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Is Ireland’s housing market also ‘headed for disaster’?

Amidst all  the gloomy headlines about housing in Ireland recently, most of the focus has understandably been on the shortage of homes and the spiralling rent costs. The jitters in housing markets elsewhere and the possibility of huge jumps in interest rates impacting negatively on mortgage holders has perhaps seemed like secondary news.

Not any longer. The Telegraph last week warned that London’s housing market is ‘heading for disaster’ – and that “soaring” interest rates will hit buyers in the capital hard, and “pull down house prices”.

While economists warned of a 15% house price drop across the country, prices for homes  in London “will fall by twice as much compared with the rest of the country as soaring interest rates cause a mortgage crisis”, the paper reported.

Critically, the analysis pointed to monthly mortgage payments and to the proportion of monthly income being spent on a mortgage by an average UK home. Across the country, monthly mortgage repayments were equivalent to almost 42% of a median full-time disposable income, and in London this was at a staggering 51.3% of a median salary.

But that was last week. Yesterday, with the banks increasingly spooked by rising interest rates, government spending and global economy woes, the average interest rate on a two-year fixed mortgage in Britain jumped to just under 6%.

The same mortgage offer from Britain’s key banks averaged at  2.34% at the start of December last year. It remains to be seen how many borrowers will find the rocketing interest rates – and massively increased mortgage repayments – unsustainable, but it does not bode well for homeowners and for those seeking to buy a new home. Banks will also offer borrowers less in an attempt to hedge against mortgage defaults if interest rates remain high.

The same patterns are being seen elsewhere.

Rising interest rates – with hikes being used by central banks in an effort to curb inflation – have upended the presumptions about the housing markets across the globe. House prices had been rising steadily since the economic recovery after the last financial crash kicked in, and consistently low interest rates for mortgage holders helped fuel the rise.

But the sudden hike in interest rates have spooked lenders, and with due cause. When interest rates rise sharply, monthly mortgages payments can become crippling, and the burden on households unsustainable.

In Canada, rising mortgage rates have led the national housing agency to revise previous forecasts to allow for a 10 to 15% decline in real estate. Canadian home prices had already fallen for the sixth straight month, after a period of sharply rising house prices which saw the market overheating and homes out of the reach of many ordinary people.

And yesterday, Wall Street analysts, assuming a 7% mortgage rate, predicted a sharp decline in house prices in the U.S. – perhaps the second biggest decline since the Great Depression. Morgan Stanley and Goldman Sachs predicted falls of between 5 to 10% in the market.

House prices across the EU have risen by 45% since 2010 according to research by the European Commission, but European mortgage rates have hit a seven year high with further interest rate hikes in sight, and the European Central Bank warned in August that house prices could start to drop if house prices rise faster than inflation.

That’s the global picture, and macro economics doesn’t always fully reflect what’s happening nationally. Certainly, some of the factors driving up house prices in Ireland such as diminished supply, delays in construction, and increased immigration don’t hold across other European economies.

As shown below, Ireland is experiencing soaring rental as well as house prices, for example, and the MICA redress and retrofit schemes will keep builders busy even as construction costs soar.

But some of the global factors are inescapable. The shortage in construction and other materials (and the halt in production across the board) caused by the excessively long Covid lockdown drove up both inflation and house prices. The energy crisis, caused both by unrealistic green policies and the Ukraine conflict, is biting as hard here in Ireland as it is elsewhere.

if people are paying thousands of euros extra for electricity annually, can they also stretch to a 50% or 70% increase in their mortgage payments? It seems unlikely. In an over-stretched system, something has to give. It isn’t always easy to predict what, however.

Our interest rates are being set by the European Central Bank, and Irish mortgage holders are braced for a shock.

Almost 200,000 Irish households on tracker mortgages, for example, will face interest rates rocketing from 0.5% to 3 or 4%. In terms of monthly outgoings that’s a repayment increase of €450 every month for a €300,000 mortgage, Michael Dowling, a leading mortgage broker, told the Irish Examiner.

That’s an annual increase of €5,400 – bringing that mortgage cost from €10,776 a year to a whopping €16,164 – a 50% increase. Most families would find that rise very difficult to manage, especially when coupled with the prospect of electricity bills that may reach €1,200 over just two months in the winter.

For the 330,000 Irish households set to come off a fixed rate mortgage, the ECB interest hikes will mean that the costs of their home loans will also sharply increase, with rates potentially jumping from 2.5% to 5.5%. That could mean a mortgage increase of €300 a month or €3,600 a year.

Against the bad news on interest rates is the particularly high demand for housing in Ireland, the price-to-rent ratio, and strong employment figures. But it’s difficult to predict how a global recession might swing any of those factors and tip the housing market.

This morning, the ESRI’s quarterly bulletin warned that house prices were about 7% – or possibly a couple of percentage points higher – above their expected trend values as at the end of last year

“That doesn’t necessarily mean that house prices are going to fall by that amount, but what it does suggest is that the substantial increases in house prices that we’ve witnessed cannot continue into the future and you’re likely to see a significant moderation in terms of house price growth in the coming quarters and over the next year,” the research institute said.

So is Ireland’s housing market ‘headed for disaster’? Time will tell. In the meantime, for many homeowners, it’s time to buckle up.

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