By | September 18, 2022
Is a house price correction on the cards?

It’s hard to justify talk of house prices slowing or the property market cooling when inflation is still running at a rampant 13 percent. Nonetheless, a pattern of deceleration linked to cost-of-living concerns and higher interest rates can be discerned even though the price cap for buyers has not changed.

Headline inflation hit a cyclical high of 15.1 per cent in February/March before falling to 14.5 per cent in April, 14.1 per cent in May and 14 per cent in June, with the latest figures for July pointing to year-on-year growth. increase of 13 percent. Anecdotally, real estate agents report more stocks on the market, resulting in longer sales times and a leveling out of asking prices.

“There was a noticeable change in the months of May and June where price increases slowed. We see this trend continuing,” said Pat Davitt, chief executive of the Institute of Professional Auctioneers and Valuers (Ipav) in response to the latest house price figures.

We are most likely witnessing the end of the pandemic phase when prices were driven up by factors such as increased savings and telecommuting and the beginning of a new cost of living/higher interest rate phase with consequent dampening of demand. But will it lead to a correction in prices?

One forecast sees annual house price inflation falling to 8-10 per cent in December, lower in Dublin. Higher interest rates – the European Central Bank is planning a sequence of hikes to fight inflation – will almost certainly slow the rate of growth next year, but accelerating population growth – one of the traditional drivers of housing demand – combined with the ongoing and perennial issue of supply works in the other direction, supporting demand.

Ever-optimistic industry professionals therefore do not believe that the current downturn will turn into a decline in prices (in general) but acknowledge that some areas of high prices and high demand could see a correction.

Industry forecasts rarely pan out, some unforeseen dynamic usually takes over and Ireland has one of the most volatile real estate markets in the world. It had the fastest growth in house prices before the 2008 bust, the biggest collapse in property values ​​after the crash, and the fastest recovery afterwards.

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The industry didn’t pick up on any of these trends until they were well established. It predicted that the pandemic would lead to a price crash, the opposite happened.

The overall trend is a confluence of forces, making it difficult to predict.

Housing has become one of the most divisive issues on the planet with low and middle income earners being priced out of urban markets from here to New Zealand.

The uniform nature of the problem in industrialized countries with different local problems – supply being the main thing here – has led many to speculate on the connection between real estate prices and the great financial experiments of the era, quantitative easing and low interest rates.

QE effectively increases the amount of money in the economy, which means banks can lend more cheaply, which means mortgages also become cheaper. Whether it is the main driver of the global housing issue is still debated but the link is undisputed.

“When the bank buys government bonds with a certain maturity, it bids up their price. This, in turn, lowers the interest rate that the bond pays to its holders. When the interest rate on government bonds is lower, this is passed on to other interest rates, such as those on mortgages and business loans,” Bank said of Canada’s Deputy Governor Paul Beaudry recently.

Massive infusions of cash into the global financial system by central banks post-2008 era and more recently as a result of the pandemic have anchored rates while sending investors further and further afield in search of yield, creating asset price bubbles in several sectors, but more obviously in real estate. Will the reversal of this policy change the dynamic?

Home prices in Canada fell for a sixth straight month in August amid a sequence of aggressive rate hikes by the central bank. Some regions recorded only small declines, but prices in other regions have fallen sharply.

A report by BNP Paribas predicts that house price growth in Europe will slow significantly in 2022, “offset by the substantial price increases of recent years and the substantial increase in mortgage rates.”

“The rise in mortgage rates will exclude many households from home ownership and could adversely affect debt-ridden households on variable interest rates, as well as those who must refinance their mortgages,” it said. The report notes that “affordability appears overstretched” in most European markets and that the rise in mortgage rates will continue to erode housing affordability and cause a slowdown in the private housing market.

All we can say at present is that house price growth is slowing. Where the trend goes depends on a number of factors, not least the current inflation dynamics.

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