Where to from here? The future of the housing market
It might be easier to build on sand than predict what will happen in the current dysfunctional property market. Even so, five experts from across the sector are prepared to nail their colours to the mast
Conall MacCoille: Chief economist at Davy
1 House price inflation will remain close to 10pc
Irish house price inflation, at close to 12pc, is clearly outstripping wage growth. This almost certainly means new first-time buyers are taking out more highly leveraged mortgage loans, bidding up prices as they do so. In fact, the average first-time buyer mortgage approval in July was €210,000 - up from €192,000 only 12 months ago. This trend is likely to continue. The latest Central Bank data suggests that the average loan-to-income ratio among first-time buyers was 2.9 times average income, well below the regulatory threshold of 3.5 times average income. So as the housing market tightens, first-time buyers will seek higher levels of mortgage debt, pushing house prices higher. Irish banks clearly have the capacity to lend higher levels of mortgage debt while staying within the Central Bank mortgage lending rules.
2 Liquidity in the housing market will continue improving
This year the final number of housing market transactions will probably finish off at around 55,000 sales, up around 10pc on last year. Put another way, 2.5pc of the housing stock of Ireland's two million homes will be sold this year. This means at current transaction rates the average home is sold just once every 40 years. Transaction rates in the UK are roughly double the level seen in Ireland. While low levels of homebuilding will remain a constraint, liquidity among existing homes should continue to improve helped by the economic recovery and as households come out of negative equity.
3 Signs of rising housing supply will become more evident
There may be controversy about the true level of homebuilding - probably close to half the 15,000 units signalled by the official 'housing completions' data - but there can be little disagreement that activity in the construction sector is gradually picking up. A range of indicators, planning permissions, commencements and the Construction PMI, point to a rapidly expanding sector, albeit off a low base. However, with natural housing demand of at least 30,000 units per annum it will take a number of years for supply to catch up.
4 Political pressures on housing will ratchet up
Clearly there is currently a great deal of lobbying activity to persuade the new housing minister to keep the much-criticised Help-to-Buy scheme. Next up will be the Central Bank's 2017 review of its mortgage lending rules. With the Bank of England setting its loan-to-income threshold at four times gross income, the case will almost certainly be made for the Central Bank of Ireland to loosen its rules, limiting the number of new mortgage loans with a loan-to-income ratio over 3.5 times average income. Ultimately, the only answer to Ireland's housing crisis is freeing up land for housing development, accompanied by a proper planning system.
Dr John McCartney: Director of research at Savills
1 The Help-to-Buy scheme will be found to have added to house price inflation
The first half of 2017 has unfolded much as expected in the housing market. Continued population growth and a lagging construction response have made the demand/supply imbalance even more acute. This has propelled house price inflation (HPI) from 9pc per annum last December to 11.6pc currently. Policy changes since the beginning of this year have amplified the inflationary pressures. Some commentators argue that the impact of Help-to-Buy (HTB) is quite limited because it only covers new homes purchased by first-time buyers (FTBs). I'm not convinced. For one thing, FTBs' share of the market may be much greater than we thought. Banking and Payment Federation Ireland data shows that FTBs drew down 14,072 mortgages last year. This is 24pc more than the total number of FTB purchases recorded by the CSO. Moreover, the notion that prices will only be inflated by the value of the FTB rebate is flawed because, once this is added to the deposit, buyers can also borrow more. My own estimates indicate that HTB adds significantly to headline inflation. It will be interesting to see what the Government's evaluation of the scheme says.
2 Population will add to housing demand and increase prices further
So far our rapid population growth has happened without significant in-migration. But the 2017 statistics will almost certainly indicate a strengthening inflow of people because of Brexit and our booming economy. This should add to population growth and housing demand. On the other side of the equation there are signs that housebuilding activity is picking up, and completions have risen by 25pc in the first five months of 2017. But output is rising from a very low base. Official statistics, which rely on the proxy of ESB connections, probably overstate the absolute level of housing output.
3 Fears over the Help-to-Buy review might cause FTBs to 'pile in' - further accelerating house prices
Another thing to watch is the potential impact of the ongoing HTB review. If qualifying buyers believe the measure is about to be withdrawn, they could 'pile-in' over the coming months. Leaving aside the inflationary impact of additional HTB money, this front-loading of demand would provoke a further acceleration in house price inflation. However, in the event that the scheme was to get withdrawn, we could expect this to unwind in 2018.
