Grand Canal, Dublin [photo credits to infomatique]
If the Emperor Napoleon was alive today (but hopefully not planning an invasion) he might describe the Irish as ‘a nation of property investors’ both at home and abroad. Now that the outlook for residential investment is dimming somewhat, both nationally and internationally, a lot of questions remain about Irish property investment. Will there be a bust and, if so, how long for? Will better value at home mean Irish capital invested overseas in property being repatriated? Is there a ‘whole of Ireland’ market for residential real estate and are types of property or parts of the country still offering alluring opportunities?
As far as the Republic is concerned, there certainly seem to be most of the ingredients for a serious downturn in residential property prices, chiefly very substantial increases in property prices over the last 10 years (the average price of a new house rose from €87,202 in 1996 to €305,637 in 2006) and a substantial oversupply of housing. Out of the country’s housing stock of 1.77m dwellings, 216,000 (12.2%) are unoccupied and this figure doesn’t include the Republic’s 50,000 holiday homes.
These figures suggest that purchases for investment purposes are an important driver of house prices. There has already been extensive reporting and comment on the first signs of dips in prices in the Irish press. Statistics showed a 2.1 % drop in house prices in the January-May period of this year and this drop increased by a further half of a percentage point in June. Far more worrying than falls registered so far is the prediction by Professor Morgan Kelly of University College Dublin that the Irish housing market could be entering on a sustained slump with a 50% fall in house prices between now and 2015/16 (Irish Times 3rd July).
Morgan Kelly cites the increase in the ratio of house prices to incomes and the decline in rental yields (lower in 2006 than in 2000) to argue that the Irish housing market is set for a turbulent time (read his report here [pdf]). Furthermore the Central Bank has also been investigating the relationship between house prices and personal borrowing power. The Central Bank has also shown that Ireland has a high proportion of personal indebtedness relative to GDP and the proportion of personal debt relating to property purchases is also higher than the European average.
On the less gloomy side it could be argued that the economy is not expected to go into recession but, on the contrary, to continue to grow at above European average rates (The Economic & Social Research Institute predicts 4.8% growth for 2007 and 3.7% for 2008). Nor is the Irish housing market particularly vulnerable to European Central Bank interest rate changes. The increase in euro interest rates that had been expected up until this month may not happen now but even if it does it’s unlikely to present such a big problem as the overhang of unoccupied property. If the ECB could see its way to holding or reducing interest rates, that would be better still. It might even help if there was a bit more inflation.
Up until now the trajectory of Northern Irish house prices has followed a distinct path to that in the Republic. This contributor remembers overhearing a discussion about purchasing buy-to-let for students in Belfast between two passengers on a train to East Croydon three or four years ago, and thinking that was a novel idea. More recently family members have been relocating from the East Midlands to Belfast and have given up on buying for the time being, unable to pin down a deal that represented a good investment. According to the Halifax, the average price of house is now £229,000 (Irish Times, 6th July), rather more than the equivalent figure for the Irish Republic. This partly explained by the absence of a housing construction boom until recently in the North.
Opinions about the performance and near-term prospects for the N Ireland housing market vary from the University of Ulster Quarterly House Price Index (which reported a 36% rise for 2006 and an annualised 46% in Q1 2007), which said in July that there was no sign of slowing, to the RICS which believed that there were signs that the market was definitely slowing. To be fair the University of Ulster 1st quarter report(pdf) had said that the quarter could be the high water mark of house price increases.
The opportunities presented by the current situation are various but small-scale. In both Northern Ireland and the Republic there are shortages of affordable starter homes. Indeed, the glut of new housing in the South is being spoken of as an opportunity for local government to make some wise investments in social housing. One particular feature to look out for is the standards of energy efficiency in houses built in the recent boom. With fuel prices set to rise (in the medium term and permanently) the newer houses constructed with this in mind should have a definite edge. In the north, in particular, careful investments in various kinds of commercial premises (notably office accommodation) could be promising.
With Irish players being an important presence in a number of continental property markets a house price drop at home could eventually see some of that wealth being repatriated – bad for Bulgaria but helpful for Ireland. If some more distant Mediterranean holiday destinations become less popular, Ireland’s attractions could make holiday home lets an even better investment prospect.