Housing Market Update: softer tone

Rising interest rate, falling real incomes and tighter credit standards have led to a turn in the international housing cycle, with the long boom now giving way to a slowdown, most notably in the US, although in most countries that as yet has not translated into large nominal price falls.

In Ireland, prices nationally are still rising but at a much slower pace; by 0.8% in the three months to December, compared to 3.4% in the same period of 2021. As a consequence the annual increase in December slowed to 7.8%, compared to 15% in the early months of the year.The trend has not been uniform across the country, however, as prices in Dublin actually fell in the final quarter, albeit by a modest 0.6%, leaving the annual change at 6%, against a figure of 9.3% elsewhere in the country, although double digit gains were recorded in the West ( 14.9%) and the Border counties ( 11.5%). .

One factor in the softer price tone was a marked increase in housing supply, with completions emerging at just shy of 30,000 in 2022, a substantial rise from the 20,000-21,000 totals seen in recent years.This also helped to boost mortgage draw downs for house purchase, increasing to 36,800 from 34,500 in 2021.The average purchase mortgage rose by 10% , to €276,000 , so boosting the total value of purchase mortgages to €10.2bn from €8.6bn the previous year. Headline new mortgage lending came in at €14.1bn , inflated by a very significant rise in switching, although the latter has no impact on housing demand nor indeed net mortgage debt. In fact the latter fell in 2022 by €700m or 0.9%, and the absence of credit growth perhaps best explains why the Central Bank eased its mortgage controls, increasing the LTI for FTB’s to 4 from 3.5.

That credit contraction alongside the huge level of household savings in Ireland left the domestic banks here with deposits exceeding loans by €89bn. As a consequence new mortgage rates only started to rise in December, five months after the first ECB rate increase, leaving Irish rates well below the EA average ( 2.69% versus 2.95%) and now the third lowest in the euro area.

The average rise in house prices in 2022 (as opposed to year-end) was 14.2% which was reasonably close to our model forecast rise of 12%. The biggest demand factor for housing is real household income and that fell last year, albeit by not as much as many anticipated it would seem (the final quarter figure has yet to be published) boosted by strong employment growth. This year will probably see a big fall in inflation so we expect a broadly flat income figure. which would be more supportive of demand. On interest rates most models tend to use the real mortgage rate , which fell sharply last year given the surge in CPI inflation, but we find the nominal rate is better supported empirically. On that basis the market is currently priced for another 1.25% from the ECB which may not all feed through to retail here but the likely increase is a negative factor for demand.

Affordability on our model deteriorated in 2022, reflecting the rise in the average mortgage, but was still below the long run average due to the offsetting impact of rising nominal incomes and lower interest rates. That changes this year, given the rate outlook, and affordability is forecast to be worse than the long run average for the first time since 2009.

Housing supply enters our model with a lag so the 2022 increase acts to dampen price growth in 2023, although we expect house completions to fall back to around 26,000 through the year, which would be supportive in 2024. That anticipated fall in supply also affects our mortgage forecasts, with new purchase loans falling to 32,500, with the value figure also falling to €9.4bn, although switching may boost the headline figure to €14.4bn, marginally above the 2022 out turn.

Expectations also play an important role in the housing market, both from buyers and developers, and that is difficult to capture in a formal way. We prefer adaptive expectations (ie. the recent price trend determines current expectations) but shocks to the economic or political outlook can materialise ( another sharp rise energy prices for example, or a larger rise in unemployment than we expect) but absent shocks we expect an average price rise in 2023 of 5%, implying a continued slowdown through the year to around 2% by December.