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Property Poll Back  
Ireland’s leading financial services economists give their predictions for the outlook for Ireland’s residential, commercial, retail and industrial sectors over the next five years.
What are the assumptions behind the bullish scenario and why have you chosen these growth rates?

Austin Hughes
Probably the most significant factor underpinning a relatively bullish view of the Irish property market is the exceptional resilience of this economy and its remarkable capacity to sustain jobs growth through the recent downturn. Recent data suggest a renewed strengthening of the jobs market and there have also been some encouraging pointers on overseas investment in Ireland. These developments argue strongly that the fundamentals of this economy should remain supportive of a healthy property market.

In the next few years positive demographic factors, most notably strong inward migration, could be much more influential than previously expected. The explosive wealth gains of the past decade are also a potentially strong driver of property demand. The recent change to legislation allowing pension funds to borrow will likely add to asset demand for property in addition.

With confidence in the Irish economy improving and an increasing likelihood that household spending power will get a major boost from budget largesse and maturing SSIAs, in the coming years the forces supporting demand for housing look set to remain solid.

A final argument for the bullish scenario is the continuing momentum in house prices in the face of a quite dramatic increase in house building in recent years. This suggests the supply side has become increasingly responsive to price changes. So, it is likely that any softening of prices would result in a corresponding reduction in supply lessening the risk of major downward adjustment in Irish property values.

Eunan King
• GDP Growth to remain close to 5p.c.-6p.c..
• Interest rates to rise to 4p.c.-5p.c. over the period.
• Even though employment and incomes continue to grow, rising interest rates will take the steam out of house prices.

Dan McLaughlin
Employment growth is the key driver of housing demand and that has picked up momentum in recent months, as evidenced by the Bank of Ireland Jobs index, income tax receipts and the falling trend of the Live Register. Consequently it is difficult to see the market weakening to the extent required to generate falling house prices. On the upside there are a number of factors constraining price gains.

One is supply; some 69,000 houses were built in 2003 and in 2004 completions may reach 70,000, which is the equivalent to a 5p.c. addition to the housing stock, an extremely large annual change in a market such as residential property. Rental yields have also fallen steadily over the past decade and our now below 3p.c. on my model, which may persuade some potential investors to switch into alternative assets or into property abroad. A third factor is affordability: the cost of a new mortgage is not onerous relative to average incomes but is no longer at levels which would imply large upside in terms of house price gains. Overall the conclusion is that the market is probably approaching equilibrium levels after a decade of excess demand, which will result in annual price gains in line with the general rise in consumer prices.

Alan McQuaid
Despite the doomsday merchants predicting a major crash in the Irish property market, it has yet to happen, and indeed the signs are prices will continue to rise in the short-term, especially if as I expect, interest rates remain very low by Irish historical standards, and employment prospects stay favourable. Major property crashes across the globe have by and large been associated with a sudden sharp rise in interest rates. Given the economic outlook for the Eurozone, a significant upward movement in rates is unlikely any time soon. Despite the huge rise in house prices in the last few years, and the fact that new home owners and first-time buyers are facing a monthly mortgage burden several times greater than those who purchased homes before the property boom, figures from the CSO’s Quarterly National Household Survey, show that three-quarters of recent first-time buyers believe their mortgage repayments either easy to manage (21p.c.) or manageable (55p.c.).

Although supply/demand equilibrium should be reached over the next eighteen months or so, the low interest-rate environment and the strong labour market should ensure that demand for housing remains robust and that prices stabilise rather than collapse going forward. Of course there are other issues that are likely to have a big impact on property prices in the near-future, including decentralisation, development levies, restriction of sale of property to locals only, the Luas, and the economic implications of foreign-exchange developments, but in overall terms I continue to look for steady growth in house prices over the next few years, albeit in single digit terms.

Niall O’Grady
Demand has held up very well to date in 2004. However, the market and price growth is now disproportionately influenced by the level of demand coming from both investors and second home purchasers. The activity from this segment is a key driver of the health of the market and price growth in the future.

These bullish growth rates assume that in addition to the continuing high number of first time buyers getting onto the property ladder and a buoyant trading up sector, the rental market remains strong, thereby facilitating strong investor / second home demand.

Employment growth and record house building will continue in line with current strong forecasts. This also assumes that the market will be underpinned by interest rates remaining at their current low level and that the stockmarket continues to stutter towards a slow recovery, leaving the property sector as a more attractive investment than low deposit rates or unpredictable stock market growth.

Jenny Pollock
The bullish scenario assumes a maintenance of the factors that supported the Irish housing market throughout 2003 and in 2004 to date. The market is well underpinned on the demand side by demographic factors but also by investor demand, the strength of demand for second homes and by the level of unsatisfied, pent-up demand.

While affordability has been an issue in releasing this pent-up demand, there is evidence that the industry is responding though the construction of more affordable units and through the provision of longer-term mortgages.

