An especially uncertain outlook for 2023

This quarter’s MyHome report points to the housing market holding up better than some anecdotal evidence has suggested. Asking prices fell by 0.4% in Q4 2022, a relatively small decline for the final quarter of the calendar year, but are still up 6% on the year. Dublin is seeing a more pronounced slowdown, with prices down 0.8% on the quarter and up just 3.6% on the year.

However, the number of vendors cutting their asking prices is still at low levels. Also, transactions in Q4 were still being settled above asking prices, indicative of a tight market. There are 15,000 properties listed for sale on MyHome, an improvement from the beginning of 2022 but below pre-pandemic levels exceeding 20,000. The average time to sale agreed in Q4 was just 2.7 months, still close to historic lows. We expect transactions will exceed €21bn in 2022, up 7.5% in volume terms on 2021.

The key point is that because employment has remained robust, there has not been any hit to housing demand despite the uncertain economic environment posed by events in Ukraine, higher energy prices and CPI inflation and European Central Bank (ECB) rate hikes. However, even if mortgage interest rates rise to 4%, debt service ratios are unlikely to become stretched and there will be only a limited headwind to house prices.

That said, the average residential transaction in Q3 2022 was €370,000, now 7.7x the average income of €48,000. This is a similar valuation multiple to the UK, where house prices are now falling but caused by a surge in mortgage rates above 6%. It is quite possible that a degree of froth exists in the Irish housing market that could continue to unwind in early 2023.

The CBI has estimated that the decision will eventually add 8% to Irish house prices over three years. It is quite possible that first-time buyers could act more quickly to take on more leverage on their borrowing as they compete for the limited pool of homes listed for sale. This poses an upside risk to our forecast for 4% house price inflation in 2023.

Recent months have seen worrying trends in the homebuilding sector. Housing starts have slowed, and the construction PMI survey has pointed to the flow of new development drying up. The new First Home Scheme will help overcome viability concerns on housing developments arising from build cost inflation. However, the pick-up in funding costs could well impede apartment development, which has so far been reliant on institutional investment into the private rented sector. A process of price discovery is now at play, with capital values under pressure as residential yields must adjust to the ECB’s tighter monetary policy.

We still expect housing completions will pick up to 28,400 in 2022 and 27,000 in 2023. However, the outlook for 2024 is far more uncertain. The government’s ambitious plans to expedite planning processes are welcome although, as ever, the proof will be in the pudding.

For more information on the residential property market, download a full version of the Q4 2022 MyHome report.