House Price Forecast Jan 31st 2022
The common characteristic of every medium term housing price forecast that I have encountered is that they have been universally wrong, and perhaps understandably so to some degree. The eco system that is the housing market is so complex by nature that its growth path has proven time and time again to be largely illusive to even our most erudite of economists.
Considerations must be taken from a vast web of interrelated factors, each one of which constitutes a moving target that on its own remains powerful enough to change the entire dynamic of the market. For example; the interplay of supply and demand, interest rates, the wider economy, wage inflation, the level of mortgage lending, increasingly stringent building control regulations, difficulties in the planning system, the generalised beliefs about the direction of the market, the consequence of negative yields, the large scale entrance to the residential housing market of international investment funds, the Central Bank’s restrictive lending rules, demographics, the flow of new home formations, immigration levels, construction cost inflation, the level of social housing provision etc. etc.
Predictions based on current trends are prone to fall victim to what appears obvious for now. Perhaps we too will fall foul of this in-built inertia. Standard economic theory suggests that prices will level off as supply ramps up. History shows us otherwise. Prices will continue to rise in the expectation of further rises regardless of increase in supply.
House prices are rising at a rate not seen for the best part of a decade. There is a chronic shortage of housing across the country. Inflation is running at rates not seen for decades.
Wage inflation is now following price inflation. With the prolonged restrictions on international travel there are currently smaller pools of employees to chose from. Competition to secure the required talent is now remarkably intense. We are seeing wage increases at levels never before seen in the Irish employment market. Off course this is by no means a universally applicable phenomenon.
The ECB has claimed recently that Irish House Prices are undervalued by 17%. They are worth paying attention to as they called it correctly in 2007 when they said that the Irish property market was overvalued by 25%. We did overshoot on the way down due to the turning off of the credit supply, so I think their analysis was about right. We ended up with the largest price correction in Western Europe which has helped to keep the current market somewhat in check in comparison to many of our International counterparts
Off course the other factor that has kept us in check this time round is the strict Central Bank lending rules and in particular the 3.5 times loan to income ratio. These rules have been conjured with the sole intention of preserving the financial stability of the banking system. Ironically it is these same restrictions that have locked a generation of middle income earners out home ownership and have plunged the population en masse in to the servitude of the rental market which has grown out of all proportion since these market interventions were implemented.
It is cruel twist of fate that at precisely the same moment that many potential mortgage applicants were being frozen out of the lending market, that we witnessed the wholesale market entry of investment funds armed with unbridled access to vast amounts of cheap money and leverage. If we do see a housing crash 2.0 at some point in the future, it will may well have its roots in the over exuberance of yield chasing investment firms rather than from our banking system which although is theoretically operating in the risk business is no longer permitted to take risks.
Access to finance is the cornerstone of wealth generation. The long term effects of the denial of finance to vast swaths of the population is incalculably large. The state will now have to build like never before to fill the resulting gaping hole that has been created in housing supply. In the end this may prove more costly than if they had let the banks perform their natural role of providing the required level of finance to developers and mortgage applicants in order to facilitate the necessary level of housing supply.
These same Central Bank rules and their relationship to wage inflation gives us the clearest indication of what will happen next in the housing market. We are going to see wage inflation running at 10% plus in the coming 12 months across numerous industries and perhaps as much as double that figure for highly competitive employment markets.
Because of this house price inflation will become embedded in the system for at least the short to medium term, with potential increases of up to 10 percent per year for perhaps the next three years.
For those fortunate enough to capture these increases in income house prices will remain relatively stable in real terms. Unfortunately, for the rest of the population which will represent a substantial cohort of society, housing is set to become increasingly more unaffordable in the coming years.
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