Despite taking tough anti-Keynesian measures to balance the country’s budget and stem the country’s economic meltdown, Ireland continues to experience the worst recession in its recent history. With the country’s economy expected to shrink in both 2009 and 2010, the current outlook for the real estate market in Ireland remains grim. See the following article from Global Property Guide for more on this.
Ireland is experiencing its worst recession in recent history, and yet house prices continue to plummet, creating a dangerous downward spiral.
In August 2009, the average house price in Ireland was €235,260, 1.5% down on the previous month, 13% down on a year ago and 24% lower than the February 2007 peak, according to Permanent TSB/ESRI.
When adjusted for inflation, the average house price was 1.9% down on the previous month, 7.6% from a year earlier and 25% from the peak.
A particularly worrying sign is that while house prices in other countries are starting to recover, August 2009 saw the worst house price falls ever in Ireland.
If Dublin continues to precede the national cycle, the situation will get worse before it gets better. The average house price in Dublin was 1.9% (2.3% in real terms) down on the previous month and 28.6% (29.6% in real terms) below the April 2007 peak price. Outside Dublin, the average house price was down 2.4% (2.8%) on the previous month, and 23.5% (24.2%) lower than the January 2007 peak price.
Ireland’s boom was one of the longest among developed countries.
From 1996 to 2006 average house prices soared:
- In Dublin, by 360% (235% in real terms)
- Outside Dublin, by 253% (157% in real terms)
- In Ireland as a whole, by 280% (179% in real terms)
The house price boom had two major causes: economic and wage growth, and the rapid expansion of the mortgage market. The reversal of these two main growth drivers has pushed prices down.
Most loans in Ireland are variable rate mortgages, taking advantage of the historically low interest rates. When the European Central Bank (ECB) raised interest rates in 2006 and 2007, the rapid increase of house prices halted. Many borrowers had problems with their mortgage payments, triggering the housing market crash.
Having contracted 3% in 2008, the economy is likely to shrink by as much as 9% in 2009 and 2.5% in 2010. Economic growth is not expected to return until 2011 and the housing market is not expected to stabilize until then.
Banks reluctant to lend
The European Central Bank (ECB) started cutting key rates in October 2008. In May 2009, they lowered its key rate to a historic low of 1% where it has remained until now (November 2009).
Following that, average interest rates on mortgages in Ireland with floating rates or initial rate fixation (IRF) of up to 1 year fell from 5.58% in September 2008, to 2.62% in August 2009.
Despite the rate reductions, residential mortgage lending in Q2 2009 was 5.7% down on a year earlier, at €113.65 billion. By August 2009 it had dropped to €109.62 billion, 10.2% down on a year earlier.
Irish banks were still tightening lending criteria in Q3 2009, according to the latest ECB Euro Area Bank Lending Survey. Irish lending is expected to remain tight in Q4 2009, while other eurozone countries’ banks are likely to ease credit standards.
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Huge oversupply of property
During the house price boom, the number of dwellings completed rose very sharply in Ireland, tripling from 30,000 in 1995, to over 93,000 in 2006. After the bubble popped, completions fell to 73,000 units in 2007 and 51,724 units in 2008.
Oversupply was estimated at 250,000 units in 2007 in a June 2009 study by S&P, the credit rating agency. Around 16,000 houses and apartments are expected to be built in 2009, according to Merrion Stockbrokers’ Spring 2009 Housebuilder Survey. It projects that completions will drop further to 14,000 in 2010, while the oversupply of new houses will not be cleared until the middle of that year.
The exodus of migrant workers has contributed to the increase in oversupply. For the first time in 14 years, more people left Ireland than arrived. From April 2008 to 2009, the number of emigrants was 65,100 while there were only 57,300 immigrants; a net migration of 7,800. This was in sharp contrast to the net immigration of 71,800 in 2006, and 67,300 in 2007.
Immigration was once a key driver of the housing market, both for rental and owner-occupancy. Ireland’s economic growth attracted many workers from Eastern Europe, especially in the construction industry.
Unemployment to rise to 15%
The fall in construction activity has helped push unemployment to 12.2% in July 2009, up from 4.6% in 2007. Unemployment is expected to rise to 15% in 2010, and peak at 16% by 2011. After contracting 3% in 2008, GDP is expected to fall by as much as 9% in 2009 and 2.5% in 2010, among the worst declines in the EU, outside Eastern Europe.
This is one of the worst recessions experienced by an industrialized country since World War II.
Gross fixed capital formation is expected to fall by 32% in 2009, after contracting by 15.5% in 2008, mainly due to the 36% fall in building and construction activities.
With the economy in recession, more households are finding it difficult to pay their mortgages, worsening the financial system’s problems.
The legacy of 17 years of house price boom
House prices had been rising for 17 years in Ireland, without a break. Since 1996, when the surge began in earnest, national average house prices rose from €75,000 to €287,664 (end-2006), i.e., a rise of 283% in nominal terms. Dublin saw a 366% rise, from €82,400 (1996) to €384,247 (end-2006).
