Improvement in housing availability with vendors coming back to the market

Our latest MyHome.ie report shows there was a moderate slowdown in house price inflation in Q2 2022.

Asking prices rose substantially, by 5% on the quarter, as they typically do ahead of the busy summer trading season, but the annual inflation rate fell back slightly to 10.9%. 

There was also some improvement in housing availability with vendors coming back to the market. The number of properties listed for sale has flattened off after consistent declines over the past two years, but the 12,700 properties for sale are still well below pre-pandemic levels. The situation is better in Dublin, with the number of listed properties up 7% on the year. However, the average time to sale agreed has fallen to a fresh record low of 2.6 months, indicative of the exceptionally tight housing market. 

Demand is clearly still very strong, driven by buoyant jobs and pay growth. The MyHome data shows that in Q2 homebuyers were bidding up transaction prices 6.6% above asking (at the median). In April, the average mortgage approval was €283,700, up 9.4% on the year, now above Celtic Tiger era levels for the first time. It may well be that Irish banks have taken a less conservative approach to their lending than during the pandemic. Specifically, granting additional exemptions to the 3.5x regulatory threshold on loan-to-income (LTI) ratios.

Despite the news the Residential Property Price Index (RPPI) rose by just 0.1% in April, perhaps signalling affordability is starting to act as a constraint, there could still be sufficient momentum to drive house prices higher in the coming months.

That said, anecdotal evidence from estate agents points to momentum slowing. Also, financial markets now expect the European Central Bank (ECB) to raise official rates aggressively to 1.3% by end-2022 and to 2.5% by end-2023. So, we still expect the RPPI to slow in H2 towards our forecast for 7% inflation in 2022. 

The possibility of a modest fall in Irish house prices can’t be ruled out, correcting some of the froth built-up since the beginning of the pandemic. However, double-digit declines or a repeat of the Celtic Tiger era housing crash seems very unlikely.

This is because the Central Bank of Ireland (CBI) rules have stopped homebuyers taking on too much debt. The median LTI ratio amongst first-time buyers is currently 3.1x, well below the 4.5x recorded in 2007/08 and conservative by European standards. 

Similarly, debt-servicing ratios are low by historical standards. For the median first-time buyer, close to 24% of disposable income is currently absorbed by mortgage payments. In fact, the CBI has estimated that Irish house prices might have been 25% higher in the absence of the regulatory constraint of the lending rules. 

Given there is latent appetite to take on more debt amongst frustrated homebuyers, the Irish housing market should be relatively well placed to absorb higher ECB interest rates. Still, 2022 should be a year of two halves, with double-digit inflation and sharp price gains giving way to greater concerns on affordability, the economic outlook and the impact of the ECB raising interest rates.

For more information on the residential property market, download a full version of the Q2 2022 MyHome report.