Low housing stock will fuel accelerating price inflation, say analysts

Marian Finnegan,

Chief economist, Sherry FitzGerald

New dwelling sales encouragingly increased during the second quarter, totalling about 2,400 in the first six months. This represents an uplift of 9 per cent on the same period in 2015. Developers are focusing on more expensive property types for which demand is more secure. That said, budgetary and recent measures should begin to address this issue.

On an annual basis, average rents nationwide increased 9.9 per cent, with the growth in apartment rents continuing to outpace house rents. Notably, annual rental inflation for apartments outside Dublin was at a record high at the end of June 2016, at 12.7 per cent. The second quarter saw average rents in Dublin exceed the peak levels recorded in the final quarter of 2007 by 3.9 per cent.

On the supply side, in July residential units advertised for sale nationwide were down 14 per cent when compared to July 2015. In Dublin, available stock was down 18 per cent annually. This represents 1 per cent of the total private stock. All four local authorities saw supply levels decrease on an annual basis, with the highest reduction – 28 per cent – in south Co Dublin. Commuting counties around Dublin also recorded a decrease in supply during the 12 months, albeit a more moderate decline compared to Dublin.

Budget 2017 with its help-to-buy scheme and last week’s amendment to the lending policy for first-time buyers are to be welcomed. The previous restrictive lending policy towards first-time buyers had stifled the supply of new residential units and led to the exclusion of important cohorts from the market. The new policy is more in line with international practice and it should help underpin an increase in construction activity.

The preliminary census figures have revealed a greater increase in the State’s population than had been forecast. This, combined with the historically low construction levels of recent years, means the gap between the demand for housing and the supply has widened considerably. Our current forecasts suggest we need to deliver 35,000 units per annum over the next 10 years. It is essential that any barrier to delivering these be removed.

Keith Lowe

Chief executive, DNG

Only 1,189 new home units were built and sold in Dublin in 2015 in new housing estates of three or more units. For the first six months of 2016 there were only 709. The new 5 per cent first-time buyer’s grant, which will be a strong selling point for houses priced at under €500,000, will assist in giving confidence to builders and ultimately will lead to more supply.

The percentage of new homes being bought for rental purposes is negligible due to high taxes and little funding being available for buy-to-let investors.

Despite rent certainty measures being introduced by the Government, rental levels have surpassed their previous height in the second quarter of 2006 and continue to move upwards as the number of houses and apartments rented out continues to go down due to many landlords leaving the sector.

This exodus is as a result of high taxes and the fact that many buy-to-let mortgages, which were originally interest-only, have reverted to capital and interest payments that are proving harder for landlords to service.

Many of these rental units when sold are tending to return to their original use as family homes. Few new landlords are entering the sector due to limited buy-to-let funding being available and the high tax regime in place. Landlords, who still cannot write off 100 per cent of their interest payments against rental income, are forced to pay USC on rental income and property tax, which makes renting properties in Ireland unattractive despite the record high rents.

Period houses in first-class south Dublin suburbs have sold well. Property sales in suburbs on the northside have been particularly strong and with the new Luas line under construction we predict that property price rises on the northside will exceed those on the southside in 2017.

Next year we would expect property prices to rise by 7.5 per cent to 10 per cent in Dublin – and by 10 per cent for properties priced below €220,000. Outside Dublin prices will rise 10 per cent and rents will increase at the same rate.

David Byrne

Director, Lisney

The mid-market, typically occupied by those wishing to trade up, was notably more active this year, as more buyers moved further away from legacy issues such as negative equity and had increased confidence in the economy. This market, however, was probably the most fraught with difficulty as buyers were very reluctant to sell their existing home before securing a new home to move to, partly because of the severe shortage and high cost of rental accommodation available as a short-term option. This effectively placed those who had sold and were “ready to go” at a distinct advantage when competing in this segment of the market.

For the right product the upper end of the market remained robust in 2016 with some particularly strong results achieved throughout the year. There was a notable increase in interest at this end of the market from Irish buyers who felt the time was right to make the move to a trophy home. This underpins an increased confidence in the Irish economy. However, there is no doubt this market is more affected by global uncertainty around issues such as Brexit and elections in the US.

David Cantwell

Director, Hooke & MacDonald

The new homes market has continued to recover and stabilise this year, evidenced by builders starting or accelerating work on sites. Hooke & MacDonald has had the busiest year in a decade with a significant level of house sales in all parts of Dublin.

The question of construction costs, or to be more accurate, non-construction costs such as levies and tax take, still needs to be addressed if major apartment schemes are to become viable for the sale and rental market. The demand for apartments from buyers and renters is very strong, which is not surprising when account is taken of the fact that the Government's housing agency forecast that one-, two- and three-person households will make up 75 per cent of new households in Dublin in the period 2014-2019; 57 per cent will be one- or two-person households. The recent pre-sale off the plans of 40 homes in the Marianella, Rathgar, scheme by Cairn Homes is testament to this as well as the sale of the entire Neptune building in Dún Laoghaire of 197 apartments by Cosgraves for €72.5 million.

The quality of new homes on offer is at a very high standard and represents a considerable advantage over second-hand properties, especially when energy efficiency, repair and maintenance costs are taken into account. There is a strong case for this being more reflected in mortgage application assessments by financial institutions than is the case.

The recent emergence of a build-to-rent sector could contribute strongly to an easing of pressure in the rental market if the imminent announcement by Minister for Housing Simon Coveney of rental market solutions contains sufficient incentives, and if housing delivery cost issues are addressed.

We would expect a further acceleration in new homes activity in 2017 particularly in the €300,000 to €500,000 price range.

