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ESRI warns houses overvalued – investment funds, surplus savings play role

Also inflation, recession concerns

The ESRI has said that Irish house prices may be overvalued by 7% or more according to its modelling, and asserts that rising house prices “cannot continue into the future”.

The research unit said that a surge in savings caused by the Covid lockdowns was a factor in the increase in house prices, but that it was clear, going forward, “that the recent surge in savings and wealth is not sustainable over the medium term.”

“Therefore, changes in house prices will become re-aligned with movements in income over this period,” the body’s quarterly bulletin reported.

Commentary on house prices in the bulletin noted that “house prices are assumed to be a function of a certain set of fundamental economic and demographic variables,” and that modelling based on those variables showed Irish house prices were in dis-equilibrium, and a correction was due.

ESRI research professor Kieran McQuinn said that while it was uncertain by how much house prices would fall, a significant moderation was likely.

“But what it does suggest is that, really, the kind of substantial increases in house prices that we have witnessed cannot continue into the future, and you are likely to see a significant moderation in terms of house price growth in the coming quarters and over the next year,” he said

The report made no comment on the effect of rapidly rising immigration rates on the housing market.

It did, however, point to “the increasing share of non-household purchasers” such as investment funds as a reason for over-valued housing.

The ESRI report point out that “institutional investors, local authorities or other AHBs” who are purchasing housing units in the market will not be as influenced by variables such as household disposable income and mortgage interest rates.

“They may, for example, be more influenced by their own financing conditions and government spending in the area,” the paper notes.

In regard to inflation and energy prices, the ESRI says it anticipates “no further worsening of energy prices beyond what is planned for the coming winter.”

“However, with a historically low unemployment rate, and high savings ratios, we do see second round and general inflationary effects materialising, resulting in an inflation rate of 6.8 per cent in 2023,” the research body noted.

“Despite extraordinary uncertainty in the international economy, the Irish economy continues to demonstrate a significant degree of resilience. This is particularly evident in the ICT and pharmaceutical sectors which have continued to drive Irish export growth,” the report also said.

It said that while question marks persist as to the ongoing sustainability of corporation tax receipts, the returns “are likely to continue to remain elevated even with the proposed OECD Base Erosion and Profit Shifting (BEPS) reform.”

However, it was also noted that: “recession risks are now rising across Ireland’s main trading partners, with prospects for the UK economy of particular concern. While the Irish financial sector is in a much more stable position than it was in 2007 and is less integrated with the UK sector than before, it is very difficult to fully assess the contagion effects of a possible full-blown financial crisis in the UK.”

“The deteriorating outlook amongst most large economies will likely lead to a moderation in growth in the investment and the traded sector. Overall, we expect modified domestic demand to increase by just 2.5 per cent in 2023, which is a notable downward revision on our previous estimates.”

Commenting on the report, author Kieran McQuinn of the ESRI stated: “While the Irish economy has performed robustly in recent years, the overall growth rate in the economy is set to moderate somewhat in 2023 with Modified Domestic Demand (MDD) now forecast to increase by 2.5 per cent”.

Conor O’Toole of the ESRI said: “As inflationary pressures continue to erode real incomes in Ireland, continued use of targeted policies to address the cost of living crisis is warranted. The commitment to a rainy day fund of a portion of the excess corporation tax receipts is very welcome, especially given the extremely uncertain global context.”

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