Does the “soft landing” narrative for house prices stand up to scrutiny?

The Covid-induced sugar rush in property markets is over. Headline inflation is slowing or turning negative due to rising interest rates. Anecdotal evidence suggests buyers are being forced out of sales agreements because their lender gave them less in the loan offer or withdrew it altogether.

Property website MyHome says it has 3,300 more properties for sale than at the same time last year and a higher percentage of sellers are revising their asking prices downwards. The Economic and Social Research Institute (ESRI) also reported that house prices there are overvalued by at least 7%. And this calculation only goes back to the end of last year, which suggests that the overvaluation could be higher.

Regardless of your view, there is evidence of a slowdown, but will this trend turn into a price correction?

Industry professionals here say no. Most point to the supply-demand mismatch, which has haunted the market for more than a decade, as something that will secure prices at least in the medium term.

According to Sherry FitzGerald, there were 15,300 used properties for sale across the country in July, representing an annual increase of 1,800 properties. Despite the improvement, the total volume of properties for sale in July represents only 0.8% of the total housing stock.

In a normal, functioning market, one would expect to see about 2% of existing stock being renewed at any one time. Likewise, while we have seen a slight increase in new construction – new home completions in the year to June stood at 24,929 – this is not yet close to the estimated level of demand at 35,000.

Others point to the relatively benign macroeconomic outlook. The Irish economy is expected to grow strongly this year and continue to grow next year as many other countries fall into recession. The government’s two buyer support programs – the First Home program and the Help to Buy program – will also continue to support prices, they say.

So, according to the industry, we will have a slowdown in price growth, but not a correction. Keith Lowe, managing director of real estate agent DNG, says he expects headline inflation to fall to between 5 and 7% in the coming months, from its current rate of 13%, and to 2% next year.

This soft landing narrative, however, contrasts with sentiment overseas, which is focused on the corrosive impact of higher borrowing costs, which are expected to trigger downturns in property markets across the world and an eventual reset. painful in some of the most overvalued markets.

“We will see a globally synchronized housing market downturn in 2023 and 2024,” Hosei University’s Hideaki Hirata, a former Bank of Japan economist and co-author of a paper in the journal, told Bloomberg recently. International Monetary Fund on world real estate prices. He warned that the full impact of this year’s aggressive rate hikes will take time to be felt for households.

The turmoil in UK financial markets has prompted analysts to predict that property prices could fall by up to 20%. Prices are already falling in Canada, Australia and New Zealand due to sharp increases in interest rates.

An example of this is the United States, which is ahead of us on the path to rate hikes. Mortgage rates attached to 30-year fixed-rate contracts more than doubled to reach 6.7%. In practice, this means that paying $2,500 a month now buys a house worth around $480,000. This time last year, the same monthly repayment could have bought a property worth $760,000. In other words, housing affordability is declining rapidly.

The European Central Bank (ECB) is the last major central bank, apart from the Bank of Japan, to initiate monetary tightening, in part because it is generally less interventionist than the US Federal Reserve. It has raised rates by a combined 125 basis points in its last two meetings and markets are pricing in further hikes of 175 basis points by next spring, bringing interest rates down from zero to 3% one year. in short, we have yet to feel the full impact of the higher rates.

A central question is whether the drag from rising interest rates outweighs or proves more impactful than the supply shortfall that so plagues the Irish market. Lorcan Sirr, a lecturer in housing studies at Dublin’s Technological University, insists that “there is a greater correlation between interest rates and house price movements than supply and price movements”.

We also don’t know how high interest rates will go. It depends on the current inflationary spiral, the energy price shock underlying it, and Vladimir Putin’s war in Ukraine, a seemingly unknowable set of variables.

Another question is what impact higher interest rates will have on funds operating here. These entities are responsible for most of the apartments built in Dublin and other urban centres. What happens when the yield on safe-haven government bonds exceeds the yield on real estate? Are they going to start divesting themselves of their holdings here?

Nothing is ever certain when it comes to Ireland’s volatile property sector. The frenetic buying and bidding activity of the pandemic period may be over, but what comes next is still unclear.

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