Irish house prices, along with housing markets elsewhere in Europe, are heading for a “soft landing” ratings agency S&P said on Monday. But a soft landing in an Irish context still means another three years of strong growth until supply catches up with demand around 2021.

It was famously promised more than 10 years ago, as politicians, economists, and even the then Governor of the Central Bank asserted that growth in the then bubbly housing market would ease off rather than decline. Of course it eventually fell off a cliff.

Now S&P has come out and forecast another soft landing for the Irish market; a market which has grown rapidly since hitting a trough around 2012, with prices in Dublin almost doubling since then. Indeed last month influential newspaper The Economist said that based on incomes, property prices in Dublin were over-valued by about 25 per cent.

However economists at the ratings agency said on Monday that house price growth in Ireland will ease - but won’t turn negative - as supply catches up with demand. It is forecasting price growth of 9.5 per cent this year, but easing thereafter to 8 per cent in 2019, 7 per cent in 2020 and 6 per cent in 2021.

‘Soft landing’

However, while growth might ease, based on these figures it does mean that a house costing €300,000 as of end 2018 will still be worth almost €70,000 more by end 2021 - a substantial hike nonetheless for people saving to buy a home. Moreover, S&P is forecasting the strongest growth rates for the Irish economy out to end 2021. Indeed its 6 per cent growth rate for 2021 is far in advance of that forecast for nine other European economies, with a growth rate of 4.5 per cent predicted for the UK, 3 per cent for Spain, and 3 per cent for Germany.

S&P says that activity from institutional investors is one of the factors underpinning Irish house price growth. In 2017 for example, almost one-fifth of all residential property transactions were by institutional investors, including small-scale buy-to-let buyers. More recently, there have been several acquisitions of multiple units by institutional buyers, such as Irish Life’s deal to acquire 262 south Dublin apartments at Fernbank for more than €100 million.

But the real issue driving house price inflation is ongoing supply shortages S&P said, pointing to “legacy capacity constraints”which continue to restrict how many homes can be built, even if supply is starting to now take off.

“But this comes from such low levels that even if house completions were to continue to grow at their extraordinarily strong current rates--of 30 per cent annually in the first half of this year or an annualised 7,950 units--it would still take until early 2021 for supply to meet demand (estimated at 35,000 units per year),” the ratings agency said.

Once supply improves however, “excessive pressure on house prices should gradually subside” it said.

The risks

But there are risks to a soft landing. On the issue of a “disruptive Brexit”, S&P said it could affect the significant cross-border trade in both goods and services with Northern Ireland “and hence the economy as a whole”.

However, it doesn’t overstate these risks. If this was to materalise, S&P said that house price growth would likely slow, but not turn negative.

“The increased activity of foreign investors in the housing market would also likely mitigate the impact of reduced activity from UK investors,” S&P said.

Europe

Across Europe, S&P expects house price inflation to ease, due to a number of factors. In France, after a record-breaking 2017, it says that house price rises should ease to 2.7 per cent this year, while from next year monetary policy tightening and deteriorating affordability suggest a soft landing. In the UK, a tougher environment for the buy-to-let sector, as well as Brexit uncertainties, are contributing to a slowdown, “with prices stagnating this year and dynamics remaining softer in the coming few years”. And in Belgium, low affordability and increasing mortgage rates could start to weigh on demand.