The launch of the euro on schedule has pushed Irish house prices up another notch, but, while Ireland's main economic forecasters are anticipating a decline in the hectic pace of housing inflation from now on, (May 1999) the rate of price increase is expected to remain very strong for the foreseeable future.
This emerges from the third annual compilation of property price forecasts by economists in the main financial institutions by Finance.
The individual forecasts are detailed in the table on this page - they reveal an unanimous view that strong house price inflation can be expected to continue. Indeed, the expectation is at least as strong as it has been at any time since the first of these surveys was published (in May 1997), despite a rise in house prices of approximately 50 per cent in the intervening two year period.
In fact the economists are more 'bullish' about property price rises for the next five years in this survey than they were in the two previous Finance surveys, in the Spring of 1998 and 1997 respectively.
The panel's 'maximum' increase forecast is for a 87.7 per cent rise in secondhand house prices over the next five years. This compares with 82.9 p.c. in last year's survey, and 63.1 p.c. in the first (1997) survey.
The survey indicates a maximum price increase of 24.2 per cent this year, and, that, by the middle of next year, house prices may have risen by as much as 45 per cent compared with what they were during the summer of 1998.
The survey asked forecasters to predict a maximum and a minimum price increase scenario, based on differing sets of outcomes, such as higher/lower interest rates, and economic growth outcomes. On balance the panel leans towards the more bullish set of circumstances - with an estimated average probability of 80 per cent for the maximum forecasts. Applying this to the results would give a prediction that prices this year will rise on average by 22.2 per cent compared with the average for 1998, and that by mid 2000, Irish house prices would be 14 per cent higher than now. Also, by then, prices are predicted to be just under 40 per cent (39.8%) higher than they were in the summer of 1998.
It should be noted however that while economists now may be more 'bullish' about future price increases than they have been at any point over the past two years, it is not the same thing as saying that property prices will in fact rise more in the next few years than they have been rising recently. In fact, bullish as they are, the economists predict a diminishing rate of price increase in the years ahead, and that by the early years of the next century the annual rate of house price increase will moderate to under 10 per cent a year.
The evidence shows that house price rises have tended to accelerate throughout the past year - prices in the final quarter of 1998 and the first quarter of 1999 have been increasing on a year to year basis by 28-30 per cent. We believe this (unprecedented) rate of increase to be related to the actual (as distinct from anticipated) introduction of the single currency on January 1st 1999. With the euro effect disappearing, it is to be expected that price rises will moderate from now on, and this is in accordance with the forecasts in the survey.
Thus, by the end of this year/early 2000, house prices should be rising at an annual clip of 15-17 per cent, compared with the heady rates of a year earlier, moderating, during the course of 2000, towards about 12 p.c. at year end.
This pattern is indicated from the monthly price increase figures produced by the Irish Permanent Building Society Index and also First Active price index, which both have now been running for over a year. The table shows the figures for the Irish Permanent index, and the shaded part is a projected inset of forecast year to year increases produced by Finance, based (and consistent with) the annual price forecasts of our panel of economists in this survey.
What the forecasters say:
Alan McQuaid, Bloxham states that the reason for his high forecast is that 'low interest rates continue to push the market ahead and there is a real possibility of another ECB cut before year-end', he believes that 'until rates stabilise and supply issue is addressed prices will continue to increase'.
Regarding the minimum increase in house prices over the next five years, McQuaid says 'it is hard to be overly negative in short to medium term. However if Government were to introduce tougher tax regimes against individuals who own more than one home, then the price may start to ease off. If ECB rates rise, if not in 2000, but 2001 then house prices should peak.
McQuaid says that there are 'no easy solutions to the housing problem. Decentralisation of business away from Dublin is essential in the longer term but this can't be done unless the overall infrastructure of the country is improved. This will take time. Meanwhile the Government must increase the supply of new houses to the market as soon as possible. They should also consider: increasing grants for first time buyers, abolishing stamp duty on houses less than £200,000, and/or re-introduce full mortgage interest relief for individual/couples earning less than £50,000.' As regards lending criteria for building societies, McQuaid would not be in favour of increasing the salary multiple for loans, as he thinks this would lead to a UK style structure.
Considering change over the past twelve months, McQuaid says that despite initial optimism after the release of the Bacon Report, the latest trends suggest only upward movement. There is a lot of cash circulating in the economy at present and the fact that Ireland's first £1 million development sold out within hours is indicative of the market at this time. The other problem is that Dublin centre is continuing to boom but is too small to cope with number of people.
Patrick O'Sullivan, AIB, says that the demographic factor, along with strong economic growth, low interest rates, strong employment growth, increase in disposable incomes and supply constraints will continue to be supportive of high house prices.
This year he sees no significant let up in rate of prices. 'The level of house prices is reaching a stage where people can no longer afford to buy, thus while demand remains strong in years ahead, prices should bottom out. Also interest rates should rise over the next few years.'
O'Sullivan believes that 'a supply constraint is probably the single biggest problem facing the property market. However, there does not appear to be any immediate resolve to tackle this issue at the moment.'
In the past twelve months demand has remained quite strong. 'Despite the effect of the Government (Bacon Report) little has been achieved in stopping house price inflation. House prices have remained more underpinned than I expected', he says.
