Five years ago, a rent increase compelled Aimée Roche to quit her apartment in Dublin and move back home to her mother’s house in Tallaght, so she could save to buy a property of her own.
n February 2020, armed with approval in principle for a mortgage and a 10pc deposit, Roche started looking for properties in Tallaght within her budget of up to €225,000. Then Covid struck.
Not only was she juggling remote working from her mother’s kitchen with studying for a degree to land a better-paying job, she was also faced with restrictions on property viewings and a supply of homes that was quickly drying up. The property market defied forecasts of an impending collapse – and as it continued to climb, Roche was quickly outbid, and priced out of the market.
“People were bidding for homes based on them seeing the photos alone,” Roche says. “I had to take the Daft and MyHome apps off my phone for the sake of my own mental health.”
The 40-year-old has since secured a new, permanent managerial position – but she’s holding tight to that deposit for now, in the belief that house prices will soften as the global economy slows and as higher interest rates make a dent on the housing market.
She’s determined to time her entry into the property market right, so that she doesn’t end up part of a new generation in negative equity.
“Inflation and talk of interest rate rises are making me panic,” the Dubliner says. “A lot of people make the argument that if you don’t buy now, you never will.
“But I have friends who bought in 2006, ended up in negative equity, and were never able to get a mortgage again. I feel that if I mess it up, I’ll be stuck for the rest of my life.”
The past 12 months have proved a nightmare for would-be first-time buyers, with the housing market heating up at a rate not seen for more than half a decade. On Monday, the CSO reported property prices jumped by 15.2pc in the year to March, marking the biggest increase in seven years.
However, there are signs that property price growth has started to slow.
Davy chief economist Conall Mac Coille says the market likely peaked in March, when property prices were 118.2pc higher than their trough in early 2013 and just 2.1pc lower than the giddy Celtic Tiger heights of 2007.
He expects price growth to slow to 7pc this year from 14pc in 2021.
Such predictions, combined with the threat of a global recession and looming ECB rate increases, are prompting prospective buyers like Roche to postpone buying a home.
Indeed, when Ciarán Mulqueen – whose Crazy House Prices account on Instagram has more than 100,000 social media followers – posted on Tuesday about mortgage lenders increasing their rates, he received at least 500 responses from novice house-hunters saying they plan to pause their purchase.
“Higher interest rates are the main worry for these people, with the ECB hinting it will raise rates,” says the 35-year-old teacher, who bought a house off-market with his wife last year after a long search.
“For some people, their only hope of buying a house is if there’s a crash, because prices are so out of their reach.”
Is history repeating itself, with another catastrophic property crash around the corner?
Many economists say it’s unlikely, given that the credit boom and reckless lending that drove the 2008 property collapse is absent this time round. They say demand for property – which is still far higher than supply – will continue to be buoyed by strong domestic economic growth and low unemployment.
But David McWilliams, who last year called for a “buyers’ strike” because of a dearth of quality supply, has warned of an “affordability crisis”, saying “the higher the price, the more fragile the market and the more susceptible it is to collapse.”
Across the western world, the house-buying frenzy that dominated economies emerging from lockdowns is showing signs it could fizzle out. Economists see the era of ultra-low interest rates ending, while simultaneously Russia’s war in Ukraine is driving up the price of energy and China’s zero-Covid strategy is exacerbating supply-chain bottlenecks – all of which hits global economies.
Higher interest rates are already starting to bite in the US property sector, where there are predictions that the days of rapidly rising house prices are drawing to an end, while prices in some Canadian cities have started to decline. In the UK, house price growth slowed in March – and in New Zealand, where prices fell in April, two of the biggest banks have forecast prices are on track to drop by up to 20pc, which would take them back to where they were just over a year ago.
In Ireland, says Mac Coille, “the Central Bank estimated that prices would have been 25pc higher, had it not been for the mortgage lending rules” that limit borrowers to a mortgage of three-and-a-half times their annual salary.
“You can’t have double-digit increases without it being unsustainable. I think price growth will slow. If house prices do contract, that’s not because we’ll have solved the housing market issue, but because people are nervous about a global recession and interest rates.”
