The Irish housing bubble is back. Don’t believe me? Just ask the Economic and Social Research Institute (ESRI) who in a recent quarterly economic report estimate that Irish house prices are around 10 per cent overvalued meaning the worth of homes across the country vastly exceeds the purchasing power of the public among other things.
The ESRI’s findings confirm recent figures published by the Irish Central Bank that found that average Irish house prices stand at €318,000 against average household disposable income of €66,600.
That’s 4.8 times disposable income relative to home prices.
The last time it was this bad was 2008 and we know what happened next.
As interest rates have risen house prices have fallen, and with the European Central Bank (ECB) leaving no stone unturned in its fight against inflation rates are set to rise even further with markets anticipating a 3.0 per cent rate by July this year.
While the last bubble was caused by the accessibility of cheap credit to developers the source of the current one is the rate of return on investment to international property investors, and a series of policies undertaken during the pandemic.
In 2008 when the artificial bubble that was the subprime mortgage market burst in the United States, the man at the helm of the financial regulator in Ireland Patrick Neary took the form of the dog in the ‘This is Fine’ meme from KC Green’s 2013 Webcomic.
Irish banks are “resilient and have good shock absorption capacity to cope with the current situation”, Neary said maintaining that Irish banks had only a “very limited” exposure to the subprime market.
Four months later Neary was out of a job and Irish taxpayers were footing a €64billion bill with gruelling austerity on the horizon.
Now, the European Union (EU) seems keen on inheriting the mantle left by Neary in their insistence that Irish property prices are in fact not overpriced.
The European Commission’s Alert Mechanism Report released at the end of last year gave an opposing viewpoint to that of the ESRI maintaining that Ireland’s housing market “do not show signs of potential overvaluation.”
While the annual bulletin notes that several other member states are experiencing overvalued property prices Ireland does “not show signs of potential overvaluation” apparently.
Unfortunately the commission, like many bodies hitherto, drank the Green Kool-Aid using the highly exaggerated and misleading GDP metric when measuring the purchasing power of households across Ireland.
The commission’s report was a case of leprechaun economics on an epic scale depriving readers of an accurate assessment of the Irish property market.
While the last bubble was caused by the accessibility of cheap credit to local developers the source of the current bubble is the rate of return for international property investors, and a series of policies undertaken during the pandemic.
Institutional Investors
In May 2021 the public observed in horror as the US property investment firm Round Hill Capital bulk purchased most of an 170-home estate in Maynooth, Co Kildare locking out prospective first time buyers in the process. The homes were not only designated for first-time buyers but also, in conjunction with the affordable housing body Tuath, for those on a social housing waiting list. Instead, the estate would be a source of favourable rental yield for the fund.
The week before the purchase was announced, the same REIT purchased an estate in Hollystown Dublin 15 heralding the return on investment on the company’s website stating this was “further evidence of the strong appeal of the Irish build-to-rent sector for institutional capital, attracted by its resilient, long-term yields.”
Having opened an office in Dublin and bragging of its €1billion balance sheet, Round Hill Capital may have been more conspicuous with its investment than others, but they are not the only players in town far from it.
Figures from Q1 – January, February and March – of last year show that almost two thirds of all new builds in Dublin were bought by non-household purchasers. Indeed, construction investment growth in Ireland was higher in 2016 and 2017 than during the exuberant Celtic Tiger period, with the exception of 1996-97. In 2010 investors bought 10 per cent of properties in Ireland, this has since increased to 25 per cent.
The homes were not only designated for first-time buyers but also, in conjunction with the affordable housing body Tuath, for those on a social housing waiting list. Instead, the estate would be a source of favourable rental yield for the fund.
Former deputy governor of the Irish Central Bank Stefan Gerlach warned back in 2016 of the risks attached from “the collapse of asset bubbles.”
“With construction activity and investment spending grinding to a halt, sharp recessions – which cause tax revenues to fall, even as surging unemployment demands increased social spending – are unavoidable.
“Taxpayers may even be asked to shore up financial institutions’ capital base. The last time that happened in Ireland, it cost more than €60bn, or about 40pc of GDP.”
Stefan Gerlach, former deputy governor of the Central Bank
The Pandemic
The confluence of a cessation of home building and promotion of pent-up demand through excess savings caused the death knell for whatever correction the Irish property market may have been heading towards before the pandemic.
Ireland was the only European country to cease construction during covid lockdowns while offering generous subsidies for workers to encourage them stay at home.
According to the Irish Central Bank between Q1 of 2020 and the same period of 2021 total household deposits grew by around €18billion or 15 per cent of disposable income. By mid-2022 Irish household deposits stood at well over €100billion, almost 30 per cent higher than before the pandemic – the highest figure in the entire Eurozone.
Indeed, many savers became prospective buyers chasing a good – housing – that was in little supply, causing prices to rise even further. In November-December 2020 mortgage approvals were up over 20 per cent from the same period in 2019.
The calls for more supply is only a smokescreen for the broader issues facing Ireland’s property market.
In 2006, right before the crash, Ireland was building more homes per capita than virtually any nation on earth; indeed, this building boom was simply enlarging a bubble that burst months later.
The coming burst is unstoppable. The calls for austerity are inevitable, regardless of how disproportionate such measures may be.
This time around, in response to the last crisis, Ireland has in place a series of macro-prudential rules – that have recently been eased – that regulate mortgage borrowing, and banks have sufficient reserves. Hopefully, this will help ease the storm, but the public must brace it.
But given the preponderance of non-bank lenders in the market, who knows if the public will be asked to bail them out, like they did for domestic banks in 2008?
Theo’s Blog 