Is a house price correction on the cards in Ireland?

It’s hard to justify talking about house prices slowing or the property market cooling when inflation is still at a runaway 13 per cent. Nonetheless, a pattern of deceleration linked to cost-of-living issues and higher interest rates is discernible even if the affordability constraint on buyers hasn’t changed.

Headline inflation hit a cycle high point of 15.1 per cent in February/March before falling to 14.5 per cent in April, 14.1 per cent in May and 14 per cent in June, with the latest figures for July pointing to a year-on-year increase of 13 per cent. Anecdotally estate agents are reporting more stock on the market resulting in longer sale times and a levelling off of asking prices.

“There was a noticeable change in the months of May and June, where price increases slowed. We see this trend continuing,” Pat Davitt, chief executive of the Institute of Professional Auctioneers and Valuers (Ipav) said in response to the latest house price numbers.

We’re most likely witnessing the end of the pandemic phase when prices were fuelled by factors such as increased savings and remote working and the beginning of a new cost-of-living/higher interest rates phase with demand dampening as a result. But will it lead to a correction in prices?

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One prediction sees annual house price inflation falling to 8-10 per cent by December, lower in Dublin. Higher interest rates — the European Central Bank is planning a sequence of hikes to combat inflation — will almost certainly drive the rate of increase lower next year but the acceleration in population growth — one of the traditional drivers of housing demand — combined with the ongoing and perennial issue of supply work in the other direction, propping up demand.

Ever-optimistic industry professionals therefore don’t think the current slowdown will morph into downturn in prices (generally) but admit some high-priced, high-demand areas may see a correction.

Industry forecasts rarely play out, some unforeseen dynamic usually takes over and Ireland has one of the most volatile property markets in the world. It had the fastest growth in house prices in the run-up to the bust of 2008, the biggest post-crash collapse in property values and subsequently the most rapid recovery.

[ David McWilliams: The property market and its players have changed profoundly since 2008. We are now dealing with a different beast ]

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The industry didn’t pick up on any of these trends until they were well established. It predicted the pandemic would lead to a crash in prices, the opposite occurred.

The overall trend is a confluence of forces, making it difficult to predict.

Housing has become one of the most divisive issues on the planet with low- and middle-income earners priced out of urban markets from here to New Zealand.

The uniform nature of the problem across industrialised countries with different local issues — supply being the main one here — has led many to speculate on the link between property prices and the great financial experiment of the era, quantitative easing (QE) and low interest rates.

QE effectively increases the amount of money in the economy, meaning banks can lend more cheaply, meaning mortgages also become cheaper. Whether it’s the main driver of the global housing issue is still debated but the link is undisputed.

“When the bank buys government bonds of a given maturity, it bids up their price. This, in turn, lowers the rate of interest that the bond pays to its holders. When the interest rate on government bonds is lower, this transmits itself to other interest rates, such as those on mortgages and corporate loans,” Bank of Canada deputy governor Paul Beaudry said recently.

Massive injections of cash into global financial system by central banks in the post-2008 era and more recently as a result of the pandemic have anchored rates while sending investors further and further afield to find returns, creating asset price bubbles in several sectors, but more obviously in real estate. Will the reversal of these policies change the dynamic?

House prices in Canada fell for a sixth straight month in August amid a sequence of aggressive interest rate hikes by the Central Bank. Some regions recorded only small dips but prices in other regions have fallen steeply.

A report by BNP Paribas predicts house price growth in Europe will slow significantly in 2022, “brought on by the considerable increases in prices over the last years and the substantial rise in mortgage rates.”

“The increase in mortgage rates will exclude numerous households from home ownership and could negatively affect indebted households who are on variable rates, as well as those that have to refinance their mortgage,” it says. The report notes that “affordability seems overstretched” in most European markets and that the rise in mortgage rates will continue to worsen housing affordability and cause a slowdown in the private housing market.

All we can say for now is that growth in house prices is slowing. Where the trend goes depends on a host of factors, not least the current inflation dynamic.