Irish Housing Market Responds to Rising Interest Rates

Bank of Ireland's Irish Property Review, the quarterly analysis of the Irish property market, published today (Tuesday 31st July 2007), reveals that the Irish housing market is experiencing a slow down, a predictable result of a rising interest rate cycle and record growth in supply. However, the Review highlights that the interest rate peak is now in view and that demand for housing remains robust, led by an economy that is still showing strong employment growth (75,000 new jobs expected for 2007) and a 5% rise in average earnings.

Symptoms of this slowdown can be attributed to the latest interest rate rise in June that brought the repo rate to 4% from 2% eighteen months earlier. The impact of this on affordability is the basis for the deceleration in price inflation and loan growth. In this context, the market is unlikely to pick up momentum again until there is clarity with regard to the peak of the interest rate cycle, which Dr Dan McLaughlin, Group Chief Economist, Bank of Ireland, predicts will be in the autumn, at an interest rate of 4.25%.

However, demand for housing remains strong as evidenced by the rapid rise in rents. Commenting on this dynamic Dr. Dan McLaughlin said: "The impact of the rate cycle is clear when we look at the relationship between rents and prices. The rental market was soft in 2004 and 2005, reflecting the fact that the marginal house hunter could afford to switch from renting to buying given the interest rate backdrop. House prices were also expected to rise at that time, so encouraging people to buy now rather than wait. The reverse is now true: the marginal buyer is now renting, given the additional cost of servicing the average mortgage, and the view that prices are unlikely to rise sharply in the coming months. The result has been a rapid rise in rents, which have increased by around 11% over the past year, and static house prices."

While rising interest rates have impacted the cost of an average new mortgage, an improvement in affordability is expected with the peak of the rate cycle in sight. Joe Larkin, Director Personal Lending, Bank of Ireland elaborates further: "The first time buyer in particular has benefited from a combination of factors that will certainly improve affordability for them as we reach the peak of the interest rate cycle. These factors include increases in mortgage interest relief, the abolition of stamp duty for first time buyers, household income growth of circa 9% and zero property price inflation. "In the short term, however, increases in interest rates have offset this benefit to some extent, with every 0.25% rise in interest rates adding circa €32 per month to the average mortgage of €229k."

On the price front, Dr Dan McLaughlin states "Our 3% projection for 2007 now looks unlikely given the recent market trend, showing a fall of over 2% in the three months to May, the first since mid-2001 when prices fell for five consecutive months. Consequently we now project flat house prices in 2007, with a very modest 2% gain in 2008, on the assumption that the rate cycle is seen to peak this year. The building sector has started to respond to these signals and supply is adjusting and we now expect 75,000 house completions in 2007."

The Review highlights that, understandably, a slowdown usually manifests itself in sluggish transactions. This is indeed the case now, with the value of new loans for house buyers falling by 10% in Q1. The main explanation for this deceleration is to be found in the volume trend where the number of new mortgage transactions is down.

The national mortgage book will continue to rise by 14.7% in '07, a more modest pace of growth than in previous years. This pace remains quite a bit ahead of the euro area average, where mortgage-lending growth is currently 8.5% and will slow further.

In its analysis of the commercial property market, the Irish Property Review reiterates that returns for 2007 will be 12%, by comparison with 27% in 2006. Having peaked last year it has left little scope to yield further compression given the rise in longer-term bond yields.

Bank of Ireland's Irish Property Review is published by Bank of Ireland Mortgages and the Economic Research Unit of Bank of Ireland Global Markets and is led by Dr. Dan McLaughlin.

ENDS

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