Five years ago, a rent increase forced Aimée Roche to give up her Dublin flat and move back to her mother’s home in Tallaght to save money to buy her own property.
n February 2020, armed with approval in principle for a mortgage and a 10 percent security deposit, Roche began searching for real estate in Tallaght within its budget of up to €225,000. Then Covid struck.
Not only did she have to balance remote work from her mom’s kitchen with studying for a degree to get a better-paying job, she also faced restrictions on property viewing and a fast-dwindling supply of homes. The real estate market defied predictions of an imminent collapse – and as it continued to rally, Roche was quickly outbid and forced out of the market.
“People were bidding for houses because they only saw the photos,” says Roche. “I had to take the Daft and MyHome apps off my phone because of my own mental health.”
The 40-year-old has since secured a new, permanent managerial position – but she’s sticking with that deposit for the time being, in the belief that house prices will ease as the global economy slows and higher interest rates weigh on the real estate market.
She is determined to time her entry into the real estate market at the right time lest she become part of a new generation with negative equity.
“Inflation and talk of rate hikes are making me panic,” says the Dubliner. “A lot of people argue that if you don’t buy now, you never will.
“But I have friends who bought in 2006, ended up in negative equity and were never able to get a mortgage again. I feel like if I screw up I’ll be stuck for the rest of my life.”
The last 12 months have proven to be a nightmare for potential first-time buyers as the real estate market has warmed at its fastest pace in more than half a decade. On Monday, the CSO reported that house prices rose 15.2 percent in the year to March, the largest increase in seven years.
However, there are signs that house price growth has slowed.
Davy chief economist Conall Mac Coille says the market likely peaked in March, when house prices were 118.2 percent above their early 2013 low and just 2.1 percent below the Celtic Tiger’s staggering highs of 2007.
He expects price growth to slow to 7 percent this year from 14 percent in 2021.
Such predictions, combined with the threat of a global recession and the looming ECB rate hikes, are causing would-be buyers like Roche to put off buying a home.
When Ciarán Mulqueen — whose Crazy House Prices account on Instagram has more than 100,000 social media followers — reported on Tuesday about mortgage lenders raising their rates, he received at least 500 replies from inexperienced home seekers who said they plan to increase theirs interrupt purchase.
“Higher interest rates are the main concern for these people, although the ECB has indicated that they will raise rates,” says the 35-year-old teacher, who bought a house with his wife on the market last year after a long search.
“For some people, their only hope of buying a home is a crash because the prices are so unreachable.”
Is history repeating itself with another catastrophic real estate crash just around the corner?
Many economists think that’s unlikely given the lack of the credit boom and reckless lending that led to the housing collapse of 2008 this time. They say housing demand – which still far outstrips supply – continues to be supported by strong domestic economic growth and low unemployment.
But David McWilliams, who last year called a “buyers’ strike” over a lack of quality supply, warned of an “affordability crisis,” saying “the higher the price, the more fragile and prone the market is to collapse.”
Across the western world, the home-buying frenzy that has dominated the economies that emerged from lockdowns is showing signs that it may fizzle out. Economists see the end of the ultra-low interest rate era, while at the same time Russia’s war in Ukraine is pushing up energy prices and China’s zero-Covid strategy is exacerbating supply chain bottlenecks – all hitting the global economy.
Higher interest rates are already starting to have an impact on the US housing sector, where forecasts are that the days of rapidly rising house prices are drawing to a close while prices in some Canadian cities are beginning to fall. In the UK, house price growth slowed in March – and in New Zealand, where prices fell in April, two of the biggest banks have forecast prices to fall by as much as 20 per cent, which would take them back to where they were before over a year.
In Ireland, says Mac Coille, “the central bank estimated that prices would have been 25 percent higher had it not been for the mortgage loan rules,” which limit borrowers to a mortgage of three and a half times their annual salary.
“Double-digit increases are not possible without being unsustainable. I think price growth will slow down. If house prices are falling, it’s not because we’ve solved the housing problem, it’s because people are nervous about a global recession and interest rates.”
