New House Price Index showing wide regional variations.

The CSO has just released a new residential property price index, which is based on total transactions from Stamp duty returns, as opposed to data from mortgage lenders. The latter was only capturing around half of total transactions, so the new index is more representative of the housing market  as a whole as well as providing a host of additional information , including price and turnover  trends at a  regional and localised level.

The  inclusion of cash buyers ( or more precisely, buyers who are not being funded by Irish mortgage lenders) has not greatly altered the  perceived picture of the  housing cycle, although there are some modest differences revealed. Prices are now seen to have peaked nationally in April 2007, five months earlier than previously thought, although still bottoming in March 2013. The decline is now a little steeper, however, at 54.4% againt 50.9%, primarily due to a bigger fall in prices ex-Dublin; the crash there is now put at over 56% against 49% on the old index.

Cash buyers appear to pay less than  buyers with mortgages and the new index shows that the recovery has been a little weaker than previously perceived, albeit not dramatically so;  national prices in July 2016 were 3% below the index based on mortgage data alone. The divergence is not material in Dublin (less than 1% in June) but is pronounced elsewhere in the country, with the new index 8.4% below the old.

What about the recent trend, now that the Central Bank’s mortgage controls have bedded in? What is apparent is that prices in the Capital have slowed appreciably since last December and were flat in the first six months of this year, with monthly falls alternating with modest gains. Prices did rise in June and July, by a cumulative 2%, so boosting the annual change to 3.8%. Dun Laoghaire/Rathdown has fared the worst ( +1.1% over the past year) with Fingal ouperforming (+6.4%).

Elsewhere, the market is more buoyant. Prices ex-Dublin were broadly unchanged over the Winter and early Spring but then accelerated, rising by 6.7% in the three months to July, boosting the annual increase to  11.3%. There is a regional divergence however, with prices rising by just under 19% in the Midlands and by some 15% in the South West against 6% in the South East and 4% in the Mid East.

Prices in the Capital are still well above the national norm, of course, at an average €385,000 versus €236,000 according to the CSO, which is common feature in many economies. Dublin also significantly outperformed the rest of the country in the early years of the recovery but that now appears to have ended, with some modest catch-up underway.


Bit early to blame Central Bank for house price fall

The CSO’s  residential property index   for February showed a fall in Dublin prices for the second month in a row, the 0.7% decline bringing the fall over three months to 2.4%. This still left the annual rise at over 21% but the market in the capital has clearly lost some momentum over recent months and some have claimed that the Central Bank’s new macro-prudential controls on mortgage lending are responsible. Prices excluding Dublin were flat in February but also fell on a three month basis, albeit by only 0.3%, so adding to the perception that there is a common factor at work across the country.

The evidence is not persuasive, however, at least not yet. The rules only came into operation in late January , for a start, and there does not appear to have been a significant shift in the recent pattern of mortgage approvals ahead of the decision. Mortgage approvals in the three months to January rose by an annual 55,5%, and as such not materially different from the 56.5% in the three months to December. Housing transactions in January were actually very strong, according to the Property Price Register(PPR), rising by an annual 68% . The available February data does show a marked deceleration in the pace of annual growth in transactions, to 35%, but that figure may be quite different when all the filings are included, which does take time.

The Central Bank’s own research (1) also suggests that the mortgage limits on Loan to Value and Loan to Income will have little impact on prices but a more significant  effect on mortgage lending and on the supply of housing, which they suggest will be some 2-3% lower per annum for a number of years ,resulting in a loss of some  2000  units  after 4 years relative  to an unchanged policy forecast. That  reduction in supply will put upward pressure on prices , so dampening any downward effect from tighter credit standards.

Any such simulation depends on the housing model used of course, and the ESRI (2) has just come out with some findings of its own. These also point to a significant effect from the new mortgage rules on house completions, with a supply fall of some 4%-5%, although they predict a larger effect than the Central Bank on prices, albeit  still a modest 4%-5%.

Another problem inherent in linking recent price trends in residential property to the Central Bank regulations is that not all housing is behaving the same way. Apartment prices nationally rose by 1.9% in February and by 2.5% on a three-month basis. Apartments in the capital also rose strongly on the month, by 2%, and by 1.8% over three months. The price series on apartments is extremely volatile but apartment prices in Dublin have now risen faster than houses over the past year (by 24.5% versus 21.1%).

Perhaps a better explanation for the most recent slowdown in house prices is simply that a market which appears to be primarily  driven by cash buyers is likely to lose momentum. That’s not to suggest that prices are likely to fall sharply but that annual house price growth in excess of 20% is unlikely to be repeated for long in the absence of excessive credit growth. New mortgage lending is picking up , and showing very strong percentage growth given the low base, but it is still accounting for less than 50% of housing transactions. Indeed, the latest PPR figures show transactions of over 15,600 in the final quarter of 2014, with the number of new mortgages drawn down for house purchase amounting to less than 7,000 , or 44% of the total.

(1) ‘Assessing the Impact of macro-prudential measures’ Central Bank of Ireland, Economic Letters , Vol. 2015, No.3

(2) ‘Quarterly Economic Commentary’, Spring 2015, ESRI