Property industry plays down impact of higher interest rates: Is it right?

The property industry here was decidedly downbeat in its outlook when Covid-19 first hit in 2020, predicting a significant contraction in prices.

In the end, we got a mini house price boom on the back of remote working and other trends like increased savings.

Now in the face of higher interest rates and concerns that rates might be kept higher for longer to rein in inflation, the sector remains remarkably positive in its outlook, predicting a slowdown in price growth, yes, but no contraction.

MyHome.ie, which is owned by The Irish Times, said asking prices for properties rose in the three months to the end of June following three quarter-on-quarter declines in a row, an indication that the market was “stabilising”.

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“The Government’s demand-side initiatives and looser Central Bank lending rules appear to be negating the effects of rising interest rates, but we also need to see available properties on MyHome.ie approach the pre-pandemic figure of 20,000 to make a meaningful difference,” said Joanne Geary, managing director of MyHome.ie.

She put her finger on the crux of the issue, namely whether higher interest rates and the affordability constraints that imposes on buyers will be outweighed by other factors such as ongoing undersupply, the various Government help-to-buy schemes or looser Central Bank rules.

Several commentators think the industry is underestimating the impact of interest rates. Borrowing €300,000 over 30 years on a mortgage rate of 2 per cent – the rate available at the beginning of last year – would have had a monthly repayment of €1,109 a month.

If rates go to say 5 per cent (they’re already at 4 per cent) to keep the same monthly repayment of about €1,109, either the amount borrowed or property prices would need to fall by about 30 per cent. That limit on affordability could overwhelm the current undersupply dynamic.

It is worth noting that British house prices fell last month in annual terms at the fastest rate in 12 years on the back of surging interest rates, according to mortgage lender Halifax.