Pandemic paradox: Why aren’t house prices falling?

Is it the time for selling “gracious” homes with a residents’ club and concierge? Cairn Homes certainly thinks so. Some three years after acquiring a plot of land from RTÉ for €107.5 million, it is getting ready to launch its Donnybrook Gardens development next month.

And the pandemic doesn’t appear to have affected its pricing strategy, with properties starting at €855,000 for a two-bedroom apartment, rising to €1.25 million for a three-bed.

It’s a curious feature of the crisis. Unemployment is running in the mid-double digits, thousands are on the pandemic unemployment payment, others are having their salaries paid for by the Government, while about 43,000 homeowners aren’t making full mortgage repayments.

And yet house prices have – thus far at least – held firm.

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For those working in the professions and for globally oriented businesses, their finances haven't been unduly affected – at least not yet

Indeed, despite warnings from the ESRI back in May that prices could fall by up to 12 per cent, latest figures from the Central Statistics Office show that in the year to July, prices fell by just 0.5 per cent across the country. Dublin’s city centre, like so much else, took the brunt of the decline, with prices falling by 2.7 per cent. But out along the coast road to Dún Laoghaire Rathdown, home to some of the priciest property in Ireland, prices actually rose by 1.3 per cent in the period.

And Ireland isn’t alone in seeing its housing market shielded from the pandemic. In the UK, house prices recently reached record levels, while across the G7 house prices are growing by 5 per cent on an annual basis.

In a recent article, The Economist put rising global house prices down to a combination of three things: cheaper credit, government hand-outs during the pandemic, and changing consumer preferences.

But what’s the story in Ireland?

Two pandemics

For one, there have been sharply diverging experiences in recent months. In the tale of two pandemics, those working in services such as entertainment, travel and hospitality have had their livelihoods threatened.

But for those working in the professions and for globally oriented businesses, their finances haven’t been unduly affected – at least not yet. In some cases they may even come out of the pandemic in a better position, having boosted their savings or returned to live at home to save for a deposit.

Cheaper money may also be a factor here, even if Irish borrowers still pay more than those across Europe. This can facilitate higher prices, as cheaper money may mean you can borrow more.

In this respect, the recent arrival of Avant in the market is putting even more downward pressure on rates. Repayments on a €250,000 mortgage, for example, are €355 cheaper a month on Avant’s new fixed rate of 1.95 per cent, compared with Bank of Ireland’s 4.5 per cent variable – savings which can, perhaps, be put towards a more expensive home.

Where there are bidding wars, they may be having a disproportionate effect on the market

But if lending has gotten more affordable, it hasn’t necessarily become easier to access.

Banks have imposed more restrictions in recent months, such as excluding those on Covid wage subsidies from borrowing, while Central Bank exemptions, which allow borrowers to exceed certain income and loan-to-value limits, are still tricky to come by – although Permanent TSB is understood to be open to offering these again.

What it does mean is that in a tightening mortgage market, those with the approvals in their pockets are keen to get their property purchase across the line, for fear their circumstances – or that of their lender – should change if they have to reapply. This sense of urgency among some buyers is leading to several bidding parties on certain properties. One agent tells of 5-10 per cent increases on asking prices on sales in south county Dublin where there were several bidders.

Falling transactions

And where there are bidding wars, they may be having a disproportionate effect on the market. For every house that sells over its asking price, after all, you’ll find another lingering on the market, or selling at a discount; but with transaction levels so low, official figures don’t always reveal this.

Sales of houses plummeted in the aftermath of lockdown earlier this year, with the property price register showing that from January to October 6th of this year, some 8,579 properties were sold in Dublin. This is 36 per cent down on transaction levels in 2019, and the decline is even greater if we look at just March-October, where sales slid by 47 per cent.

It’s hard then, to offer a true gauge on prices when transactions are so low. With agents pointing to a pick-up in sales again of late, data in the new year might offer a more representative view.

Supply

One reason for lower transactions is reduced supply. Figures from Myhome.ie show that in Dublin, in September 2018 and September 2019, there were about 5,600 homes on the market. This September there were just 4,476, or 20 per cent fewer.

New homes may be coming on to the market slower than they otherwise would, while the mortgage situation might put off second home sellers who are reluctant to sell their own home for fear they won’t get financing for another.

When combined with the lending situation, this shortage in supply can put more pressure on certain types of home, driving prices higher among a small pool of properties and small pool of buyers.

And it may get even worse. In a recent report, the ESRI warned that a reduction in construction investment could tighten supply even further going into next year, which means that if demand recovers while supply is weak, we could be looking at house price inflation, rather than deflation, once more. Pandemic or not.