Crash of the monarchy in Ireland | Will house prices fall in Ireland?

Can the Irish property market withstand rising prices and maintain peak Celtic tiger levels? Photo: Travel-Fr / Shutterstock

Interest rates are rising across the Eurozone, and the sense of turmoil may not be more severe than in Ireland. The country’s housing market is echoing its famous “Celtic Tiger” past, which was halted by a catastrophic downturn that took 15 years to recover from.

Will high inflation, slower growth and high interest rates lead to a new emergence Ireland’s housing market crashOr will the country weather the headwinds of the global economy and come out unscathed?

What is a housing crash?

A housing crash, similar to crashes in other asset classes, occurs when the average home price in an area drops significantly, triggering a financial crisis.

Home prices tend to rise in tandem with GDP growth, which usually reflects rising incomes and prosperity, leading to increased demand for housing. Since most of the average person’s wealth is tied to their homes, higher house prices increase wealth, stimulating consumer confidence.

Conversely, in recessions, home prices typically fall, turning that rising confidence on its head and encouraging spending cuts. This can be offset slightly by the expansionary monetary policy of the banks, which lower interest rates, making house prices more affordable.

A housing crash often follows a hot period in the market, in which prices rise to an extent that can be described as a “bubble,” either through unsustainable high levels of liquidity in the economy, or through a speculative frenzy of traders, which has hit the past in the broader financial system.

Increased interest rates can also lead to a housing collapse by pushing home ownership costs into unaffordable territory for a large group of households. The interest rates set by central banks, such as the European Central Bank (ECB), are the criterion that ultimately affects the mortgage rates set by commercial banks.

Higher interest rates have profound implications for the family, as they have to spend more each month on their mortgage. Additionally, the deflationary effects of raising interest rates on the economy are generally hurting confidence for homeowners and potential buyers, reducing the number of buyers available in the market, even as more homes are put up for sale in response to those rising costs.

Ireland’s housing collapse could be triggered by high interest rates – a new kind of housing collapse in a country previously rocked by the subprime mortgage epidemic that took more than a decade to recover from.

Will raising interest rates cause property collapse in Ireland?

The Irish real estate bubble is all too familiar to those who live in the country. Ireland enjoyed rapid growth and sudden prosperity during the Celtic Tiger era with rising incomes and demand for homes. Loose lending restrictions also helped more people enter the market. These conditions led to an unprecedented collapse in the housing sector in Ireland.

A major real estate crash began in Ireland in 2008, with homes losing more than half their value through a continuous five-year decline.

Prices began to recover in 2012, while a three-year period of relative stagnation was halted by renewed demand during the Covid-19 pandemic.

Ireland House Price Index, 2005-2022

It has taken Ireland more than 15 years for house prices to recover, which is slower than in other western countries.

The latest data from the Central Statistics Office (CSO) indicated that average house prices in Ireland are now 0.8% higher than the record set in April 2007. This inevitably has some people worried about the possibility of another real estate crash in Ireland in 2022.

House prices in Ireland may face problems as the central bank battles record levels of inflation.

Driven by rising fuel and transportation costs, the Consumer Price Index (CPI) reached 8.7% in August, down from highs of 9.1% in June and July, but still well above the Central Bank of Ireland’s target.

The eurozone, to which Ireland belongs, is battling similar headwinds, with inflation hitting 8.9% in July. Interest rates were on an upward trajectory. As part of the Eurozone economic zone, Irish interest rates take the lead from the European Central Bank.

Earlier this month, the European Central Bank raised interest rates by an unprecedented 75 basis points, after rising 50 basis points in July. It’s an aggressive move in line with measures taken by the United Kingdom and the United States, and something ECB Vice President Luis de Guindos said on September 19 that could go further:

“Monetary policy always tries to work to combat inflation, which will have an impact on consumer spending and investment by businesses… The increase in interest rates will depend on economic data… Inflation is the biggest pain for the residents of Europe.”

This could have repercussions on the recovering Irish housing market backed by strong levels of liquidity.

The latest data from the Central Statistics Office showed that the rate of house price growth has slowed in recent months, with Dublin growing more slowly than the rest of Ireland in a trend that has been going on for several months.

The European Commission’s May 2022 review encouraged optimism when it indicated that a property crash in Ireland was unlikely, thanks to stricter controls on financial markets, which previously led to Ireland’s housing bubble. The committee wrote:

In general, the financial sector looks healthier compared to the period before the Great Financial Crisis. Since then, Irish banks have become significantly more resilient, and the introduction of stricter rules and requirements has addressed many of the weaknesses in the pre-crisis banking sector.”

“Apart from more stringent capital and liquidity requirements, the introduction of mortgage-related measures in Ireland has reduced the exposures that banks can have to the real estate sector, particularly through the introduction of binding loan-to-value and loan-to-income limits.”

The committee did not believe the prices were inflated, citing low home inventories:

“The commission’s internal benchmark measures do not indicate that national average home prices in Ireland are overstated. However, these calculations are based on long-term average house prices, which includes a large housing bubble that emerged in the mid-2000s. “.

Ireland’s housing market outlook for 2022, 2023 and beyond

The outlook for the Irish housing market is relatively optimistic, with few indications of a collapse in the housing market in Ireland in the near future.

In a June note, Davy Group Chief Economist Conall MacCoille said the slow return of sellers to the market is helping mitigate price hikes, noting:

“The possibility of a modest decline in house prices in Ireland, while correcting some of the churn accumulated since the start of the pandemic, cannot be ruled out. However, double-digit declines or a repeat of the Celtic Tiger era housing collapse seem unlikely.”

This is because the tightening of mortgage rules has dramatically reduced the chance of another mortgage crisis, MacCoille said.

In July, the Society of Chartered Surveyors in Ireland (SCSI) released home price forecasts in Ireland to rise 4% in 2022. However, the agency noted that it should be viewed in the context of high inflation:

“Currently, the current rate of consumer price inflation is around 8% which means that compared to consumer prices, the expected increase is actually a decrease of 4% in real terms.”

SCSI added that the majority of dealers still see the low level of housing supply as the main factor supporting prices in the near term.

In a quarterly economic report released in June, the Social Research Institute of Ireland (ESRI) forecast house price growth to slow through 2023 amid the effects of a rate hike in European Central Bank policy, but underpinned by rising demand and lower supply:

“However, it is clear that other demand-side characteristics, such as income levels and population levels along with a relatively slow response to supply in the local market, will continue to put upward pressure on Irish house prices over the next year.”

The agency said higher interest rates would see home prices in Ireland fall 2% “than they would otherwise be”.

Note that analysts’ predictions of the housing market crash in Ireland may be wrong and should not be used as a substitute for your own research. Always perform your own due diligence before trading. And never trade with money you can’t afford to lose.

questions and answers

Will home prices fall in Ireland?

House price growth in Ireland is expected to slow after returning to levels last seen in 2007, but prices are not expected to deflate, according to a number of agencies, including Chartered Surveyors Ireland (SCSI), Davy Group and Ireland’s Economic. Social Research Institute (ESRI).

Is there a real estate crash coming in Ireland?

Analysts at Chartered Surveyors Ireland (SCSI), Davy Group and ESRI Ireland do not expect a property crash in Ireland, thanks to tighter borrowing terms compared to the recent incident, and a lower supply of suitable housing. .

What caused the latest housing collapse in Ireland?

The recent housing collapse in Ireland was backed by loose financial controls, which allowed a large number of mortgage borrowers to go into the market who defaulted on loans when the recession hit.

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