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Property price increases of 60
per cent expected by 2005
The fourth annual Finance survey of economists‚€ô expectations for residential property price increases over a five year timeframe shows that opinion is strongly convinced about continued increases, albeit at an falling rate. The highest price increase expected in the period 2000-2004 is 91 per cent, the lowest is minus 3 per cent.
Economists expect residential property prices to grow by 60 per cent in the period 2000-2004, the annual Finance property survey reveals. As a further report to the Government by Peter Bacon is imminent, economists on the Finance panel expect prices to rise by 18 to 20 per cent this year, and 13 to 15 per cent in 2001.

Any crash scenario is absent from these economists‚€ô outlook. No economist foresees a sharp price reversal in any of the years up to 2005. The point is made in survey responses and in articles contributed to this month‚€ôs edition that the expected price increases are not socially benign, especially for first time buyers.

A review of past Finance surveys shows that the economists accurately forecast the scale of the coming increase. While near-term forecasts were more likely to be on target, the tapering off effect did not happen as expected. The same tapering off is expected for the five years to the end of 2004, and it remains to be seen if this will be borne out. Having seen a near 30 per cent house price increase in 1998, it seems that sentiment is firmer now that the tapering off will happen within the five year timeframe.

The average probability assigned to a bullish scenario is approximately 75 per cent, down only five per cent since last year, but indicative of a slightly greater doubt about the economic scenario ahead. Still, the strength of conviction that the housing market is not going to experience a crash is evident from the fact that only one economist sees a net negative move in house prices over five years, and then only by minus 3 per cent. The largest annual house falls envisaged in a deliberately pessimistic scenario, with a less than one in four chance of occurring, are in the order of minus 10 per cent, and these would be foreseen in 2002 and 2004.

The comments of each economist on aspects of the survey are set out below:

What are the assumptions you make for the bullish scenario and why have you choosen these growth rates?

Eoin Fahy: Economic growth will remain strong, helped by lowish interest rates, a benign global economy, and further tax cuts and deregulation. However, inflation will run at a faster pace than we have been used to, which will be one of the factors pushing up house prices. But the main influence will continue to be the imbalance between the demand for houses and the supply of houses, and this is unlikely to significantly change for the next couple of years.

Bernard Feeney: Latest data show that house price increases are moderating. Long term trend is for further moderation because of rising interest rates, more moderate income growth, increased supply of serviced land and reduced immigration

Marian Finnegan: The projections are based on the following assumptions:
‚€Ę the continued strength of the economy
‚€Ę strong household formation
‚€Ę continued strong net immigration
‚€Ę competitive though rising interest rate environment
‚€Ę and finally the perhaps most significantly for this year the increase in the purchasing power of the population brought about by the recent tax concessions.

The factors positively influencing demand outlined above must be weighted against rising interest rates, increasing levels of supply and the stability of the wider economic environment. Current projections suggest that base rates are unlikely to increase beyond 5.0% or 5.5% in the year ahead. By historical standards this is still relatively competitive. Although construction levels have started to increase, thereby increasing the supply of new properties to the market, the pace of increase to-date is unlikely to notably impede inflation. Finally, the outlook for the wider economic environment remains positive with rising growth levels forecast for Europe, the US and UK.

Austin Hughes: Although supply is increasing markedly, it still falls some way short of the growth in demand. Demographic factors remain supportive, income growth is stronger than might have been envisaged previously and, on average, mortgage rates are set to be significantly lower inside EMU than before the EMU. In addition, domestic budget policy will likely to boost demand. The bullish scenario also incorporates a slightly less favourable outlook for prices in the next couple of years. The construction industry is already working close to capacity. The further demands placed upon this sector by the National Development Plan suggests that prices will remain under upward pressure. In addition, the possibility that the Irish economy as a whole could be facing an enduring period of higher inflation will also tend to boost house prices. Finally, the persistence of strong property inflation for a number of years may have caused an expectation of substantial increases to be built in to the pricing framework.

Eunan King: Interest rates do not rise beyond 4.5 percent at peak of this cycle. Tax reductions at pace of recent years. No new property taxes. Planning & sewage infrastructure bottle necks mostly not solved. House prices are not decelerating in recent months in month-on-month terms and should rise by a substantial amount this year unless something radical happens very soon.

Dan McLaughlin: The fundamental factors underlying the sustained rise in Irish property prices are still at play, with demand set to outstrip supply for some years. Demand is being driven by 5% plus gains in employment, 5% plus gains in average earnings, inward migration and historically low real interest rates. A sharp correction in prices can only arise out of a demand shock but EMU membership means that the interest rate shocks familiar to the Irish property market in the past are virtually precluded. An employment shock is unlikely given the ongoing gains in competitiveness.

