House prices across the country are back at record highs, with official figures showing that after years of rapid growth, the cost of a house is now higher than what it was back in the Celtic Tiger boom.
Latest figures from the Central Statistics Office show that the national house price index is now 3 per cent above its previous peak in April 2007, although Dublin continues to lag behind, with prices about 6 per cent off their 2007.
The figures also show however, that the rate of growth is starting to slow down, which suggests that prices may not stretch too far past current highs – at least in the short term.
But could they fall?
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There are a number of factors that will continue to support strong prices in 2023. These include ongoing supply issues, as well as greater access to finance - from the start of this month, potential homebuyers have been able to potentially increase their budget, given a relaxation in the rules which govern how much people can borrow to buy a home.
However, these may be tempered by interest rate hikes, which remain a very real threat to house-price growth. So, could the recent experience of Sweden, where house prices plunged by almost 20 per cent from their 2022 high, be a precursor of what the future holds for Ireland?
Falling house prices
Interest rate rises are a clear factor behind the price decline in the Nordic state. Outside the euro zone, where rates are set by the European Central Bank (ECB), interest rates in Sweden, like elsewhere, were stuck at zero since about 2014. Last year, however, the change began and since April rates rose by 2.5 per cent — a 13-year high — with a further 50 basis-point increase expected next month.
This has had a severe impact on house prices; in January, state-owned lender SBAB said house prices were down by 19 per cent from their spring 2022 peak.
This was the biggest decline seen across 56 countries in 2022, according to estate agent Knight Frank, surpassing the declines seen in New Zealand (-10 per cent), South Korea (-8 per cent) and Canada (-7 per cent).
There are perhaps a couple of reasons why the decline has been so swift and swingeing.
First, house prices have some way to fall. According to Knight Frank, Swedish house prices rose by 94.6 per cent over the past 10 years, thus putting significant pressure on affordability.
The country also has very high personal debt, at 203 per cent of net disposable income in 2021, according to the Organisation for Economic Co-operation and Development (neighbours Norway and Denmark also have rates in excess of 200 per cent). Contrast this with the Republic, where household liabilities shrunk following the financial crisis. Figures from the Central Bank show that household debt, as a percentage of household disposable income, stood at 100 per cent in the third quarter of 2021 — an all-time series low.
A higher cost of servicing debt has a clear impact on affordability.
This is not to say, however, that the Irish housing market is not also exposed to rate hikes. While the burden of mortgage debt remains comparatively low — Central Bank figures show Ireland had the third-lowest mortgage rates in Europe in November — this will likely change. Already the ECB has signalled further increases for 2023, and earlier this month Martins Kazaks, ECB council member, said he expects rates to be raised “significantly” in February and March.
And it’s likely that the banks will follow suit with their own rates. Earlier this month Permanent TSB increased its rates by about 0.5 per cent, and was quickly followed by Bank of Ireland, with increases of between 0.5 and 0.75 per cent.
As Daragh Cassidy of bonkers.ie notes, “November is likely to mark the lowest point in the current mortgage rate cycle for Ireland for several years to come”.
Fixed rates
In Sweden, part of the reason why interest rate hikes hit home so fast is perhaps due to the fact that a much higher proportion of homeowners in Sweden are on variable mortgage rates. This means that they feel the impact of rate hikes much sooner. About half of Swedish homeowners with a mortgage are on a variable rate — 55 per cent of new mortgages in the period January to June were variable according to Statistics Sweden, due to lower costs when compared with fixed rates.
And herein lies the warning for the Republic.
About 60 per cent of Irish mortgages are fixed — and 44 per cent of mortgages, or almost one in two, are now fixed for more than three years, figures from the Central Bank for September 2022 show.
But these fixed terms will, at some point, come to an end and when they do homeowners will likely face a very different vista.
