A year of two halves

Our latest MyHome.ie report shows the Irish housing market starting to cool off in Q3 2022.

The MyHome report shows that asking prices fell by 1.3% in Q3 2022, pushing annual inflation back into single-digit territory at 7.8%. Asking price inflation in Dublin was 6.2% and 9% in the rest of Ireland. The message here is that stretched valuations and overly exuberant expectations among vendors are taking a toll on pricing. The 1.3% decline in the third quarter shouldn’t be taken as a sign that the housing market will now see persistent price falls. Asking prices are typically weak as the busy summer trading season peters out and fell in both Q3 2018 and Q3 2019. After the disruption of the COVID-19 pandemic, the usual seasonal pattern has re-emerged.

However, a sense that the housing market has peaked may have contributed to vendors returning to the market but also that activity levels are returning to normal. The stock of homes listed for sale is now 16,300 – up from the 11,200 trough at the beginning of the year, albeit still down on the 21,000 average in the three years preceding the pandemic in 2020.

New listings for sale were particularly strong during the summer, up 17% on the same period of 2019. However, residential transaction volumes in 2022 are up 6.8% on 2019, evident through the first nine months, suggesting that the market is merely making up for lost time following delayed transactional activity in 2020 and 2021.Looking forward, we expect that Irish house prices will grow by 6% through 2022 and by 3% in 2023. There are of course many risks to this view. Ireland potentially faces an energy crisis this winter amid fears of a full-blown European recession brought on by events in Ukraine and surging natural gas prices.

The housing market will also have to cope with the European Central Bank (ECB) raising interest rates to potentially above 2% by end-2022. This will contribute to slower price growth. However, the Central Bank’s mortgage lending rules have contained both leverage and debt-service ratios on new lending, with plenty of appetite among potential homebuyers to borrow more. On this point, pent-up demand in the Irish housing market remains strong. In July, the average mortgage approval was €288,300 – up 8% on the year. In the year to June, 16% of mortgage approvals failed to translate into a drawdown, indicative of frustrated buyers. Similarly, the 30,000 applications to avail of the Help-to-Buy scheme over the past 12 months are well in excess of claims of just 7,400.

Most unwelcome are signs that supply is being curtailed by supply-chain issues and rising input costs. The Construction Purchasing Managers’ Index (PMI) indicated that residential activity contracted for three straight months. Housing starts have also decelerated. Although completions have beaten expectations and look set to rise well above 25,000 this year, it now looks far less likely they will expand above 30,000 in 2023. Although Ireland faces a more challenging economic environment, for now substantial cuts in employment do not look likely. While modest declines in Irish house prices towards the turn of the year 2022/2023 are certainly possible, we still expect 3% growth in Irish house prices in 2023; in the context of pent-up demand and with supply constrained, this is more than we had previously thought.

For more information on the residential property market, download a full version of the Q3 2022 MyHome report.