4 Dublin will re-emerge as the engine of house price inflation
For the last two years regional markets have consistently experienced stronger inflation. This is because a given money-value increase translates into a bigger percentage rise in these lower-priced locations. However, while Dublin house price inflation (HPI) remains marginally below that in other locations, it has accelerated from 6.6pc to 11.1pc in just six months. This is being driven by fundamentals; Dublin's population is rising by 1.7pc per annum compared with 0.8pc elsewhere. Meanwhile, housing completions (and commencements) have picked up less strongly in the capital. But policy is also a factor. The introduction of HTB and the easing of mortgage lending restrictions were always going to impact more heavily on Dublin where affordability had been a bigger barrier. I predict Dublin HPI will be outstripping the regions before the month is out.
5 The number of people sharing houses/apartments will increase
Given the absolute shortage and rising costs of housing, we can expect more intensive utilisation of the housing stock as people club together into bigger households. After 45 years of steady shrinkage, household sizes are rising again. One reason for this is young adults staying longer in the family home - there are currently 459,000 people in this position. Another reason is house sharing. Letting agents say that, whereas a couple might previously have occupied a two-bedroom apartment, today they are more likely to take a one-bed unit to save money. And who is moving into the two-bedroom apartment? Two couples. Equally three-bed apartments, which were traditionally slower to let, are now in hot demand because of house sharing. Reflecting all of this, average household sizes in the private rental sector have reached their highest level since quarterly records began.
Ronan O'Hara: Director of Sherry FitzGerald; Member of the Society of Chartered Surveyors Ireland (SCSI)
1 Construction will fall short of demand until at least 2026
Early indications show that new residential construction nationally will be approximately 10pc ahead of last year. In the context of our current housing supply, this is a positive trend but one that is regrettably not enough to prevent house price increases.
In any normal functioning housing market, approximately 5pc of the national housing stock is available for sale every year. The current rate here is only around 2pc, which is mainly as a result of the lack of supply in the market, although negative equity remains a problem for some households who cannot afford to sell. The problem of under-supply is unlikely to be addressed quickly any time soon, as residential development takes time to plan and build. Looking at current new build projections, added to the cumulative under-supply for the past eight to nine years, it is worrying to see that a balance between supply and demand will not be met until at least 2026.
That means that for the medium term, house prices will remain under inflationary pressure. This sentiment is shared in the Q2 SCSI /Central Bank of Ireland Residential Property Report which highlights that, for the first time since the report started back in 2013, 100pc of property professionals say that house prices in Dublin will increase in the next three years.
2 The number of property transactions will remain the same as for last year at 49,000
As an agent working in Dublin, I found the first half of 2017 extremely busy and it looks like the autumn season will be equally active. The number of property transactions will most likely remain similar to last year (49,000) and the number of mortgage draw-downs is up on last year by almost 17pc. However, another significant impact on prices is lending limits and we are seeing affordability become a big issue, especially in Dublin. We see more and more buyers moving further out of Dublin to find affordable housing and this trend, according to the SCSI Annual Property Survey, is likely to be a feature of the market in 2017 and beyond unless radical action to increase supply at affordable levels is taken.
3 The housing crisis remains the biggest issue for Government
The challenge is to stimulate more construction activity to build the right type of homes in the right locations. Higher density in and around the city is a must if we are to be in a position to accommodate a growing population but, as things currently stand, constructing apartments is not financially viable. Further investigation is required to find ways to bring down the total delivery costs to affordable levels. The 'bricks and mortar' element of building houses represents 45pc of the total delivery cost so there is scope to tackle this issue to enable people to buy affordable homes in the right location. If we want to remain economically competitive, we cannot allow housing prices and rents to spiral out of control.
4 There will be strong interest from Brexiteers wishing to buy in Dublin
My colleagues in our commercial division are reporting strong interest from UK companies to acquire office space in Dublin but housing capacity constraints are a big concern for these companies. We are also beginning to see the first of the Brexiteers looking to buy here, many of whom are expats who have decided to fast-forward their return to Dublin.
Ruchika Hassan: Director of marketing and sales, Cairn Homes
1 Dublin needs 18,000 new homes per annum, a far higher number than most people think
Demand for new homes is exceptionally strong and this is driven by a combination of factors including pent-up demand from a protracted period of limited supply, an ever-growing population with demographically driven demand, improved affordability among purchasers, and escalating rental costs. People don't realise that Dublin was never really over-supplied with new homes during the Celtic Tiger years, unlike other parts of Ireland. We predict that, contrary to other estimates, in excess of 18,000 new homes are required in Dublin alone each year into the long term. Various forecasts point to Dublin being the fastest-growing city in Europe in the next 15 years and we need to significantly increase supply to meet demand. Owning a house in Dublin today is on average 30pc cheaper than renting the same house. Dublin is unique in a European context in this regard.
