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House prices could be over-valued by 7%, with market predicted to 'moderate substantially'

That’s according to the ESRI’s latest quarterly economic commentary.

Image: Leah Farrell

HOUSE PRICE IN Ireland could be over-valued by around 7%, due in part to the number of “institutional investors”.

However, house prices are predicted to “moderate substantially over the short to medium term”.

That’s according to modelling contained in the Economic and Social Research Institute’s latest quarterly economic commentary.

In the year to July, CSO figures revealed that residential property prices increased by 13%.

Unlike the period prior to the financial crisis in 2007 when there was also significant over-valuation, the ESRI notes that excess credit is not likely to be a factor this time round.

And while credit levels have increase in recent years, the ESRI does not believe they have done so on “an unsustainable basis”.

Rather, the institute points to the “increasing share of non-household purchasers”, such as “institutional investors, local authorities or other Approved Housing Bodies”.

The report also points to increased savings by Irish households during the pandemic as a “likely cause” of recent house price rises.

There is evidence from the European Commission that Irish households have used these savings in the residential property market, which fuelled housing demand.

Figures from the CSO show a substantial increase in household savings over the course of the pandemic.

Between 2012 and 2019 savings in aggregate terms averaged €2.3 billion per quarter, but in 2020 and 2021 this jumped to over €8 billion.

However, the ESRI notes that “the recent surge in savings and wealth is not sustainable over the medium term” and that “changes in house prices will become re-aligned with movements in income”.

The institute forecasts that “this means that recent increases in house prices are likely to moderate substantially over the short to medium term”.

Meanwhile, Tánaiste Leo Varadkar said it was not a “huge surprise” that prices had showed signs of levelling off given rising interest rates and the increased cost of living.

He added that house prices are likely to fall a bit in the period ahead.

Varadkar said: “The likelihood is that we will see house prices moderate and even fall a bit in the period ahead.

“There is some signs that there’s increased availability of homes and that house prices are levelling off, are starting to fall back, and that isn’t a huge surprise.

“Interest rates are rising. And also people are facing other costs with the rising cost of living.”

Elsewhere, the ESRI report predicts the Irish economy to preform in a “robust manner” for the remainder of the year, though this pace of growth will moderate in 2023.

 

The report points to a “significant degree of resilience” as evidence by the technology and pharmaceutical sectors which have continued to drive Irish export growth.

It’s predicting the economy will grow by 7.5% this year, but that this figure will drop to 2.5% next year.

Inflation is also expected to average 8.1% this year and 6.8% next year, “as the war in Ukraine and strain on the European energy market continues”.

The report also notes that recession risks are “rising across Ireland’s main trading partners, with prospects for the UK economy of particular concern”

And while the Irish financial is less integrated with the UK sector than before, the ESRI warns that it “is very difficult to fully assess the contagion effects of a possible full-blown financial crisis in the UK”.

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