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SOME READERS MIGHT remember that two years ago, it was announced that Irish houses were likely 7% overvalued.
Since then, property values have risen by a further 11% – so about 18% overvalued, right?
Well, in recent weeks it was announced once again that house prices are overvalued; but ‘only’ by 10%.
Wait, what? What’s going on?
Well, let’s take a look at why Irish house prices were called overvalued in the first place, why they rose in spite of that – and why they will likely still rise even further.
The observation that Irish property prices were probably too high was made in a paper published in October 2022 by the ESRI.
This was based on a model used by researchers which compares property prices to disposable income and mortgage interest rates.
Researchers for the think-tank said they thought two key factors were behind what they considered to be the over-valuation of Irish house prices:
The ESRI said house price inflation would likely drop off in the medium term as people spent their pandemic savings and as mortgages rates were expected to rise sharply.
‘It is clear, going forward, that the recent surge in savings and wealth is not sustainable over the medium term,’ the paper said.
‘Therefore, changes in house prices will become re-aligned with movements in income over [the medium term]… This means that recent increases in house prices are likely to moderate substantially over the short to medium term.’
Since then, the researchers have been proven wrong, as house prices have once again increased substantially. This increase has come even as interest rates did indeed surge, making mortgages more expensive.
So, why did this happen?
Well, a new study published by the ESRI has tried to answer this question.
Researchers still consider there to be two fundamental factors in determining property values: income levels and interest rates.
So if interest rates surged since October 2022 – in other words, just as the last study was published – why did property price inflation accelerate?
This is where the new part of the study comes in. Basically, the ESRI thinks consumers’ expectations play a major role in property prices. If people expect house prices to rise, they’ll behave in a certain way [buying more property] which actually will cause them to rise.
The ESRI thinks three main variables factor into consumer expectations: expected trends around house prices, household income, and inflation.
It tested this idea using a model looking at historical housing data and found there was a statistically significant link between income expectations, expected house price growth and actual house price growth.
By contrast, while interest rates did have an impact, it was reduced compared to the other two.
‘Households are more influenced by expected changes in real interest rates than in changes in the actual rate,’ the study said.
Interest rates started to surge from October 2022, but the fact that they would rise had been well-flagged for months in the media.
This idea has other implications – namely, that house prices sometimes behave in a way which is ‘non-rational’.
‘The tendency for households to have house price expectations that are different from rational expectations, which are often associated with efficient markets, can exacerbate the variability of house price movements,’ the ESRI said.
‘While actual movements in real interest rates do not appear to significantly impact changes in house prices, expected changes in real interest rates do.
‘Periods of significant house price appreciation, which are maybe initially due to variations in fundamental variables in the housing market, can then be amplified by alternative house price expectations among consumers.’
What does all of this mean?
Basically, even though house prices may have been overvalued in 2022, there was a reason that they continued to rise.
The ESRI expected at the time that interest rate rises which had started to kick in would help lower prices.
In reality, what they’ve found in the 2024 study was that consumers had already priced in these rises before they started to take effect. So the actual impact when they came into effect was more muted than expected.
Another factor is the Central Bank easing mortgage lending rules, letting people borrow more money to buy houses.
This was announced in October 2022, only a few days after the ESRI paper was published.
Since then, there has been a rise in the levels of mortgage debt, which the ESRI recently found are back near Celtic Tiger levels.
This has also resulted in homeowners spending a high proportion – 33% - of their disposable income on mortgage repayments. Again, this was the highest level since the boom.
This has left many households vulnerable to risks such as any fall in real wages or increase in unemployment.
Ok, so given all that – can we finally say that Irish house prices are actually overvalued?
Well, as stated earlier, the ESRI’s model now puts it at 10%.
Perhaps the more important question: does the overvaluation mean that house prices will slow down now?
Well, clearly no, given that they already rose in 2022 after the ESRI’s initial prediction.
Again, there may be something which may not be considered in their 2024 analysis, like how consumer expectations and the impact of interest rates were not fully accounted for. Or there could be a change in external actors, like with the Central Bank loosening its lending rules.
But perhaps most importantly, the ESRI itself has said it still expects house prices to rise.
Why, if they also think they’re overvalued? Well, the Irish economy is still performing well. Real incomes are rising, which as we’ve learned, is a strong indicator of future house price rises.
The European Central Bank has also signalled it will continue its recent policy of cutting interest rates. Again, the rate cuts themselves may not have a major impact – but the anticipation of them might.
