House prices: have we reached peak affordability?

House prices in Dublin are now more than nine times the average salary, a level not seen since the heady days of the boom, prompting some experts to suggest that we’ve reached peak affordability.

This time around, we have Central Bank rules to keep a tight rein on borrowing and this may explain the abrupt slowdown in price growth. At certain levels, house prices simply become unaffordable, even to the well-off.

Inflation

The latest figures show headline property-price inflation has cooled significantly in the past year, falling from 12.4 per cent in May 2018 to just 2.8 per cent 12 months later. In Dublin, the slowdown has been even more pronounced with prices rising just 0.6 per cent in the year to May. The annual rate of inflation in the capital had been negative in April.

The numbers show the Dublin region had the highest median price of €366,000. This was more than nine times average annual earnings – currently put at just under €40,000. In the case of Dún Laoghaire-Rathdown, typically the most expensive area, the median price was €538,000, which is 13½ times average annual earnings.

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To purchase a property in Dublin, first-time buyers need to have earnings that are considerably higher than the national average.

The price-income multiple is a standard measure of affordability worldwide. In the days before property became a fast-moving financial asset an “affordable” home for a worker was considered to be three to four times their income. The Central Bank’s mortgage restrictions, which limit people to borrowing 3½ times their income, reflect this.

Rise

The rapid rise in house prices in recent decades has, however, decoupled this relationship, with buyers requiring many multiples of income to get on the property ladder.

The Central Bank’s rules may have corralled price inflation into a sensible band, but critics say pent-up pressure in the housing market has now simply transferred to the rental sector, as evidenced by the 7 per cent rise in rents last year. So it seems we’ve just removed one pot from the stove while turning up the heat on another?