Slowing Irish house price inflation; should we (and the IMF) be happy?


March house price data continue trend slowdown in Irish property price inflation

Softer Irish data coincide with step up in IMF concerns re global property price trends

We consider Irish developments in relation to risk factors cited by IMF 

Analysis by Austin Hughes

Irish Residential property prices were up 3.9%y/y in March 2019, the slowest increase since August 2013 (+3.6%). The softer trend of late is primarily a reflection of softer Dublin property prices of late, with five successive monthly declines leaving Dublin housing prices just 1.2% y/y, the smallest increase since November 2012.

Is this slowdown a temporary blip, could it be a worrying sign that the rollercoaster is about to turn again or is it possible that recent developments are a sign of bumpy process leading to greater stability in Irish property price trends?

An IMF blog post this week, House prices are up, should we be happy? contained the following diagram:

The IMF blog went on to warn how the synchronised nature of recent gains in property prices globally was ‘raising concern about the potential for large, coordinated declines’. It said risk factors that may provide some warning in relation to the risk of a housing bust were rapid economic growth, overvaluation of house prices, credit booms and tighter financial conditions, particularly higher interest rates.

What are we to make of the fact that the IMF graph shows Irish and Dublin property price growth with the fastest rate of increase in the past five years? In the paragraphs below we consider these influences in an Irish context with a view to assessing whether the recent slowdown in Irish house prices should be seen as welcome or a warning, but first it may be useful to see the recent strength of Irish property price growth in relation to the weakness that preceded it.

The graph below sets out both the performance of property prices for the five years prior to the period shown in the IMF graph and for the full ten year period 2008-2018. For ease of viewing we have not included city data.

The graph above shows Ireland was more exceptional in the intensity of the 2008-2013 downturn in property prices than it has been in the subsequent recovery. As a result, Irish property prices are still clearly lower than in 2008. In part, the larger swings in Irish property prices reflect larger swings in economic activity in Ireland (even correcting for distortions related to the activities of the multinational sector) than elsewhere as the graph below showing the correlation of house price growth with nominal GNI* illustrates.

In this context, virtually all mainstream forecasts envisage a notably calmer pace of economic growth in Ireland in coming years than through most of the past two decades. Such circumstances would make it more likely that the rate of property price inflation would ease notably from the experience of recent years.

The IMF also highlights the risks posed by overvalued house prices. Unfortunately, different metrics can send widely different signals on house price trends. The ECB attempts to reduce the problem of conflicting signals by producing indicators based on a range of different approaches.  Their latest iteration contains data to end 2018 and as the diagram below indicates, the ECB’s calculations suggest that, in contrast to the Euro area as a whole, Irish property prices do not seem to be overvalued (and may still be marginally undervalued) relative to broader developments in the Irish economy.

The IMF also cite credit booms as a risk factor for housing, but the introduction of macro-prudential mortgage lending limits coupled with notably greater risk aversion among borrowers and lenders has meant the stock of mortgage credit has continued to trend downwards and the pace of increase in mortgage drawdowns for house purchase has been on a moderating trend for the past couple of years as the diagram below shows.


Finally, we would see little early threat from any marked tightening in borrowing costs with markets now questioning whether the next move by the ECB could be a further easing of policy (see our blog post Draghi steps up dovish message)


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.