Mac Coille points out that the CSO’s Residential Property Price Index showed the first tentative signs that house-price inflation is starting to slow. While annual inflation was at 15.2pc in March, the month-on-month gain of 0.6pc was the slowest increase in 12 months.
Indeed, this gain represented a “marked slowdown”, compared to the increases of at least 1pc in each of the final six months of 2021.
Rachel McGovern, director of financial services at Brokers Ireland, which represents 1,225 brokers nationwide, says it would be “difficult to see” the same level of house price increases “maintained over the remainder of the year” amid warnings about three rate increases this year, and because prices have “come within touching distance of their peak in 2007”.
Kieran McQuinn, research professor with the ESRI, says: “The reality is that you can’t expect house prices to continue increasing at this level. People will not be able to afford it.
“Eventually prices will have to taper off, and the heavily indicated move by the ECB that it will raise rates in July will ultimately feed into higher interest rates for mortgages. You will see the rate of house-price inflation coming down in the next few months.”
To combat eurozone inflation – the fastest pace recorded since the currency was introduced – the ECB is expected to start raising rates as early as July.
Last Tuesday, Dutch central bank chief Klaas Knot, a hawkish member of the ECB’s governing council, raised the possibility of an aggressive 0.5pc hike by the ECB in July if inflation continues to climb.
Knot’s statement edged up market expectations for the size of a rate hike, with Bloomberg data on Tuesday showing a consensus of a 1 percentage point ECB rate increase this year, up from about 0.93 percentage points the previous day.
Earlier this month, the US Fed introduced the sharpest rise in interest rates in 22 years and the Bank of England followed, pushing rates to their highest level in 13 years as it warned about the prospect of a recession.
European mortgage lenders are already raising their own rates, as anticipation of the ECB hike pushes up costs on global money markets.
In Ireland, Avant Money has increased the rates on some of its fixed-rate home-loans – and just last week ICS Mortgages boosted its lending rates for a second time in two months, with a rise of 1pc for three- and five-year fixed-rate mortgages.
This means, for example, that a first-time buyer with a 10pc deposit who wants to avail of ICS’s five-year fixed rate and is borrowing €250,000 over 30 years will be paying €1,872 a year more than someone who borrowed before ICS’s March hike, according to Bonkers.ie.
There are also indications that the severe property shortage buyers encountered during Covid is beginning to ease. At the start of March,
Daft.ie reported there were only 10,000 homes for sale across the country, compared to a 2019 average of 17,500. By Thursday, that figure had edged up to almost 15,200.
Housing completions are also starting to recover from the restrictions that were imposed on construction in 2021 and 2020: in the first three months of 2022, new dwelling completions (at 5,669) were at the highest level for a first quarter in a decade and were up 45pc from the first quarter of 2021, according to the CSO.
The ESRI expects 26,000 housing units to be completed this year, up 27pc from 2021, when completions were slightly below the pre-pandemic level of 21,049 in 2019. The institute sees completions picking up to 30,000 units next year.
However, these figures still fall substantially short of the 35,000 units a year that the ESRI estimates is required to meet demand.
In addition, the surging costs of building materials and a shortage of thousands of construction workers is adding to the cost of building (research by McQuinn last year found that a 1pc increase in building costs lowers new supply by about 1.4pc), and international investment funds are snapping up new housing developments, leaving ordinary buyers out in the cold.
“While supply is increasing, it’s not increasing at the pace of demand – and the huge increases in costs will certainly impact on housing supply,” McQuinn says.
“During the property collapse, we had a massive credit bubble – and when people were no longer able to afford houses in the early 2000s, the banks gave them extra credit and then prices increased, until then eventually it all unravelled.
“Now there are macro-prudential rules on the level of credit that households can get, so there is no credit bubble. If prices fall this time, it’ll be down to fundamentals like income, interest rates and unemployment.”
For her part, Roche is hoping for some relief from rocketing house prices.
“What goes up, must come down – at some stage,” she says.
