Jim Power: Rate cuts may add further fuel to housing fire
Their Property Above April 10 Prices Lower Are Just 8% In National The The Boom Peak Unsustainable 2007 7% 2007, February Prices Are Dublin Average Of Than Peak
Housing has always been a national obsession in this country and garners saturated coverage regardless of what direction prices are moving. The latest house price data from the CSO relating to June confirm the upward trend that has become established over the past couple of years.
The data does not make for pleasant reading as rapidly escalating house prices cannot be regarded as an economic or social good as they just soak resources out of the real economy and soak spending power from house buyers. In addition, escalating house prices also drive rental costs.
National average residential property prices increased by 8.6% in the year to June — the highest growth rate since October 2022. Average property prices outside of Dublin increased by 8.2%, and average prices in Dublin increased by 9.3%, which is the highest growth rate since August 2022.
We are now in a situation where national average prices are 10.8% above the peak of the property boom in April 2007, Dublin prices are just 0.7% lower than their unsustainable February 2007 peak, and prices outside of Dublin are 11.5% above their May 2007 peak.
One of the interesting features of the Irish housing market over the past couple of years has been the strong upward trend in prices despite a dramatic increase in interest rates between July 2022 and September 2023. In July this year, average mortgage costs were 78.6% higher than in July 2021.
Normally, one would expect such an increase in mortgage costs to have a dampening impact on house prices. However, the Irish market is characterised by strong natural demand, a serious deficit of supply, and a preponderance of cash buyers, or at least buyers with large deposits, in the market.
It is always difficult to forecast anything, however, looking forward at the housing market over the next couple of years would not fill one with optimism, unless one is of the view that escalating house prices are a good thing.
The basic deficit between supply and demand is unlikely to get significantly better, unless there is strong net outward migration and/or the economy collapses. Not too many reasons to expect that to happen over the next couple of years. The other likelihood is that the ECB will continue to cut interest rates over the coming year.
The ECB cut rates by 0.25% in July and naturally accompanied it with a conservative and cautious outlook to manage expectations. However, recent economic and market events would suggest to me that the ECB will have to keep easing.
Equity markets had a recent troublesome wobble for a variety of reasons, and while they have settled back, they look like remaining volatile and potentially vulnerable. US economic concerns are partly responsible for market nervousness, but there are other factors at play, such as the perception of an AI bubble.
If market weakness and volatility return, the Federal Reserve would be likely to cut rates more aggressively from September onwards. In the case of the ECB, the arguments for more aggressive easing are largely economic.
It seems likely that the ECB will cut rates again in September and over the next year at least 1.5% could conceivably be taken off rates. Such a rate decline would improve affordability and drive demand, assuming of course the monopolistic banking fraternity decides to widen the net interest margin further.
In Budget 2025, I think it should be clear that measures to boost supply in a more meaningful way would be most appropriate rather than throwing money away in the scattergun approach that characterises Irish budgets.