A pick-up in economic growth, and in employment growth in particular, should also be positive for demand. Furthermore, while interest rates are expected to rise from their current very low levels, no hike in rates is anticipated until well into 2005 at the earliest and even then rates will still be low by historic Irish standards.

At the same time, it is assumed that the construction industry is responsive to the risks of over supply and scales back the level of completions accordingly so as not to over saturate the market and, at the same time, redistributes output towards more affordable housing.

Jim Power
The projected path of house prices is consistent with a soft landing for the Irish housing market, reflecting an elimination of the imbalance between demand and supply over the next two years. Such an outcome assumes that the fundamental forces that have been instrumental in driving demand over the past decade remain strong. Namely, positive demographics with strong household formation, an ongoing decline in household size, continued inward migration, average GDP growth of 5p.c. per annum over the forecast period, an increase of 2p.c. in mortgage rates over the forecast period with the first tightening occurring in 2005, unemployment remaining below 5p.c. of the labour force and average real growth of 2p.c. per annum in incomes. Housing supply is set to remain strong over the forecast period, with around 72,000 completions in 2004, gradually edging back towards 50,000 by 2008. The evolution of the market is likely to be characterised by strong demand for owner occupied and holiday homes, and a weakening in demand for buy to let, reflecting excess capacity and consequent rental compression.

The projected outcome would be most desirable for the stability of the economy, but first-time buyers will find it increasingly difficult to enter the market. This is not desirable, but it appears inevitable. The overriding assumption and hope is that there will be no further de-stabilising or ill-considered interventions in the market by Government.

What would be the assumptions for the bearish scenario and why have you chosen these growth rates?

Austin Hughes
The resilience of the Irish economy and the housing market, in particular, in the face of a wide range of severe shocks to the global economy in recent years offers some comfort against ‘Doomsday’ scenarios in which Irish house prices might suffer a spectacular fall.

It has to be recognised that the frenetic pace of borrowing of late means that any significant increase in interest rates could have a marked impact on the momentum of the Irish property market and consequently on house price inflation. However, it is difficult to imagine conditions in the major continental European economies changing sufficiently to warrant particularly aggressive action by the ECB. I think Euro area interest rates will be on a rising trend in 2005 and beyond but I don’t expect either a rapid tightening or a sustained increase in ECB rates much beyond the 4? to 5 per cent range that might cause problems for Irish house prices. Another risk factor would be a price crash in other housing markets, particularly the UK, that might threaten a ‘contagion’ effect on Irish property values. Here again, risks shouldn’t be exaggerated.

In summary, it’s hard to argue that the Irish economy will remain sufficiently weak for a sufficiently long period of time to cause Irish house prices to fall in ‘real’ (inflation adjusted) terms. As a result, the bearish scenario encompasses a prolonged period of flat ‘real’ house prices.

Eunan King
• Some shock to the economy such as a continued acceleration in oil prices
• Growth rate slows to 2p.c.-3p.c. and unemployment rises, but not dramatically.
• Interest rates remain low
• Underlying demand situation remains intact

Dan McLaughlin
There are two broad catalysts for a correction in house prices. The first and less serious is a sharp rise in interest rates. Given Ireland’s euro membership this would only materialise in a situation in which the French, German and Italian economies were to expand at a pace sufficient to erode the substantial degree of spare capacity available across Europe. Consequently much higher rates would be against a backdrop of rising incomes so offsetting some of the negative impact on affordability. A labour market shock would be a more significant catalyst for a price correction, and could arise from a generalised global downturn (driven by high oil prices, for example) or by a local Irish factor such as the withdrawal of a number of large multinational employers. A more left leaning Government with an anti-business agenda might be the trigger, or a structural change in a major market. One should remember however, that the corollary of an extremely responsive supply side is that price swings are dampened-if prices were to weaken, supply would fall so underpinning housing values.

Alan McQuaid
This primarily comes down to the assumption on interest rates. It is not totally impossible, given its track record, that the European Central Bank will raise rates aggressively over the next couple of years particularly if inflation in Euroland gets out of control (mainly as a result of higher oil prices and exorbitant wage deals). This would in my view send the Eurozone economy back into recession. Another slump in the world’s stock markets and its detrimental effect on the global economy and in turn the Irish economy is also a key issue that could impact on house prices going forward, especially given Ireland’s huge dependence on the ‘high-technology’ industry, something that has been brought home to us in a big way in recent years. Another global shock (similar to September 11, Madrid bombings, and /or a serious worsening of the political situation in the Middle East) would also have a negative impact and send house prices lower. Although anything is possible, I think all things being equal the US economy is on the road to sustained recovery, which is good news for the world as a whole, and for Irish employment prospects. Unless there is a major downturn in the global economy, I think Irish house prices will continue to record positive growth over the next few years.

Niall O’Grady
In this scenario low / declining rental yields for investors leads to a combination of reduced investor demand for new units as well as a number of non performing existing units coming back on the market.

