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Thursday, 25th April 2024 |
| Economists’ Property Poll 2003 |
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| Ireland’s leading financial services sector economists give their predictions for the outlook for Ireland’s residential property market over the next five years. |
What are the assumptions you would make for a bullish scenario and why have you chosen those growth rates?
Dan McLaughlin: I have been a long time bull on Irish house prices but I now think the market is in a broad equilibrium, so the days of double digit house price gains are gone. Demand may be curtailed somewhat by slower employment growth and a deceleration in wage inflation but the key factor making for a balance in the market is supply, which has soared in recent years. Completions may well exceed 55k again in 2003 which is sufficient to meet demand-indeed there may be an excess supply of apartments in some areas of Dublin. The low interest rate regime and a return to trend growth should underpin prices in the medium term.
Eunan King: It is assumed that the market remains in its current mode through 2003 and that interest rates fall further 50 bps in the EU over the year. Interest rates are assumed to increase only 1p.c./2p.c. in the period up to 2007. Immigration continues at about 25000 pa.
Jim Power: The key risk to the Irish housing market would emanate from a sharp employment shock. It does not matter how low interest rates are, if one loses one’s job, then a mortgage becomes unaffordable. A major employment shock prompted by the US multi-national sector would very quickly bring the Irish housing market crashing down. Consequently, observers of the Irish housing market should watch development in US corporate boardrooms rather than domestic developments. This is not my central scenario.
The key assumptions underlying the bullish scenario for house prices are that the US economy gradually recovers from the current prolonged soft patch over the next 18 months, that the Iraqi war proves a relatively short affair with a quick and clean removal of Saddam Hussein from office, that the ECB cuts interest rates by another 0.5p.c. by the middle of 2003, and that over the forecast period, the ECB increases interest rates by 2p.c. at most, reflecting ongoing economic difficulties for the German economy. From a domestic economic growth point of view, the house price forecast is predicated on real GDP growth of 3.8p.c. in 2003, and average GDP growth of 3.5p.c. - 4p.c. per annum between 2004-2007. Furthermore, it is assumed that over the first 2 years of the forecast, investor demand for residential property will remain strong despite weaker capital appreciation and rental growth. After three very painful years for equity investors, property will be seen as the investment vehicle of choice, with many investors likely to prove reluctant to invest in equity markets.
In the aggregate, housing supply has now matched demand, implying that house price inflation should level off. However, in a locational sense supply rarely matches demand. In effect this means that in established areas with limited supply, strong demand should ensure that prices can continue to rise strongly. In the further out suburbs of Dublin and in areas outside Dublin where land supply is not a constraint on housing supply, prices could remain flat or perhaps fall back. Unlike the past decade when house prices rose strongly virtually regardless of location, over the coming years location will be the most important factor driving house prices.
Jenny Pollock: The bullish scenario assumes that the Irish housing market continues to be supported by excess demand in the years ahead. Demographics and changes in household formation should combine to provide ongoing robust underlying housing demand. Under the bullish scenario this demand is further supported by an increase in employment growth as the Irish economy responds to a pick up in global economic activity from the second half of 2003. In addition, it is assumed that the increased instance of second home ownership, either for investment or as a holiday home, that has been a significant characteristic in recent years, continues to be a feature. At the same time, it is assumed that the construction industry recognises the near term downturn in the economic situation and the risk of over supply and scales back the level of completions accordingly so as not to over saturate the market. Meanwhile, affordability does not become a major problem due to the continuation of the current low interest rate environment.
Austin Hughes: It is possible to create fairly extreme bullish and bearish scenarios for house prices in the current climate. Depending on what assumptions you make about a vast range of variables running from war/terrorism effects through equity market valuations to more traditional influences such as economic growth, interest rates and inflation, Armageddon or Nirvana can be made appear equally plausible outcomes.
I think it may be more useful to make reasonably conservative assumptions in relation to these variables in order to assess the inherent momentum in the Irish property market. The sharp rise in house price inflation seen through the past year suggests underlying demand is still reasonably robust. I don’t expect the increases on this scale to be repeated in the near future but a speedy rebound in US economic growth, allied to the likely persistence of reasonably low interest rates in Europe and comparatively higher inflation in Ireland could generate double-digit price increases for the foreseeable future. A sustained upswing in activity prompting an eventual return to economic growth rates for Ireland in the 5 to 6 per cent area coupled with the return of SSIA savings to consumers could cause demand to outstrip supply and lead to a somewhat faster pace of property price increases towards the end of the forecast period.
