| Euro interest rates - 2 to 4 more quarter point rises by end 2008 |
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| Following the June increase, which brought the ECB Refi interest rate to 4 p.c., double what it was in December 2005, FINANCE's panel of leading economists see on average two more rate rises by the end of 2008, with the most pessimistic predicting four, and the most optimistic (two respondents out of eight) saying that present levels represent the peak of the cycle. As ECB interest rates represent the most powerful influence on Irish house price trends, the panel's forecasts for house prices in 2007 and 2008 naturally reflect their interest rate expectations. |
FINANCE asked a panel of economists for their interest rate, and then to factor in these predictions into their outlooks for the housing market.
The panelists are: Eoin Fahy, chief economist, KBC Asset Management; Austin Hughes, chief economist, IIB Bank; Pat McArdle, chief economist, Ulster Bank; Dan McLaughlin, chief economist, Bank of Ireland; Alan McQuaid, chief economist, Bloxham Stockbrokers; Dermot O'Brien, chief economist, NCB Stockbrokers; Dermot O'Leary, chief economist, Goodbody Stockbrokers; Jenny Pollock, senior analyst, AIB; and Jim Power, chief economist, Friends First.
Interest rate hikes - not as bad as feared
FINANCE's panel of economists collectively believe that by year end 2007, there will only be one further rate increase, while 2008 will see just one increase bringing the ECB rate up to 4.5 per cent at the end of that year. Indeed two respondents, IIB Bank's Austin Hughes and Bank of Ireland's Dan McLaughlin, believe that the European Central Bank's interest rate hikes are now done, and neither of them foresee further increases over the next 18 months.
McLaughlin believes that the Eurozone economic cycle is at a turning point and that growth has passed peak momentum. 'We may be very near or already at the top of the rate cycle and any further rate increases are likely to be minimal,' he says.
KBC Asset Management's Eoin Fahy predicts the most rate hikes, as he believes that rates will reach 5 per cent by the end of 2008. Bloxham's Alan McQuaid is just behind Fahy, saying that rates will reach 4.75 per cent by year-end 2008, with just one further rate rise by year-end.
'I am holding to the view that we will get just one more quarter-point hike in the second half of this year, mainly because there seems to be a strong difference of opinion between the Bundesbank and the Bank of France as to how much tightening the Euroland economy needs to contain inflationary pressures and expectations. Furthermore, I also believe that the full impact of the 200bps in tightening we've already seen since December 2005 has yet to be felt by the Eurozone economy, and the ECB may want some 'pause' time to reassess the situation,' he says.
Tough year ahead but market may look up in 2008
And how do these interest rate predictions feed into property prices going forward?
The panelists predict that prices will remain flat, or more specifically, grow, on average, by just 0.1 per cent in 2007. For 2008, the panel is marginally more optimistic, with an overall growth rate of 2.0 per cent predicted.
Pat McArdle, chief economist with Ulster Bank, has the highest year on year forecast, but this is explained, he says, 'because house prices were still growing by 10 to 15 per cent in the early months of 2007, these forecasts are consistent with a sharp slowdown through the year'. His bullish forecast on prices is underpinned by the fact that he expects only one further interest rate rise, and predicts that the Government's stamp duty changes will give a temporary boost in Summer 2007.
Unlike the majority of the panel, McArdle's forecast for 2008 is worse than for 2007, as he predicts an annual average decline of 0.3 per cent, the second most bearish prediction behind Alan McQuaid's 0.02 per cent.
'2008 appears worse on the surface but the forecast annual averages hide a modest but steady improvement throughout the year as the absence of further interest-rate rises permits a modest recovery in sentiment. This should see the monthly rate of price increase again turn positive in the second half of the year, albeit that the rate is unlikely to exceed 3 per cent by year end,' McArdle says.
For 2007, Fahy is the most bearish, predicting an annual decline of 5 per cent, followed by an upswing of 2 per cent for 2008.
NCB Stockbroker's Dermot O'Brien is the most bullish for 2008, as he expects prices to rise by 4-5 per cent, as the uncertainty which has beset the market in 2007, is resolved.
'For 2008, assuming a continuing broad balance between supply and demand, a low, single-digit rate of house price increase - in the 4 to 5 per cent range - seems likely. The risks to this forecast are probably to the upside. On the basis of current demographic trends, there is no reason to expect any significant fall in demand but any cutback in the volume of house building in reaction to current negative commentary could mean that supply falls short with obvious implications for prices,' he says.
AIB's Jenny Pollock, who predicts a further two ECB rate increases by year-end 2008, says that affordability conditions seem set to deteriorate even more, but that this will be offset, to some extent, by a further modest decline in house prices over the next few months, backing up her prediction of an overall price fall of 2 per cent for the market in 2007.
Looking to 2008, she says that, 'personal taxation changes and a further increase in mortgage relief for first time buyers in the next Budget are likely to boost disposable income and further aid house affordability'.
First time buyer range to remain flat - all other price brackets to fall
The panel was also asked to give price predictions for specific price categories both within and outside Dublin.
Buoyed by the Government's recent exemption of stamp duty for first time buyers, houses in the €300-€500,000 bracket in Dublin look set to perform the best in the coming year, with a growth rate, albeit a minimal one, of 1.2 per cent.
'The first time buyer market will be supported by the increase in mortgage tax relief, but this will not be of significance at higher price levels, so prices may remain flat, particularly outside Dublin,' says McLaughlin, who predicts growth of 3 per cent in the first time buyer category in 2007, and 4 per cent in 2008.
Outside of Dublin, houses in this bracket are expected to fall, while houses in all other price brackets are predicted to experience declines by year-end, with houses in the E2 million+ plus category expected to decline by the most.
For 2008, the overall outlook is more optimistic, with houses nationwide expected to remain flat, with growth of almost 2 per cent predicted in the first time buyer category, again in Dublin.
Nationwide, prices are expected to remain flat in 2008, while in Dublin, there will be marginal increases, of the order of 1 per cent in all other price categories, including the €2 million + category.
Going forward, McLaughlin maintains that affordability will improve over the next year as a result of rising incomes, 'but a substantial rise in house prices is unlikely until rates start to decline again, probably in 2009,' he says. |
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| Article appeared in the July 2007 issue.
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