House prices 'could fall another 20%'

Property prices in Ireland could fall by another 20 per cent before hitting bottom, ratings agency Fitch has warned – on top of the almost 50 per cent decline to date.

Its outlook for property prices in Ireland is worse that for any other of the 12 countries assessed in its Global Market Outlook for Housing and Mortgages, including the other peripheral states.

However, Fitch states that, in contrast to other markets, it has adopted a conservative approach in its assumptions about the downside risks to the Irish market.

“It is also conceivable that Irish prices stabilise sooner and at a higher level than Fitch’s base case assumption suggests,” the report states.

It also acknowledges the improvement in affordability, especially for first-time buyers not burdened by legacy debt, citing it as “the one bright spot in the Irish housing market” although it adds that constraints on mortgage lending are limiting the impact.

Overall, however, the agency expects prices to continue to decline, worsening by around 20 per cent over the next two to three years, stating that “the consequences of the property market boom may not have fully played out yet”. This compares with a 15 per cent decline for Greece and Spain, and 13 per cent for Portugal and Italy.

Recent data from the residential property price index for November, published by the Central Statistics Office, noted that prices in Ireland had fallen 49 per cent from their early-2007 peak.

The Fitch outlook refers to continuing high vacancy rates and “severe oversupply” in rural areas as drags on the overall market.

“Some signs of stabilisation are taking hold ... However, market fundamentals still point to limited improvement in house prices in the near term,” the report states.

“While the pace of deterioration has slowed, Fitch cautiously ...assumes a further house price correction over the next 12 months equal to around 10 per cent on a national basis.”

Fitch states that political considerations will increasingly influence the performance of mortgage markets in some countries in 2013.

“Political pressure is evident in those peripheral euro zone countries that have already experienced some of the sharpest housing market corrections and slumps in mortgage performance, namely Ireland and Greece,” Fitch said in a statement. “Along with a continuation of the economic pressures that have also driven rises in arrears, this contributes to our gloomy view on these markets, where we expect significant further deterioration in mortgage performance.

“The continued rise in arrears in Ireland is, in our opinion, to an extent driven by the imminent introduction of policy measures relating to debt forgiveness. Lenders are constrained from, or have been unwilling to undertake, large-scale repossessions.

“Coupled with borrowers in arrears potentially benefitting from debt write-downs this has increased moral hazard.”

Fitch’s interest is largely on the prospect of default and the impact on residential mortgage backed securities, which it rates. Its outlook says the default outlook among the 12 states examined is “most pessimistic” for Ireland.

The states included in the study were: Ireland, the UK, the United States, Australia, Germany, France, Italy, Spain, the Netherlands, Belgium, Portugal and Greece.