Housing output is predicted to reach record levels this year as the economy and the construction industry continue to grow strongly. Consumer confidence is high in spite of the threat posed by the recent surge in oil prices. And while mortgage interest rates may rise in the coming months, the demand for new homes is expected to remain firm as price increases moderate.
Reports of a 14 per cent increase in the number of new housing starts registered in Dublin during the past six months provide strong evidence that supply and demand in the marketplace are moving towards equilibrium. The number of new homes built this year is likely to reach or exceed 75,000, according to some economists, a rate of development not seen elsewhere in Europe.
This increase in supply looks to be finally feeding through to a moderation in house prices, though only gradually. The latest Permanent TSB/ESRI House Price Index, published yesterday, shows that prices have increased by 5.7 per cent in the first seven months of 2004, compared to 8.1 per cent in the same period last year. The most significant decline is in the new home category, reflecting the strong rate of house building. However, prices remain more than 11 per cent ahead of July 2003. One of the main factors driving up housing prices here has been the cost of building land. A site now accounts for 40/50 per cent of the cost of a new house, compared to 10/15 per cent at the start of the economic boom. And while the Government promised to penalise those developers who hoarded land in order to drive up prices and make exorbitant profits, nothing has happened. Policy action in this area may yet be needed.
The Central Bank has been warning financial institutions with varying degrees of disapproval, for years, against the operation of lax lending policies that could lead to the creation of a bubble in the housing market. It could have saved the ink. Six years ago, the average new mortgage issued by Irish banks amounted to €75,000. This year it will be an estimated €170,000. The pace of mortgage lending growth is clearly unsustainable and has shown little sign of easing back in recent months.
Financial institutions and economists are hoping for a gradual, orderly slowdown in both house prices and borrowing. Some are talking about single digit price rises, though the Permanent TSB/ESRI index still suggests that the average increase for this year could top 10 per cent.
Much will now depend on international developments. If the United States' economy runs out of steam and oil prices - which are at record highs - continue to rise, then the Irish economy is bound to be affected. Any sharp slowdown in growth would threaten the housing market, while the pace of interest rate increases is the other big uncertainty. A soft landing for the property market is still a possibility, but the longer house prices and borrowing rise well ahead of the level of economic growth, the greater the dangers facing the market over the next few years.