Then there’s also our old friend, housing supply – or, more accurately, lack of it. Ireland still isn’t building enough homes to meet current housing demand
Various estimates have put the number of homes needed annually at 52,000 a year, or even as high as 82,000.
New dwelling completions for 2024 are expected to finish somewhere between 33,000 and 36,000, so likely well below what is needed.
And that’s not even factoring in the backlog of homes needed from all the other years that Ireland has missed its housing targets, which makes the problem worse and worse with time.
So despite warnings of overvaluation, without a new external actor coming into play, don’t expect property price falls just yet.
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Ban investment funds buying up Irish housing and restrict immigrants from buying houses in Ireland, same as other EU countries such as Denmark and Malta have done. A lot of Irish people can’t compete with higher paid foreign tech workers in the housing market.
@Dave Callaghan: That’s a great way to stop highly skilled people from filling much needed roles….. Ban them from buying houses!
@Dave Callaghan: And multinationals shouldn’t be allowed to expand here to their hearts content while we haven’t adequate housing stock for Irish people.
@another one? what’s going on is the semi state sec: are you deliberately dense?
@another one? what’s going on is the semi state sec: Restrict them from buying houses for 5 years like Denmark… let them rent instead… renting seems to be good enough for Irish people in Ireland at the moment, right?
@Liam Boyne: nope, but I’d hazard a guess that you unintentionally are though!
@Dave Callaghan: You said ban originally, now you’ve changed your tune to a 5 year restriction. Which is it?!?!….. 5 year restriction won’t do anything. There’s still a massive housing shortage, they will still need to wait a year or two for a deposit, a mortgage and be made permanent in their roles. Delaying them won’t do much for the Irish that can’t afford to buy. We need a lot more houses in order for the houses prices to reduce. 10-15 years at least…… You’re overestimating the numbers of highly paid immigrants that are affecting the housing market.
@another one? what’s going on is the semi state sec: Read it again: I said ‘restrict immigrants from buying houses in Ireland’ Specsavers for you lad!
@Dave Callaghan: It’s early, missed that, beer goggles still on, apologies!!
@another one? what’s going on is the semi state sec: No bother, Happy new year to you,
@another one? what’s going on is the semi state sec:
He did refer to multi Nationals, property speculators, Vulture landlords “buying up housing”! Not “people”, individuals, “workers” who are enslaved to years, decades or a lifetime (in my case) of paying dead money rack rent (expatriated to American investor pension fund bank accounts) for property they (I) will never own.
The “Highly Skilled People” you mention, are exiting the Country by the plane load because they can’t afford the Builderberg Club rents here. Do they have coffee on your planet? You should have a cup or two… strong!
Why have the government allowed investment and vulture funds continue to snap up housing stock.No wonder our most valuable resourse (our well educated young people are leaving our shores.
@Willie Marty: It’s a very complex issue though Willie and the solutions are going to be easy to find. Most builders, large companies nowadays, raise finance from non banks, including Venture capitalists as our ” banks” aren’t in the game like they were so return on investment for the VCs is a lot more important. The Government spends 2bn is rent assistance a year, investment from CCs is non existent yet there are 160k vacant derelict properties with about 50% salvageable and could be used after renovations. Building new is important but not easy but seems to be the only gig in town with all parties.
It needs urgent addressing but I don’t think we have the government, builders, nor the will to change anything unfortunately.
@Paul O’Mahoney:,* rent assistance and funding buying properties.
@Paul O’Mahoney: sorry Paul nodded off there again after my initial post( late night).Yes I know its complicated.I just wish we had more accomplished experienced people in charge.Youre contribution to the journal is appreciated.Happy new year to you and your family.
@Willie Marty: And to you Willie and your s.
@Willie Marty: who buys housing stock is irrelevant as it doesn’t change the number of houses available. The solution is simple- just bring back section 24 type tax relief for refurbishment of our 200,000 empty properties. It should be self certified to avoid the ridiculous bureaucracy associated with the current croi conaithe scheme with random audits by revenue to ensure claims are genuine
@Willie Marty:
There is a major deficit in democracy because the Fourth Real Estate and broadcasting companies are making an absolute fortune from flogging property through advertising property through, columns, editorials, supplements, property porn shows, subliminal selling, infomercials, celebritising estate agents, architects, speculators, glamorising home ownership and generally maintaing Irelands 855 year old British Imperial Mass Tenant Farming Absentee Landlordism Racket, introduced by Richard de Clare Strongbow, 2nd. Earl Pembroke in 1170.