Austin Hughes, Irish Intercontinental Bank, says that 'the 'high' forecast assumes the persistence of the very supportive macroeconomic backdrop currently underpinning the property market. 'Our broader economic forecasts envisage such an outcome', he says. 'It seems valid to suggest that demographic factors should remain conducive to a strong trend in property prices into the medium term. Although government measures to enhance supply might be expected to restrain prices in the latter years of the forecast, budgetary decisions are likely to act in the opposite direction in two important respects. First of all, further reductions in direct taxation should provide a continuous boost to disposable incomes. In addition, efforts to meet the Irish economy's infrastructural needs are likely to increase the overall demands placed on the construction industry, which, in turn should imply sustained increases in building costs.
Any assessment of maximum potential price gains should also incorporate the likely impact of the persistence of a low interest rate environment. Although our best guess is that euro interest rates are at or close to a trough, another half- percent fall is a distinct possibility. More importantly, unless the Euro area economy undergoes a rapid transformation, sluggish growth looks set to persist for the next couple of years and this, in turn, would ensure that any eventual increase in interest rates would be of modest proportions. One couldn't entirely rule out a significant deterioration in equity markets over the forecast period that would also bear down on interest rates. Finally, there are signs of an acceleration in earnings growth in the Irish economy that, if sustained, would also underpin a rising trend in house prices.
Turning to the 'low' forecast, Hughes says 'it is readily possible to construct a doomsday scenario in which exceptional factors prompt a collapse in Irish property prices. Among the elements in such a scenario might be a severe and prolonged downturn in the Irish economy on foot of adverse tax legislation across the Euro area. A collapse of the UK or US economies, the break-up of EMU or much higher interest rates on foot of a commodity led surge in inflation. Obviously, in such circumstances, one could envisage a substantial drop in Irish property prices. However, on the balance of probabilities, an extremely unfavourable scenario should not materialise.'
Hughes' low' forecast, reflects a deterioration in the Irish economy of more modest proportions reflecting (i) some weakening of economic performance as overheating becomes more evident and significant production bottlenecks emerge (ii) some weakening in the high-tech sectors on cyclical / competitiveness grounds (iii) a sharper than expected rise in European interest rates. (iv) a greater than anticipated rise in supply. Against this background it is possible to construct a forecast encompassing a deteriorating trend into the medium term. However, only in the event of significant emigration is there likely to be no offsetting support to property prices from demographic influences.
'As with last year's forecasts, we do not expect the most likely outcome to be halfway between the 'high' and low ends of the range', he says. 'As last year's forecasts show, the current environment is one in which property prices are rising at or about rates that analysts would regard as their maximum potential. That remains the case in 1999 and in all probability that performance can be sustained for the forecast period. As a result, we would attribute about an 80% probability to the high forecast and 20% to the low forecast'.
'Obviously, the momentum in house prices looks much stronger a year further on. The capacity of house prices to withstand any 'psychological' weakening from the sequence of government measures reflects the exceptional strength of demographics and purchasing power as driving forces. In turn, the buoyancy of purchasing power reflects both the capacity of the Irish economy to sustain faster income growth than might have been expected and the even lower than predicted interest rate environment delivered by EMU. Although both these factors might lessen in intensity in the forecast period, they look set to be more enduring supports to house prices into the medium term than could have been envisaged a year ago.
Jim Power, Bank of Ireland, identifies three factors behind the high forecast:
1. strong rates of household formation
2. low interest rates
3. demand/supply unbalance
The only suggestion for the lower price inflation is, according to Power, disimprovement in consumer confidence and a downward adjustment to expectations.
Power says there is still a fundamental unbalance between demand and supply which should continue to drive prices higher. Low interest rates, strong job creation and higher household formation will keep demand strong. Supply remains limited and a strong immediate response is required by the Government to increase supply. The OECD proposals on CGT and mortgage interest rates make little sense according to Power. 'The housing market is close to crises and has the potential to result in serious economic, social and political problems.' 1999 is stronger than expected due to lower interest rates and a generally more buoyant economic environment. There should be some slowdown in price increase expected hereafter, but no collapse.
Dan McLoughlin, ABN Amro, expects that there will be little upward movement in rates and that in the early years of next century, as the euro picks up in currency markets, interest rates will rise.
Sean O'Brien, Irish Life, sees the maximum rise in house prices reliant on the global economy (especially US), low interest rates (euro), sustainable growth in Ireland. There may be some slackening in house prices due to Ireland becoming less competitive and/or rising interest rates. O'Brien believes that the rental sector needs encouragement.
Bernard Feeney, Goodbody, predicts that supply will remain constrained in the short term but will gradually ease, but demand will remain high. The possibility of lower increases in house prices would be on foot of net immigration reducing on foot of lower growth and already high property prices, wherey demand would slacken.
Eoin Fahy, Ulster Bank Markets, says no adverse taxation changes and little impact from supply measures will mean a continued acceleration in house prices. If there is major additional supply, unfavourable tax changes or expectations of higher interest rates then we may see lower increases. 'The key issue is supply - will the various measures taken by the Dept. of the Environment help to boost supply to the point where it meets demand? The likelihood is that it will take some time for this to happen, but in the meantime demand will remain strong, indeed very strong. I remain bullish on the Irish property market.'
Eunan King, NCB, believes that due to GDP growth at 6% average, net immigration continuing at 20,000 plus per annum and that supply side measures will be slow to come. The lower scenario could be accompanied by net immigration of only 5,000 per annum, with supply side measures hitting strongly from 2000 onwards. Dublin central locations could be seen as outperforming as traffic congestion rises even more. Suburban houses in 3 bed sector will, by the same token, be the first to soften towards the end of the forecast period. |