The price rises had one major explanation, the exceptional growth of the economy. Ireland experienced average GDP growth of 9.8% during the six years 1995-2000, with no less than 10.7% GDP growth achieved in 1999, and 11.7% in 1997. From 2001 to 2007, GDP expanded by an average of 5.5%.
Unemployment fell from 15% in the early 1990s, to an average of 4.3% from 2001 to 2007. Real wages grew by an average of 5.6% annually during the same period, greatly boosting purchasing power.
The perils of deregulation
The rapid growth of the housing values was assisted by mortgage market deregulation, the de-mutualization of building societies, and by the entry of foreign banks. Outstanding residential mortgage lending surged by more than 300% from €29 billion in 2000 to €123 billion in 2007. It rose from 28% of GDP in 2000, to 65% of GDP in 2007.
However, the rapid growth of mortgage lending was partly due to housing equity withdrawal, as individuals borrowed on the strength of their higher house prices. Equity withdrawal makes households more vulnerable to house price falls. Realizing the risks, the new Irish Financial Service Regulatory Authority (IFSRA), asked mortgage lenders to tighten their lending criteria, slowing the growth of mortgage loans even before the crisis struck.
After the financial crisis, outstanding mortgages fell to €114 billion in 2008 or 63% of GDP, still above the EU average of 50% of GDP.
Rents down, yields miserable
Irish rents were decontrolled in the 1990s, leading to an increased supply of buy-to-let properties.
The government’s reaction to the rise of the buy-to-let sector was to impose distortionary tax measures, now mostly abolished, to dampen this new activity. Then in 2002 mortgage interest deductibility against rental income was reintroduced, slightly boosting the market. In 2004 the Residential Tenancies Act introduced stronger protection for tenants, but without any obvious negative effects on the buy-to-let market.
In Ireland 73% of all households were in owner-occupied dwellings in 2006. Around 13% live in private rental housing units, and 7% in social rented housing.
The increased supply of rental units has recently had a tremendous effect on rents, which began to decline, falling by 8% in 2003, and 4% in 2004, in sharp contrast to the earlier period between 1998 and 2002, which saw a 60% rise in rents.
The rental market registered rent increases in 2005 (3%), 2006 (8%) and 2007 (10%). However, the rent index started to decline again in early 2008. By December 2008, the rent index was down 10% from a year earlier.
The rent decline accelerated in 2009, as developers rented out unsold units. Properties for rent surged from around 6,200 in August 2007, to more than 23,400 in August 2009, according to Daft.ie. In July 2009, the rent index was down 18% y-o-y; with urban areas more severely affected. Average rents in Dublin were down by 17% to 23% from peak.
These developments explain Ireland’s relatively low yields, averaging 3.3% in Q2 2009 according to the latest Daft.ie rental report. Dublin yields are only slightly better, with city-centre yields at 4.6% while ranging from 3.5% to 4.2% in other Dublin counties.
Ireland rejects Keynes, preferring tough love
The government has responded to Ireland’s economic meltdown with a surprisingly anti-Keynesian approach, focusing on balancing the budget, even opting out of the EU’s €200 billion economic stimulus package.
From a budget surplus of 3% in 2006, the fiscal situation worsened in 2007 to a surplus of only 0.05% of GDP. In 2008, there was a whopping 7.3% of GDP budget deficit. A deficit of more than 12% of GDP is expected in 2009 and 2010, way beyond the EU’s 3% budget deficit limit.
To balance the budget, the 2009 budget hiked income taxes (from minimum-wage earners to the wealthiest individuals), cigarette and diesel fuel taxes, to raise €3.5 billion in revenues.
The government also halved unemployment benefits and early child-care payments. The traditional bonus payment for social welfare recipients was also scrapped.
Spending is likely to be cut further in 2010, and taxes increased. The 2010 Budget includes a €5 billion fiscal adjustment:
- €4 billion reduction in current expenditure; which includes
- €1.4 billion cut in public sector pay;
- €1.3 billion cut in social welfare costs; and
- €1.3 billion cut in delivery of services
- €0.5 billion in tax base broadening; and
- €0.5 billion in capital expenditure savings.
Stamp duty repeal offers hope
In the Q3 2009 report, Daft.ie noted that looking at the next 12 months, two factors in particular are important for Ireland’s property market.
- The universal property tax set to replace stamp duty “If done correctly, this may not only remove uncertainty but also stimulate a healthy level of transactions,” says Ronan Lyons, an economist in Daft.ie.
- The National Asset Management Agency (NAMA)
Similar to special-asset vehicles in other countries, NAMA is being established to facilitate the availability of credit into the real economy and to remove uncertainty relating to the non-performing assets on the balance sheets of important credit institutions.
It will function as a “bad bank”, acquiring property development loans from Irish banks in return for government bonds, primarily with a view to improving the availability of credit in the Irish economy
However, it is not clear on how soon these will affect the housing market given the overwhelming odds Ireland faces.
This article has been republished from Global Property Guide. You can also view this article at Global Property Guide, an international real estate analysis site.
