Economists predicted a Covid property collapse. It hasn’t happened

Unemployment is toxic for the property market. When people lose their jobs, they can’t buy houses or pay mortgages. That means fewer transactions, growing mortgage arrears and falling prices. That was the basic assumption behind a series of economic forecasts back in April and May, which suggested that we were going to see a plunge in property values in 2020. Unemployment had shot to record levels – over 28 per cent in April – and the outlook for the sector was marked down accordingly.

Davy Stockbrokers led the charge, predicting the coronavirus crisis would trigger a 20 per cent fall in house prices last year.

KBC Bank Ireland forecast a 12 per cent decline, deepening to 20 per cent in the event of a second wave of infections and/or a more protracted exit from lockdown, both of which we've had or are having.

The Economic and Social Research Institute (ESRI) talked of a 12 per cent fall in prices. Disposable income drives demand and as long as that is subdued it would affect demand for properties, it said.

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These predictions have been spectacularly wrong.

The latest Residential Property Price Index from the Central Statistics Office (CSO) points to an annual decline in prices of just 0.4 per cent while estate agent DNG predicts prices may actually end the year 2 per cent up.

Sherry FitzGerald, the country’s largest estate agent, said the average value of second-hand homes rose by 1.2 per cent last year, exceeding the growth of 0.2 per cent in 2019. In Dublin, prices rose by 0.4 per cent in the final three months of the year, the strongest quarterly growth in two and a half years.

While the CSO bases its price index on sale completions DNG’s measure is based on a basket of properties being valued each quarter but claims to be more up to date.

Apart from the hiatus in construction, viewings and house inspections during the first lockdown, the market has proved remarkably resilient and, if anything, is continuing along a pre-Covid path.

The value of mortgages approved in November was €1.28 billion, according to Banking and Payments Federation Ireland (BPFI). This was the highest level recorded by the BPFI since it began the series in 2011.

The feverish demand for property has been one of the stand-outs in a Covid-depleted economy.

A derelict house on a third of an acre in Rosslare, Co Wexford with a guide price of €175,000, sold at auction recently for €531,000 after 28 bidders, making 211 bids, fought a price war to secure the property. This is reminiscent of the pre-2008 period and yet we're in the middle of a global pandemic.

Buying power

So why has the unemployment/souring property values assumption not played out? The answer is simple. Those who bore the brunt of the Covid hit, those who lost their jobs and livelihoods in such large numbers, were in relatively low-paying service jobs and were not part of the home-buying market in the first place. The removal of their buying power hasn’t changed the underlying market dynamic.

Buying property is an increasingly exclusive game and those on lower and middle incomes are increasingly estranged from it. Of all the trends that Covid-19 has accelerated or exposed, the State’s growing property divide is an obvious one.

In a recent report, rating agency Moody’s predicted the pandemic would merely speed up “fundamental shifts” in European housing markets.

"Even before the pandemic, housing affordability was worsening in Europe, with home purchase deposit requirements becoming increasingly challenging for low-income buyers, given prevailing house-price-to-income ratios," it said.

The average income of first-time buyers taking out a mortgage in Dublin is now just under €90,000, double the national average.

DNG chief executive Keith Lowe says his company has in recent months sold more than 50 homes in the €1 million-plus category and that the strongest performing price range in Dublin was houses in the €1 million to €2 million category.

“Covid-19 was a time for contemplation when it came to property. Many families in apartments decided to move to homes with more space and/or gardens,” he says.

DNG is predicting house prices will rise 3-5 per cent this year with transactions reverting to 2019 levels of 55,000-60,000. He also believes the Government’s new shared equity loan scheme will be a factor in enabling more people to buy their first homes. “This will in turn free up much needed rental accommodation and increase new housing output,” he says.

“With negative interest rates in play those with large amounts of money on deposit will transfer their wealth to residential property,” Lowe says.

Savings splurge

The pandemic has triggered a savings surge, with households – presumably those unaffected by job losses – putting an additional €12.6 billion into bank and credit union accounts. Part of this is likely to flow back out in property-related transactions.

If the demand side is firmer than expected, the supply side is weaker with housing completions expected to be 19,000-20,000 this year, below the pre-Covid forecast and well below long-term demand, recently estimated by the ESRI at 28,000 homes a year.

At the heart of Ireland’s property conundrum is an interaction between three variables: supply, affordability and viability. Supply is ticking up albeit producing houses that people on middle incomes can’t afford. The industry claims it is not viable to build at affordable rates and wants the Government to bridge the gap with initiatives such as its new shared equity loan scheme.

Critics, however, claim high land values – the product of divisive speculation – are what’s driving prices and that the affordability gap will remain until the Government steps in and builds en masse on State-owned land. They also claim that repeated Government initiatives to help people on the property ladder merely support prevailing market conditions.

Why we can’t or haven’t built high-density housing in cities like the rest of Europe remains an unanswered question.

Most local authorities procure about two-thirds of their social housing needs from the private sector as turnkey acquisitions, underscoring the State’s reliance on the private sector even for social housing.

"The need for both public and private housing remains," David Duffy, director of Property Industry Ireland, says. "Improved collaboration between sectors and evidence-based analysis should help our understanding of the market and the delivery of new homes."

With so many unable to buy on the open market, international investors have zeroed in on the comparatively strong returns from Ireland’s private rental sector.

The current trend is for developers here to sell their schemes as a job lot to investors such as Canadian-owned Ires Reit or US investment group Kennedy Wilson for the rental market.

While the arrival of these funds has generated negative headlines, industry insists they have delivered a supply pipeline of apartments that wouldn’t otherwise have been built.

The increased supply of apartments should, in theory, have a moderating influence on rents in 2021. Covid-19 has also killed off the short-term listings market, resulting in landlords withdrawing their rentals from sites such as Airbnb and placing them back on the traditional long-lease market via the various letting sites.

Most industry pundits believe rents will stay relatively level or continue to temporarily soften until the Covid-19 crisis is over.

For Dublin architect and property expert Mel Reynolds, 2020 illustrates the futility of attempting short-term predictions in a volatile market.

“Policymakers should be looking beyond the short term at the effects of lower construction activity, ultra low interest rates and huge fiscal stimulus washing through markets from the end of this year, and how this affects the property sector and rental and home ownership patterns,” Reynolds says.

“Once the pandemic is over it is likely that the structural imbalance between large financial institutional investors and home owners and renters will come back to the fore, with predictable results,” he says.

So it seems Ireland’s property market is more Covid-resistant than most would have guessed.