The first interest-rate increases in more than a decade are due at the end of this month and the property industry is bracing for what should be a negative change in financial conditions.
Whether the European Central Bank ( ECB) hikes by a quarter-point or a half, the cost of borrowing will be higher, albeit still at historically low levels.
That means some marginal buyers inevitably will be priced out of the market and demand for houses will drop.
The Economic and Social Research Institute ( ESRI) has calculated the impact this would have on house prices into the end of the year.
All things being equal, the ESRI said, prices would fall 2pc. But all things are not equal.
The tiny change on the demand side from a few ECB rate rises in 2022 looks set to be overwhelmed by chronic undersupply issues that have plagued the Irish property market for years.
According to property market analysts, stock is set to remain low for the foreseeable future due to materials shortages, input cost inflation and capacity limits in the construction sector.
“There’s not a massive amount of new product and the stock of second-hand homes is the lowest ever,” said Marian Finnegan, managing director on Sherry FitzGerald’s economic research team.
“Builders’ input factors are impacted by the war and they don’t have the steel or timber. A pick-up won’t be possible because the materials just aren’t there.”
Goodbody chief economist Dermot O’Leary has pulled back his forecast for new homes in 2023 from 29,000 to 27,000, noting that there is actually now a decline in owner-occupied units coming on stream as builders focus on filling demand for rental apartment schemes.
Sherry Fitzgerald estimates, based on Census 2022, that Ireland would need to build nearly twice that number to meet demand, suggesting price drops are a long way off.
Nonetheless, a slew of reports analysing the property market this week have formed a consensus that price increases are beginning to level off and will grow more in line with incomes, in the range of 4pc to 7pc a year.
Higher interest rates are part of the equation, but so are a slowdown in income growth after the post-pandemic mini-boom. Once the pent-up demand is satisfied, a more normal picture of sustained demand is likely to emerge.
Yet despite the severe lack of supply, the Central Bank’s strict mortgage lending limits are likely to act as a persistent braking mechanism, effectively putting an upper limit on what people can pay for a house.
Evidence of a cool-down is showing up in bank-lending statistics already.
Last month, most of the increase in lending at the banks came from people switching to fixed rates, while the Central Bank reported yesterday that household lending declined in May, mostly driven by mortgage activity.
Maybe those rate hikes are having an impact after all.