Alan McQuaid: National house price figures released in the year to date show that the annual rate of increase is still running at over 19%, though there are signs that it is moderating. In my view, the overall increase in house prices will ultimately depend on the level of interest rates. It seems that we are now entering a phase of higher Eurozone rates, which should in theory dampen demand in the housing market. That said, the demographic nature of the Irish economy will continue to keep the demand for housing fairly high. Because current interest rates are still very low by Irish historical standards, and because the supply issue will still take a few years to be resolved, I think house prices will continue to grow, albeit at a slower rate than in recent years.

Se√°n O‚€ôBrien: Although interest rates will increase, they will do so at a gradual rate - no more than 1.5% for 2000. After 2000, supply of new houses should improve sufficiently to meet demand against a background of an economy continuing to grow at about 5% per annum.

Patrick O‚€ôSullivan: Continued strong economic growth will underpin strong employment and income growth. Furthermore, the recent and proposed tax changes will increase take home pay and provide another stimulus to house prices over the coming years. The reduction in the personal taxation burden that has taken place since over the past decade means that disposable income has risen at a faster rate than actual earnings. Both of these factors are expected to support the underlying demand for housing over the medium term. Employment is forecast to grow by a further 4.0% in 2000 and 3.0% in 2001 with personal disposable income rising by a respective 10.6% and 9.0%. Over 100,000 immigrants are expected to enter the country over the next 5 years. About half of these are projected to enter the labour force, which will also have implications for housing demand. Interest rates, and interest rate expectations, are now lower than they had traditionally been in Ireland with volatility also expected to be much lower going forward.

Jim Power: The dynamics of the housing market remain positive. Historically low interest rates, inward migration, falling household size, strong employment creation, strong growth in household formation and demographic factors are all combining to ensure that demand is still exceeding supply. Over the period of the forecast this demand/supply imbalance is set to gradually narrow, but in the meantime house prices will continue to rise albeit at a decelerating pace. The growth outcome included in these assumptions would result in significant wealth creation and will take Ireland well above the EU GDP per capita average. Managing expectations in such an environment will prove a major challenge for the authorities, as will the need to address the serious infrastructure bottlenecks building up at the moment.

GDP growth is projected to average 7% over the period 2000-2004, but the more meaningful measure of growth, GNP, is set to average 6.3%. A gradual slow down in economic activity is projected. This soft-landing is predicated on the view that there will not be a negative shock to the economy, but rather that capacity constraints in the economy in the form of labour shortages and pressures on the infrastructure, will force a gradual easing of investment activity. Furthermore, it is envisaged that Foreign Direct Investment (FDI) will slow considerably over the period as the IDA becomes less aggressive in attracting new investments.

On the supply side, planning difficulties, the lack of availability of serviced land and bottlenecks in the construction sector will continue to limit supply.

What are the assumptions you make for the bearish scenario and why have you choosen these growth rates?

Eoin Fahy: In this bearish scenario, world stock markets are very weak, and a negative ‚€úwealth effect‚€Ě kicks in as the many new investors in internet stocks get burnt, and stay away from the property market also. Meanwhile, Irish competitiveness is badly damaged by much higher inflation and wage increases, and job losses start to mount up, again hitting the property market. Also, the very weak euro leads the ECB to raise interest rates by far more than expected, so that potential property buyers are deterred, while meantime measures to increase the supply of housing begin to kick in.

Bernard Feeney: Reason: same as above but to happen more quickly

Marian Finnegan: The imbalance between demand and supply in the Irish residential market is such that the significant deceleration in growth outlined above would require a dramatic reduction in demand, synonymous with an economic crisis. There is nothing on the immediate horizon to suggest that this is about to happen, however a shock to the economy by its very nature is sudden and unpredictable. One potential vulnerable point for the Irish economy is the current overvaluation of the US dollar and Stockmarket. It is our view that the fundamentals underpinning the property market are such that any reduction in demand would be short lived and that property market would recover relatively quickly.

Austin Hughes: In constructing a bearish scenario, it is important to distinguish between the very limited probability of a doomsday outcome and a more likely ‚€ėpoor‚€ô outcome. Although an EMU break-up is technically possible, the damage it would visit upon European economies means that is extremely unlikely. In the event of an EMU break-up, Irish mortgage rates would likely double and broader economic prospects deteriorate significantly. The impact on house prices would be dramatic - so dramatic that we have excluded this possibility from our bearish scenario.