2 Increasing apartment densities, reducing apartment sizes and increasing building heights in a sensitive way will deliver a higher Brexit dividend
We predict legislation to make the delivery of apartments more economical (densities, minimum apartment sizes, reducing car park spaces per apartment, number of apartments per core, dual aspect review, etc), will be enacted within 12 months and this will have an immediate positive impact on Dublin's Brexit dividend - businesses considering relocating from London want comfort that their staff can be accommodated in city centre apartment schemes. A change in legislation will immediately facilitate the delivery of a significantly higher number of apartments in Dublin, the housebuilding sector will react, and this will lead to more Brexit relocation announcements. Dublin has historically made very poor use of its finite stock of residential land. We need to be smarter in the way we use the land in our city and increase permitted heights in the right locations.
3 Purchasers' expectations will continue to grow
Purchasers have never been more educated and informed, meaning that homebuilders have to step up to the mark. While they are both knowledgeable and price conscious, they also pay particular attention to areas like energy efficiency, air ventilation and insulation. The first-time buyer today now plans for the future and asks: "Can I raise an expanding family in this house?" They expect the house to be able to adapt to their needs, so features like future-proofed attic space (ie, one that can be converted into additional living space) will become the norm. They also expect lifestyle and community facilities in close proximity to their homes (schools, shops, crèche facilities, playgrounds, etc). Purchaser expectations will have to be matched by homebuilders becoming more flexible in their approach to construction, customer service, and, in particular, after-sales service.
4 Mortgage providers will reduce fixed rates
The mortgage market continues to show strong growth trends, albeit off a relatively low base, on both the value and volume of mortgage approvals and draw-downs. Standard variable rates continue to fall marginally but are still very high by European standards, and when compared to fixed rates, are not very attractive. We are now seeing competition really heating up on fixed rate offerings. With the majority of mortgage providers solely focused on promoting keener fixed rate offerings, we believe that we are going to see some really competitive fixed rate offerings over the coming year. Two of the largest mortgage providers in the market have reduced their fixed rates recently and we predict that others will follow suit. Mortgage interest rates in Ireland are still double the European average - downward movements in rates have a fundamental impact on affordability for purchasers. The average three-year fixed rate (excluding the benefit of cash-back offers) in the market is currently 3.34pc for mortgages with an LTV below 80pc. There should be scope to reduce these by an average of 30 basis points.
Tom Parlon: Director-general of the Construction Industry Federation (CIF)
1 The number of new residential completions will increase from 18,000 in 2017 to 20,000 in 2018
This compares to 12,666 units in 2015, representing an overall increase of 42pc from 2015-2017. On current trends, this will leave us short of the required 35,000 annual output required for the medium term. However, with the correct policy measures and an increase in the availability of finance, housing output could meet national demand by 2021.
According to CIF analysis of house-building activity levels throughout Q1 2017, the rolling 12-month figure shows an increase of 37.6pc in terms of overall commencements for the 12-month period to end March 2017. The total commencement figure for 2016 was 13,234. The CIF is concerned about the capacity of regional house-builders to build as it becomes financially viable to build again outside the Greater Dublin Area. While there is realisable demand increasingly outside Dublin with house price inflation making building new homes viable again, there are few avenues for housebuilders to access finance. As a result, without finance, we may see delivery of houses delayed outside Dublin. While limited supply is resulting in upward pressure on house prices and rents nationwide, it must be borne in mind that 91.5pc of the dwelling purchases filed with the Revenue Commissioners in May were for existing rather than new homes.
2 House price inflation will continue to increase in line with last year as demand continues to outstrip supply
Ironically, this may see housebuilding become viable again outside the Dublin region. Currently, in these regions, housebuilders cannot build houses below the going rate of existing stock. As a result, people are being forced into the second-hand house market. We predict that in 2018/19, as the gap between the cost of building new homes and the cost of existing stock narrows to somewhere around 15pc, small pockets of new houses will appear in regional towns.
3 We will see apartments become viable outside high-end postcodes within two years
Apartment building remains financially unviable at the moment outside D2, D4 and D6. We anticipate that apartment building may become viable outside these areas in the coming two years or so - specific measures to support such construction may be required to meet rapidly increasing demand in urban centres in particular. We predict any such apartments will be higher end and, due to the shortage of supply and location, at the premium end of the market for the foreseeable future.
4 Construction costs could escalate by 35pc
Construction costs are set to increase in the coming months for a number of reasons. The tightness in the labour supply in relation to pent-up demand will put upward pressure on wages. The introduction of a sectoral employment order in the industry is to be welcome. The Government has agreed to a Labour Court recommendation to increase wages across the industry by 10pc. This is restoration of wage cuts over the last decade but will put smaller and regional builders under pressure. In addition, the claim for an 80pc increase in wages for crane drivers made by UNITE has the potential to drive relativity-based claims across all other operatives in the industry. If this situation were to arise, construction costs could escalate by 35pc. Finally, product suppliers into the industry are now in a position to increase prices after a decade of depressed activity. This and any potential Brexit effect has the potential to see increases in costs in the near term.