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Residential Market yet to bottom

A quarterly analysis of trends in the Irish property market

– First time buyers now dominate

– Commercial market may be at or near floor

The international property cycle has turned following the steep declines seen in recent years, with many contries seeing rising prices in both commercial and residential property, notably the UK.  In Ireland, in contrast, there are few if any indicators that the residential market has hit bottom, although the signs are more positive on the commercial side, and we may be at or near the cycle low in that market.

Irish house prices continued to fall in the first quarter on the main published indices, by between 1.3% – 1.6% a month, although this does represent some deceleration in the pace of decline, as prices had fallen by 2% – 2.5% a month in the final quarter of 2009. The March data left prices 34% down from the peak on both the permanent tsb / ESRI index and and are now below the average of the last decade and back to levels last seen in late 2002.

Affordability has improved dramatically in the past eighteen months, with the average new 25-year mortgage costing €1,000 a month to service, against €1,670 two years earlier, and our affordability model shows payments are under 29% of income in 2010, and as such below the average over the last thirty five years. The average rental yield is around 4.3% on our model, which is not far below the 4.5% average recorded since Ireland joined the euro, and rents rose in May for the first time in two years according to the CSO.

Yet these factors ae not impacting demand, at least year to date. First-time buyers now account for over half of new mortgages for house purchase but gross mortgage lending for house purchase fell below €1bn in the first quarter. Again, the pace of decline slowed relative to 2009, but the mortgage data shows that new lending is now being offset by redemptions and write-downs, with the outstanding stock of mortgage debt now contracting.

The outlook for the Irish economy has improved and growth may have resumed in the first quarter but the unemployment rate is still high (if stabilising) and employment falling, so would-be buyers may be waiting for a clearer turn in the labour market before entering the market in larger numbers.

The price and rent trends over the last three years also imply excess housing supply but the absence of timely data on transactions makes any estimates tentative. What is clear is that completions have fall substantially, with 26,400 built in 2009 and perhaps 17,000 likely this year, the latter adding less that 1% to the housing stock, and as such around the depreciation rate, The Registration data does imply that this year may be the low of the cycle, however.

On the commercial market the main property agencies differ as to condtions in the office market in the first quarter, although most point to some pick up in activity. The IPD index also recorded its first gain in two years in the first quarter, and the fall in capital values slowed sharply.  However, on that basis, we may be at or near the floor on that market and we now expect flat returns this year, from a 23% fall in 2009.

Dr. Dan McLaughlin

Posted By Caterina Nolan

16th June 2010.

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