Tuesday 17 October 2017

Househunters will have little to look forward to in 2017

Dan O'Brien

Dan O'Brien

Housing was centre-stage in 2016. Don't expect matters to change much in 2017. Owing to the time it takes to build new homes, a likely (modest) increase in the supply of housing this year won't transform trends in rents and house prices.

Rapidly rising rents, higher than desirable house price inflation and homelessness are all consequences of a dysfunctional market which has failed to meet the demand generated by a population that is growing at one of the fastest rates in the developed world.

With banks and many developers still nursing the wounds they inflicted on themselves (and so many others) a decade ago, and a highly indebted government with very limited financial resources, neither the market nor the state is well positioned to push housing output up to an appropriate level.

While the number of new homes built this year should increase on 2016, there is little reason to believe that it will be enough to make much a dent in the mismatch between supply and demand. If that is not music to people's ears, let's start off with an often mentioned aspect of the housing piece that nobody needs to worry about.

When property prices started to rebound in 2014 - very strongly in some areas - concerns were voiced that another bubble was inflating. In some places prices are up significantly and it is not uncommon again to hear the "B" word.

Thankfully, there is no bubble. That is because there has not been a lending frenzy, something that is almost universally the cause of bubbles and the crashes that follow them (indeed, I can't find a case of a property bubble-crash anywhere in the world that was not preceded by a period of high growth in bank lending).

On the contrary, what we have in Ireland now - arguably - is a deficiency of credit. For almost nine years households have been paying more back to banks and other mortgage holding institutions than they have been receiving in new property loans.

Despite Irish households still being among the most indebted in the world relative to their disposable income, this nine-year period of "deleveraging" looks likely to come to an end in 2017, as new lending by the banks accelerates. The partial loosening of central bank restrictions on mortgage lending and the Government's daft and iniquitous "Help to Buy" scheme can only be expected to add to the momentum of credit growth this year. That will combine with population growth to continue to drive demand for housing in 2017.

That can mean only one thing for prices, particularly as supply is weak.

If those seeking to buy this year face the unhappy prospect of high property inflation, then perhaps the only comfort is that prices are still far below the peaks of almost a decade ago. Nationally residential prices were still one third below their pre-crash peak.

And that, incidentally, is also the case in Dublin, where supply and demand mismatches have been most acute in recent years (prices in the capital fell by more than the national average during the crash and have risen at a faster pace since the recovery began but they are currently still one third below 2007 peaks).

Home ownership has been in decline since the early 1990s. With young people enjoying longer periods of single life before settling down and a big increase in immigration (new arrivals are much more likely to rent than natives) there has been a transformation in housing tenure, with fewer people owning their homes and more renting. That has been particularly the case in urban areas.

The combination of strong demand and weak supply in many urban areas has caused rents to rise even more rapidly than house prices over the past four years or so. This is particularly the case in Dublin, where rents are by far the highest in the country, now averaging €1,308 a month. That is equivalent to 40pc of disposable income, almost twice the national average.

The recent decision by the Government to put a cap on rent rises in Dublin and Cork, and possibly elsewhere, should have some short-term impact on dampening increases, even if the international evidence suggests they are likely to harm the supply of new housing in the medium-term.

The exclusion of new and refurbished rental properties from capping will both limit the curbing effect on overall rent inflation and the most damaging, supply-dampening aspect of placing a ceiling on rents by legislative fiat.

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Could anything put a real dampener on property prices and rents in 2017? More new houses is the short answer, and one almost everyone agrees on. Owing to a better functioning market and some of the Government's measures, higher supply should partially meet demand over the next 12 months, but that will not be enough to make a huge difference.

Only if the wider economy were to slow sharply would property-related inflation be curbed significantly, something nobody really wants to happen. But it could happen. Quite a few indicators pointed to a slowdown in economic growth in the second half of 2016.

But even if a slump does set in later in 2017, it would take time to have an effects on rents and house prices.

So - one way or another - housing pressures will continue to be front and centre over the course of the year and, all told, the most likely outcome for 2017 is accelerating house prices and somewhat more modest rent hikes than last year.

Irish Independent

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