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Rather than falling, Dublin residential prices continue to rise Back  
The factors underpinning demand are very robust and increased construction levels have not yet significantly altered supply, so the outlook is for sustained price inflation in the Dublin market, writes Marian Finnegan.
Following five consecutive years of escalating asset price inflation and a rising interest rate environment, one could have assumed that the demand for residential property would decelerate. Indeed such is the strength of the sentiment in favour of this hypothesis that many now believe it has taken place with some reports even going so far as to suggest that the value of residential property has fallen in recent months.

Unfortunately for those who have not yet entered the market and perhaps are hopeful that the story of deteriorating prices is true, there is no evidence to suggest that the value of residential property has fallen. On the contrary, the young demographic profile of the population coupled with what is still a competitive interest rate has sustained demand, a factor, which is reflected in the pace of asset price inflation.

The results of the Sherry FitzGerald barometer of second-hand houses in Dublin reveals that the average price of such a house increased by approximately 7.9% during the first quarter of 2000. This follows inflation of approximately 26% in 1999.

Traditionally the strength of inflation is more heavily weighted towards the first half of the year and in particular the first three months. During the first quarter of 1998 and 1999 the average price of a second-hand house increased by 17% and 9% respectively. The imbalance between demand and supply has eased somewhat since the pre-Bacon period of 1998 however it is still strong enough to generate house price inflation in double digit figures once again this year.

Demand-supply imbalance
Those who believe that the imbalance between demand and supply in the residential property market has been significantly reduced, base this assumption on the increase in construction levels evident in recent years. To put this in context let us review construction activity. The latest release from the Department of the Environment reveals that a total of 46,512 residential units were constructed in Ireland in 1999, representing an increase of 9.8% on the previous year.

Construction levels in Dublin City and County reached 10,035, up 12% on the previous years total. While in Dublin and the Mid-East region, house completions were up 7.1% in the twelve months to December 1999. All very positive news however, it is still too little too late to completely halt the escalation in house prices as suggested.

The review of the Strategic Planning Guidelines for the Greater Dublin Area published recently indicates potential demand for 20,000 housing units in the Greater Dublin Area each year to 2006 reflecting a population increase to 1.65 million. Although a detailed analysis of the construction figures are not yet available a 7.1% increase in construction levels in the Mid East in 1999 suggests an output total of approximately 15,000 units. Even assuming that the Strategic Planning Guidelines have overestimated demand, current construction levels are still inadequate in the face of both the existing backlog of demand and projected future demand.

The satisfaction of this demand will also require the delivery of a significant supply of serviced zoned residential land - in the region of 8,000 acres in the Greater Dublin Area. Furthermore, it will be dependent on the capacity of the industry to respond to the need for higher completion levels a factor, which should not be treated lightly given the supply constraints in the labour market. Until this demand is satisfied, house prices will to continue to rise.

Demand underpinned
Looking to the year ahead, the combination of a rapidly expanding economy, the young demographic profile of the population, strong net immigration and the increase in the purchasing power of the population brought about by the recent tax concessions will continue to underpin demand. During the first quarter the strength of demand generated asset price inflation of 7.9% in the Dublin second-hand market. The pace of inflation in the remainder of the year will be determined by the interaction of demand and supply side factors. 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%. By historical standards this is still relatively competitive and therefore is unlikely to limit demand significantly.

Supply, supply, supply
Although construction levels have started to increase, thereby increasing the supply of new properties to the market, the impact on the greater Dublin area has to date been very moderate and 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. In conclusion, there is nothing on the immediate horizon that can be expected to significantly inhibit the rate of asset price increase. As such inflation levels in the Dublin second-hand market could reach up to 20% by the year-end.

A more radical stabilisation in the pace of house price inflation though desirable for all will only be achieved through significant further increases in supply and the distribution of economic activity and population throughout the country as a whole. Positive steps such as the publication of a spatial strategy for the development of Ireland are now urgently required if we are to insulate the Irish economy against the negative implications of an uncompetitive property market.

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