A steadier Irish housing market could help homebuyers
Buying a house is a really big deal – for most people it’s probably the biggest ‘deal’ of their lives. Most buyers consider a wide range of factors in their efforts to get this big decision right. Austin Hughes, Chief Economist for KBC Bank, tells us abou
Austin Hughes, Chief Economist for KBC Bank, tells us about the economic factors likely to play a key role in determining when people buy homes and how much it costs them
The decision to purchase a home is personal and, for most buyers, it’s their specific housing needs rather than economic conditions that drive their decision to enter the property market.
Last autumn’s wave of the KBC homebuyer sentiment survey found that for most people, it was reaching a certain age or point in their life cycle, having new or broken relationships, finding the right space for larger or smaller families, or experiencing changes in what job they did or where they worked that were the key reasons why they are now house-hunting.
YOU CAN’T ENTIRELY ESCAPE DEMAND AND SUPPLY
If most people’s reasons for buying a home are personal, the broader economic environment has a big say in how easy or hard that process might be.
“Housing, like many other aspects of our lives, is subject to the laws of demand and supply,” says Austin Hughes, Chief Economist for KBC. “A steady improvement in the health of the Irish economy in recent years has seen the demand for homes increase sharply.
“However, the downturn following the financial crisis meant a large number of house purchases were postponed. So, a substantial amount of ‘pent-up demand’ from earlier years means demand is now higher than normal at a time when new house building is well below normal.”
While homebuyers may have to compromise as to where or what they buy, Austin says they are still being careful.
“There isn’t the same scramble to ‘get on the property ladder’ that was such a feature of the boom of the early 2000s. Homebuyers are now trying to ‘future proof ’ their purchases rather than buying with the intention of quickly moving on. In this context, 61% of homebuyers in the autumn KBC survey said they planned to stay more than 10 years in the home they plan to buy.”
SUPPLY IS INCREASING…
Unfortunately, finding the right property is not easy at the moment. About 18,000 homes were built in Ireland in 2018, which is about half the number needed to match Ireland’s ‘normal’ housing needs. So, supply remains far below demand.
As a result, property prices rose last year as they have every year since 2013. That said, the annual rise to December 2018 at 6.5% was the smallest end-year increase since 2013. Could this be a sign that conditions are changing in the Irish property market?
“Homebuyers should see more choice as construction activity ramps up further. Although new supply fell well short of demand last year, the number of new homes completed was nearly four times higher than in 2013.
“Moreover, supply should increase further in coming years, dampening price growth. So, there is no panic to buy whatever is available as quickly as possible.”
…WHILE DEMAND GROWTH MAY BE EASING AS BREXIT IS LOOMING
Austin says there are also signs that the pace of demand growth is slowing. In part, this is because the pipeline of pent-up demand should ease.
Austin says: “A more important factor is diminishing affordability as house prices have increased about eight times faster than average earnings in Ireland since 2013, although they had fallen much faster in the previous five years. A cautious approach on the part of borrowers and lenders reinforced by Central Bank lending limits has also curbed the capacity for house prices to permanently move away from broader trends in the Irish economy.
“Of course, the outlook for demand could be materially altered by Brexit. A ‘soft’ Brexit, entailing a transition period and a reasonably close future economic relationship between the UK and the EU would probably see the Irish economy perform strongly in 2019. This could even lead to a brief ‘bounce’ in property prices.
“In contrast, if the UK were to ‘crash out’ of the EU at the end of March, this would put the Irish economy on a notably poorer footing. In turn, this would likely lead to a Brexit ‘bump’ in the property market as an economic slowdown would cause purchasers to hold back at least temporarily.”
INTEREST RATE WORRIES HAVE EASED
If Brexit is now a major source of uncertainty for the Irish housing market, another concern has eased considerably of late. Austin says that a year ago, it was generally thought that rising interest rates would be a key feature of 2019. However, slower global growth and stubbornly low inflation mean expectations for both the timing and scale of interest rate increases have changed markedly, with ‘lower for longer’ now summarising current financial market thinking.
“Interest rates are exceptionally low by historic standards at present and, at some point, borrowing costs will move higher. But the ‘new normal’ of a more fragile world economy suggests that any eventual rate increases may be later and less aggressive than in the past.
“Moreover, current conditions have translated into downward pressure on market rates,” continues Austin. “As a result, the cost to homebuyers of protecting against any future increases in rates by ‘fixing’ their borrowing costs is lower now than what historically was the case.”
A DULLER IRISH ECONOMY WOULD BE BETTER FOR HOMEBUYERS
The combination of improving housing supply and no early threat of higher interest rates are significant positives for those now contemplating a first property purchase or moving home.
While the shadow of Brexit hangs heavily over the near-term outlook, strong population dynamics, the resilience of the Irish economy and lessons learned from the downturn all mean anyone searching for a suitable property is unlikely to be alone.
“There are encouraging signs that the Irish housing market no longer looks to be on the rollercoaster ride of the past. A duller ‘macro’ environment should allow buyers to concentrate their energies on the vast range of personal considerations that go into finding a property that is perfect for them.”
THE COMBINATION OF IMPROVING HOUSING SUPPLY AND NO EARLY THREAT OF HIGHER INTEREST RATES ARE SIGNIFICANT POSITIVES FOR THOSE NOW CONTEMPLATING A FIRST PROPERTY PURCHASE OR MOVING HOME.