Sharp rise in Dublin prices the key driver

Intensity of pent-up demand and inadequacy of new supply underpinning strong price trend

Momentum in prices unlikely to fade quickly but should eventually ease

Any policy interventions must be very carefully considered

The annual rate of Irish house price inflation accelerated again to +12.3% in July, its fastest pace in two years. This pick-up was led by the largest monthly rise in Dublin property prices (+2.7%) since July 2014. As a result, Dublin house price inflation is now outpacing that in the rest of Ireland for the first time in two years.
 
The pick-up in Dublin price inflation reflects the increasing intensity of the demand/supply imbalance in the capital of late.  As the diagram below illustrates, growth in the number of Dublin residential property transactions outpaced the increase in prices through the second half of 2016 (admittedly from a low base). However, the increase in activity has slowed markedly of late even as the pace of increase in prices has picked up, highlighting an increasing shortfall in supply relative to notably strengthening demand.
 
In contrast, the trend in transactions outside the capital has shown a more consistent if modest growth of late. This has translated into a steadier if still strong pace of property price inflation outside Dublin.
 

The current momentum in house price inflation is stronger than might have been envisaged and reflects the strength of pent-up demand now emerging in the face of a very limited increase in new supply.
 
We have repeatedly argued that the importance of pent-up demand has been consistently underestimated as a driver of house price inflation in recent months. This surge should eventually ease but this process could take a year or more. We would also expect new supply to expand somewhat faster in the next year or two but this is unlikely to match prospective demand. 
 
There are some tentative pointers that might suggest an eventual slowdown in property price inflation. These are shown in by diagram 2 below. This shows a recent slowdown in the rate of increase in new mortgage approvals and in the average loan size approved.  In time, this should serve to restrain growth in house price inflation but this is unlikely to be a speedy or smooth process.
 
In the interim, it is understandable that calls for policy action may intensify. It is difficult to envisage policy interventions in the upcoming Budget or indeed, the annual review of Macro-prudential settings that would make a dramatic difference for the better in the near term. However, at the margin, credible and consistent policy stances should help foster a sustainable boost to supply and/or ‘calm’ demand and thereby assist the path to a healthier price trajectory.

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.