Saturday 25 October 2014

Honohan: we’ll burst any bubble in housing market

Donal O'Donovan, Charlie Weston and Mark Keenan

Published 01/05/2014 | 02:30

Central Bank Governor Patrick Honohan
Central Bank Governor Patrick Honohan

THE Governor of the Central Bank Patrick Honohan has vowed to burst any new property price bubble.

Dr Honohan said houses in Dublin were no longer “under-valued”, based on economic models used by the Central Bank.

That is a big change from last year when research from the Central Bank had suggested prices were below where they should be based on the wider economy – a finding that may have encouraged some people to buy in the past year.

A severe shortage of family homes in certain sought-after parts of Dublin has led to dramatic price rises in those areas, fuelling fears the market was becoming overheated again.

Dr Honohan yesterday suggested that Dublin prices may have plateaued after recent sharp rises – but admitted even his bank had difficulty interpreting house price data.

New figures from the Central Statistics Office show houses prices are up 7.8pc nationally in March and up 14.3pc in Dublin compared to a year ago.

But prices did fall nationally in March for the second month in a row, while prices in Dublin remained unchanged. “There is no way we are going to let things get out of hand again in terms of a bubble,” Dr Honohan told the Oireachtas Finance Committee yesterday.

The Central Bank could intervene by forcing banks to insist people getting a mortgage have a larger deposit or by capping the size of a home loans compared to household income.

These measures were considered normal practice for decades preceding the Celtic Tiger era when banks began to give loans that bore little relation to borrowers’ incomes or ability to save.

Ratings agency Standard & Poor's released a report yesterday which concluded that rapid price growth in urban areas is set to cool off. It said prices could rise this year by around

3.5pc nationally, and by 2pc next year – much slower than in 2013. The Central Bank Governor said bank lending had not fuelled the price hikes of the past 12 months.

But if a credit-fuelled bubble did start to emerge, the Central Bank would act, he said.

Economist John FitzGerald of the ESRI cast doubt on the latest CSO figures suggesting that prices had started to drop nationally, saying the figures did not take account of homes bought without a mortgage. “Those house prices reported by the CSO may have fallen but just how representative they are of prices overall remains to be seen.

“The big factor here is cash buyers. The CSO figures relate to mortgage buyers only. But if cash buyers are making up a large proportion of sales, as many believe, then the cash buyers are likely to be outbidding mortgage buyers and therefore accounting for the higher prices, which are not being reflected here,” he said

A spokesperson for Housing Minister Jan O'Sullivan (inset) admitted that the CSO data “doesn't capture all sales”.

“The CSO data is extremely valuable. However, as the CSO makes clear, the data is based on mortgage drawdown and as such doesn't capture all sales.”

The latest evidence of property prices rising at a more sustainable pace comes weeks after Finance Minister Michael Noonan said he wanted house prices to rise further and claimed fears of another property bubble in Dublin were exaggerated.

Yesterday’s CSO data said Dublin apartment prices were 10.4pc more expensive when compared with the same month a year before. House prices in Dublin rose 7.6pc in the same period. On an annual basis, prices outside the capital were up 2.9pc.

Calculations based on the CSO figures indicate that in Dublin, the average price is now close to €226,000, up €28,000 in a year.

Outside Dublin, the average property is selling for €150,000, up by €4,000 in a year, according to calculations by Goodbody Stockbrokers.

Economist with Davy Stockbrokers Conall Mac Coille said the runaway house price rises had eased – due to the end of mortgage tax relief in December, and weak mortgage lending. “There appears to have been some slowdown in the rate of house price inflation.”

Ratings agency Standard & Poor's said it expected residential prices to expand by 3.5pc this year across the country, even though supply shortages in urban areas have pushed up prices.

“What's more, we don't expect the housing market revival to stay as strong beyond 2014.” This was because bank lending conditions remained tight and high levels of mortgage arrears would ensure prices do not rise too strongly.

“We therefore forecast that house prices will rise by just 2pc in 2015,” the agency said.

Property Industry Ireland (PII), which is part of employers' body IBEC, said it was hard to be definitive about what was happening to house prices as the CSO data only took account of properties bought with a mortgage.

Dr Peter Stafford of the PII said: “During a period of very low numbers of transactions, excluding 40pc of all market activity makes it difficult for anyone, whether purchaser or vendor, to get an informed understating of price trends in a particular locality.”

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