Alan McQuaid: Ireland is experiencing a record level of housing completions, which is underpinned by strong demand, helped to a large extent by low interest rates. For 2003, I expect some deceleration in house price growth through the year, following last year’s national house price increase of around 13p.c.. House prices are mainly driven by the normal supply/demand of any market, and in recent years there has been quite a sharp rise in house completions. However, demand this year is likely to be constrained by slower employment growth. On the positive side, the recent fall in interest rates and the likelihood of a further reduction in the coming months will help affordability, and no doubt boost investor interest but ultimately demand will be driven by a combination of wage growth and employment gains and both will be slower in 2003 than 2002. It is quite possible that second-hand house prices will see the biggest gains this year following the abolition of the first time buyers grant on new houses and the increase in mortgage relief for first time buyers, which will extend their buying power into the broader property market. All in all, I see house prices rising by around 6.0p.c. on average this year. Looking further ahead, I think average growth of around 5.0-6.0p.c. over the next five years is a reasonable assumption, given the likelihood that the economy should have picked up, with prices rising just above the general inflation trend, but against that the level of demand for new houses may have tapered off by then, and interest rates should also be higher.
Bernard Feeney: With the exception of interest rates and population growth, all the other drivers of prices are negative. Economic growth is slowing down, unemployment is edging upwards, and consumer confidence is low. The prospects for prices in the rental market are poor and this may deter demand from investors. Central Bank concerns may curtail mortgage lending somewhat.
However, given the increase in house prices achieved through 2002, the year-on-year average price increase would be 8.1 per cent if prices were static from February onwards. A bullish scenario would therefore see very modest month-to-month growth for the rest of 2003. This would yield an average year-on-year growth in prices of about 8.9 per cent for 2003.
A bearish scenario would see investors departing the market quickly, with the growth in prices being restricted to about 7 per cent.
For the medium term, the outlook continues to be broadly negative. While economic growth rates could edge up, consumer incomes will continue to grow relatively slowly. The housing market would appear to over valued at present and a correction is possible although the timing of this is uncertain. The bullish scenario assumes a relatively orderly and moderate decline in the market. The bearish scenario envisages a more substantial correction.
Eoin Fahy: In this scenario world economic growth picks up quickly after the de-facto end of the War in Iraq. The very low level of interest rates in the world’s major economies continue to provide support both for economic growth and housing markets worldwide, and Ireland is no exception.
Nonetheless, the very benign outlook for inflation worldwide means that interest rates will not be rising until, at the earliest, the second half of 2004.
The housing market thus has the best of both worlds over the next eighteen months or so - i.e. very low interest rates combined with decent economic growth. Looking beyond 2004, house price growth in Ireland moderates, in line with the better balance between supply and demand, and over the medium to long term house prices grow in line with the rate of nominal GDP growth.
Rhona Brennan: Our bullish scenario assumes a continuation in current demand levels, primarily from aspiring first time buyers, due to pent-up demand from recent years as well as current favourable interest rate environment. We feel that the ESRI’s estimated average annual requirement of c 49,000 units in the period 2001-2006 will be achieved. Even though currently this level is being exceeded we envisage a decline in completions from 2004 onwards, which will result in an average annual completions of c 49,000 units in the period overall. The gradual narrowing of the gap between supply and demand will impact positively on prices nationally.
What are the assumptions you would make for a bearish scenario and why have you chosen those growth rates?
Jim Power: The key assumption underlying the bearish scenario is that the Irish economic suffers an employment shock of significant proportions, with the unemployment rate moving back over 10p.c. by the end of 2004.
This employment shock would emanate from the US and would be precipitated by a failure of the US economy to emerge from its current difficulties, and a failure of US corporate profits to recover. This would necessitate ongoing balance sheet restructuring by Corporate America, involving considerable disinvestment overseas. This would be very damaging to Ireland, given its heavy dependence on US FDI and its economic status as 51st state of the US. On the Irish side, this disinvestment would be accentuated by ongoing deterioration in competitiveness, broadly defined.
This would include the general cost base and a failure to address the serious infrastructure deficit, both in terms of physical infrastructure and technological capability. These are areas that need to be addressed because the competition for US FDI by low cost countries replicating the Irish corporate tax structure is likely to become very intense over the coming years. Furthermore, there is a danger that Ireland’s reputation as a flexible location in which to do business could be damaged by the current over-reaction to past tax problems and the effective creation of an over-regulated ‘police state’.
The Irish employment shock would see owner-occupiers getting into repayment difficulties, and demand for rental property falling off sharply, creating serious difficulties for investors who drove the investment boom over the past 5 years. Negative equity would then become a fact of life for many people.