As was the case last year, our bearish scenario envisages overheating strains leading to a deterioration in domestic competitiveness in tandem with a poorer external backdrop incorporating poorer condition in the UK and the US economies.

Eunan King: The main element in a bearish outcome would be a quick solution to the planning and supply issues. If taxes are not cut further this could help prices decelerate. Interest rates rising to a peak of say 6.5 percent could be a factor.

Dan McLaughlin: A bearish case could be constructed on the back of a crisis rise in rates but this is unlikely and a more realistic bear case for property is that supply rises so rapidly that equilibrium is restored earlier than anticipated. Indeed, the rise in house completions has been quite dramatic (and under-reported) in recent years, with some 50,000 completions last year, which is double the average annual completions of the mid-90‚€ôs.

Alan McQuaid: Again it comes down to the assumption on interest rates. It is not inconceivable that the European Central Bank will raise rates quite aggressively over the next eighteen months or so, especially if the euro continues to remain fundamentally weak. Indeed, if the currency does fail to recover, then more and more questions will be raised about the whole EMU project, with the possibility (albeit remote) of the whole thing collapsing. A dramatic fall in the US stock market and its negative impact on the US economy and in turn the Irish economy is also a key issue that should not be taken lightly, especially given Ireland‚€ôs huge dependence on the ‚€ėhigh-technology‚€ô industry. Although anything is possible, I don‚€ôt believe the American economy is going to crash in the short-term, and even if the worst case scenario does materialise, I cannot see a huge drop in Irish house prices, and I certainly don‚€ôt envisage a Japan/UK style property slump.

Se√°n O‚€ôBrien: Another high price rise in 2000 will be followed by a ‚€ėharder‚€ô landing, resulting in higher interest rates (prompted by a weaker euro) and a more rapid acceleration in the supply of new houses. Economy to continue to grow at around 5 per cent annually.

Patrick O‚€ôSullivan: The fundamentals of the economy are quite strong and, given the underlying dynamics, it is hard to envisage any dramatic reversion of the recent house price trends. Possibly, a large scale correction in world technology industry would have a dampening effect on the level of economic activity here and thus slow the pace of housing activity. However, such a correction would only be short-term in nature. In the longer-term the key factor that will undermine the demand for new houses will be the ageing of the demographic profile.

Jim Power: The bearish scenario outlined is based on the assumptions that domestic cost and price pressures continue to rise, leading to a steady erosion of Ireland‚€ôs competitiveness. The higher domestic cost base would force domestic investment to slow, act as a disincentive to multi-national investment and force consumers to become more cautious, thereby increasing the savings ratio. This trend would be accentuated by the ECB increasing rates by up to 2% over the next 12 months in the face of persistent euro weakness. In summary, the lower level of house price inflation is based on a slower economy (i.e. average GNP growth 4% per annum) and an earlier than anticipated narrowing of the demand/supply imbalance in the housing market.

Comment on last year‚€ôs survey outcome in retrospect

Eoin Fahy: Interestingly, the ‚€úbullish case‚€Ě average forecast for 1999 looks to have been pretty accurate. It might have been useful to have asked what probability the forecasters would have put on the bullish and bearish scenarios - I suspect most would have preferred the bullish scenario by a distance. But forecasts for 2000 and perhaps 2001 look quite conservative, and may well be revised upwards in this year‚€ôs survey.

Bernard Feeney: House prices rose 18 per cent against the average bullish forecast of 17 per cent and bearish forecast of 6 per cent. I would have more faith going forward in analyst‚€ôs bullish forecasts especially over the short term.

Austin Hughes: Last year‚€ôs forecasts envisaged rapid price growth throughout 1999 persisting into this year and beyond. Moreover, our assessment of an 80 per cent probability attaching to the bullish scenario was a reasonable guide to the buoyant sentiment of the market place. In tandem with those of most of the other analysts, the forecasts still appear reasonable today. This could be taken as evidence of the strength of ‚€ėthe fundamental‚€ô factors supporting house prices at present.

Eunan King: The outcome was 22 percent so the average bullish expectation was not far out.