This will have the double whammy of increasing supply of properties available for sale and reducing demand.

Combining these circumstances with the record number of new units to be built, a moderate creep upwards in interest rates and a more sustained stockmarket recovery or growth in unemployment, will leave property supply very significantly ahead of demand levels and would generate a total market growth of approximately 2p.c..

Importantly certain segments of the market, such as apartments and smaller townhouses, would undoubtedly be the most vulnerable sectors in this scenario.

Jenny Pollock
The main risk to the Irish housing market would appear to be from over supply. The current level of completions at some 65,000-70,000 per annum is outstripping estimated demand and cannot be sustained indefinitely. If the construction industry fails to respond to lower long-term demand and doesn’t scale back output levels accordingly, then the Irish housing market would come under threat.
In recent years a significant proportion of output has been absorbed by second homes. However, demand for holiday homes, in particular, is likely to decline given the scaling back of government holiday home schemes, a more subdued economic environment compared to the Celtic Tiger years and with increased competition from overseas markets for those looking to purchase holiday homes.

Furthermore, the Irish housing market has gained considerable support from the level of investor interest. However, lower rental incomes and difficulties in renting some residential properties has already resulted in some waning in investor interest. Any large-scale withdrawal by investors could put significant downward pressure on house prices. An increase in mortgage costs as interest rates trend upwards from 2005 onwards could be a catalyst for some investors to leave the market.

Nevertheless, prices should still rise in calendar 2004 due to carryover effects from the strong house price rises towards the end of 2003 and in the opening months of 2004.

Jim Power
The biggest threat to Irish house prices would emanate from either an employment shock or an interest rate shock. The employment shock would result from either a failure of the global economic cycle to sustain the current recovery, or Irish competitiveness to deteriorate to such an extent that FDI starts to flow out of the country at an alarming rate. The interest rate shock would result from a sharp upturn in the Euro Zone economic growth and inflation. Neither of these scenarios appears very likely over the forecast period. Another possibility would be for the market to suffer spontaneous combustion due to a collective sub-conscious decision by house buyers to push prices down. There is no international precedent for such a phenomenon and it appears unlikely, despite the elevated level of Irish house prices. It would appear that the prophets of doom who have been predicting a sharp reversal in house prices for some years have at most a 30p.c. probability of being proved correct. This is not an insignificant probability and its relatively high level does reflect the fact that prices have increased at an unprecedented pace over the past decade.

Marie Hunt
Prospects for growth in the Irish commercial property investment market are now better than they have been for many years with improving economic conditions, interest rates remaining relatively low and a decline in the office vacancy rate emerging. Strong demand coupled with limited supply of good-quality property has put pressure on yields in the first quarter of 2004.

Total returns reached 2 per cent in the first quarter of 2004 bringing annual returns in the year to March 2004 to 12.5 per cent. Due mainly to the strong performance of Henry Street/ Mary Street, retail was once again the best performing sector of the Irish commercial property market in 2003, producing a total un-geared return of 26.9 per cent, compared to 6.7 per cent in the industrial sector and 6.2 per cent in the office sector.

We are now seeing institutions re-entering the property investment market leading to a greater level of competition within the market place. It is expected that the total spend on investment property in Ireland in 2004 will be down on the €900 million invested last year, simply as a result of the scarcity of good quality investment product in the domestic market. Indeed, only €150 million was invested in Ireland in the first three months of 2004. Instead, considering that prime yields have contracted significantly, we don’t expect that returns will stray much above 10 per cent in 2004. While there is still extremely strong demand from Irish investors for commercial property, CB Richard Ellis Gunne expect that the total spend on commercial investment property in Ireland will contract this year, simply as a result of the scarcity of good quality investment stock in Ireland.

A startling statistic is €2.5 billion was invested in commercial property in the UK by Irish investors in 2003, more than 2.7 times that invested in the domestic economy. Whilst market conditions in the UK show many similarities with the Irish commercial property market, a better choice of product, greater yield potential, cheaper transactional costs, better quality of covenants available in the UK market and tight supply in the domestic market are the main factors attracting Irish investors to the UK.

On the back of improving economic conditions and the low interest rate environment, the prospects for commercial property investment market in Ireland over the next few years are very positive indeed. While we are unlikely to return to the heady heights of 1998 when total returns of 38 per cent were achieved in the commercial property market, I expect that more sustainable rates of growth of 12 per cent-13 per cent per annum will be achievable over the coming years, which when leveraging is taken into account represents a very attractive rate of growth in comparison to other forms of investment. With demand continuing to outstrip supply in the retail sector, it is expected that this sector will continue to be the best performing sector of the commercial property market with strong rental growth forecast over the coming years. In the office sector, following two years of depressed conditions, a resurgence in activity is now evident and it is hoped that the market will see considerable improvement in 2005/2006 as demand translates into lettings.

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