Over the past 10 years, Ireland has seen an unprecedented boom in house prices, fuelled by strong demand from buyers. The boom has reflected the rapid rate of economic growth, where an expanding workforce has helped to drive up much of that housing demand. A prolonged period of low interest rates also greatly helped to underpin soaring house prices. With mortgage repayments accounting for a smaller share of a borrower's income, home ownership became more affordable, and thus easier to finance. In recent months, however, we have seen a modest reversal of that benign trend.
The economy is no longer growing as rapidly. As interest - and mortgage - rates have risen, house prices have fallen. Fewer houses are being built, while for some new borrowers those higher mortgage repayments have imposed an extra financial burden. With less disposable income, they also have less spending power. So far, the housing downturn has been an orderly and well-managed affair. Indeed, the downturn in Ireland is mirrored by similar developments in Britain and elsewhere; most notably in the US, where the fall in house prices has been sharper, accentuated by the subprime mortgage crisis. In short, a worldwide property boom is finally winding down against the background of a steady rise in global interest rates, which are now temporarily on hold.
In Ireland, this housing market adjustment should be put in context. Since 1997, new house prices have risen more than 200 per cent, a rate of price appreciation that few other countries have either matched or surpassed. In July, according to the Permanent TSB/ESRI house index, average house prices had declined by less than 1 per cent on a year earlier. Since the start of 2007, however, the fall in prices has accelerated, with a 3 per cent drop over the last seven months. Nevertheless, in the context of the huge rise over the past decade, such a modest fall in house prices amounts to a very small market correction. And, to date, there have been few indications of either borrowers defaulting on loans or of banks repossessing homes.
That, however, is neither to underestimate, nor to minimise, the financial concern that some new homeowners now feel. They may have taken out substantial mortgages and now find themselves worried about the impact of higher interest rates on their ability to service their repayments. They may well be apprehensive about the implications of a slowing economy for the jobs market, indeed for their own jobs, and therefore for the security of their homes in such circumstances.
This week, the chairman of the Affordable Housing Partnership, Des Geraghty, has been critical of the banks and financial institutions. He has accused them of inflating house prices by offering 100 per cent mortgages. As yet that is more a matter of opinion than established fact. Either way, imprudent lending or reckless borrowing makes little financial sense for lender or borrower; least of all now in a falling market .