Irish Housing Prices May Begin To Increase

Residential property prices in Ireland declined 0.6 % m/m in October. In Dublin, house prices fell only 0.2%.

Last month's strong gains were only partly erased and other indicators such as demand for housing loans continue to improve.

We thus continue to believe that the Irish housing market has turned around after bottoming in June.

Our Irish housing market model suggests that house prices may have undershot by 10-15%. We expect Irish house prices to increase around 5% on a 12-month horizon.

House price setback
Residential property prices declined 0.6% m/m in October after a 0.9% increase in September. In Dublin, house prices fell only 0.2% following a 2.4% increase in September. Thus, last month’s house price gains were only partly erased. However, Dublin apartment prices fell 0.4% after a 0.2% increase in September, emphasising the fragility of the recovery in residential property prices.

Outlook
We expect a fragile export-driven recovery, low interest rates, pent-up demand and the absence of new supply to support house prices. The OECD leading indicator, in line with PMIs, signals that the Irish recovery will gain further momentum. We expect low interest rates to remain a supportive factor for the Irish housing market for a long time. Housing affordability has improved a lot. Compared with the most stretched level, housing affordability has improved by 35% despite the decline in disposable income per capita and without taking the decline in interest rates into account.

There are also signs that international investors are upping their exposure to prime Dublin property, with, for example, Blackstone making its first foray into the Dublin property market, with the purchase last week of the famous Burlington Hotel for EUR 67m. The termination of tax-relief measures for new buyers next year is a factor that we expect to dampen demand early next year.

We believe the impact will be limited if housing market stabilisation has gained firmer ground. Importantly, a capital gains exemption will remain open on any property purchased in 2012 and 2013, provided the property is held for a minimum of seven years. Thus, substantial support for the housing market will remain in place throughout 2013.

Our model for Irish house prices, which are driven mainly by GDP, unemployment and loans for house purchases, indicates that Irish house prices have undershot by 10-15%. This result should be interpreted cautiously, as it is difficult to assess what is fair value. Nevertheless, with the drivers discussed above in place, we expect Irish house prices to increase by about 5% in the coming 12 months, though risks remain high.

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