New supply needed to counter housing costs
The Economic and Social Research Institute’s David Duffy reviews the differences between the Dublin and non-Dublin property markets and considers the need for increased supply.
Over the past 20 years, Ireland has experienced one of the largest housing market booms and one of the largest housing market crashes. Between 1995 and 2007, we saw house prices increase by 74.5 per cent. Since then, we have seen them fall by close to 60 per cent. So where are we now?
Recent data would suggest that the housing market is recovering – although there is a regional element to this.
The numbers for June 2014 show that house prices in Dublin were 23.9 per cent higher than a year earlier. For properties outside Dublin, the increases was 3.4 per cent. Rents are also increasing, showing the same regional divide. Data show an increase in the number of properties listed for sale and a growth in the number of transactions, again with stronger increases in Dublin.
The strength of the price increases, particularly in Dublin, has raised some concerns about the emergence of a property bubble. However, it is more likely that the increases reflect supply and demand. Demand from people looking to buy or to rent a property has risen – people still want to set up their own household.
At the same time, the supply of housing has remained low. New housing is only being built in small numbers as the increase in prices in many areas of the country is not yet sufficient to make building profitable. It is also likely that tracker mortgages, as well as widespread negative equity are making existing homeowners reluctant to move.
Negative equity occurs when the price of a property falls below the value of the outstanding mortgage secured on that property. Negative equity can reduce household spending and reduce labour market mobility. It is estimated that the total number of mortgage loans in negative equity reached a peak of over 314,000 by the end of 2012.
The recovery in prices experienced in 2013 reduced the number in negative equity to 268,000 by the end of the year – a fall of approximately 45,000, or
15 per cent. The numbers in negative equity in Dublin fell by over 35,000 by the end of 2013. This represents over three-quarters of the improvement experienced nationally.
The majority of those experiencing negative equity are first-time buyers, who account for approximately 57-58 per cent of those in negative equity in each year from 2010 to 2013. This may well reflect the high initial loan-to-value ratios on mortgages taken out by first-time buyers. House price growth to date in 2014 should see the positive trend of falling numbers in negative equity continue.
The improvement is also important in the context of financial stability. The reduction in the value of mortgage-based assets can lead to a reduction in the availability of credit to both households and firms as banks make provisions for an anticipated increase in expected losses. The more mortgages that exit negative equity, the stronger the balance sheets of Irish credit institutions.
Direction
Demographic changes will influence the need for additional dwellings over the coming decade. ESRI estimates suggest that an annual average of approximately 25,000 new households will be formed over the coming years. One of the factors behind the increase in household formation in recent years is the fall in the ratio of rent to income as a result of the crisis.
Prior to the crisis, rents had been rising rapidly and so the cost of forming an independent household was a major incentive to remain at home with parents or to share accommodation with friends, rather than moving into independent accommodation. However, after the crisis, while incomes fell, the fall in rents was substantially greater.
The result was that, for those with a job, independent living became much more affordable. The effect of the recent rise in rents will be to delay the formation of an independent household by some individuals in the coming years. This will tend to reduce headship rates (the proportion of people within an age group who are the head of an independent household), slightly easing pressures for additional dwellings.
However, the growth in the size of the cohort of people aged 20-39 means that a substantial supply of additional dwellings will be needed over the coming decade. To the extent that there are pressures for higher levels of homeownership as a result of demographic changes and changes in relative prices, this will only be realised if additional dwellings are built and if the financial sector can finance such a change.
A second aspect of household behaviour, which is very important for the housing market, is whether households will choose to buy or to rent their dwelling. The proportion of people renting has risen significantly over the last five years. One area of uncertainty is whether the result of the crisis has been a permanent change in preferences away from home ownership to renting. The crisis has illustrated the fact that homeownership carries risks.
Until the supply of dwellings responds to the rise in prices and rents, there will continue to be upward pressure on both prices and rents. This rise should incentivise a supply response. However, to minimise any increase that will occur, it will be very important to deal with any regulatory or administrative obstacles which may be hindering an early supply response by the building industry.
David Duffy is a Senior Research Officer with ESRI, specialising in housing.
