All of the predictions we have seen regarding Irish house prices in the middle of the next decade have been off, which is maybe to be expected. The housing market is a complicated ecosystem, making it difficult for even our most astute economists to predict its future growth.
One must take into account a complex network of interconnected elements, each of which is a moving target with the potential to alter the market as a whole. For instance, the prevailing beliefs about the market’s trajectory, the impact of negative yields, the widespread entry into the residential housing market of international investment funds, the Central Bank’s restrictive lending rules, demographics, and the famine all play a role.
The obvious can easily be overlooked when making predictions based on existing patterns. Perhaps we, too, will succumb to this innate resistance. Prices should stabilise as supply increases, according to conventional economic theory. The past contradicts such idea. No matter how much supply grows, consumers will still expect price increases.
The housing market is seeing a price increase unprecedented in the past decade. Across the country, there is a severe housing scarcity. The current inflation rate has not been witnessed in decades.
The rate of wage growth has caught up to the rate of price growth. There are presently fewer pools from which to choose due to the ongoing limitations on overseas travel. Getting your hands on the necessary talent has become a remarkable competitive process. In the history of the Irish labour market, we are witnessing unprecedented pay growth. Of course, this is not something that holds true everywhere.
The European Central Bank has made the allegation that Irish home prices are 17% below their true worth. Their 2007 prediction that the Irish housing market was 25% overpriced was spot on, therefore you should pay heed to what they have to say. Since we overshot on the way down when the credit supply was cut off, We believe their assessment to be accurate. When compared to many of our international peers, our present market has been slightly restrained thanks to the greatest price correction in Western Europe.
Of course, the rigorous Central Bank lending standards, and the 3.5 times loan to income ratio in particular, have held us in check this time around as well. These regulations were crafted with the exclusive goal of preventing a collapse of the banking system’s financial infrastructure. The rental market has exploded out of all proportion since these market interventions were enacted, and yet it is these same limits that have kept a generation of medium income people out of house ownership.
It’s a terrible irony that at the same time many would-be mortgage borrowers were being shut out of the lending market, investment funds with unlimited access to cheap money and leverage entered the market at the wholesale level. Our banking system, which is ostensibly working in the risk business but is no longer authorised to take risks, is less likely than the overexuberance of yield-chasing investment businesses to be the cause of a housing collapse 2.0.
Having easy access to capital is essential for building wealth. The magnitude of the long-term consequences of denying access to financing to significant segments of the population is difficult to estimate. The state will have to undertake unprecedented construction efforts to meet the urgent need for new homes. It’s possible that this will wind up costing more than if banks were allowed to conduct their normal function of lending money to builders and those looking for mortgages.
The most reliable predictor of the housing market’s future is the link between Central Bank regulations and wage inflation. Wage inflation will exceed 10% in the next year across a wide range of sectors, and might reach twice that level in very competitive labour markets.
As a result, home price inflation is here to stay for the foreseeable future, with annual hikes of up to 10% possible over the next three years.
Real estate prices in Ireland will remain consistent for individuals who are lucky enough to benefit from these wage gains. As a result, a sizable portion of the future population will find it increasingly difficult to acquire a home in the coming years.
