House Prices:Last week was a bumper week for economic news. On Wednesday, the CSO released its 2006 growth figures. This was followed on Thursday by new Census data, while the ESRI's Quarterly Economic Commentary was launched the same day.
The information in these reports should indicate how Ireland's property market will perform for the remainder of 2007. However, with so much happening at once, it is easy to lose track of the key dynamics.
Time, therefore, to get a few things straight. Firstly, on balance, the data indicate a favourable outlook for the housing market. Wednesday's quarterly national accounts showed that GDP grew by 6 per cent last year.
Moreover, the ESRI predicts that growth of 5.4 per cent will continue through 2007. Combine this with census data showing population growth of over 2 per cent per annum, and it is clear that housing demand will remain strong. It is also clear that housing supply is tightening - planning permissions and commencement notices are down, indicating that new house completions will fall for the first time in 13 years.
Whatever way you cut this up, it is hard to avoid the conclusion that house prices will continue to rise. Granted, interest rates will provide a headwind, at least until June when they are expected to top-out, and this will probably lead to a continued slowdown in the rate of price growth. Nonetheless, with strong demand and constrained supply, prices should continue to rise in the medium term.
The ESRI shares this conclusion and is predicting a soft landing for the market. Despite this, there is a misperception that the ESRI is pessimistic about the housing market. This appears to stem from misinterpretation of a comment in its latest report which indicated that house prices were overvalued.
In its analysis, the ESRI applied a standard model (used in many countries) to predict house prices based on four determining factors - income, real interest rates, population and house building. This exercise predicted a price level 15 per cent below today's actual prices. The ESRI emphasises that this does not mean that house prices will fall by 15 per cent. Instead, it suggests that the gap between actual and predicted prices is due to the fact that its generic housing model does not factor in an increasingly important part of the Irish market - second homes. The correct interpretation, therefore, is that the demand for second homes has pushed prices 15 per cent beyond what they would have otherwise been.
It would be wrong to say that the ESRI is not concerned about the upsurge in second homes. It estimates that almost 25 per cent of newer properties are now unoccupied second homes. Its concern is that, because there is no absolute need for these properties, they could be sold off at their owners' discretion. And if many owners did this simultaneously, the market could be flooded and prices would fall.
While this would be worrying, it is hardly likely. For a start, some event would have to trigger a sell-up. A sharp and sustained fall in property prices might do the trick but demand and supply conditions make this improbable. But even if this did occur, an exodus would be unlikely.
Second homes fall into two categories - investments and holiday homes. Investors may be prompted to sell-up if capital appreciation slowed or reversed. But residential rents are increasing by around 10 per cent per annum and this, along with transactions costs, would be offsetting factors in any exit decision. More importantly, many second home owners do not see their properties as financial investments - they hold holiday homes for personal use and are unlikely to react to market turbulence.
Clearly, a higher ratio of holiday homes to investments would make the market less vulnerable to a sell-off. Unfortunately, we don't know this ratio with any accuracy.
Census data separates unoccupied properties into holiday homes and vacant properties. However, these categories are not mutually exclusive and there is some subjectivity in assigning empty houses under these headings.
My instinct is that most unoccupied houses are holiday homes. This is based on two factors. Firstly, the counties with the highest vacancy rates - Leitrim (29.3 per cent), Donegal (27 per cent), and Kerry (24.8 per cent) are traditional leisure destinations.
Secondly, few investors would be forced to leave rental properties unoccupied in the current market. This suggests that concerns about the number of second homes should not be overplayed.
It has been a busy week for our economists, and the new information will take time to digest.
For now, however, the ESRI's forecast of an orderly slowdown to sustainable house price growth seems a likely outcome.
John McCartney is head of research at Lisney
