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Dublin Residential market under pressure Back  
Marian Finnegan writes that by the first quarter of 1999, the Dublin residential market was experiencing a resurgence in both owner occupier and investor demand.
The first quarter of 1999 has proven to be another turning point for the Irish residential market. In the period immediately after the Government issued its 'Action on house prices' in April 1998, the pace of house price inflation in the Irish and in particular the Dublin residential market decelerated quite significantly. Following inflation levels of approximately 17% in the first quarter of 1998, the rate of house price inflation in the Dublin second-hand market fell to 4.9% in the second quarter, 2.1% in the third quarter and 2.7% in the fourth quarter of 1998.

Many analysts may have believed that this was evidence that the Governments 'Action' had been successful in calming the growth of residential property prices. This proved to be incorrect. By the first quarter of 1999, the Dublin residential market was experiencing a resurgence in both owner occupier and investor demand. As a result the average price of a second-hand house in Dublin increased by 8.7% during the first three months of this year.

The continued strength of asset price inflation in the Dublin residential market is evidence that the imbalance between demand and supply is still very much a feature of the Dublin and indeed the Irish residential market. In terms of the future, the demographic profile of the population combined with the continued buoyancy of the economy should underpin the strength of demand for residential accommodation into the next century. In 1998, there was an estimated 3.7 million people living in Ireland. The latest forecasts from the Economic and Social Research Institute [ESRI] suggest that this will rise to 4.06 million by 2011, with the number of households rising by 410,000 in the same period. When changing tastes, rising living standards and obsolete stock are taken into consideration, forecast demand rises to between 475,000 and 514,000 residential units in the period to 2011. That is just short of 40,000 units a year.

This projection suggests that it will be necessary to maintain the construction momentum of 1998, when over 11 dwellings for every 1000 people living in Ireland were built. This is almost twice the number of dwellings per 1000 population built in the United States in 1996 and almost three times the number of dwellings built per 1000 people in the United Kingdom.

In the period 1990 to 1998, approximately 28% of all houses constructed in Ireland were located in Dublin. A continuation of this trend would suggest demand for approximately 144,000 units over the next 13 years. To put this in context, that would represent a 42% increase in the number of households in Dublin. It is clear that the geographical and infrastructural constraints in Dublin would prohibit this level of construction.

In order to address the demand and supply imbalance in the Irish market it will therefore be necessary to look for solutions outside the Dublin market. Supply side restrictions have already led many purchasers to seek properties outside Dublin. In the period 1990 to 1998 inclusive, the number of houses completed in the counties of both Meath and Kildare increased by 317% while, the number constructed in Wicklow increased by 338%. In contrast the number of houses constructed in Dublin grew by only 77% in the same period.

It is clear that there is already a natural over-spill from the Dublin market into the counties on the eastern corridor. If this over-spill continues, it will place an increasing strain on the infrastructural resources of all these counties. A long-term regional development strategy that encourages the spread of the population throughout the whole country is urgently required to ease the supply side pressure that is building up along the eastern corridor. After all if we do not divert demand for residential accommodation away from Dublin, it will be diverted away from Ireland altogether.

The pace of house price inflation in recent years has far exceeded wage inflation. This point is perhaps best illustrated using the 'Sherry FitzGerald Affordability Index'. This index analyses the affordability of an average new and second-hand Dublin house, as defined by the Department of the Environment, for a first time buyer and trading up couple earning a weighted average salary in Dublin.

In March 1997, when this index was first developed, a first time buyer couple taking out a 90% mortgage would have been spending 27% of their net monthly income in financing their mortgage. By September 1998, this had increased to 40%. The affordability of an average second-hand house for a trading up couple taking out a 65% mortgage has also declined significantly in the same period. In March 1997, such a couple would have been spending 21% of their income financing their mortgage. By September 1998, this had increased to 34%.

From this analysis it is clear that the affordability of houses in Dublin has declined quite considerably over the last two years. An unaffordable housing market will have very negative implications for future migration levels. The future pace of economic growth is dependent on access to a large labour supply. It is therefore essential that a strong flow of migration into Ireland be maintained in the future.

Given the supply side restrictions evident in Dublin, it would seem inevitable that the gap between demand and supply can only be reduced by a more even distribution of population throughout the whole country.

However, it is obviously not possible to provide solutions to the problems facing the residential market overnight. As such the short to medium term outlook for the Dublin residential market is for continued strong demand and price inflation. The average price of a second-hand house in Dublin is likely to rise by between 15% and 20% in 1999. However, the exact figure will be dependent on the level of investor demand. If the momentum of investor demand evident in the first three months of 1999 is maintained throughout the year, it is possible that house price inflation in the Dublin second-hand market could exceed 20% for the third year running in 1999.

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