Re-enacted in 1949 by FGff as Land and Property Rights, ONLY for the 2.6% of the population who own 90% of the State’s Land and Property. 130K Farmers.
Any word of the Housing Rights FOR ALL Referendum launched, ‘well under the radar,’ by the Govt. in 2021?
Any sign of a peoples assembly debate?, RTE documentary?, Primetime report? Dail debate?, Seanad Report? Opposition Bill,?, Newspaper Editorial?…. Nope. Nadal. Not a dicky bird!
The first 90% of this article is of little importance . Population growth and lack of supply are the key drivers in the housing market. It’s not whether people think the ecb is going to do one thing or another. The state buying ip houses as well as vulture funds is a significant issue. With regards immigration it would be interesting to see what %of non nationals are accessing both Hap and social housing to see what is the impact on housing in Ireland. Of course we are not permitted to ask this question as was recently highlighted in north Dublin
@Furious George – The Wasp: In 2021, The Burkean (conservative online news site) submitted a freedom of information request to all 4 Dublin county councils asking the % of foreign born people on their housing lists. The answers were as follows:
Dublin City Council-32% Foreign Born,
South Dublin County Council-35% Foreign Born,
Dún Laoghaire–Rathdown County Council 22%-35% Foreign Born,
Fingal County Council-50% but unknown After 2011.
The % must surely be higher now.
You can use google to read the entire article.
Our old friend, lack of supply as it’s referred to almost as an afterthought…
When it is the primary factor that drives everything else.
If there was willingness by the government to build social housing directly with a state building company, this would remove private builders and developers from the equation.
This would result in a separation of the social and private housing markets, local authorities would stop buying privately owned and built housing, private rental prices would drop due to a reduction in demand, and lower rental returns would make owning private rental properties less appealing to hedgefunds.
House prices across the entire sector would drop to realistic and affordable levels for those who want to own their own home and they could borrow and pay less to do so.
@Dvsespaña: a workable solution that’s why it will never be adopted by FFG. They only do failure.
@john salmon: what would this cost is the question.
@John Purcell: what is the failed housing policy costing the taxpayer now? As a society the sums being used to subsidize private sector interests are astronomical with nobody asking how much altogether directly and indirectly. The minute state provided housing is mentioned the sky is going! to fall in.
@john salmon:
Absolutely nothing wrong with the idea of the state providing housing but it does nothing to stem the real problem, lack of builders.
@john salmon: “State building company”? Apart from North Korea, I think every nation on earth has abandoned that idea.
@Frank: it worked perfectly well here before in conjunction with private builders what is the reason it can’t work again
Buy a construction company, give them good pensionable jobs, something they can see a future with, have them build and maintain all the infrastructures on the island. Soon as we enter the marketplace in our tiny crap economy we’re bound to be screwed.
@Frank: That’s why there are currently housing shortages, astronomical rents, and anti foreigner sentiments in all those countries.
Anti foreigner sentiments vary from anti immigrant or anti tourist, depending on the country in question, but the issues are the same, people can’t afford to rent, much less buy a home or apartment, and prices are inflated across the entire market due to the lack of supply.
Abandoning the idea of the state building social housing was championed by private developers and building companies, because it served their interests.
Now, they alone dictate and control the supply of houses and apartments to market and they can now build less units and make more money by doing so. Meaning that it’s in their interest to continue to maintain the housing shortage.
@John Purcell: Probably multiple billions, but if housing the population is not considered a priority issue, then what is?
We have this massive surplus and the government wants to use it to invest in the future… Well, this is the investment in the future.
The journal, isn’t it sponsored by a developer,and every week it showcases houses worth millions
The dirty relationship between politcians and developers should have been severed with massive punishment if they got back into bed with each other after 2008……instead it has actually gotten worse and now we face another boom/bust moment round housing and no doubt another round of NAMA or bailouts and guess who picks up the tab
@Patrick Newell: that made no sense at all. But good try.
@Patrick Newell: As you force developer/builders and rental providers/ landlords out of the country how many hames will YOU have provided ? Actually none. This is why communism destroys not creates.
The ESRI can’t see the forest through the trees… FFG policies are designed from the ground up to ensure investment gains from property are always on the rise.
It has taken years of hard work on the part of FFG to manufacture the current property boom. No matter what lies come out of their mouths, they have zero interest in building enough houses. Let the young people go to Canada and Australia, sure most of them don’t vote for FFG anyway.
Two things to blame .. inept politicians, and greed among the landlord classes . That’s it
@K H: I’m sure you will find a minority group to blame next. Or whatever.
