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Cliff Taylor: Are Irish house prices set to fall further, in common with many European markets?

House prices have edged lower in recent months as the housing market reaches a turning point. So what happens next?

House prices in March were 3.9 per cent ahead of the same months last year, according to the latest figures from the Central Statistics Office (CSO), but month on month figures show that prices have now fallen for three months in a row. While the declines are small – prices have dropped by less than 1 per cent since December – they are enough to reduce the annual rate of increase, which was running at close to 8 per cent last December.

With Eurostat figures showing prices across the EU showing a quarterly decline in the final three months of last year for the first time since 2015, as higher interest rates and the cost-of-living crisis take their toll - with significant enough falls in some countries - are Irish house prices set to head significantly lower? Or will the underlying shortage of supply continue to hold them up?

The figures:

Irish house prices have risen continually since the middle of the last decade, climbing back to the highs reached before the financial crash, though patterns do vary across different house types. On average, the national index of prices is 1.6 per cent above its 2007 peak – Dublin prices are still 8.7 per cent lower than 2007, while those in the rest of Ireland are 2.1 per cent higher. Property prices nationally have increased by 126.6% from their trough in early 2013 and the average (median) national price is now €310,000.

What do these trends mean? Think-tank the ESRI’s analysis of long-term trends shows that house prices became hugely overvalued in the run up to the financial crash and then collapsed to well below a value that would be justified by activity and incomes in the Irish economy. Following the post-Covid surge, prices were again becoming overvalued – by around 7 per cent at the end of 2021, on ESRI calculations, and increases in 2022 will have pushed this figure up.


In the context, ESRI research professor Kieran McQuinn, says that the recent easing down in prices does not come as a surprise, particularly in the context of higher interest rates which are bound to have some impact on demand.

However he feels there are two factors which will support prices and mean there is not a significant drop. The first is the strong economy and jobs market, with the unemployment rate recently falling below 4 per cent for the first time in living memory.

The second is the ongoing shortage of housing supply. The ESRI previously estimated that 30,000 to 35,000 houses a year would need to come on stream to satisfy demand – with population projections being increased, McQuinn says the institute is set to increase this estimate later this year in work it is doing for the Department of Housing. This structural shortage of supply is set to put a floor on prices, he believes.

New versus second-hand homes:

A key message from the figures is the different trends in the new and second-hand markets. During the first quarter of this year, prices for new homes were running 11.1 per cent ahead of the same period last year, while the figure for existing dwellings was 3.5 per cent.

Overall property prices edged down by 0.8 per cent in the first quarter, compared to the previous quarter, but Goodbody economist Dermot O’Leary pointed out in a research note on the figures that prices in the second-hand market were down 1.6 per cent quarter on quarter, while for new homes there was a 2.3 per cent rise.

Higher construction costs are pushing up new home prices, O’Leary says, while demand is supported by Government incentives. For now, in this part of the market, prices continue to rise despite higher interest rates and activity levels remain strong. New homes sales in March were 12 per cent ahead of the previous year, though down in Dublin itself – presumably due to a lack of supply.

In the second-hand market, activity levels were down slightly on the previous year, according to the CSO. Lack of stock coming on to the market is a significant issue, according to Marian Finnegan, managing director of Sherry FitzGerald estate agents. She says agents are seeing enough demand for the stock which is coming on to the market and that she is not seeing a general fall in price levels. The market is “holding,” she says and faces an important period with a return to a more seasonal pattern of sales after the post-Covid rush back to the market which saw sales right through 2022. However stock levels remain low across the market, with some sales by private landlord investors but the big additional increase in sales which some had forecast by landlords after the ending of the eviction ban not yet evident.

The bottom line:

Many European and international property markets are suffering as interest rates rise from the super low levels they had been at for many years. In Sweden, for example, prices recorded double-digit falls last year. As the vast majority of borrowers are on variable rate loans, it was among the European markets suffering the most. In Europe, Eurostat recently reported the first quarterly fall in prices since 2015, a 1.5 per cent drop in the final three months of 2022 compared to the previous quarter. The biggest falls were in Denmark, down 6.5 per cent and Germany, down 5 per cent. The almost decade-long surge in house prices has finally run out of steam. Forecasters are unsure whether this is mainly a reversal of the surprising increases seen during Covid-19, or something which could develop further as interest rates rise. The IMF has warned of the danger of “disorderly” house price falls in Europe, as interest rates rise and banks tighten up on credit.

Further afield, it is a similar story as higher borrowing costs take a toll. In some cities in Australia for example, notably Sydney, house prices had surged ahead and are in the middle of a significant correction under the weight of higher interest rates. Similar trends are evident in New Zealand, where Auckland is in the middle of a major correction.

What about Ireland? After a period when all the key factors were pushing house prices higher – lack of supply, and strong demand fuelled by rock bottom interest rates – now the picture is more mixed. The strong growth in the economy and low unemployment should continue to provide support, as well as the ongoing shortages of supply. But as interest rate rises continue to be passed on, affordability will be hit.

According to McQuinn, we could be in for a period when not too much happens to prices with the market “muddling along.” Key metrics to watch will be sales levels and whether mortgage borrowing from banks holds up. Of course any further shock to the economy could also take a toll, but for now Ireland seems to be weathering a period of slower international growth. One risk factor is European inflation remaining high and more further rises than expected in ECB interest rates.

It would be no surprise to see further monthly house price falls and possibly prices starting to fall on an annual basis as the post-Covid bounce unwinds. The long price surge is over, even if the dynamics of the Irish market and the stronger financial position of households look set to provide some support to prices, avoiding a re-run of the financial crash. Will we see some stability now in a market which has behaved like a roller-coaster for many years?