Property prices overvalued by 10% risking another market crash, ESRI warns
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Property prices in Ireland are overvalued by as much as 10% which adds to the risk of a "painful correction” in the housing market similar to the 2007 property crash, a new assessment by the Economic and Social Research Institute (ESRI) has found.
As part of its latest quarterly economic commentary, the ESRI conducted an assessment of the sustainability of current Irish house price levels and found overvaluations are creating dangers for the future of the market.
Research Professor at the ESRI Kieran McQuinn said Irish property prices are currently overvalued in the region of 8% to 10%, adding that this figure is based on an economic model that takes account of income levels, interest rates, and population dynamics as well as housing supply.
He said: "Overvaluation does bring dangers, and the larger the degree of overvaluation, the greater the risk of a significant correction in the housing market at some stage."
The ESRI said that year-on-year growth in property prices have continued to increase, exceeding 10% in August and September. House prices as of August were 13.4% higher than they were pre-financial crisis in April 2007.
The ESRI noted that the accelerated increase in house prices experienced so far in 2024 has “led to concerns in the domestic market about the sustainability of such increases and the prospect of a painful correction such as that witnessed between 2007 and 2012” should there be an economic or labour market shock in the future.
Prof McQuinn said the market “isn't anywhere near quite the stress levels that it was in 2008” but they are starting to see some trends such as the ratio of household’s income to mortgage repayments approaching pre-financial crisis levels.
The ESRI said the Central Bank of Ireland must be “particularly vigilant and prudent in any review of the mortgage measures”, given recent evidence that suggests changes to loan-to-income ratios contributed to house price increases.
It previously found that the Central Bank’s decision to move the loan to income ratio from 3.5 to four times a person’s, or couple’s, income had fuelled higher house prices.
On Wednesday, the Central Bank proposed a change to the regulatory framework for Credit Unions which would allow them to almost triple the lending they offer for mortgages and business loans.
Under new proposals, current limits on the sector will be significantly eased, with the capacity for house and business lending rising from the current €2.9bn to €8.6bn.
In terms of housing development, the ESRI noted that home completions were lower during the first six months of the year compared to the same period in 2023.
However, following a pick-up in the third quarter, completions this year are broadly similar to the equivalent figures in 2023.
It noted that 33,000 homes are expected to be delivered this year which is far short of what the market requires. The supply of homes not keeping up with demand will inevitably lead to further price increases, it warned.
Banking and Payments Federation of Ireland (BPFI) chief executive Brian Haynes said average house price inflation "has gained momentum mainly due to low housing stock and continuing housing and mortgage demand amid growing employment and income levels”.
He said unless something is done to help increase productivity in the residential construction sector it is “unlikely” it will be able to produce the output required in the short term with existing resources.
Demand is also likely to increase as interest rates continue to decrease making housing more affordable.
The European Central Bank (ECB) is due to meet today where another interest rate cut is expected.
This will be the fourth rate cut this year as the ECB attempts to boost the sagging European economy.