Mac Coille points out that the CSO’s Residential Property Price Index was showing the first tentative signs that house price inflation was slowing down. While annual inflation was 15.2 percent in March, the monthly gain of 0.6 percent was the slowest rise in 12 months.
In fact, that gain represented a “significant slowdown” compared to gains of at least 1 percent in each of the last six months of 2021.
Rachel McGovern, director of financial services at Brokers Ireland, which represents 1,225 brokers nationwide, says it is “difficult to see” the same level of house price increases “maintaining through the rest of the year” amid warnings of three rate hikes this year year , and because prices “have come within touching distance of the 2007 peak”.
Kieran McQuinn, research professor at ESRI, says: “The reality is that house prices cannot be expected to continue rising at these levels. People won’t be able to afford it.
“Eventually, prices will have to ease and the ECB’s heavily hinted move to hike rates in July will ultimately result in higher mortgage rates. You will see house price inflation come down over the next few months.”
To combat inflation in the euro zone – the fastest pace on record since the currency’s inception – the ECB is expected to start raising interest rates as early as July.
Last Tuesday, Dutch central bank governor Klaas Knot, a hawkish member of the ECB’s governing council, raised the possibility of an aggressive 0.5 percent rate hike by the ECB in July if inflation continues to rise.
Knot’s statement raised market expectations for the magnitude of a rate hike, with Bloomberg data on Tuesday showing consensus on a 1 percentage point ECB rate hike this year, up from about 0.93 percentage point the previous day.
Earlier this month, the US Federal Reserve introduced its biggest interest rate hike in 22 years and the Bank of England followed suit, pushing interest rates to their highest level in 13 years as it warned of a recession.
European mortgage lenders are already raising their own rates as anticipation of the ECB hike drives up costs in global money markets.
In Ireland, Avant Money has hiked rates on some of its fixed rate home loans – and just last week ICS Mortgages raised its lending rates for the second time in two months, with a 1 percent increase on three and five year fixed rate mortgages.
That means, for example, that a first-time buyer with a 10 percent deposit who wants to take advantage of ICS’ five-year fixed rate and borrows €250,000 over 30 years will pay €1,872 more per year than someone who borrowed from ICS before March Hike, according to Bonkers.ie.
There are also signs that the severe housing shortages encountered during Covid are gradually easing. At the beginning of March,
Daft.ie reported that there were just 10,000 homes for sale across the country, compared to an average of 17,500 in 2019. As of Thursday, that number had risen to nearly 15,200.
Housing completions are also beginning to recover from the housing restrictions of 2021 and 2020: In the first three months of 2022, new housing completions (at 5,669) were at their highest level since a first quarter in a decade, rising to 45 from the first Quarter of 2021, according to the CSO.
ESRI expects 26,000 housing units to be completed this year, up 27 percent from 2021, when 2019 completions were slightly below the pre-pandemic level of 21,049. The institute expects completions to increase to 30,000 units next year.
However, those numbers are still well below the 35,000 units per year that ESRI estimates are needed to meet demand.
In addition, the rising cost of building materials and a shortage of thousands of construction workers are contributing to construction costs (research by McQuinn last year found that a 1 percent increase in construction costs reduces new supply by about 1.4 percent) and international Investment funds are snapping up new housing developments, leaving ordinary buyers out in the cold.
“Supply is increasing, but not with demand – and the huge cost increases will certainly affect the housing supply,” says McQuinn.
“During the housing collapse, we had a massive credit bubble – and when people couldn’t afford houses in the early 2000s, the banks gave them extra credit and then prices went up until it all finally cleared up.
“Now there are macroprudential rules on the amount of credit households can get, so there is no credit bubble. If prices fall this time, it’s because of fundamentals like income, interest rates and unemployment.”
For its part, Roche is hoping for some relief from the skyrocketing real estate prices.
“What goes up has to come down again – at some point,” she says.
https://www.independent.ie/opinion/analysis/could-property-have-a-soft-landing-this-time-around-41670582.html Could real estate have a soft landing this time?