Property markets worldwide are showing signs of slowing in response to higher interest rates with some going into reverse already.
Here, the annual rate of growth in property prices nationally had slowed to just below 8% by the end of last year, the latest measure form the Central Statistics Office this week showed.
In December of 2021, the rate of growth in prices was almost double that.
The latest pullback marks a continuation of a trend which has happened largely in tandem with the cost-of-living crisis.
As well as the cost of utility bills, fuel and groceries rising steadily, mortgage servicing costs have started to increase since the European Central Bank embarked on its latest interest rate hiking cycle in the summer.
While many householders moved quickly to fix their payments in advance of the rate hikes, many more will be coming out of fixed rate arrangements in the months and years ahead and will be entering a vastly changed – and much more expensive – rates regimes.
For others, who will be entering the property market for the first time, they too will likely be meeting vastly more expensive mortgage costs in the years ahead.
So, to what extent is pricing in the mortgage market likely to impact property prices and could it lead to prices falling?
Percentage increases back in single digits
Most analysts agree that interest rate hikes will contain house price growth to some extent.
The kind of double digit percentage increases that we saw last year and into this year are unlikely to be revisited in the immediate future.
And indeed we have already witnessed quite a considerable lag on prices in the space of a few months.
Much of that can be accounted for by the rapidly rising cost of owning a home.
Unless a buyer is paying cash, they will be seeking finance.
A €300,000 home loan, which would have cost just over €1,100 a month to finance over 30 years at an interest rate of 2%, would cost €1,600 a month to finance if that rate moved to 5%, according to calculations by the price comparison website, bonkers.ie.
That’s a whopping €500 a month increase, adding considerably to the total cost of financing that loan.
If that doesn’t exercise the mind of the prospective buyer, it certainly will the lender.
Banks carry out stress tests on a mortgage applicant’s ability to financially withstand an increase in interest rates.
The tests are designed essentially for what we’re going through now – a period of sustained increases in interest rates.
With many mortgage applicants already seeking to borrow close to their affordability limits, the stress test criteria could rule them out of the reckoning in a higher interest rate environment, even with the slight relaxation in the Central Bank’s lending rules.
Strong demand, but declining mortgage approvals?
There are signs that mortgage approvals for first time buyers may be waning.
According to the Banking and Payments Federation, while the number of approvals last year exceeded 58,000 – an increase of over 9%, with values up 18% to almost €16 billion – approval volumes fell in the final months of the year, particularly for first time buyers.
Much of the activity in the market is being driven by people switching providers, for the most part locking in fixed rates in an attempt to ride out the higher interest rate period.
In fact, the incidence of switching has more than doubled in recent months.
The BPFI forecasts that mortgage demand will remain strong throughout this year, but demand does not necessarily translate into approvals.
Many would-be buyers could be forced to sit out the market for a while.
And indeed if there are signs of prices stabilising – or potentially falling – some could decide to actively wait it out for longer.
So, are prices going to fall then?
Big interest rate hikes in Australia, Sweden, the UK and New Zealand in the last year have already contributed to an outright fall in property prices in those markets.
Unfortunately, for those hoping to see a sustained fall in prices in Ireland, it looks unlikely that it will follow here.
There are a number of factors conspiring against that outcome.
Population growth, net inward immigration, a strong economy and a continued mismatch between housing supply and demand are the main factors that will support prices.
And supply shows signs of slowing in the years ahead.
“The volume of new homes completed exceeded expectations in 2022, but they are still not keeping pace with the demand, never mind making up for the lack of completions in previous years,” Trevor Grant, Chairperson, Association of Irish Mortgage Advisors pointed out.
“We’re now looking at a potential slowdown in the volume of new home construction in 2023 so, it’s difficult to see how the growth in house prices could reverse in the near future,” he added.
The easing of the Central Bank’s mortgage lending rules at the start of the year will also no doubt support prices.
Instead of a limit of three and a half times income, first time buyers can now borrow up to four times their income.
In addition, the extension of the Government’s Help-to-Buy scheme for first-time buyers and the new shared equity scheme will help to support prices for newly built homes.
Conall MacCoille, chief economist at Davy and author of the property price reports for the MyHome.ie listings website, pointed out that prices have been showing surprising resilience in recent months.
While the annual rate of price growth has been slowing, in monthly terms there are signs of prices ticking back up again.
Price growth of 0.3% in December followed growth of 0.2% in prices in November.
The MyHome barometer – which analyses prices being sought by vendors as opposed to transaction prices – captured a fall in asking prices of 1.3% in the late summer and of 0.4% in the final three months of the year.
“It is surprising to not at least see the usual seasonal price falls during the quiet winter months,” Conall MacCoille said.
He also pointed to the strength of residential transactions last year which grew to €24 billion with little sign of any slowdown in the early part of this year.
He said Davy’s forecasts of property price growth slowing to 4% this year could be too conservative in light of the housing supply issues and the decision to loosen the lending rules.
So, more expensive houses and higher interest rates then?
With further interest rate hikes already promised by the European Central Bank, the base lending rate is set to climb further.
Already at 3%, the ECB’s lending rate will move to 3.5% in March and possible even 4% by the summer.
On the basis of the lending rate moving to 3.75%, Daragh Cassidy, Head of Communications with bonkers.ie, estimates that the cheapest rate available on the market here by the end of the year will be around 5.65%.
He bases that on the minimum ‘spread’ – or difference – between the main ECB rate and the best rate on the Irish market in recent years being around 1.9%.
However, he points out that this will probably apply to ‘green mortgages’ which are only available to those who are purchasing a property with an A or B energy rating.
So, the average first time buyer could be looking at a rate closer to 6%.
Daragh Cassidy believes that will inevitably have an impact on prices.
He makes the point that, with ECB rates sitting at – or close to – zero for much of the past decade, the impact of rising debt servicing costs on the property market has almost been forgotten about as a factor in influencing property prices.
That will come back into play in a big way in the immediate future.
Ratings agencies foresee a significant cooling in prices here with Fitch eyeing growth in prices of between 0 and 2%.
Their counterparts at Moody’s have a similar outlook but they certainly don’t envisage a catastrophic crash in prices.
They point to an absence of ‘red flags’ in the economy and the necessity for a greater shock on the demand side – such as soaring unemployment – to knock things off course.
The best case scenario – from the point of view of a prospective buyer – is perhaps that prices will stabilise this year and next.
However, if they’re borrowing money to make that purchase, they will be paying significantly higher servicing costs for that debt.