.

In light of widespread expectations of significant policy measures on housing in the Government’s upcoming Summer Economic Statement, it may be worth considering what we see as four distinct drivers of rising Irish house prices at present (though Irish housing market difficulties run well beyond these factors);

1. A global trend towards rising asset prices and ‘hot’ house prices, in particular, with a clear acceleration evident of late. This significantly reflects historically low borrowing costs, plentiful liquidity and a generally positive economic outlook. As we noted, last month Irish residential property price inflation is comparatively modest in an international context at present. The most recent data show US house prices heating up  (14.6%,April v 13.3% in March), UK house prices strengthening (+10%,May v 9.6% in April) and, for the latest available period, Irish house price inflation even fell well short of the Euro area average (+5.8%,Q1'21 v 5.6%, Q4'20).
2. A fundamentally positive outlook for the Irish economy amplified by favourable income trends and supportive demographics.
3. A blockage in supply most obviously due to the impact of the pandemic on new housebuilding but also reflecting a longer-lasting underlying shortfall in current and expected supply relative to demand that has translated into persistent upward pressure on prices
4. A ‘bubble’ in demand at present because of an inadequate level of activity through the past decade that has translated into a progressive build-up of  large numbers in housing that no longer adequately suits their needs. A significant element of this previously latent demand has been crystalised by the pandemic as the increased incidence of working from (and remaining at) home has exposed deficiencies in accommodation while the uneven nature of shut-downs has led to a significant increase in savings capacity for some. With fears around inadequate supply also encouraging buyers to look to buy now rather than later, some element of demand ‘overheating’ has emerged.

While factors 1 and 2 may offer some lasting support to Irish property prices in coming years, an easing in the current ‘bubble’ in demand and blockage in supply should prompt an eventual easing in Irish house price inflation in coming years.  How quickly and how smoothly that process is will depend in no small part on the nature and scale of policy interventions in the property market in coming years.

While we have consistently argued the case for fiscal measures to support the Irish economy’s transition to a sustainable post-pandemic path, we must distinguish between the need for demand-focussed measures in some areas to underpin job prospects and supply focussed measures in other areas such as infrastructure spend that would include housing supply.

In most circumstances, engineering an appropriate degree of impetus to demand is a far simpler operation than enhancing supply. While we continue to downplay the financial constraints on the Irish government’s financial capacity to support housing, equally important physical capacity constraints argue that in the near term the risks to injecting too much additional spend into housing may be as great as injecting too little. In a recent piece (link to monday ) we suggested that further increasing public spending on housing by much more than €1bn in the next year or too may entail costs in terms of straining the construction sector’s capacity that significantly offset associated benefits.

To the extent that there is a temporary bubble in terms of the current level of demand, fiscal measures that strain physical capacity could exacerbate rather than ease difficulties in the short term. In such circumstances, the difficult task is to arrive at a ‘Goldilocks’ (not too hot, not too cold but just right) level of additional spend on housing and the precise formulation of measures that delays some current demand and speeds up some future supply.

In this context, the critical issue is what is done rather than how much is spent. Measures that encourage both buyer and builder expectations of a sustained and significant future increase in supply are likely to be more productive than interventions focussed on maximising Government spending on housing in the next twelve to eighteen months.