• Irish property price inflation jumps to 12.4% in September, a new three year high
• Momentum increased markedly through summer months
• We think demand pressures are becoming more intense...
• ...and could have further to run...
• ...but affordability strains and increased supply should lead to moderation through 2022   

Analysis by Austin Hughes

Irish house price inflation accelerated further in September, to 12.4% from 10.9% in August. The September reading is the fastest since May 2018 (also +12.4%).

While supply constraints remain key, we continue to highlight a sharp build-up in demand pressures of late, reflecting (I) significant numbers of households that are stuck in properties ill-suited to their current needs, (II)  an increased focus on housing because of the pandemic driven by more time spent at home and increased savings capacity for some, and (III) some element of ‘panic’ buying on fears of a persistent shortfall in supply and  a corresponding lasting uplift in prices.  

If supply constraints were the key driver of the current upswing in property price inflation, upward pressure on prices would be accompanied by downward pressure on transaction levels. However, the current strength in demand is underlined by increased transaction levels. On Market residential property purchases by household buyers in September 2021 were 34.8% higher than in September 2020 but also 4.9% higher than in pre-pandemic September 2019.     

Some sense of the intensity of upward momentum in Irish house prices at present is suggested by diagram 1 below which shows the annualised growth for the July-September period at 24.6% is the fastest in seven years (September 2014 +33.1%) and nearly twice the conventional y/y increase  (of 12.4%).  In that respect, the upward pressure on prices at present is similar to that seen in the early stages of recovery from a deep slump.

While upward pressure on Irish house prices is broadly based, the fact that the 3 month annualised increase in property prices outside of Dublin at 27.8% is the fastest in the series that stretches back to 2006 suggests affordability limits and increased working from home are widening the geographic range of properties being sought.

Model-based estimates suggest that Irish residential property prices may still be somewhat undervalued relative to  broad ‘macro’ developments in the Irish economy. In this context ECB calculations suggest an undervaluation of about 12% in Q1 2021. However, the acceleration in house price inflation relative to average earnings growth is severely straining affordability metrics for ‘average’ buyers.

The diagram below suggests that for a single First Time Buyer on average earnings, the CBI’S 3.5 income multiple would imply they would need a deposit of around €163k to reach the average home price of €318k paid by First Time Buyers in September. While First Time Buyer couples who are both on average earnings would find this target attainable, they would need a deposit of  about €107k to reach the average price paid by First-Time-Buyers for Dublin property in September (€425.7k).  

While some First Time Buyers may be capable of securing a large deposit, the likelihood is that most purchasers are likely to those earning significantly more than the national average. On the basis of somewhat dated 2018 data on the distribution of earnings (ie assuming this distribution still held around Q2 2021 earnings), a single First time buyer would need to be in the top 10% of earners to purchase a home with a 90% mortgage in September 2021 while a couple would need to be in the top 25% of earners to purchase a home in Dublin with a 90% mortgage.

While we may not yet have seen the peak of inflation in the current cycle, there should be some material moderation as 2022 progresses. With new supply set to increase materially and affordability constraints likely to intensify, Irish house price inflation should trend materially lower through the year ahead although, as in previous episodes, the path towards a more sustainable trend in Irish property prices and housing output could prove uneven and extended.