Does the ‘soft landing’ narrative for house prices stand up to scrutiny? – The Irish Times

The Covid-induced sugar rush in property markets is over. Headline inflation is slowing or turning negative due to higher interest rates. Anecdotal evidence suggests that buyers are forced to back out of sales agreements because their lender has undercut or withdrawn the loan offer altogether.

Property website MyHome says it has 3,300 more properties for sale than it did last year and a higher percentage of sellers revising their sales prices downward. The Economic and Social Research Institute (ESRI) has also indicated that house prices here are overvalued by at least 7 percent. And that estimate only goes through the end of last year, suggesting the overvaluation may be higher.

Whichever way you look, there is evidence of a slowdown, but will this trend turn into a price correction?

Industry professionals here say no. Most point to the supply-demand mismatch, which has dogged the market for more than a decade, as something that will support prices at least in the medium term.

According to Sherry FitzGerald, there were 15,300 resale properties for sale nationwide in July, representing an annual increase of 1,800 properties. Despite the improvement, the total volume of homes for sale in July represents only 0.8% of the total housing stock.

In a normally functioning market, you’d expect to see about 2 percent of existing shares rolling over at any given time. Similarly, while we have seen an uptick in new construction (new homes completed in the year to June stood at 24,929), it is still nowhere near the estimated level of demand at 35,000.

Others point to the relatively benign macroeconomic outlook. The Irish economy is expected to grow strongly this year and continue to grow next year when many other countries slip into recession. The two government buyer support schemes, the First Home scheme and the Help to Buy scheme, will also continue to support prices, they say.

So according to the industry, we will get a slowdown in price growth but not a correction. Keith Lowe, chief executive of real estate agency DNG, says he expects headline inflation to fall to between 5 percent and 7 percent in the coming months, down from its current rate of 13 percent, and to 2 percent next year. year.

However, this soft-landing narrative contrasts with sentiment abroad, which is focused on the corrosive impact of higher borrowing costs, which are expected to trigger falls in property markets around the world and a possible painful restart. in some of the most overvalued markets.

“We will see a globally synchronized housing market downturn in 2023 and 2024,” Hideaki Hirata of Hosei University, a former Bank of Japan economist and co-author of an International Monetary Fund paper on world prices, recently told Bloomberg. of the house. He warned that the full impact of this year’s aggressive rate hikes will take time to show up in households.

The turmoil in UK financial markets has led analysts to predict that house prices there could fall by as much as 20 per cent. Prices are already falling in Canada, Australia and New Zealand due to sharp increases in interest rates.

The United States, which is further along the path of rate hikes than we are, is illustrative. Mortgage rates attached to 30-year fixed-rate contracts have more than doubled to 6.7 percent. In practice, that means paying $2,500 a month now buys a home worth about $480,000. This time last year, the same monthly payment could have bought a property worth $760,000. In other words, housing affordability is sinking fast.

The European Central Bank (ECB) is the latest major central bank, outside of the Bank of Japan, to start tightening monetary policy, in part because it is typically less interventionist than the US Federal Reserve. It has raised rates by 125 combined basis points at their last two meetings and markets are pricing in another 175 basis points in hikes between now and next spring, which will see interest rates jump from zero to 3 percent in less than a year. In short, we have yet to feel the full impact of higher rates.

A central question is whether the drag of higher interest rates cancels out or outweighs the supply shortfall that plagues the Irish market so much. Lorcan Sirr, professor of housing studies at Dublin University of Technology, insists that “there is a greater correlation between interest rates and house price movements than supply and price movements.”

We also don’t know how high interest rates will be. That depends on the current inflationary spiral, the energy price shock underpinning it, and Vladimir Putin’s war in Ukraine, a seemingly unknowable set of variables.

Another question is what impact higher interest rates will have on the funds operating here. These entities are responsible for most of the apartments that are built in Dublin and other urban centers. What happens when the yield on safe-haven government bonds rises above the yield on real estate? Will they start disposing of their properties here?

Nothing is certain when it comes to Ireland’s volatile real estate sector. The frantic buying and selling activity of the pandemic period might be over, but what happens next is still unclear.

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