BoI says property boom may have peaked last year

The property boom may have peaked in 2004 as the supply of new houses has finally caught up with demand, the Bank of Ireland said today.

Writing in the latest edition of Irish Property Review the bank's chief economist Dr Dan McLaughlin maintains that the unprecedented building boom which saw 77,000 house completed last year has taken the wind out of the market.

"There is now mounting evidence that this supply response has finally reached the point where it is impacting on the rate of capital appreciation," Dr McLaughlin writes.

Dr McLaughlin said the property market reached a watershed in 2004 and 2005 should see more modest growth of around 5 per cent. This year will be the first in over a decade in which household income growth will exceed that of house prices, making houses more affordable, he added.

He pointed to the cooling of the rental market where rents have been falling since the end of 2003 and declining by some 5 per cent in 2004.

While the residential market was slower to respond, house prices slowed from the 13.8 per cent recorded in 2003 to 8.6 per cent in 2004 according to the widely quoted permanentTSB/ESRI property index.

But rumours of a property crash are greatly exaggerated as the fundamentals of the Irish economy such as the buoyant labour market and low interest rates should underpin the market.

"Investor interest in the market may well have cooled somewhat, but has been more than made up by additional first-time buyer and trading-up activity, " Dr McLaughlin writes.

Despite the expected half-point increase in interest rates this year affordability is unlikely to deteriorate to levels that will seriously undermine the market according to Dr McLauglin.

As a result Bank of Ireland expects gross mortgage lending of €19 billion in 2005 against €17 billion last year.