John McCartney

Director of research, Savills Ireland

If 2016 proves anything it is that the fundamentals of supply and demand always prevail. Dublin, in particular, has been experiencing rapid population growth, which has created an enormous demand for housing. However, due to tight development credit, clunky planning, rising building costs and other factors, supply has struggled to keep up. This has led to inflationary pressure.

Over the past 18 months many people argued that this pressure would not translate into house-price inflation because restrictive mortgage lending and sluggish income growth impose hard affordability limits on buyers.

However, the data exposes this as a failed analysis. Following a sharp slowdown in 2015, house price inflation in Dublin has more than doubled over the last year. This is partly because tight lending forced potential first-time buyers into the rental market, inflating rents which, in turn, attracted cash investors. Unencumbered by any mortgage restrictions, these investors have piled in and driven price growth.

But the inflationary pressures are now also beginning to assert themselves through other channels. With unemployment below 8 per cent, wage inflation is clearly back on the agenda. This will further drive house prices because, for every extra €1 of household income, mortgage rules potentially allow additional borrowing of €3.50 for home purchase.

Government policy, formulated in a context of fierce political pressure, which itself stems from supply and demand imbalances in the housing market, will also fuel inflation. Examples include the help-to-buy scheme and the relaxation of mortgage restrictions.

Despite the promising supply-side initiatives in Rebuilding Ireland, it will be some time before we can deliver enough new housing units to feed demand. Therefore, house price inflation will be stronger in 2017 than in 2016.

Rena O’Kelly

Head of residential, Knight Frank

Against the backdrop of national and global uncertainty, the Dublin residential market has shown great resilience. Prime and super-prime properties, which are mostly financed by cash, have continued to transact strongly with transactions of more than €1 million up 24 per cent in the year to the third quarter of 2016 compared to the same period in 2015.

The outcome of the Brexit vote shone a spotlight on the Dublin market for investors, particularly from Asia, attracted by low purchase costs and a market in recovery. This inconsistency in the market where not all sectors are performing at the same rate has created a fragmented market which is also price sensitive.

The outlook for 2017 is slightly improved by the easing of restrictions on first-time buyers which will bolster the first-time buyers’ market section and go some way to easing the pressure on the rental sector. Despite uncertain times in the wake of Brexit and the election of Donald Trump in the United States, a single-digit increase in the Dublin market is expected in the region of 5 per cent for 2017.

Low levels of supply, with just 2 per cent of housing stock available, looks likely to continue to be a feature of the market in 2017.

Pat Davitt

Chief executive, Institute of Professional Auctioneers and Valuers

The relaxing of mortgage restrictions for first-time buyers is recognition, implied rather than admitted, that the Central Bank rules were not just over zealous but that fears of an emerging property bubble were entirely unfounded – evidenced by the fact that property prices are still 30 per cent to 35 per cent behind 2006 prices.

The capital’s outer commuter belt has widened in 2016 to about 80km-100km or one-1¼ hours drive or train journey from Dublin. A three-tier price market now exists: the city of Dublin; the old commuter belt of 25km–35km from the city; a new outer commuter belt extending as far as 100km where there is good road or rail access to the city.

With the introduction of Government measure to help first-time buyers, there is a real danger that intensifying demand could fuel further price rises, unless further supply-side measures are introduced. It has proven extremely difficult to promote the idea that it’s much better to bring down the cost of new housing, by measures such as reductions in levies and VAT, rather than allowing the price of second-hand homes to inflate and equate to those of new builds.

Not extending the 10 per cent deposit rule to second-time buyers is a mistake. Those who were first-time buyers during the boom have little or no equity in their homes, many are still mired in negative equity and it is extremely difficult to come up with a 20 per cent deposit to move to a more suitable property or location to meet their changing circumstances. If it were otherwise, these properties would become available to first-time buyers. If the Government’s help-to-buy scheme were extended to include second-hand homes it would also help the supply side.

Angela Keegan

Managing director, Myhome.ie

Low stock levels are the main driver of what’s happening in the market and will be for the foreseeable future. Right now there are 20,733 properties available for sale on Myhome.ie. This is 9 per cent down on this time last year.

The shortage of stock is driving prices, particularly in Dublin where we will probably see a rise of 7 per cent this year and are looking at something similar next year. The shortages are also reflected in shorter sale-agreed times – 4.5 months nationally and 3.3 months in Dublin.

While the appointment of a Minister for Housing was a positive move, it was also official confirmation that the housing issue was now a full blown crisis, and further evidence that we should have been delivering for the recovery three years ago. We will build 15,000 new houses this year, but the target of 25,000 for next year already looks outdated with several economists saying population growth means we will require 35,000 units annually for the next 10 years.

The help-to-buy scheme – really a supply-side initiative – and the recent changes to the Central Bank’s lending rules were positives but it is probably a bit early to judge their impact. The same is true of 2016’s wildcards: Mr Trump’s election and Brexit.

It is clear 2017 will be a key year. As we know to our cost, delivering plans is one thing, delivering an adequate supply of well-built affordable homes in the right locations is another entirely.

Conor O’Gallagher

Director of residential, JLL Ireland

The October first-time buyer budgetary changes are to be welcomed and we have seen a marked increase from our developer clients scaling up house production as more certainty exists that buyers will be able to purchase completed stock.

The recent Central Bank mortgage rule changes will help, but we would have concerns that these changes don’t address the supply constraints which still exist especially in the new homes market. Rental stock is still at an all-time low and we would caution how affordable and competitive Dublin will be if double digit rental growth continues over the coming years. The introduction of incentives for institutional landlords needs to be accelerated to help the expansion of the multifamily/ private rental sector markets in order to increase supply and contain rental growth.

We await with interest the upcoming legislation changes from Mr Coveney on both the planning and rental market, the combination of which will hopefully address some supply-side issues and ease the upward pricing pressures.