Soft to steady house price trends largely reflect pre-pandemic market conditions

Sharp but not surprising drop in transactions points towards more problematic outlook

Government’s July Recovery Package could help indirectly as well as directly through ‘crowding in’ effects by improving financial sustainability of firms and households

Analysis by Austin Hughes, Chief Economist, KBC Bank Ireland

Irish house prices showed only a marginal  0.1% month on month drop in May to remain 0.3% higher than a year earlier. The persistence of fractionally positive annual house price inflation through recent months largely reflects broadly stable pre-Covid-19 conditions in the Irish residential property market.

Given the normal timeframe for the completion of home sales and possibly longer than normal lags in the filing of those transactions at present, these data largely capture sales completed before or in the very early stages of the ‘lockdown’ period. As such, they are unlikely to give any clear insight into the likely trend in Irish property prices through the remainder of the year.

However, a sharp 45% drop between March and May in the number of transactions on which these price data are based that leaves them a little more than a third of the level prevailing a year ago gives some sense of the dislocation the Irish property market now faces.  With property price register data suggesting an even sharper year-on-year drop in sales in June, this also forcefully suggests the major impact of the pandemic on the Irish property market in 2020 is likely to be seen primarily in the form of depressed activity levels rather than dramatically lower prices.

That said, historic relationships between Irish house prices and key drivers such as employment and incomes continues to point towards the risk of some weakening in property values as 2020 progresses. Important as health-related restrictions on new supply may be, shifts in effective demand-in the numbers of people now willing and able to purchase a property-may be more significant in terms of very short term market dynamics.

In this context, the latest Bank lending survey data for Ireland show a sharp and sudden pull-back in demand for home purchase loans in recent months. As the diagram below illustrates, this adjustment was markedly greater in Ireland than elsewhere in the Euro area. Moreover, the  diagram also suggests that in the past such swings in demand have usually translated into corresponding shifts in property price trends.

Market comments and mortgage approvals data caution against extrapolating the weakness seen in the bank lending survey too far but, on balance, effective demand is likely to be constrained through much of the remainder of 2020.

A key unknown remains the scale and speed of the rebound in activity and employment as the Irish economy re-opens through the summer months. The size and shape of the Irish Government’s July recovery package could play an important role in limiting both the length and extent of declines in house prices and related activity.

An influential strand in economic thinking has traditionally emphasised the risk that expansionary fiscal measures risk ‘crowding out’ private sector activity because those measures prompt tighter financial conditions. However, in the current circumstances supportive fiscal actions may have additional positive spill-over effects if they ‘crowd in’ private sector activity by enhancing the financial sustainability of firms and households and thereby limit any tightening in credit conditions.   

In  much the same manner as expectations of a large and long austerity process weighed on the housing market a decade ago, fiscal measures that credibly point in a more supportive direction for activity and employment in the Irish economy could help underpin the property market both directly and also indirectly by limiting adverse movements in domestic financial conditions.  .