June property prices up 6.9%-fastest increase in 31 months

Current momentum suggests surging demand as well as delayed supply creating upward pressure

Is Pent-up demand turning to panic?

Transactions recovery suggests housing market ‘normalising’ but old ‘normal’ was inadequate to develop healthy balance  

 Balance unlikely in short term-emphasis should be on policies that stabilise demand and support sustainable increase in supply   

Analysis by Austin Hughes

Irish house price inflation accelerated for the tenth month in row in June as initial pandemic-related softness has increasingly given way to concerns about a persistent shortfall in supply in the face of strong and increasingly disappointed demand. So, a backlog in supply and a build-up in demand are creating the ‘perfect storm’ in terms of upward pressure on house prices at present. 

The annual increase in Irish house price inflation increased to a new two and a half year high of 6.9% in June from 5.4% in May, marking a sharp pick-up from the recent low-point of -0.9% recorded in August 2020.

Some sense of the current exceptional momentum in Irish house prices is suggested by the diagram below. The year on year increase in the house price index (+6.9% in June) is shown in red. The other lines show three month annualised  increases for the national house price index as well as corresponding numbers for property prices for Dublin and for the rest of Ireland. At present, these are all running in excess of 13%, emphasising both the strength and the spread of property price pressures at the moment.

It is clearly the case that the supply of residential properties for sale in Ireland at present is inadequate to meet demand. While the shortfall in supply has been aggravated by the pandemic, the reality is a demand-supply imbalance has been a persistent feature of the Irish property market.

Given encouraging new construction data of late, it might be argued that a more notable consequence of the pandemic is the boost that it has given to demand. Clearly, the downward pressure it has exerted on current and prospective interest rate costs is an important consideration. Possibly most influential has been the effect to activate previously latent pent-up demand.

If the impact of the pandemic was largely on supply, one might expect property transactions would still be relatively depressed. However, the graph below suggests that the (seasonally adjusted) in purchases by household buyers has recovered markedly of late and bears favourable comparison with activity levels in previous years.

Admittedly, a significant element of this reflects a catch-up from last years depressed transaction levels but the speed and strength of this turnaround also highlights the buoyancy of demand at present. We think this partly reflects an increased emphasis on the home as somewhere to work and play as well as rest. This activated demand among significant numbers living in conditions that did not suit their current needs. In addition, increased  evidence of curtailed supply may have encouraged some element of panic among prospective purchasers.

There is little doubt that a shortfall in housing market activity in recent years is the critical element contributing to current upward pressure on prices. Elementary economics suggests increased supply would materially ease current pressures. However, there is also a sense that demand side influences are aggravating the current situation.

These pressures are unlikely to disappear in the short term. However, identifying these distinct factors is important to putting new construction on a path that doesn’t encourage large price movements in either direction. In practice, that may need to ensure demand-calming measures as well as credible and sustainable increases in supply.