Prices hit first-time buyers' bid for homes, says AIB

A "hot house" property market is pushing the price of houses beyond the reach of first-time buyers, according to a new report by AIB.

Higher interest rates and house price inflation mean property is becoming less affordable for buyers, analysis by AIB's economic research unit suggests.

The property market remains surprisingly buoyant and AIB has been forced to raise its forecasts for house price growth for the second year in a row. It now predicts that house prices will grow by 12 per cent in 2006, slowing slightly to 7 per cent in 2007.

However, the bank added that its forecast for next year was "more in hope than confidence".

AIB chief economist John Beggs said the bank was concerned about price developments and would prefer a gradual cooling off to prevent a sharp downturn in demand from first-time buyers and investors later.

"We don't see a crash coming. The conditions for a crash are not there, but certainly the way in which prices are rising could kill off demand," Mr Beggs said.

The so-called "soft landing" for the market, in which house price growth would calm to about 2-3 per cent per annum, won't happen until at least 2008, he said.

"The market is going to remain red hot for the moment."

Total housing completions are predicted to reach 85,000 in 2006, surpassing last year's record of 81,000. But prices in the market suggest there is a significant shortfall in the supply of properties, particularly in Dublin, where the construction industry has blamed planning restrictions for the limited supply.

Despite the introduction of 100 per cent mortgages and mortgage terms of up to 40 years, it is becoming more difficult for first-time buyers to afford to buy, especially in the capital.

Mr Beggs said the strong market did not suggest that a significant number were already priced out of the market but, as interest rates rise further, people who have just bought property or who are struggling to enter the market would be affected.

The ratio of house prices to incomes now stands at 11 to one, compared to just over seven to one in 1998, and wages are expected to rise at less than half the average increase in house prices throughout 2006 and 2007.

"Prices cannot continue to rise at two to three times the average rise in wage incomes without eventually killing off a large number of potential first-time buyers, irrespective of the support they may receive from parents and other sources."

AIB said interest rates would increase by one percentage point over the next 12 months, taking the European Central Bank's base rate to 3.5 per cent.

Mr Beggs also warned that spiralling house prices could have a knock-on effect on immigration, if investors were forced to bump up rents to cover their costs.

"At some point, Ireland will become too expensive for migrant workers and they will just go somewhere else," he said.

Investors are increasingly depending on the capital appreciation of their properties, making them particularly vulnerable to any deterioration in market sentiment, according to the bank.