Rising rates may soften the market, so will first-timers adopt a wait and see approach? Edel Morgan reports

First-time buyers are both the most powerful property buyers in the Irish market and the most vulnerable.

As a group, they drive the market with around 47,000 of them expected to buy a new home this year, contributing €8.5 billion of the overall mortgage market. As individuals, however, they are the most exposed to the vicissitudes of the market, like rising interest rates and property prices.

Some commentators estimate that the average house price in Dublin will be €400,000 by the end of the year and, with a series of interest rate rises in the pipeline, Annette Hughes, director of DKM economic consultants, says the worry is that confidence in the market will be affected and that many first-time buyers will decide "to postpone making a transaction".

The very prospect must have builders and estate agents quaking in their boots.

Hughes was speaking at a press conference this week announcing the new EBS/DKM Affordability Index published by Irish Property Buyer magazine. The index tracks levels of affordability for first-time buyers.

Trying to accentuate the positive, she said current price levels are unsustainable but a number of factors indicate the market will ultimately have a soft landing.

Never one to be swayed by the positive, RTÉ's economics editor George Lee, who was at the press conference, took her to task and pointed out that the OECD has looked at 49 construction booms and "not one of them has had a soft landing. Why is it logical that we will have a soft landing?" he asked.

Hughes conceded that our economy is very dependent on the construction sector and said in 15 years time there would be far less people employed in the industry. She said, while the market would have slower growth, unemployment and rising interest rates were the key factors that "knock a housing market over" and, while we face a series of interest rate hikes, she could not foresee "any prospect" of high unemployment levels.

Economists, property people and mortgage lenders often use the high levels of immigration to dismiss any suggestion of a slump or crash.

Around 173,000 new PPS numbers were issued to migrant workers from EU accession states from May 2004 to January 2006 and migrants have bought, or are renting, 25,000 of 81,000 houses built in 2005 alone.

However, while many of the migrants currently renting are potential first-time buyers of the future, market conditions and the return of investors in bigger numbers are threatening to push this group out of the running for properties.

If enough first-time buyers have no option but to adopt a "wait and see" approach to buying property, will developers be forced to reassess their prices downwards to attract buyers?

A group that appears to be feeling the pinch at the moment are those who earn too much to qualify for affordable housing but not enough to live comfortably with a hefty mortgage and they will continue to struggle - each 0.25 per cent mortgage rate rise representing €14 extra per €100,000 borrowed.

Around 51 per cent of first-time buyers surveyed for the index said their mortgage repayments restricted their lifestyle.

The press release for the index focuses mainly on how couples are faring in terms of affordability as opposed to singles. Dara Deering from EBS says the reality is that a lot of first-time buyers are not buying on their own any more "but in a couple or with friends and demand for fixed rate mortgages is strong".

Couples nationally are spending an average of 27 per cent of their combined income on their mortgage repayments with those in Dublin spending 32 per cent. The average monthly repayments are €1,300 across Ireland and €1,700 in Dublin.

Since 1996 house prices have increased threefold nationally and almost fourfold in Dublin. At the end of 2005 couples nationwide spent an average of over a quarter of their joint income on their mortgage compared to 14.5 per cent in 1996.

One of the more interesting findings of the index - and which would merit a separate column - is that despite the apartment building boom, 88 per cent of first-time buyers are purchasing houses.

- emorgan@irish-times.ie