Interest rates are rising across the euro area and perhaps nowhere is the jitter stronger than in Ireland. The country’s real estate market reflects its famous Celtic Tiger past, which was punctuated by a catastrophic downturn that took 15 years to recover from.
Will high inflation, slowing growth and rising interest rates set a new example? Housing market crash in Irelandor will the country weather the current global economic headwinds and emerge unscathed?
What is a home accident?
A housing crash, similar to crashes in other asset classes, occurs when the average home price in a region falls dramatically, triggering a financial crisis.
House prices tend to rise in tandem with GDP growth, which usually reflects rising incomes and wealth and drives demand for housing. Because most of the average person’s wealth is tied to their home, rising house prices increase wealth and boost consumer confidence.
Conversely, during a recession, house prices typically fall, upending growing confidence and encouraging lower spending. This can easily be offset by the banks’ accommodative monetary policies, which lower interest rates and make houses more affordable.
A real estate crash often follows a hot spot in the market in which prices are rising to what might be termed a “bubble,” either from unsustainably high levels of liquidity in an economy or from a speculative frenzy by traders that contributed to it the past infected the broader financial system.
Rate hikes can also trigger a real estate crash, pushing home ownership costs into prohibitive ranges for a number of households. The interest rates set by central banks such as the European Central Bank (ECB) are the benchmark that ultimately affect the mortgage rates set by commercial banks.
Rising interest rates have a profound impact on a household that has to spend more on their mortgage every month. In addition, the contractionary impact of interest rate increases on the economy generally hurts homeowner and potential buyer confidence and reduces the number of buyers available in the market, even as more homes come up for sale in response to these rising costs.
As a result of rising interest rates, Ireland may experience a housing crash – a new breed of housing crash for a country previously rocked by a subprime epidemic that took more than a decade to recover.
Will rate hikes trigger a property crash in Ireland?
An Irish property bubble is all too familiar to residents of the country. Ireland experienced rapid growth and sudden prosperity during the Celtic Tiger Era as incomes and demand for homes soared. Easing credit restrictions also helped more people enter the market. These circumstances triggered an unprecedented property crash in Ireland.
A major property crash in Ireland began in 2008, with houses losing more than half their value through a steady five-year decline.
Prices started to recover in 2012, while a three-year period of relative stagnation was halted by a resurgence in demand during the Covid-19 pandemic.
It has taken more than 15 years for house prices to recover in Ireland, slower than in other western countries.
Latest data from the Central Statistics Office (CSO) showed that average house prices in Ireland are now 0.8% above the record set in April 2007. That inevitably leaves some people worried about the possibility of another property crash in Ireland in 2022.
Irish house prices could face problems as the central bank battles record inflation.
Buoyed by rising fuel and transport costs, the consumer price index (CPI) hit 8.7% in August, down from the 9.1% highs seen in June and July but still well above the Central Bank of Ireland’s target.
The eurozone, which includes Ireland, faces similar headwinds, with inflation hitting 8.9% in July. Interest rates are on an upward trend. As part of the Eurozone economic area, Irish interest rates align with the ECB.
Earlier this month, the ECB hiked rates by an unprecedented 75 basis points after raising them by 50 basis points in July. It’s an aggressive move in line with UK and US actions, and something ECB Vice President Luis de Guindos said on September 19 could go further:
“Monetary policy is always trying to fight inflation, which will affect consumer spending and business investment… and further rate hikes will depend on economic data… Inflation is the biggest pain for European people.”
This could have implications for a resurgent Irish housing market supported by high levels of liquidity.
The latest data from the CSO shows that the rate of growth in house prices has slowed in recent months, with Dublin growing at a slower pace than the rest of Ireland in a trend that has persisted for several months.
A May 2022 European Commission review encouraged optimism when it suggested a property crash in Ireland was unlikely thanks to tighter controls on financial markets that had previously fueled a property bubble in Ireland. The Commission wrote:
“Overall, the financial sector looks much healthier compared to the run-up to the great financial crisis. Since then, Irish banks have become significantly more resilient and the introduction of stricter rules and requirements has helped address many of the banking sector’s pre-crisis vulnerabilities.”
“Aside from tighter capital and liquidity requirements, the introduction of mortgage-related measures in Ireland has reduced the exposure banks can have to the property sector, notably through the introduction of mandatory loan-to-value and loan-to-value limits. ”
The commission did not think the prices were overstated, noting low home inventories:
“The Commission’s internal benchmark metrics do not suggest that Ireland’s average national house prices are overvalued. However, these calculations are based on a long-term average of house prices that includes a large housing bubble that emerged in the mid-2000s.”
Ireland property market predictions for 2022, 2023 and beyond
Forecasts for the Irish housing market are relatively optimistic and do little to point to a housing market crash in Ireland in the near future.
In a June note, Davy Group chief economist Conall MacCoille said that sellers’ slow trickle back into the market was helping to ease rising prices, noting:
“The possibility of a slight fall in Irish house prices cannot be ruled out, correcting some of the foam that has built up since the pandemic began. However, a double-digit decline or a repeat of the Celtic Tiger-era housing crash seems highly unlikely.”
MacCoille said it was because tighter mortgage rules significantly reduced the likelihood of another subprime crisis.
In July, the Society of Chartered Surveyors Ireland (SCSI) released a forecast for house prices in Ireland, which projects a 4% increase in 2022. However, the agency noted that this should be seen in the context of high inflation:
“Right now, the current rate of consumer price inflation is around 8%, which means that the projected increase represents a 4% reduction in real terms compared to consumer prices.”
The SCSI added that the majority of agents still see low housing supply as a key factor in short-term prices.
In a quarterly economic report in June, Ireland’s Economic Social Research Institute (ESRI) forecast that house price growth would slow through 2023 due to the impact of the ECB’s interest rate hike, but would be boosted by high demand and low supply:
“However, it is clear that other demand-side characteristics such as income levels and population combined with a relatively sluggish supply response in the domestic market will continue to exert upward pressure on Irish property prices in the year ahead.”
The agency said rate hikes will cause Irish house prices to fall by 2% “compared to what they would otherwise be”.
Note that analyst predictions of a crash in the Irish property market may be incorrect and should not be used as a substitute for your own research. Always do your own due diligence before trading. And never trade with money you cannot afford to lose.
frequently asked Questions
Will property prices in Ireland fall?
House price growth is expected to slow in Ireland after returning to levels last seen in 2007, but prices will not fall, according to a number of agencies including the Society of Chartered Surveyors Ireland (SCSI), the Davy Group and Ireland’s Economic Social Research Institute (ESRI).
Is Ireland facing a property crash?
Analysts from the Society of Chartered Surveyors Ireland (SCSI), the Davy Group and Ireland’s Economic Social Research Institute (ESRI) do not expect a housing crash in Ireland, thanks to tighter credit conditions compared to the last crash and a low supply of suitable housing.
What caused the last property crash in Ireland?
The last housing crash in Ireland was aided by looser financial controls which allowed access to the market for a large number of subprime borrowers who defaulted on loans when the recession hit.