B of I says house prices to rise 10% this year

Jobs growth and rising incomes are forcing up house prices and rents, a leading economist said yesterday.

In his quarterly property review, Bank of Ireland's chief economist, Dr Dan McLaughlin, predicted yesterday that house prices would rise by 10 per cent this year, twice the rate he forecast at the beginning of 2005.

He had originally expected house price inflation to slow as record numbers of new properties came on the market.

However, an increase in employment, incomes and the population meant that demand for housing continued to outstrip supply during the year.

Dr McLaughlin pointed out that 93,000 new jobs were created this year, the highest rate of growth in employment for five years. The buoyant jobs market added 10 per cent to household incomes. At the same time, it drove immigration to 70,000, compared with 50,000 in 2004.

"The implication of this combination of surging employment and soaring immigration is that the demand for housing is running above the consensus estimates and that 75,000 new houses may not be meeting demand," he said.

Dr McLaughlin added that Central Statistics Office (CSO) figures showing that rents have increased by 2 per cent over the last year support this view.

Private sector rents dipped in 2003 and 2004 as a large number of apartments became available. However, the increase indicates that demand is growing again.

Joe Larkin, managing director of Bank of Ireland Mortgages, predicted that the banks will have loaned out a total of €20 billion to 100,000 house buyers by the end of the year. That will bring the total value of all mortgages in the State to €94 billion.

But the cost of these loans is set to increase. Dr McLaughlin said that, as signs of a pick-up in the EU's leading economies continued, the European Central Bank (ECB) would be likely to increase interest rates. He said that rates could go up one percentage point over the next year. Dr McLaughlin believes that prices will increase by 5 per cent in 2006.

Dr McLaughlin said he believed that, over the long term, Irish people could afford to pay their mortgages. Just €6.50 out of very €100 earned by Irish households goes on servicing debt, compared to €8 in the UK and €13 in the US.