We need your help now

Support from readers like you keeps The Journal open.

You are visiting us because we have something you value. Independent, unbiased news that tells the truth. Advertising revenue goes some way to support our mission, but this year it has not been enough.

If you've seen value in our reporting, please contribute what you can, so we can continue to produce accurate and meaningful journalism. For everyone who needs it.

File photo of housing estate Alamy

Ireland is not a country where house prices are meant to fall

The concept of falling house prices is not just alien – it actively goes against the way things are meant to work.

THERE ARE SOME things most people agree on when it comes to Irish housing.

Statement 1: It’s too expensive relative to typical incomes – yes.

Statement 2: It should become more ‘affordable’ – yes.

But then if these two statements are both true, that something is too expensive and has to become more affordable, surely that means it must become – whisper it – cheaper.

So – Statement 3: Irish house prices should fall.

But where most people would agree with statements one and two, statement three is where things start getting murky.

That is because much of Ireland’s political and economic system is set up in a way in which property prices are not meant to go down.

To start, let’s look at the general public.

Ireland is roughly two-thirds homeowners, one-third renters. Of that home-owning group, their house is by far their most valuable asset.

Figures published recently by a Central Bank researcher found that housing accounts for 67% of all wealth in Ireland.

It also makes up a proportionally bigger share of wealth for the middle class than for those in the richest 10%, who spread their money around more.

So falling house prices would have a major impact, particularly on middle to high earners. It’s not something many homeowners want in practice.

New local housing schemes are often flooded with objections from local residents concerned about property values.

This then has a knock-on impact on councils and planning bodies, which often cite worries about “depreciating property values” as reason to block new housing (see here, here and here for a few quick examples).

Therefore, councils favour lower density housing developments – the opposite of what most experts agree is needed to accelerate housing supply and make an impact on housing affordability.

The financial system also favours price increases.

Interest rates are calculated based on the loan to value (LTV) – the ratio of a homeowner’s loan to the value of the property. Rising prices mean a better LTV, which means better mortgage rates for the homeowner.

Much like the Irish public, the wealth of banks is concentrated in housing, with lending for residential property accounting for about 60% of the loan books at Irish lenders.

A Central Bank study in 2019 found this level of exposure to residential property was the highest of 21 European countries assessed.

There were just two other countries – the Netherlands and Belgium – where residential property accounted for more than 50% of the loan books of banks. Exposure of 30% – 40% was more typical.

While Irish lenders are currently raking in billions in profits on deposits following European interest rate hikes, their bread and butter is residential mortgages.

If there was any major drop in the price of Irish housing, the banks could quickly find themselves in trouble again.

Much of this information has come to light via the Central Bank, which provides excellent research on a variety of Irish financial topics.

However, the organisation also plays an active role itself in house prices via its mortgage lending rules.

These previously limited house buyers from borrowing more than 3.5 times their income. In late 2022 these were loosened – now people could borrow 4 times their income.

The regulator was widely criticised at the time, as the move came right as European regulators were raising interest rates in an attempt to limit borrowing power to curb inflation.

Why, many wondered, would the Central Bank give Irish buyers more borrowing power, when interest rate rises are meant to do the opposite?

Central Bank governor Gabriel Makhlouf himself even admitted the change would likely further inflate property prices, although he said he thought the effect would be “modest”.

But look back at the language the Central Bank used when introducing the mortgage rules in 2015 – it is all about ensuring the “resilience” of borrowers and lenders.

Much of the criticism of the Central Bank’s mortgage lending decision misunderstood the regulator’s role. The organisation’s job is to make sure the financial system is stable – not to keep a lid on house prices.

Would a big drop in house prices be a good or bad thing for borrower and bank ‘resilience’? Given how heavily exposed both are to property values, the answer seems pretty clear.

Then there are the developers, the ones tasked with increasing supply to get prices to a reasonable level.

But builders themselves freely admit that this is something they can’t do. Michael Stanley, the head of one of Ireland’s biggest householders, Cairn Homes, recently said that “in every developed economy housing cannot be delivered at four to five times the industrial wage … that’s just a reality”.

Builders don’t have a massive incentive to drive down property values – houses are getting snapped up at current levels due to massive demand.

And while some builders might be incentivised to lower prices to be more competitive, they seem mostly incapable of doing so.

This is despite a dizzying number of government supports supposedly introduced in an effort to make it easier to deliver new homes, eventually making property more ‘affordable’.

These include the help to buy and shared equity schemes, which between them involve an annual spend of several hundred million euro per year.

However, these supports are not aimed at getting private builders to construct cheaper homes. They instead help people to buy homes at the prices developers build at – again doing nothing to lower house prices, and possibly even doing the exact opposite.

Which leads into politics. This is where many people’s hope for lower prices would rest – that government policies, such as a massive state building programme of low-cost housing, could eventually making buying a home possible for those on typical incomes.

But while there is political support for public housing, there is less enthusiasm for lower house prices.

Mary Lou McDonald is one of the few political figures who has not only said she would like to see house prices fall, but actually put a figure on it – when she said Dublin prices should drop to around €300,000 (compared to their current level of about €430,000).

The response from then-Taoiseach Leo Varadkar was revealing as to how he thinks the ‘affordability’ circle could be squared: “What we really should try to achieve is a situation whereby incomes rise faster than house prices. That’s the way you achieve affordability in my view.”

So we don’t want house prices to go down. We want people’s incomes to grow strongly, while a steady stream of new housing supply keeps house price inflation at a reasonable level.

The obvious problem is that is the exact opposite of what has happened in the last decade or so, where house price growth has far outstripped wage rises.

Even if pay was to increase significantly, it would take years and years to bridge the gap. And that’s if new housing supply was moderating house price inflation – which it isn’t and probably won’t do for the foreseeable.

Renters may be hoping for some house price fall if Sinn Féin win the upcoming election. But even here, the party’s successful push for mortgage interest relief last year – a policy which only exists to shore up the finances of mortgage holders – suggests the party will not be in a hurry to upset existing homeowners.

All of this adds up to a system where the concept of falling house prices is not just alien – it actively goes against the way things are meant to work.

So for those looking for Irish property prices to actually drop – if things go south economically and there’s a recession, sure, it could happen.

But while things are going ‘right’ – well, don’t hold your breath.

Readers like you are keeping these stories free for everyone...
A mix of advertising and supporting contributions helps keep paywalls away from valuable information like this article. Over 5,000 readers like you have already stepped up and support us with a monthly payment or a once-off donation.

Your Voice
Readers Comments
This is YOUR comments community. Stay civil, stay constructive, stay on topic. Please familiarise yourself with our comments policy here before taking part.
Leave a Comment
    Submit a report
    Please help us understand how this comment violates our community guidelines.
    Thank you for the feedback
    Your feedback has been sent to our team for review.

    Leave a commentcancel