A shortage of homes has led to a spike in property prices, but should house hunters buy, sell, or sit it out in 2021?
If you’re looking either to get into the residential property market for the first time or to trade up to something larger, you may have spent the past year watching your savings accumulate and looking forward to the inevitable drop in house prices as a result of the pandemic, planning to swoop in and nab yourself a bargain.
Except that it doesn’t seem to have worked out like that. Irish residential property prices have proved remarkably resilient and, according to figures supplied by Marian Finnegan, Head of Residential & Advisory at Sherry FitzGerald, increased by an average of 1.2pc during 2020, with prices in Dublin up by 0.5pc.
On the surface, it makes no sense that property prices should remain strong at a time when Government coffers are haemorrhaging funds to support the health service and individuals and businesses affected by Covid, and large swathes of the economy are effectively on hold. But that’s exactly what’s happening.
It’s largely down to supply and demand — there’s a shortage of homes for sale, and a backlog of potential buyers. To illustrate the scale of the problem, only 6,000 new units were built in Dublin last year, when there is a need for 10,000-12,000. Restrictions on construction activity mean that the shortfall will not be met this year.
“Last year there was a huge amount of buying activity as we came out of the first lockdown, and this year it will be even greater,” says John Ring, Head of Research at Savills. “The dynamics of the market are such that there is pent-up demand. Office workers in secure jobs who have been remote working have built up more savings than they might have expected and there is now a pool of buyers who meet mortgage requirements. They are largely unaffected by the pandemic and now have extra funds with which to bid on properties,” he explains.
“There hasn’t been much for people to do during the pandemic so they have had more time to look at properties and discuss them; they want to move on with their lives. Now, with the vaccine rollout and a sense that normality will return, and mortgage rates low, we expect an even stronger rebound when restrictions are lifted and viewings can start again.”
Although some property transactions are happening at the moment, the bulk of these are either for new homes that are easier to view virtually or may not even be built yet, or for properties that were already on the market prior to the current lockdown. The market for second-hand homes is stalled.
“When viewings open up we expect some inflation, at least in the short term,” says Ring. “We expect this to apply across all property types as there is a shortage across the whole residential market.”
Over the past year, there has been a lot of talk about a reduction in demand for urban properties, and a drift to the outer suburbs and beyond, with some commentators suggesting that this change will be long-term.
Ring doesn’t agree. “Once things open up again, the city will come back,” he says. “The long-term trend is towards city living and greater urbanisation, and the market may rebound stronger. People are starved of social interaction. Property is a 30-year asset so you have to look at longer-term trends. If you are thinking of making that big decision and moving to the countryside, you have to have a strong belief that remote working is sustainable for you, and that your employer will be happy with that. Many people have not even had those discussions yet.
“It’s important to distinguish between short-term pandemic considerations and those that are more long-term,” he continues. “Recently, rentals in the city centre have not performed so well [many of those employed by international companies have taken the opportunity to return to their home countries or counties and work remotely], but that could look a lot different very quickly. You must look past the next 12 months to three or five years, and beyond.”
“Prices were relatively flat in the couple of years pre-Covid,” says Finnegan, “due to the lending rules contained in the Central Bank’s Mortgage Measures. The rules create stability and if we did not have them, prices would have gone down. Property is now a stable investment because of them.”
But not everyone agrees with this assessment. Economist David McWilliams shared a very different take during a recent episode of his podcast. The market is at “peak dysfunction”, he says, and house hunters should sit it out and continue renting until it stabilises. He also added a rule of thumb: “When rent prices are falling and [house] prices are increasing, do not buy.”
When the pandemic struck, some expected a recession and a property crash to follow. But neither has materialised. “Initially, there was a lot of noise around a global crisis but we saw no evidence of that,” says Finnegan. “Stock was tight and when lockdown ended there was a frenzy of activity, an absolute avalanche of demand. We saw the strongest inflation in Dublin in Q4 that we’d seen in several years. There is a natural demand for 35/40,000 houses per year and in early January there were only 15,500 available, the lowest figure since 2009. I’m not projecting huge inflation this year, but certainly higher than what we have seen over the last four to five years.”
