Tailwinds and headwinds will buffet Irish house prices in 2023

This quarter’s MyHome report shows another 0.3% fall in asking prices in Q1 2023. Prices fell especially sharply, by 0.8%, in Dublin but rose marginally by 0.2% in the rest of Ireland. We believe this represents frothy valuations built up during the pandemic inevitably cooling off. It also suggests the 0.6% decline in the Central Statistics Office’s (CSO) Residential Property Price Index (RPPI) measure of transaction prices in January will continue in the coming months.

The CSO’s RPPI index shows that Dublin house prices have already fallen by 2.1% since their peak in September. This isn’t surprising. The average Dublin price was €541,000 in January, or nine times average incomes. Clearly, the most stretched valuations are vulnerable to correction. 

However, Ireland’s housing market is not in free-fall. True, marked or even double-digit house price falls are expected in markets such as the United Kingdom or United States, but we do not believe Ireland will follow suit. 

First, demand remains buoyant given the resilient performance of the Irish economy. Second, housing supply remains very constrained. Third, the European Central Bank (ECB) is not expected to raise interest rates as aggressively as the Bank of England or Federal Reserve. Fourth, the surprise decision by the Central Bank of Ireland (CBI) to loosen the mortgage lending rules will in time put upward pressure on house prices. 

So Irish house prices face several headwinds and tailwinds in 2023.

There are now just 13,600 properties listed for sale on MyHome, well below levels above 20,000 pre-pandemic. Similarly, the average time to sale agreed is still close to a historic low of just three to four months. Mortgage approvals and Help-to-Buy applications have pointed to more resilient housing demand than in other countries. Ireland’s exceptionally tight housing market will support prices through 2023.

There are also signs that the loosening of the regulatory threshold on first-time buyer, loan-to-income ratios (LTIs) is starting to have an impact. The average first time buyer mortgage approval rose very sharply, by 2.3%, in February to a fresh record high of €281,350. The CBI has estimated that the rule change will gradually add 8% to house prices. This upward pressure will probably become evident in H2 2023.

Most 2- to 3-year fixed rates on Irish mortgage products are close to, or just above, 4%. Financial market instruments imply that the ECB will raise its deposit rate once more to 3.25%; however, prior to the US banking crisis, a 4% peak had been expected. The extent to which the ECB decides to raise official interest rates further, depending on the extent of inflationary pressures, is also a key uncertainty for Irish housing. 

On balance, we have decided to revise down our forecast for Irish house price inflation to 1.5% in 2023 (from 4% previously). This small rise could quite possibly split between falls in the capital but modest price gains in the rest of Ireland. However, the outlook is very uncertain and small price falls cannot be ruled out. Why? Asking prices have clearly had a weak start to 2023. Also, the correction in stretched valuations in some areas looks to have further to run. However, as 2023 progresses, the tight market, the resilient economy and, crucially, the easing of the CBI’s mortgage lending rules should support Irish house prices.

For more information on the residential property market, download a full version of the Q1 2023 MyHome report.