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August annual increase of 12.2%, the fastest in two years
Momentum building as broad range of factors boost demand
Budget 2018 measures to boost supply will help but not for some time
Danger that double digit price increases come to be seen as the norm
Irish residential property price inflation remained very strong in August with the year on year increase reaching 12.2%, compared to a downwardly revised rate of11.6% in July (previously estimated at 12.3%). The annualised rate of change over the past three months, augmented by seasonal influences, has reached 25.9% to underline the momentum in Irish property prices at present.
The nature and extent of Irish property price pressures is further emphasised by today’s separate release of September consumer price data which show a monthly price drop that resulted in a consumer price inflation rate of just 0.2%. While we lack a complete data set for other countries at this point, these data suggest Ireland is likely to continue to have the lowest consumer price inflation in the EU and a rate of property price inflation that is among the very highest.
The August price data remain consistent with an Irish housing market in which the list of factors supporting demand growth, including improving employment and incomes, increased confidence, greater credit availability and supportive policy settings in the shape of fiscal incentives for home-buying and low interest rates, is now longer than the range of influences restraining growth in supply.
The pace of property price inflation has steadily picked up through the past twelve months (from 7.2% in August 2016) as stronger economic conditions augmented by changes in policy settings encouraged the emergence of pent-up demand at a time when supply growth was limited. Our sense is that we should see a very gradual easing in property price inflation as this demand ‘bulge’ moderates and supply improves. However, this process may take some considerable time.
In this context, a range of initiatives introduced in Budget 2018 should encourage the expectation of an eventual but meaningful increase in supply that should slowly assert some influence on property price expectations and consequently on the pace of property price inflation. The range and scope of fiscal changes relevant to new housing supply announced in Budget 2018 is such that it is almost impossible to estimate exactly when and how much of an impact they will have.
It seems likely that any feed-through from this week’s Budget announcements to 2018 output levels is likely to be modest but notably stronger supply effects should begin to be felt in 2019 and increase in subsequent years. This means that through next year the main impact of Budget 2018 is likely to be felt through price expectations as would-be buyers and sellers factor in the implication of future levels of output that might be notably higher.
If the supply supportive measures announced in Budget 2018 act to dampen price expectations, there is an opposite risk that the current momentum in house prices acts strongly in the opposite direction. It now seems likely that property price inflation will average more than 10% in 2018. This carries with it the risk that double digit increases in property prices again come to be seen as the norm.
While sentiment in regard to house prices is very positive at present, it is not clear this has translated into a corresponding step-up in expectations for future price growth as yet. Formal measures of expected property price inflation such as the Central Bank/Chartered surveyors’ property price survey suggest that most market participants see the current surge in prices as a largely temporary phenomenon, in that three year projections seem to imply that survey participants see the current strong momentum in prices giving way to sharply lower rates of property price inflation in coming years.
The worry is that if the current trajectory of prices is sustained into next year, longer term price expectations could shift notably upwards and possibly overshoot. The promise of greater supply suggested by the measures announced in Budget 2018 is helpful in this regard but it remains to be seen how far and how fast this will change thinking on prices or lead some prospective buyers to postpone purchasing as well as bringing forward additional supply.
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.