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While real estate markets around the world have suffered at the expense of a larger financial crisis, Ireland has experienced more loss than most. In Dublin, home values have fallen more than 60% below peak levels seen in 2007, and other areas of the country have not fared much better. Irish banks are still in disarray, job decline is rampant and the country’s economy continues to struggle. The result has been a shrinking mortgage market and a massive oversupply of homes that feeds a cycle that continues to drive home prices down. Analysts claim Ireland’s biggest mistake was bailing out its troubled banking system, which has cost the country (and the European Union) billions and continues to frustrate attempts at a recovery. For more on this continue reading the following article from Global Property Guide.

Ireland’s economy is now slowly recovering, but its residential property market is still in deep trouble. In 2011, the national residential property price index plunged by 16.7% (-18.7% inflation-adjusted), based on data released by the Central Statistics Office.

On a quarterly basis, the residential property price index dropped by 5.36% (-5.39% inflation-adjusted) in Q4 2011, after quarterly declines of 3.83% in Q3, 4.18% in Q2, and 4.47% in Q1.

The national average asking price for residential properties fell by 18% to just above €175,000 in 2011, after falling 15% in 2010, according to Daft.ie, Ireland’s biggest property website.

In Dublin, the capital, asking prices of residential properties continued to fall in December 2011 and are now more than 50% below the peak levels seen in mid-2007.

  • In the city centre, the average asking price was €159,099, about 61.2% below the peak level
  • In South Dublin Country, the average asking price was 55.3% below the peak, at €322,754.
  • In North Dublin County, the average asking price was €215,939, around 51% below the peak
  • In West Dublin County, asking prices were 53.7% below peak levels, at an average of €177,729.

In other areas, house prices are also plunging.

  • In Carlow, in Leinster (the eastern part of Ireland), the average residential asking price was €162,673, down 48.1% from peak levels
  • In County Cork, the most populated area in Munster (the country’s southernmost region), the average asking price was €181,209, down 48.2% from the peak
  • In County Galway, the most populated and the main urban area in Connacht (the country’s western region), the average asking price was €152,094, down 50.7% from the peak level
  • In Monoghan, which is located in Ulster (the northern part of Ireland), the average asking price was €160,563, down 50.9% from peak levels

Ireland’s house price boom was one of the biggest in Europe, with prices for new houses surging by more than 200% from 1997 to 2007, and average used home prices rising by around 280%. When the bubble burst in 2008, it was the world’s biggest property bust.

The total number of properties on the market was 56,000 by end-2011, the lowest level since mid-2008.

The banking sector is in deep distress. In 2011, Irish banks issued around 13,000 mortgages, down almost 95% from the 200,000 mortgages issued in 2006. About 47.5% of all outstanding mortgages were in negative equity by end-2011, up from 31% in 2010.

On the other hand, rents are now stabilizing. The national rent index rose slightly by 0.5% in January 2012 from the previous year, according to Daft.ie. However, the rental index is still 26% below the peak levels of mid-2007.

It is difficult to forecast when residential property prices are likely to reach bottom, but everyone agrees that Irish property prices will continue to fall in 2012.

Massive bubble and crash

Ireland’s house price boom was one of the longest and biggest in Europe. It saw prices of second-hand homes surge by around 330% from 1996 to 2006. The average price of new houses rose by 250%, according to the Department of Environment, Heritage and Local Government (DOEI). Historically low interest rates encouraged variable rate mortgages.


HOUSE PRICE CHANGE 1996 - 2006

 
NEW
SECOND-HAND
IRELAND
250%
334%
Dublin
318%
391%
Cork
257%
358%
Galway
231%
263%
Limerick
240%
350%
Waterford
237%
296%
Others
231%
263%
*Source: DOEI

The housing boom was originally fuelled by strong economic growth, immigration, and generous tax incentives and grants from the government, creating a virtuous cycle of economic growth and house price increases. Low interest rates and loose credit conditions provided financing.

Vicious cycle

All these elements are now gone, and the cycle has turned vicious. When interest rates were raised in 2006 and 2007, many borrowers ran into problems, triggering a housing market crash.

The situation was exacerbated by the 2006-2007 US subprime mortgage crisis which led to the global financial meltdown in 2008. The resulting credit crunch made it extremely difficult for Irish banks to find additional financing to cover their losses. The mortgage market continues to shrink, as job losses and falling wages lead to more mortgage defaults and foreclosures.

From its peak level in Q4 2006, the average house price dropped 36% to Q3 2010. In Dublin, the price fall was 44% while it was 32.6% in areas outside Dublin, according to Permanent TSB/ ESRI.

Shrinking mortgage market

The amount of new housing loans approved in Q3 2010 fell 10% from a year earlier, to a mere €5.91 billion, a pittance compared to the heights of Q3 2006 when housing loan approvals reached €15.57 billion.