Finnegan points to the fact that many of the newly unemployed who worked in hospitality, the arts, events and retail were not earning enough pre-pandemic to be in the market for property, while increased savings by first-time buyers coupled with an urgency to buy new homes to avail of the €30,000 Help-to-Buy incentive has only added to demand. (The Living City Initiative, available to buyers of certain second-hand properties and due to expire at the end of 2022, offers tax breaks to those refurbishing properties in Special Regeneration Areas of Dublin, Cork, Galway, Kilkenny, Limerick and Waterford. There has been poor take-up of this, with only 119 valid applications in Dublin since the scheme was launched in 2015.)
With an abundance of first-time buyers fuelling demand, have investors gone away? “There has been a heavy tax burden on investors since the recession,” says Finnegan. “Many who bought in 2006 are finding their investment is not washing its face and are getting out now. So there are three times as many investors selling as there are buying, but we are seeing more people buying through their pensions, which makes much more sense. Investor activity is generally quite poor, though. Will they come back? Perhaps, now that there is proven stability and the market is not the rollercoaster it was.”
Given investor apathy, Finnegan reckons that apartments are currently undervalued. “Around the world apartments are a successful place to live. Two-beds are always seen as more attractive but a good one-bed in a nice location near shops and public transport and close to family is cheaper to heat and a great option for those trading down.”
In terms of where in Dublin the best value is to be found, Finnegan opts for the suburbs to the north and west of the city, where buyers will get more space for their money — handy if people are working from home. Outside the capital, she tips the ‘bungalow bliss’ market in Galway, Cork and Limerick.
“They are not very expensive houses,” says Finnegan, “but it’s critical to have good broadband.”
Finnegan says low interest rates mean that cash is still strong, with cash buyers involved in approximately 30pc of transactions at the ‘super prime’ level and at the starter end of the market.
James Butler, Head of Country at Savills, specialises in the prime/aspirational end of country property — everything from cute cottages to shooting estates on hundreds of acres.
“Last year, despite the challenges of Covid, was a good year for the country residential market,” he says. “We had almost double the number of buyers registered compared to 2019 and the number of viewings also increased in spite of lockdown.”
Potential buyers include those “with an international address but an Irish accent” (they accounted for 36pc of Butler’s buyers last year), and others wanting to move from the city to the country. If ditching the daily commute is possible, you could swap an ordinary Dublin three-bed semi-d for a “very fine” house with a lot more space in the countryside.
“There is a definite appetite for country living,” says Butler, “and we have seen a change in search requirements. Pre-Covid, people wanted property within an hour of Dublin or Cork and the airports, now it’s two hours — the horizon is broader.
“Buyers want a house fit for contemporary living with natural light, good energy efficiency and open-plan living spaces, with good-speed broadband. They want space internally for working from home, and outside space for walking either in their own grounds or the local area. Potential buyers based abroad often either view virtually or ask a trusted friend or family member to view on their behalf. When a property is unique, and the buyer has a connection to the location, they know that a similar opportunity is unlikely to present itself again soon and so they don’t want to let it slip through their fingers and are prepared to pay a premium not to miss out.”
Lack of supply is noticeable in the country market too.
“From talking to other agents, I know that there is a lower supply now than in recent years and a need for more stock,” says Butler. “Properties that had been on the books for a long time have found buyers at higher prices than originally envisaged. The market is currently on pause, but it looks as if supply will continue to be tight when restrictions lift.
“The usual reasons for selling are the four Ds — downsizing, death, debt and divorce — and for the moment, sellers are sitting tight. Those who can afford to wait are doing so, and that leads to a lack of stock, but demand continues to increase.”
More than 80pc of Butler’s buyers are paying with cash, with 88pc of properties sold last year subject to competitive bidding, and securing an average 16pc above asking price.
“The situation is often the driving factor,” says Butler. “Buyers want privacy, security and protected boundaries. They are prepared to wait for the right opportunity, and to pay a premium of anywhere between 25-50pc for anything on the water. Unless it’s a protected structure, they can change the house itself in due course.”
When it comes to location, Butler says that the whole of Ireland is more sought-after than it was 18 months ago, with the southeast — Wexford, Wicklow, Carlow and Kilkenny — in particular demand.
“If I was investing myself,” he says, “I’d look for a very special situation without blemishes, with privacy and views, close to water and not below a flight path. If the property is not too protected, there is scope in time to develop, extend, create and make a home for modern living. And being from a farm, I’d like a field so I could look out at my cattle.”