New trends emerge in house prices

The latest data on residential property prices shows that, after some moderation in the opening two months of the year, they have resumed their upward trajectory,writesOliver ManganChief Economist atAIB.

Nationally, prices increased by 0.5% in May, after rises of 0.6% in April and 0.9% in March.

The renewal of upward pressure on prices has been expected, as the weakness in January and February mainly reflected temporary factors, such as seasonal issues and uncertainty in relation to the Central Bank’s new rules on mortgage lending.

In terms of the national picture, though, some interesting trends are emerging. For one, there has been a marked slowdown in house-price inflation in Dublin.

Indeed, in May, Dublin prices were down by 0.7% on their end-of-2014 levels. The year-on-year rate of increase slowed to 15.2% from a peak of over 25% in mid-2014. Based on trends in the year-to-date, Dublin house-price inflation will have decelerated to low, single-digit levels by the end of this year, which is some contrast to 2013/14.

Outside of Dublin, on the other hand, the pace of price increases has generally been on an upward path over the course of the past year. Prices have risen strongly in recent months, taking the yearly growth rate up to 11.9% by May. This represents its strongest rate of increase since mid-2007.

However, prices outside of Dublin are up only 15% from their trough, whereas Dublin house prices are now 45% above their low point. This suggest that the recent trend of bigger house-price rises outside of Dublin will continue as it catches up with the capital.

Other factors also point in this direction, such as affordability. In addition, the new Central Bank limits on the size of mortgages, which were introduced earlier this year, are likely to have a much greater impact on the Dublin market, where house prices are far higher than in the rest of the country.

Meanwhile, the housing market continues to be characterised by a major mismatch between demand and supply.

On the demand side, housing models suggest that the economy needs at least 25,000 new residential units per annum, based on demographics, including migration flows.

On the supply side, however, there is still a considerable shortfall in housing output. This is highlighted by recent housing completions data. Last year, completions totaled 11,000 units and this figure is likely to increase to 14,000-15,000 in 2015, still well short of estimated demand of 25,000 units.

The shortfall in housing supply is also reflected in Daft data on sales and rental stock. The number of residential units for sale at the end of the first quarter was 16% lower compared to a year earlier.

Likewise, the rental stock also continues to fall, down around 40% in April, on a year ago. Against this backdrop, rent prices are continuing to rise sharply, up 8%-9% on a year-on-year basis in recent months, and are now just 3% off their pre-recessionary peak.

Recent data also suggests that the recovery in house-building activity will continue. There was a very big jump in planning permissions in the opening quarter of the year. Meanwhile, new housing registrations, which refer to developer activity, were up by 96% in the first five months of 2015.

However, despite all of these positive signs, it will be a number of years before house construction reaches the levels required to meet current demand. Likewise in the mortgage market, the data shows that while lending activity in the sector remains on an improving trajectory, the size of the market is some way short of ‘normal’.

Overall, the Central Bank should be pleased to observe that the new mortgage regulations appear to have taken some of the heat out of the Dublin property market. However, new house-building needs to rise considerably further for the market to properly stabilise and return to a more normal environment.