Despite a key interest rate of 1%, unchanged since October 2008, mortgages are still not flowing freely, because banks are tightening up. In Q2 2010, 10% of banks were reported to have tightened their credit standards on loans for house purchases, according to the ECB’s bank lending survey (BLS), mainly due to the deterioration of banks’ own balance sheet situation.

The average interest rate on mortgages with floating rates or initial rate fixations (IRF) of up to 1 year was 2.94% in October 2010, up on 2.6% in January.

Outstanding housing loans continue to shrink, falling to €107.524 billion from €127.3 billion in May 2008. Yet because the economy has shrunk even faster, the ratio of mortgage loans to GDP actually rose to around 68% in 2010, from 63% in 2008.

Rents stabilising, but yields poor

The housing market crash devastated the rental market, but the situation is now stabilizing. The housing crash initially resulted in a huge expansion of rental offers. From 6,200 units in August 2007, the number of properties for rent rose significantly to more than 23,400 in August 2009. However, the stock of rental properties has now fallen to less than 18,000 (October 2010).

Dublin rents actually rose during 2010, but are still 30% below their peak levels.

  • The all-Ireland rent index fell 2% y-o-y to October 2010, according to Daft.ie, a significant smaller fall than last year’s 17% rent collapse. The average rent in Ireland in Q3 2010 was €840 per month, down from €880 in mid-2009.
  • On average, rents in cities rose 0.7% y-o-y while rents in non-city areas fell 0.7%.

Yields have slightly improved but remain stubbornly low.

  • The average rental yield across Ireland for Q3 2010 was 3.8%, up from 3.4% in Q3 2009.
  • Dublin’s yields are slightly better at 5.5% in the city centre. In other Dublin counties, yields range from 4.0% to 4.7%.

Huge oversupply of housing

Oversupply is estimated at 17.4% of the housing stock, 345,116 units (April 2009), according to a University College Dublin report of March 2010. The vacancy rate is also around 17%.

During the house price boom, dwellings completed tripled from 30,000 in 1995 to over 93,000 in 2006. After the bubble popped, completions fell dramatically to 26,420 units in 2009. Less than 20,000 units are expected to be completed in 2010, the lowest completion rate since 1991.

Due to the house price falls, the housing market may already be undervalued by about 12%, according a Standard and Poor (S&P) report of June 2010.

Ireland’s fatal mistake?

Ireland’s decision to save the banking sector at all costs is becoming one of the most expensive bailouts in the world. To prevent the banking sector from collapsing, the government has poured billions of euros into bank bail-outs. It also spent around €80 billion to establish National Asset Mangament Agency (NAMA) to acquire toxic loans primarily with a view of improving the availability of credit in the Irish economy, and to remove uncertainty about non-performing assets on bank balance sheets.

The fragile financial sector has only been kept afloat by the government by multi-billion bail-outs. The best example is Anglo Irish Bank or simply Anglo. In 2009, it was nationalized with a €1.5 billion capital infusion, followed by a €4 billion additional bail-out. In March 2010 an additional €8.3 billion was provided by way of promissory notes. In June, an additional €2 billion was injected into Anglo as part of the €10 billion estimated to be needed to keep it afloat. The government also announced that bank rescue efforts might need an additional €34 billion.

Of the €85 billion EU-IMF bailout fund, €10 billion will go to bank recapitalizations (primarily Anglo), €25 billion for banking contingencies and €50 billion for financing the budget.

In exchange, Ireland agreed to one of history’s harshest austerity programs. The government is set to cut spending by €4.5 billion, and increase taxes by €1.5 billion.

From a budget surplus of 3% in 2006, the fiscal situation has worsened to a deficit of 7.3% in 2008 and 14.3% in 2009. The deficit for 2010 is expected to be around 11.6%, lower but still very high, given the massive budget cuts and tax hikes implemented since 2009.

The government plans to slash the deficit further to 3% by 2014. But this ambitious plan will involve yet more tax hikes and spending cuts.

Yet these moves have failed to reassure investors, because the government’s overall debt is expected to be around 100% of GDP by the end of 2010, significantly up from a mere 25% of GDP in 2007. By 2011, the debt is expected to be around 124% of GDP. If the debts of NAMA are included, these figures go up significantly.

However the economy is slowly improving, and the government hopes that GDP will expand by 1.7% in 2011.

  • Ireland experienced a 7.1% GDP contraction in 2009, its worst recession in decades.
  • After 0.5% q-o-q growth in Q3, GDP will probably fall a mere 1.55% during 2010.

The massive tax increases and budget cuts, however, may halt this fragile recovery.

Severe unemployment problems

Unemployment has drastically increased to 11.8% in 2009, 13.6% in 2010 and 14.3% in 2011, according to the IMF. Unemployment was below 4.5% from 2000 to 2006.
In January 2012, the jobless rate fell slightly to 14.2%, according to the Central Statistics Office. However, it is expected to rise further to 14.6% for the whole year of 2012.

Prime Minister Enda Kenny, who swept to power last year, promised to solve the country’s severe unemployment problems and create about 100,000 jobs by 2015.

This article was republished with permission from Global Property Guide.