The shortage of affordable housing across the State is to persist over the medium term and will remain “a key driver” of sustained house price growth, according to a major report by S&P Global.
However, the report, Europe's Housing Markets: Soft Landing in Sight, published on Wednesday, pointed out that should the United Kingdom exit the European Union without a trade deal, the negative effects on the Irish economy would drive prices down.
The report noted that Irish house price inflation accelerated to double-digit rates in 2017, rising to an estimated 11.6 per cent year on year in the fourth quarter, up from 8.5 per cent a year earlier.
This was down to “very solid economic growth overall” due to the recovery in employment and a “moderate acceleration” in wage growth. Secondly, house prices have been driven by a “pronounced and persistent shortage” of supply since the crisis.
“It is true that the residential construction sector is now seeing a remarkable recovery, with output in the sector, in volume terms, up 39 per cent year on year in third-quarter 2017,” it said.
“However, the improvement comes from such low levels that it would take another four years’ growth at these rates to regain pre-crisis levels.
“As a result, completions, albeit growing fast, are still far from satisfying pent-up demand. Demand for housing is also being fed by positive net immigration on the back of an improving economy.”
On mortgages, the report said lending has returned to growth in value terms, but the fact that half of all transactions are cash purchases – twice as much as in normal times – illustrates how far the housing market is away from normalisation.
In terms of the outlook, S&P said the labour market would continue to strengthen.
“This should continue to support demand for housing, but also help with further deleveraging of household debt, which stood at 142 per cent of disposable income in the second quarter of 2017,” it said.
Capacity constraints
This figure is still higher than in most EU countries, but already substantially down from its 210 per cent peak.
Although the Central Bank has now relaxed deposit rules for first-time buyers, the report said this was "unlikely to add much" to house price momentum, not least because banks are approaching prudential regulatory loan-to-income caps in their books.
On the supply side, the construction sector has “only just started to recover”. The resulting capacity constraints, along with high building and development cost in conjunction with planning impediments “should continue to restrain supply”.
The Government introduced several measures to remedy the shortage in its November budget, but the cost and planning impediments make it “unclear” how many units will actually be built.
On Brexit, the report pointed to the Republic’s “tight links” with the UK, which is its largest trading partner, and said the forecast was subject to “Brexit-related risks”.
“Should the UK government fail to secure a transition phase and crash out of the EU without a trade deal, Irish trade with the UK would likely suffer, including residential investment in Ireland originating in the UK,” it said.
“In that case, our forecast for house prices would likely be substantially lower.”