@K H: It’s not ineptitude, they’re highly successful at ensuring there is no collapse in property values. For landlords, landowners and investors there is no housing crisis, it’s a property boom.
FFG’s housing policies are a dance between building just enough houses so that the country won’t collapse but not building so many houses that the property market would lose value.
It must be great to be in a job like the ESRI where you can just be totally wrong and it doesn’t matter. It sounds like they don’t have a clue on what has gone on or what will happen in future. David McWilliams spoke 20 years ago on how when the market is on the up people behave irrationally. His analogy on hose prices was like watching a game in the aviva stadium. Someone stands up in front of you so you then stand up then the person behind you does and so on. That is akin to when people see prices rising. That the ESRI have to have a second report to basically suggest this is bizarre. Essentially there are loads of vested interests in the property sector. They are all over the place. Housing has been commodified at the expense of having somewhere to live. That is the decision that has been taken. Restricted supply means top dollar for what you’re selling so that will remain especially since the same government has been voted in again. However, as always happens something will come along to topple the entire house of cards at some point and there will be a correction anyway.
I don’t understand how a nation can vote back in FF and FG giving the housing crisis that exists as a result of both parties housing policy.
They will keep doing this, letting the rich get richer, (themselves) and the big housing investors.
That there are irish children who are classed as homeless is an indictment of the utter incompetence of FG and FF, shame on those two parties and the selfish greed that goes with them
@Jak Oshe:
Exactly! For the circa 3+ million non property owning, rack rented, rack mortgaged masses to vote FGFF Ltd. back into power is comparable to America voting MAGA and Von Trumpf back into the White House.
It will crash to the ground in a heap soon enough.
you. an call and explain the way you want. it’s called greed.
capping the prices or do the right things is not the way of FF and FG. the tradesmen parties won’t allow that to change
@Dominic Leleu: How can you cap prices? Tell tradespeople to work for less, and suppliers to sell at a loss? Best of luck with that.
@Willie Marty: our well educated people have ALWAYS left the country. No point blaming housing stock when this was not an issue years previously.
@AnthonyK: The housing shortage has always been an “issue”, but it has become an issue that now impacts the majority of the people in the country, either directly or indirectly.
The cost of living, the fact that a lot of people working fulltime, are struggling to pay for accommodation and put food on the table, along with increasing demand, and not just from immigrants, but from our own children growing up and looking to move into their own homes and finding it impossible to do so.
The crux of the issue is the lack of social housing, ten year waiting lists existed before the celtic tiger years, but the resistance against building more predates that by thirty years, to the present day.
Young people leaving the country is fine, but their never having the possibility of returning isn’t.
Foreign investors and vulture funds are a very safe option for multi-house buying, if unfortunately. In the face of massive job losses (for whatever reason) the banks must be protected. This is why so many foreign investors and vulture funds are renting bought houses instead of selling them. In this case, lessons from 2008/9 have been learnt. It’s not a pleasant explanation but it’s one that works, but that also causes a rise in house prices.
Reforming the estate agent industry would be a good place to begin. Measures needed to outlaw the sealed bid scam.
@McMurphy:
Estate agents take instructions from the sellers.
Whats the bet they are told to get the hightest price and never told to sell to the most deserving couple at a fair price.
@H Woo: Estate agents have the means and opportunity to enrich themselves at their leisure by fraudulently increasing prices by means of fake bids and taking their commissions off the top. A licence to print money. Put an end to this inflationary cycle and watch prices stabilize.
Classic Fourth ‘real’ Estate clickbait column. I fast-scrolled through the mass of real estate bumpf, generated by The FGFF Ltd. ESRI/CSO/CIF/PRTB/HOUSING-LAND Agency quangos, 300 Private Housing Associations/BANKER/NAMA/DEVELOPER/DAFT/MYHOME/LANDLORD ASSOCIATIONS/VULTURE FUNDS/BOND HOLDERS, etc., comprising ‘The Irish Builderberg Club’. They will be more than delighted with this ongoing, middle Irelabd media Ltd. hype, which continues to perpetuate the orchestrated Celtic Tiger Housing Bubble price inflation, in line with the FGFFGREEN “Scarcity of Supply Agreement, designed to inflate prices by creating demand.
When did The Journal last report on the Housing Rights Referendum launched in 2021 when FGFF appointed it’s Housing Referendum Commission?
Anybody?
Paul.
@Paul Newsome: if housing becomes a civil right, useful idiots like O’Gorman would invite the dregs of the earth to Ireland to give it away to them.
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