There is no doubt that 2021 will be a bumper year when it comes to house price increases.
Although the official figures only lasted until October at the end of the year, annual price inflation reached a very high level of 13.5%.
This is the highest rate of house price increase in six years, at a time of year when price gains normally start to weaken.
Most analysts now agree that price inflation for the full year is expected to exceed 10%, with Davy raising his forecast to 13% growth in 2021.
Who would have predicted that we would be in this scenario when the pandemic struck?
Certainly not the professionals. Most agreed that we would consider house price increases of more than 10% in March 2020.
And they weren’t alone among their international peers.
Most analysts expected major global real estate markets to be hit by recessions to varying degrees, but prices to rise at a rapid pace.
Although there are a multitude of factors influencing property prices, the main factor here is a clear mismatch between supply and demand.
Supply improved throughout the year from the low point of 2020 when putative home sellers decided not to deal with the pandemic and delayed bringing their properties to market.
However, by the end of the year there were signs that supply had returned to an all-time low in almost all parts of the country except the capital.
According to a report by the real estate website daft.ie released this week, the total number of properties available for purchase online on December 1 was less than 11,500.
This was almost half of the pre-Covid average of 22,500 in 2019.
âCompared to the early 2010s, when there were over 50,000 homes for sale across the country, it’s a whole different market,â said Ronan Lyons, a professor at Trinity College, author of the reports for daft.ie.
However, the Institute of Professional Auctioneers & Valuers – IPAV – believes the shortfall may not be as dramatic as the numbers suggest.
He says his agents have reported a constant supply of inventory in the market, especially at the end of the year, but they don’t advertise them on real estate portals.
âIt’s less necessary because agents have approved mortgages and cash buyers on their books for properties coming onto the market,â said Pat Davitt, CEO of IPAV.
He predicts more of that in the coming year.
âIn today’s market, sellers know they can sell their homes without having to wait for those that haven’t been approved as ‘ready to go’ by agents and some of whom may not have intended. to buy but may be studying the market, âhe said. added.
Sellers can perhaps afford that luxury in an environment where the pandemic has put them in the driver’s seat.
But it is unlikely to be so forever.
One thing that is playing a lot in the seller’s favor right now is the lack of new homes that need to be built to keep up with demand.
New houses resume their course
There are different estimates of how many homes need to be built each year to meet demand in Ireland.
The Central Bank has set it at around 35,000 units per year for decades to come, although some analysts believe it is likely to be much higher than that when different types of occupancy – owner-occupied, private rental and housing sector. social – are taken into account.
We currently exceed roughly 20,000 units each year.
While it’s still quite a distance from where it needs to be, that’s not a bad result in the context of pandemic-induced construction shutdowns for extended periods of time this year and last year.
However, as new housing construction has picked up the pace, the market remains heavily dependent on the supply of existing housing, it seems, with new construction not appearing high in transaction figures. .
In the year to October, for example, more than 85% of all real estate transactions were in existing homes, according to Brokers Ireland.
Either the lack of supply of new homes is so vast, or new homes are simply beyond the reach of many buyers, especially first-time buyers who can benefit from the Home Buyer’s Assistance Program if they buy a home. newly built.
The aging face of first-time buyers
Given the shortage of supply and the rapid pace of price increases, it’s probably not surprising that the average age at which people buy their first home is getting younger.
A market analysis carried out by the Banking and Payments Federation of Ireland in recent months concluded that just over a quarter of first-time buyers were 30 or younger last year.
This represents a halving of the proportion in 2004, when six in ten people who took out a mortgage for the first time were in this age group.
And even as they age, they are – where resources permit – increasingly dependent on parental support to climb the homeownership ladder.
Mommy and daddy’s bank under surveillance
One question that caught the public’s attention this year was the extent to which homebuyers of all stripes had family help with their purchases.
The so-called Mom and Dad’s Bank hit the headlines after the finance law contained a measure to change the tax treatment of these loans and transfers.
