Housing market could be facing a hit in 2019
Fewer first-time buyers getting on ladder and looming end of help-to-buy scheme may mean trouble
With mortgage approvals for first-time buyers down in December and new housing output in Dublin falling, the outlook for the housing market in 2019 is uncertain.
The Irish banks approved 2,908 new mortgages in December 2018 with a total value of €656m. There was an almost 6pc increase in the number of new mortgages approved compared to the figure for December 2017 while the value of new mortgages approved was up by 9.6pc.
On the face of it the December mortgage approval statistics would seem to indicate a housing market that was humming along nicely.
But a closer look at the key first-time buyers category reveals the number of new mortgages approved was down by 2.4pc to 1,363 in December 2018 compared to December 2017 while the number of buy-to-let mortgages approved fell by 16pc to just 100 over the same period.
Was December, traditionally a very quiet month in the housing market, merely a once-off or the harbinger of a downturn?
Those who argue that it was just a temporary hiccup point to the impact of the Central Bank's mortgage lending rules, which restrict most new mortgage lending to 3.5 times the borrower's gross income along with a 10pc deposit for first-time buyers and a 20pc deposit for all other buyers.
With the Central Bank refusing to budge on these rules there were reports in late 2018 of the banks urging borrowers not to draw down new mortgages until the New Year.
While the Central Bank rules probably didn't help matters, other evidence also indicates that the drop in new mortgage approvals might be the start of something more serious.
Average Dublin house prices rose by almost 97pc from their May 2012 trough to October 2018 while house prices in the rest of the country rose by 78pc from between May 2013 and October of last year.
However, house prices in both Dublin and the rest of the country fell in November with a 0.7pc drop being recorded in Dublin and a 0.1pc fall in the rest of the country compared to October prices. Even if one looks at 12-month figures, which aren't as prone to distortion by one-off factors, a similar picture emerges.
Average Dublin house prices were rising at an annual rate of 10.5pc in November 2017. This annual rate of increase had more than halved to just 5pc by November 2018.
It was a similar story in the rest of the country with the rate of increase slowing from 11.6pc to 8.8pc over the same period.
One of the main factors driving the post-2012 surge in house prices and residential rents was an absence of new housebuilding activity with very few new houses or apartments being built in the years following the 2008 financial crash. From a peak of 93,000 in 2006 new housebuilding had fallen to just over 4,500 by 2013.
Activity has begun to recover in recent years with 14,400 houses and apartments completed in 2017 with Goodbody Stockbrokers chief economist Dermot O'Leary estimating that almost 18,500 were built in 2018 and forecasting 21,700 for 2019.
Unfortunately, even last year's greatly increased level of housebuilding activity was insufficient to meet underlying demand, which O'Leary reckons to be about 35,000 units a year.
And there are at least some signs that much of this increased level of housebuilding activity is concentrated on the upper end of the market rather than in the €275,000-€375,000 sweet spot that most first-time buyers can hope to afford.
As possible proof of this O'Leary calculates that 31pc of all new homes sold in the first 10 months of 2018 were for more than €350,000, up from 23pc in the first 10 months of 2017. In Dublin the preponderance of expensive new houses was even more pronounced with the proportion of new homes selling for more €350,000 rising from 38pc to 51pc over the same period.
O'Leary then applies the Central Bank mortgage lending rules to the Revenue Commissioners' income distribution data and calculates that 67pc of couples can afford a home costing up to €287,000, 42pc can afford to pay up to €369,000, 27pc up to €450,000 and only 17pc more than €450,000.
"An increasing number of higher-value houses have come on stream in recent years. When you look at the income distribution you can see that this is only a limited cohort", he says.
There are now signs that, in Dublin at least, even this modest increase in supply may be topping out with the latest report of the Government's Housing Supply Task force showing that the number of new houses and apartments under construction in Dublin during the third quarter of 2018 fell by 20pc to just over 5,900.
Just another one-off or the start of something more serious?
O'Leary believes that the top end of the Dublin housing market "got ahead of itself" and that "we will definitely see prices at the top end of the market falling this year".
But what of the rest of the market? What can first-time buyers expect in 2019? One of the factors driving the new housing market is the help-to-buy scheme under which first-time buyers can claim a tax rebate of up to €20,000 against the price of a new home.
As things stand the help-to-buy scheme expires at the end of the year, something that is already generating uncertainty for developers, lenders and buyers.
The Construction Industry Federation (CIF) is calling for the extension of the help-to-buy scheme. "If we don't get certainty [on help-to-buy] buyers and banks will say that this is not a runner. Fifty per cent of new housebuilding activity has been enabled by help-to-buy", says a CIF spokesperson. While it is widely expected that the Government will eventually extend the help-to-buy scheme, this can't happen soon enough for the CIF.
Not alone is new housebuilding running at about half the level of underlying demand, most housebuilding is largely concentrated in the Greater Dublin area.
Last year the Government established Home Building Finance Ireland. It will lend a total of up to €750m to housebuilders and hopes to fund the delivery of up to 7,5000 new homes over the next five years.
"If that doesn't work, the housing market will stagnate", warns the CIF spokesperson.
Even if it does, more may need to be done - housebuilders may need assistance with site acquisition costs and utilities such as Irish Water and ESB will also have to raise their game, he says.
Despite these problems, the CIF remains optimistic about the overall health of the housing market, predicting "a strong year" in 2019 with 22,000 new homes being built.
Sunday Indo Business