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Buyer beware: this housing ‘boom’ has flimsy foundations

Soaring house prices, 35-year mortgages, it’s beginning to feel like 2006 all over again. Don’t believe a word of it. With the government and the banks desperate to puff up property prices in advance of the ECB bank stress tests buyers should beware.

Yesterday, the CSO published its latest house price index which showed that national average house prices rose by 8.5pc in the year to the end of April while average Dublin prices stormed ahead by 17.7pc.

The take-off in house prices comes at the same time as it emerged that many banks have quietly reintroduced 35-year mortgages.

Just for good measure, Bank of Ireland is attempting to lure first-time buyers by offering to paying up to 1pc of the value of the mortgage to cover their stamp duty costs.


So is it time to cast gloom and doom aside and party like it’s 2006? I don’t think so.

On the same day that the CSO was publishing the April house price figures, the Irish Banking Federation was releasing its first quarter Housing Market Monitor, which served as a much-needed reality check on the renewed housing market optimism.

According to the IBF, while the number of new mortgages lent by the banks was up 66pc in the first quarter of 2014 compared to the same period last year, that still translated into just 3,245 home loans.

When you realise that there are almost 2 million houses and apartments in the country it is clear that, regardless of what the banks say, mortgages are still as rare as hens’ teeth.

The latest IBF figures also show that the number of transactions in the housing market is also miniscule, just 5,400 in the first quarter, an 11pc increase on the first quarter of 2013.

While the increase in mortgage drawdowns - from an extremely low base - is definitely an encouraging sign, it’s hard to disagree with the conclusion of Davy economist Conall Mac Coille, author of the Housing Monitor commentary, that what we are dealing with is “an illiquid housing market starved of new supply”.

That’s being diplomatic. At current transaction volumes the average Irish house or apartment could expect to change hands about once every 70 years. And that is almost certainly only part of the story.

Anyone thinking of buying a house should always remember that both the banks and the government have a huge incentive to puff up the housing market in advance of the latest ECB bank stress tests, the results of which are due to be published in October.

If, God forbid, one or more of the Irish-owned banks was to fail the stress test then the government would have to pump even more capital - on top of the €64bn that has already come from the Irish taxpayer - into the banks.

With last weekend’s European and local election results having made the run-up to next October’s budget even trickier than had been anticipated, the last thing the government needs is to have one or more of the banks coming cap in hand to the exchequer.


An apparently recovering property market is good news - at least in the short term - for both the banks and government. With house prices on the rise, the banks can argue that they don’t have to write down their mortgage books by as much as would otherwise have been the case.

This makes it less likely that they will fail the stress tests, which, in turn, reduces the possibility that the government might be forced to put its 
hand in the national wallet once again.

Unfortunately what is good news for government and banks is less so for homebuyers.

The tiny numbers of properties coming on to the market, which is largely the result of the banks’ unwillingness to move against delinquent borrowers, is inflating a new house price bubble.

We have been here before and all know how such bubbles end.

When reality eventually intrudes on the property market, the volumes of property changing hands will return to more normal levels.

This is something that will almost certainly happen when the banks finally get tough with the more than 80,000 mortgage borrowers who are over 12 months behind on their repayments.

Any shortage of house supply would very quickly vanish - along with the upward pressure on prices - if a substantial proportion of the properties where the mortgages are in long-term arrears came on the market.

My advice to potential homeowners is to think long and hard before taking the plunge.

The property price “recovery” rests on very flimsy foundations and buyers could end up losing big time.