Although the measure was eventually withdrawn, it shed light on the extent of the practice and the impact it could have on house price inflation.
According to mortgage broker Michael Dowling, there is no doubt that this is fueling the rise in prices.
“If you have 3 or 4 people bidding on the same house at 400,000 or 500,000 â¬, and you can withdraw 50,000 â¬ from the hat to make a difference, that will have an impact on the prices”, he declared.
And the loans keep getting bigger.
During his three decades in the business, he said he saw the parental contribution drop from â¬ 10,000 to â¬ 30,000 generally to between â¬ 50,000 and â¬ 60,000.
ââ¬ 100,000 would not surprise me,â said Mr. Dowling.
In times of housing shortage, those who can afford to supplement their property offer with parents’ money are sure to get the keys to the house or apartment at the end of the day.
Those who do not are limited by mortgage loan limits.
Do the caps need to be altered or discarded?
The Central Bank is in the process of carrying out a major overhaul of its mortgage lending rules, the results of which are expected next year.
Currently set at a maximum of 3.5 times the income or joint income of applicants, there was reportedly a lot of pressure in the public consultation to change this requirement, leaving some leeway for low-income applicants in particular.
According to an article in the Irish Times in recent weeks, potential home buyers who earn less than â¬ 60,000 may be subject to a higher limit of up to 4.5 times their income once the review completed.
There are other suggestions, like the one from Brokers Ireland which calls for the loan-to-income ratio to go from a multiple of gross salary to a percentage of net disposable income.
2021 has been a year of radical change in the Irish banking industry with no less than two lenders announcing their intention to exit the market here.
While Ulster Bank’s impending departure was widely reported, KBC’s came like a thunderclap.
And while that may have signaled a downturn in the mortgage market, it was met with surprisingly decent offers, mostly driven by non-traditional lenders.
Avant also continued to advance in the market with its fixed rate below 2% which was introduced in fall 2020.
And that raised the competitive stakes with the introduction of the first 30-year fixed rate mortgage on the market with rates starting at 2.85%.
Finance Ireland has introduced fixed rate offers for up to 25 years with rates starting at 2.65%.
Although they are slightly more expensive than the rates offered on shorter term fixed rate mortgages, they could prove to be very attractive in the context of the current inflationary environment, with UK central banks already increasing rates and the U.S. Federal Reserve signaling three rate hikes in 2022.
On the flip side, we have had a low interest rate environment in Europe for much of the past decade and the European Central Bank has signaled that it is in no rush to raise interest rates in response to a inflationary environment which it considers âtransitoryâ.
This, according to Brokers Ireland, is irony for young people trying to gain a foothold in the real estate market in today’s market.
“It is a tragedy and very bad from the point of view of social cohesion that the younger generations and the middle income people cannot access homeownership at a time when there has been positive upheavals in the mortgage market with historically low interest rates, even if above the euro area average, and the possibility, for the first time, to lock in these rates for fixed periods of up to 30 years, âsaid Rachel McGovern, Director of Financial Services at Brokers Ireland.
“It would add to the tragedy of the situation if such low rates were no longer a feature of the market as supply approached demand,” she added.
The year to come
With a provisional forecast for house price inflation of around 5% next year, analysts are starting to revise that outlook upwards in light of the latest figures.
But so far they don’t look anything like what we’ve seen in 2021.
However, the problems that have plagued the market are likely to persist to a large extent.
While the supply of new homes will catch up for many years to come, the likely absence of a blockage in the construction sector should see the number of completions for next year surpass the better-than-expected result for 2020 / 21.
âCovid-19 has shaken the Irish property market for sure,â Ronan Lyons said.
“While the supply looks set to improve over the next few years, easing the pressure on the market, we will no doubt see more signs of a system under pressure before things change,” he said. he concluded.
And the interest rate environment may still present challenges, not just for buyers, but for mortgage holders in general – if not in 2022, then perhaps in the following years.
Just another factor playing in the perfect storm of low supply and growing demand – a storm that shows no signs of abating in the near future.