Wednesday 13 December 2017

Pick-up on the way for some areas of market

With employment expected to move on to a stronger trajectory, easing fears about job security should translate into a more confident consumer

Austin Hughes

There are nearly as many estimates of 'fair value' as there are economists, but several studies lately suggest that Irish residential property prices have fallen to, or below, what might be regarded as reasonable values given emerging trends in employment, incomes and the returns available on other investments. Estimates produced by institutions ranging from the OECD to 'The Economist' magazine indicate that, relative to incomes and rents, large declines in the past few years mean Irish house prices are now slightly below their long-term average.

Unfortunately, these studies don't say whether prices will move towards or further away from those averages.

The current 'temperature' of the housing market varies markedly depending on where you measure it. A multi-speed market may be the 'new normal' for some time but there are grounds for suggesting that conditions overall have started to move in a more positive direction.

A modest improvement in the jobs market through the past year has coincided with tentative stability in official house price data. With employment expected to gradually move on to a stronger trajectory, easing fears about job security should translate into a more confident consumer, supporting property market activity and prices.

The prospects of a turn in the housing market have also been enhanced by notably faster growth in 'new' demand than in 'new' supply of late. In the first quarter of this year, new households increased at just over twice the pace of house-building.

The pace of household formation in Ireland has picked up of late likely reflecting improvements in employment and affordability. Growth in the number of households at around 1pc is somewhat faster than in the US and stronger than elsewhere in Europe.

Of course, there is still a substantial unsold inventory in Ireland but much of this excess stock doesn't mirror what or where today's purchasers want to buy.

For example, new household formation is particularly strong in Dublin where incremental demand may be outstripping new supply by a factor of seven or eight to one.

This sort of imbalance could persist for some time and is likely to lead to sharp differences in property market performance by segment and geography.

It is often argued that credit constraints will prevent a recovery in the market.

New mortgage lending is unlikely to return to the levels seen in the middle of the last decade. So, mortgage credit outstanding will shrink for some time as maturing loans exceed new draw-downs but that is not the key metric. What matters is whether new lending picks up or shrinks.

A modest improvement is under way and new lending should increase further. This should underpin a somewhat higher level of transactions and/or prices although it will be some time before activity levels approach international norms.

Ultimately, the demand for property as shelter or investment depends on the fortunes of the broader Irish economy. Some rough calculations suggest that since 1973 the pace of growth in the money value of residential property activity has been virtually identical to nominal growth across the Irish economy as a whole. Of course, when economic conditions are strong, the property market tends to be even stronger and when conditions are weak, the property market is usually much weaker than the rest of the economy.

This long-term relationship also suggests that an uneven transition may be expected in Ireland's property market through the next three to five years, entailing a gradual improvement in both transaction levels and prices.

Austin Hughes is chief economist at KBC Bank Ireland

Irish Independent

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