Alan McQuaid: The increase in house prices over the past year is no great surprise. At the time of the last survey the ECB had just cut interest rates and there may have been a general assumption in the market that further reductions were on the way. However, it proved to be a false dawn, but while the ECB subsequently tightened monetary policy, the key ‚€ėrepo‚€ô rate ended the year exactly where it started, at 3.0%. It is only since the Bank started raising rates again this year, that house buyers have begun to realise that mortgage repayments are going to rise in the coming months. Another key factor which cannot be ignored in looking back at the housing market last year was the arrival of Bank of Scotland into the mortgage lending market, which introduced more competition among lenders, and kept mortgage rates a lot lower than they would otherwise have been. On the supply side, the amount of new houses coming on stream, although reaching record levels, was still far from adequate, with the release of land for property development still a major concern.

While increasing supply continues to be the main Government strategy as regards the housing market, it is obviously going to take time. In the interim, I still believe that the Government should be looking at measures on the demand side (even temporary ones) to alleviate the stress and hardship for first-time buyers. Increasing mortgage interest relief for couples with a combined income of less than £50,000 and/or abolishing stamp duty on second-hand houses under £300,000 should in theory go some way to easing the pressures on the market. I do accept though, that while the Exchequer would lose out on stamp duty receipts, there is no guarantee that the gain would not go to the seller/estate agent rather than the buyer. However, I still think it is an option worth considering.

Se√°n O‚€ôBrien: Last year‚€ôs forecast was for a ‚€ėsoft landing‚€ô over five years under both ‚€ėbullish‚€ô and ‚€ėbearish‚€ô scenarios, with the bullish being about 9% on average above the bearish for each year. The actual price rise at 18% per Irish Permanent Index was between the average for the bullish (24%) and the bearish (15%) - not bad!

Patrick O‚€ôSullivan: Last year‚€ôs forecasts generally underestimated the ongoing strength of housing demand, specifically the influx of immigrants. Furthermore, the radical changes in tax system were not envisaged and this boost to disposable income will play a significant part in underpinning house prices.
Jim Power: Economic growth has turned out to be stronger than expected and the medium-term outlook has improved if anything. Despite some very negative reactions from certain journalists/senators to the optimistic forecasts in the survey last year, they have proved to be too conservative. This is not a positive development as rising house prices and the lack of affordable housing represents one of the most negative social and economic developments seen in the Irish economy over the past 5 years.

To what extent will Dublin and non-Dublin prices converge?

Eoin Fahy: I expect the convergence phase to continue, but not at a particularly fast pace. As housing in Dublin becomes less and less affordable to single buyers in particular, and as plans to develop transport infrastructure become more concrete, the willingness to reside outside Dublin will increase, helping the convergence process. However, the ongoing shortage of development land in Dublin will continue to push up Dublin prices.

Marian Finnegan: At present there is an approximate 30% difference between Dublin prices and those of the country as a whole, although we are experiencing some convergence in prices between Dublin properties and those in other counties on the eastern corridor. Overall convergence of prices is possible if economic activity and therefore demand is spread more evenly throughout the country as a whole, but is likely to be a long term rather than a short-term result.

Austin Hughes: As supply remains an issue, it is likely that ‚€ėspill over‚€ô will cause prices outside Dublin to rise faster than in Dublin. However, over time supply potential outside Dublin is greater and, in the medium term prices outside Dublin could be more vulnerable to a correction.

Eunan King: Dublin‚€ôs sewage infrastructure constraint seems to be the big issues together with traffic which will support prices. Dublin‚€ôs faster pace of recent years is now waning, so this catch up period may run further before Dublin moves ahead again.

Alan McQuaid: Dublin will continue to see the biggest gains in house prices, simply because that is where the greatest proportion of the population is concentrated in. However, I feel that house prices in counties bordering on Dublin, like Wicklow, Meath, Kildare and Louth should all increase at a faster rate than the rest of the country as more and more people move out of Dublin to the outskirts. Indeed ‚€ėsatellite‚€ô towns like Navan and Drogheda could see quite a significant rise in house prices in the coming years as they are developed into key industrial centres. Prices in the big cities like Cork, Limerick, and Galway should also continue to post strong gains.

Se√°n O‚€ôBrien: No significant divergence in the percentage price changes. However, property in the Dublin area close to public transport improvements will become relatively more expensive.

Patrick O‚€ôSullivan: Dublin prices will continue to outpace non/Dublin prices given the concentration of population, industry and services in the capital. The deficient nature of the general infrastruture in the rest of the country will continue to ensure that Dublin outperforms.

Jim Power: Given the congested nature of Dublin, a more focused regional policy by the IDA and other government agencies will be needed going forward. Consequently, the demand dynamics outside of Dublin are likely to remain strong and the likelihood is that over the forecast period, non-Dublin house prices could grow marginally faster than Dublin.

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