HOUSEHOLDS ARE SPENDING almost as much of their incomes on mortgage repayments as they were in the latter stages of the Celtic Tiger, according to new economic analysis.

The ESRI warned that homeowners spending a high proportion of their income on mortgage repayments are vulnerable to risks such as any fall in real wages or increase in unemployment.

The new report has also warned that house prices may be overvalued by as much as 10%, posing a risk to homeowners in the event of another economic crash.

On average, households spent 33% of their disposable income on mortgage repayments between July and October this year. It’s the highest share of spending on mortgages that Ireland has seen since 2007 and early 2008.

For example, for a household with a net income of €40,000, spending 33% of disposable income on mortgages repayments would equate to €13,010 per year or €1,100 per month. For a household with a net income of €65,000, it would be €21,450 per year or €1,787.50 per month.

The immediate outlook isn’t great for prospective homeowners either, with the number of homes completed in the first six months of this year lower than in the same period of 2023 (although the completion rate picked up after that).

Overall, the outlook for the Irish economy for next year is good, the ESRI said as it released its latest quarterly economic commentary.

However, policy changes proposed by incoming US president Donald Trump pose risk to Ireland’s prosperity.

Housing

Continuous increases in house prices over the last 11 years mean that as of August 2024, Irish house prices are 13.4% higher now than they were in April 2007, before the global financial crisis.

The year-on-year growth in property prices reached as high as 10% in the months of August and September this year.

The report estimates that house prices are overvalued in the region of 8% to 10%, which means that householders are particularly vulnerable to a “painful correction” of prices like that which was seen between 2007 and 2012.

Researchers also said the issue raises question marks around the capability of certain cohorts of the population to own homes, given a rise in price-to-income ratios and the ability of households to meet repayments.

A crucial measure to alleviate housing pressures is increasing the availability of supply, but expectations for new housing this year and next year are still falling short. There were 20,000 homes completed in the first nine months of the year.

Seasonal patterns typically show an increase in house completions in the final three months of the year – but it’s unlikely that home completions will exceed 33,000 by the end of this month. As a result, the ESRI is maintaining its forecast that just over 33,000 units will be completed in 2024.

That is well short of the 52,000 homes needed per year to address the supply issue, according to the Central Bank.

Irish economy and US influence

The State’s tax income has increased compared with 2023, even if the income from Apple losing its case at the Court of Justice of the European Union is excluded.

However, the ESRI is cautioning that the outlook for future corporation tax receipts is uncertain in the face of the incoming US administration.

Donald Trump is due to return to the White House in January after winning the US’s presidential election in November.

Related Reads

To the politicians: 'My generation lives with a housing crisis that will last a lifetime'

The real risk of a Trump presidency to Ireland - the end of our corporate tax bonanza

Trump made promises during his campaign about certain policies that could affect Ireland, such as lowering the US’s corporate tax rate to 15%, which would match the rate here. This could make Ireland a less competitive location for multinational companies in the future.

The ESRI believes “aggressive US trade policy could affect decision-making in large multinationals”. It noted that Ireland’s corporation tax receipts are heavily dependent on a small number of firms and that the tech and pharmaceutical sectors are particularly vulnerable.

“In these sectors, there may be a higher risk of relocation because firms with complex, globalised manufacturing processes could be liable for transatlantic tariffs more than once for a given product,” the ESRI warned.

The ESRI also noted another Trump policy could also affect Irish public finances.

“The Trump campaign signalled its intention to reshore to the US profits arising from intellectual property that is located in Ireland. If this were done, it could have a significant impact on future corporation tax receipts,” the ESRI said.

Nevertheless, the think tank expects that GDP will fall by 1.1% in 2024 but rebound in 2025 to a growth rate of 4.5% due to higher exports and investment.

Modified domestic demand, which is considered to be an accurate measure of underlying Irish economic performance, is expected to grow by 3.2% in 2024 and 4.1% in 2025.

Inflation has been falling, dropping to a year-on-year rate of 0.7% as of October, which is lower than the EU average. It’s a large drop since January, when the rate of inflation stood at 4.1%. Overall, the average inflation in 2024 is expected to work out to be about 2.1%.

Unemployment remains low, standing at 4.1% as of November.