Jenny Pollock: The main risk to the Irish housing market would appear to come from over-supply. House completions grew strongly last year and we are expecting a further strong rise in completions this year.
As a result supply is outpacing estimated underlying demand. To date this has been absorbed in satisfying the pent up demand, that was a feature of the housing market for several years and by a strong take up from investors.
However, there are indications that this pent-up demand has now been largely dissipated. At the same time, the bearish scenario assumes a withdrawal of investors from the market due to falling rental incomes, increased difficulties in renting proprieties and concerns over house prices. Furthermore, the economic situation is far less supportive of the housing market than it has been for many years.
Should the global economy continue to struggle to recover - because the correction of the imbalances created by the 1990s bubble economy proves prolonged and long tern structural factors continue to impede growth - we could see an era of subdued economic growth in Ireland with a sustained up-trend in unemployment. Nevertheless, prices should still rise in calendar 2003 due to carryover effects from the strong house prices rises towards the end of 2002 and in the opening months of 2003.
Austin Hughes: It is very easy to construct a downbeat scenario but the resilience of the residential property market in the past twelve months cautions against predicting hysterically large price falls.
Admittedly, the return of investors was a key driver of the price rise of the past year. I would draw comfort from their re-appearance at a time when economic activity was softening and a great deal of attention was being given to economic forecasts suggesting that Irish property prices would fall by 20 per cent. Clearly, these investors didn’t enter the market for short-term gains.
I think it would take a fairly severe employment shakeout to prompt a dramatic decline in Irish property prices. An important offset is the likelihood that Euro area interest rates would decline sharply in the event of a prolonged shock to global activity. It is also important to remember that in such bleak economic circumstances other asset classes would probably be even less attractive than property.
Our relatively negative assessment of the scope for price declines in 2004 reflects the view that if the Irish economy weakens further through the next twelve months, rents could fall further. This could have the effect of causing some ‘recent’ investors to quit the market.
It is very important to remember that in both the bull and bear scenarios these ‘average’ increases could be dwarfed by the variation in price changes between different segments of the property market. It is certainly likely that ‘better’ property will outperform poorer elements by 5 per cent or more per annum. This reflects persistent differences in local demand and supply conditions. The reality of extremely different inflation experiences within the sector is already very evident with recent data showing annual price inflation for existing houses outstripping that of newly built houses by 10 percentage points.
Dan McLaughlin: A more severe employment shock, perhaps due to a persistent appreciation of the euro, would turn the current level of completions into excess supply and lead to falling prices particularly in areas with less intrinsic merit. Supply would adjust (i.e. completions would decline) but there may be a period of falling real house prices into the medium term.
Alan McQuaid: Although a bearish scenario cannot be ruled out, I think the chances of it happening are slim. The main concern on this front would be a collapse/recession in the global economy, mainly emanating from a prolonged conflict in the Middle East and/or sustained terrorist attacks in the US/Europe. While interest rates would invariably be low in such an environment, the effect on employment and general consumer confidence would be affected to the extent that house prices would fall. Some would argue, that in such a scenario, prices should fall further, but I think the US/UK are better placed than the Eurozone to cope with an economic downturn, and with Ireland’s close ties with both these countries, and being ‘closer to Boston than Berlin’, we should fare better than the Euroland as a whole. Furthermore, the SSIA accounts should be coming to maturity at the latter stages of the forecast time horizon, and should to some degree provide consumers with a welcome boost to offset weaknesses elsewhere.
Bernard Feeney: See bulish scenario.
Eoin Fahy: The bearish scenario assumes that even an end to the Iraq war is not enough to generate a decent recovery in economic growth worldwide, and that Ireland - which is very dependent on the rest of the world - has a period of very weak economic growth for at least the remainder of this year. In addition, the strong increases in the supply of housing in Ireland continue for another two years, and are not matched by equivalent growth in demand for housing, given the weak economic picture, and in particular the slowdown in inward migration. On this scenario, the downward trend in house prices begins soon, and gathers pace through the remainder of this year and into 2004. A recovery in house prices would not begin until 2006. Even on this scenario, however, we are most unlikely to see the kind of pain in the housing market that was seen in the UK in the late 1980s.
Rhona Brennan: Our bearish scenario assumes weaker pent-up demand and a continuation in current completion levels of c. 55,000 units-60,000 units in the period against a backdrop of weaker economic conditions in conjunction with weak employment and wage growth. |
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| Article appeared in the April 2003 issue.
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