As interest rates rise worldwide, property markets from Canada to New Zealand are feeling the heat after years of rising home prices.
Given the damage done to the Irish economy by the bursting of the last housing boom, it doesn’t seem unreasonable to be concerned as house prices here are now above their Celtic Tiger-era highs.
From the time the European Central Bank first pushed lending rates negative in 2014 until it finally started raising them this year, eurozone house prices had risen by 45 percent.
Everyone has piled on debt, and combined public and private sector borrowing in Europe is now at a record 471 percent of gross domestic product.
As in Ireland, the rebound was fueled by low interest rates from Covid lockdowns and there were vacant lots in many developed countries.
Countries like Canada, Norway and Sweden have seen a dramatic increase in borrowing as a percentage of GDP – by 25 percentage points or more since the financial crisis.
That was not the case in Ireland. Although the housing market here shares many of the same structural problems with other developed markets – essentially lack of supply – Irish borrowers are far less exposed than they were in 2008.
It’s hard to get over how crazy things were back then. Commercial and residential lending led to bank assets reaching five times the state’s total economic output.
At its peak in 2008, mortgage debt was 148.8 billion euros and the median loan-to-income ratio for first-time buyers was 4.4 times – while for second and subsequent buyers it was 3.2 times. Fast forward to 2021 and the numbers are 3.3x and 2.7x respectively, says the Central Bank of Ireland.
Investment bank UBS estimates that for Europe as a whole, non-financial corporations account for 32% of total outstanding debt, followed by financial corporations at 28%, government at 26% and the smallest share of households at just 14%.
This does not mean that housing is no longer a “risk”. It’s, it’s just been tempered
“We find that the proportion of adjustable rate loans is consistently low and has declined sharply since the global financial crisis. For Europe as a whole, the proportion is 13 percent, while Italy (20 percent) and Spain (20 percent) remain the most exposed at the country level,” says a UBS report.
This does not mean that housing is no longer a “risk”. It is, it has just been mitigated, and it is not the same threat to financial and economic stability that it was in 2008. Housing is still key to consumer trends and demand in the economy.
In countries like Ireland, which were particularly hard hit by the crash, loan-to-value and loan-to-income rules have worked well.
With all the fuss and misery about spending during Covid and now to offset the cost-of-living crisis, public finances look bulletproof and public debt will be less than 40 percent of GDP by 2024 – 75 percent on the GNI* measure. Even if you subtract €9 billion in unexpected corporate taxes, the 2024 budget will still be in surplus.
Another sign that loose credit conditions aren’t driving up property prices in Ireland is that rents are also rising much faster than incomes. That’s cold consolation for those who can’t find a place to rent, but it’s a stark contrast to the Celtic Tiger era.
These real estate increases will also hedge many borrowers against the risk of negative equity, even if there is a significant drop from current price levels. Central bank research shows that even if house prices fell by 13 percent, the proportion of households running into negative equity would rise only slightly and remain well below levels seen during the financial crisis.
Although real incomes are expected to fall dramatically this year, employment remains at record highs and unemployment at record lows. This is just as true in the eurozone as it is here. The pace of hiring growth has already slowed, but there are few signs of an increase in unemployment.
With the strength of Ireland’s economy and unemployment rates well below much of the rest of the eurozone, migration has returned following the lifting of Covid restrictions. It is now at an all-time high and that is creating even more demand for housing.
25,000 homes are likely to be built this year, and possibly in 2023. At the beginning of 2022, only 7,300 homes were available outside of Dublin, according to an analysis by Trinity professor Ronan Lyons on Daft.ie
Of course, just because things are looking good overall doesn’t mean that individual households aren’t stressed out by rising interest rates. Mortgage loans account for 77 percent of total household borrowing in the euro area.
Even in the “good times” estimates from the Household Budget Survey conducted just before the pandemic hit, 9 percent of households were at risk of missing out on mortgage payments after basic necessities like groceries were covered.
Households at the bottom of the income distribution spend over 44 percent of their disposable income on basic necessities, while households at the top spend less than 20 percent.
Poorer households have not been the beneficiaries of a pandemic and lockdown-induced surge in savings to the same extent as richer ones
A study released last week by the Central Bank of Ireland showed that over one in six economically vulnerable households with mortgages spend at least 30 per cent of their disposable income covering these costs.
Poorer households have not been the beneficiaries of a pandemic and lockdown-induced surge in savings to the same extent as richer ones. Economically vulnerable households, the central bank says, have less than a week to spend essentials as liquid savings, compared with 7-10 months for wealthy households.
To say that house prices are not prone to a sudden drop and pose systemic risk to the economy, as was the case in 2008, is not the same as saying that prices will not fall.
Modeling from the Economic and Social Research Institute suggests that house prices are overvalued by about 7 percent and that given the rise in savings in the Covid-era is unsustainable. Prices need to adjust to income growth, which would result in a significant slowdown in profits.
That view appears to be shared by Davy’s economists, who forecast house price inflation to slow to 6 percent by the end of this year and 3 percent in 2023.
If you really have to worry about the risks of a real estate crash, then China is the place to keep an eye. A country that had grown an average of 9.5 percent a year from 1979 to 2017 will grow just 2.8 percent this year and 4.5 percent in 2023, according to the World Bank, as a housing crisis bites hard.
When the financial crisis nearly bankrupted Ireland and other countries, Beijing was pumping 520 billion. That’s not happening this time.
https://www.independent.ie/business/ireland-to-escape-worst-of-property-storm-triggered-by-rising-interest-rates-42062391.html Ireland escapes worst housing storm unleashed by rising interest rates