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Ireland house price crash: Can Irish property market withstand rate hikes, maintain Celtic Tiger heyday levels?

By Ryan Hogg

Edited by Jekaterina Drozdovica

17:48, 20 September 2022

Colorful houses in Cobh, Ireland
Can Irish property market withstand rate hikes, maintain Celtic Tiger heyday levels? Photo: Travel-Fr / Shutterstock

Interest rates are rising across the euro area, and jitters may not be felt more acutely than in Ireland. The country’s housing market is echoing its famous Celtic Tiger past, which was interrupted by a catastrophic downturn that took 15 years to recover from. 

Will high inflation, slowing growth and rising interest rates spell a new housing market crash in Ireland, or will the country navigate current global economic headwinds and emerge unscathed?

What is a housing crash?

A housing crash, similar to crashes in other asset classes, occurs when the average price of a home in a region falls dramatically, instigating a financial crisis..

House prices tend to rise alongside GDP growth, which usually reflects rising incomes and prosperity, driving the demand for housing. As most of the average person’s wealth is tied to their home, growing house prices increase wealth, stimulating consumer confidence. 

Conversely, in a recession house prices typically fall, turning that growing confidence on its head and encouraging reduced spending. This can be slightly offset by expansionary monetary policy from banks, who cut interest rates, making homes more affordable. 

A housing crash often follows a hot period in the market, where prices rise to an extent that could be characterised as a “bubble”, either through unsustainably high levels of liquidity in an economy, or via a speculative frenzy from traders, which has in the past infected the wider financial system. 

Interest rate rises can also trigger a housing crash by pushing home-owning costs into unaffordable territory for a swathe of households. Interest rates set by central banks, like the European Central Bank (ECB), are the benchmark which eventually affect mortgage rates set by commercial banks. 

Rising interest rates have deep implications for a household, which is required to spend more each month on its mortgage. In addition, the contractionary effects of raising rates on the economy more broadly hurt confidence for homeowners and would-be buyers, reducing the number of available buyers in the market, even as more homes go on sale in response to those rising costs. 

An Ireland housing crash may occur as a result of rising interest rates – a new type of housing crash for a country that was previously rocked by a subprime epidemic that took more than a decade to recover from.

Will interest rate hikes trigger an Ireland property crash?

An Irish property bubble is all too familiar to those living in the country. Ireland enjoyed fast growth and sudden prosperity during the Celtic Tiger era as incomes and demand for homes rose. Loose lending restrictions, too, helped more people enter the market. Those circumstances set off an unprecedented housing crash in Ireland.

A major Ireland property crash began in 2008, with homes losing more than half their value through a consistent five-year decline.

Prices began to recover in 2012, while a three-year period of relative stagnation was halted by a resurgence in demand during the Covid-19 pandemic.

Ireland house price index, 2005 - 2022

It has taken more than 15 years for house prices to recover in Ireland, slower than for other Western nations. 

The most recent data from the Central Statistics Office (CSO) indicated that Irish average house prices are now 0.8% above the record set in April 2007. That inevitably has some people worrying about the potential for another Ireland property crash in 2022.

Irish house prices may run into issues as the central bank fights record levels of inflation.  

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Driven by rising fuel and transport costs, the Consumer Prices Index (CPI) hit 8.7% in August, a decline from highs of 9.1% in June and July, but still well above the Irish Central Bank’s target.

The euro area, to which Ireland belongs, is fighting similar headwinds, with inflation hitting 8.9% in July. Interest rates have been on an upward trajectory. As a part of the eurozone economic area, Irish interest rates take their lead from the ECB. 

Earlier this month, the ECB raised rates by an unprecedented 75 basis points, following a 50 basis point rise in July. It is an aggressive move in line with actions by the UK and US, and something ECB Vice-president Luis de Guindos said on 19 September could go further:

"Monetary policy always tries to act to fight inflation, that will have an effect on consumer spending and investment by companies...and further interest rates increases will depend on economic data…Inflation is the biggest pain for European population.”

That could have implications for a resurgent Irish housing market buoyed by strong levels of liquidity.

The latest data by the CSO showed the rate of house price growth has been slowing in recent months, with Dublin growing more slowly than the rest of Ireland in a trend that has been occurring for several months. 

A May 2022 review by the European Commission encouraged optimism when it suggested an Ireland property crash was unlikely, thanks to tighter controls on financial markets, which had previously driven a housing bubble in Ireland. The Commission wrote:

“Overall, the financial sector looks much healthier compared to the run-up of the great financial crisis. Since then Irish banks have become significantly more resilient and the introduction of stricter rules and requirements contributed to addressing many pre-crisis vulnerabilities of the banking sector.”
“Aside from more stringent capital and liquidity requirements, the introduction of mortgage-related measures in Ireland reduced the exposures that banks can have towards the real-estate sector, particularly by introducing binding Loan-to-Value and Loan-to-Income limits.”

The Commission didn’t think prices were overvalued, noting low inventories for homes: 

“Commission internal benchmark metrics do not suggest that Ireland’s average national housing prices are overvalued. However, these calculations are based on a long-term average of house prices, which include a large housing bubble emerging in the mid 2000s.”

Ireland housing market predictions for 2022, 2023 and beyond

Irish housing market predictions are relatively optimistic, with little indication of a housing market crash in Ireland in the near future.

In a June note, Davy Group chief economist Conall MacCoille said the slow trickling of sellers back to the market was helping ease rising prices, noting:

“The possibility of a modest fall in Irish house prices can’t be ruled out, correcting some of the froth built-up since the beginning of the pandemic. However, double-digit declines or a repeat of the Celtic Tiger era housing crash seems very unlikely.”

MacCoille said this was because tighter mortgage rules significantly reduced the chance of another subprime crisis.

In July, the Society of Chartered Surveyors Ireland (SCSI) released an Ireland house prices forecast for a 4% rise in 2022. The agency, however, noted that it should be seen in the context of high inflation:  

“Right now, the current rate of consumer price inflation is circa 8% which means that compared to consumer prices, the projected increase is actually a reduction of 4% in real terms.”

The SCSI added that the majority of agents still see the low level of housing supply as the key factor underpinning prices in the near term. 

In a June quarterly economic report, Ireland’s Economic Social Research Institute (ESRI) predicted house price growth would slow through 2023 amid effects of the ECB policy rate hike, but boosted by high demand and low supply:

“However, it is clear that other demand side characteristics such as income levels and population levels coupled with a relatively sluggish supply response in the domestic market will continue to exert upward pressure on Irish house prices over the coming year.”

The agency said that interest rate hikes will see Irish house prices fall by 2% “relative to what they would otherwise be”. 

Note that analysts’ predictions about the Ireland housing market crash can be wrong and shouldn’t be used as a substitute for your own research. Always conduct your own due diligence before trading. And never trade money that you cannot afford to lose. 

FAQs

Will house prices drop in Ireland?

House price growth is expected to slow in Ireland after it returned to levels last seen in 2007, but prices are not expected to contract, according to a number of agencies, including the Society of Chartered Surveyors Ireland (SCSI), Davy Group and Ireland's Economic Social Research Institute (ESRI).

Is there a property crash coming in Ireland?

Analysts at Society of Chartered Surveyors Ireland (SCSI), Davy Group, and Ireland’s Economic Social Research Institute (ESRI) do not expect a property crash in Ireland, thanks to tighter borrowing conditions compared with the last crash, and a low supply of suitable housing.

What caused the last Ireland housing crash?

The last Ireland housing crash was aided by loose financial controls, which allowed a large number of subprime borrowers into the market who defaulted on loans when recession hit.

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