The rate at which house prices have been increasing could drop by two-thirds to 5 per cent by the end of the year, while the value of some new houses could fall in 2004, leading economists said yesterday.
The cost of housing increased by 15.6 per cent year-on-year in July, according to the monthly Permanent TSB/Economic and Social Research Institute (ESRI) house price index. The average price paid for a house nationally was €222,628 last month, a €30,000 increase on July 2002.
But two economists predicted yesterday that this rate of increase would tail off by the end of the year. Mr Danny McCoy of the ESRI predicted that it would fall by as much as two-thirds to 5 per cent. Friends First chief economist Mr Jim Power said it could be 5-8 per cent by year-end.
Mr McCoy said the risk that interest rates could start rising again while unemployment continues to grow would take a lot of the steam out of the market.
"We are on the cusp of seeing those two indicators turning negative," he said. "It seems unlikely that we are going to see anything like the high double-digit rate of growth we saw on Thursday [when the housing index results were released\]."
Mr Power predicted that the overall rate of house price increase for the year would be 10 per cent. "That would imply the rate should be 5-8 per cent by the end of the year," he said. "People's affordability is starting to come under pressure, they just cannot continue to pay the sort of prices for houses that they have been. At the same time, the labour market is going to deteriorate and the demand-supply gap is beginning to equalise."
He suggested that the average rate next year would be within the 5-8 per cent bracket. But he warned that there could be wide differences within that.
"Established areas with city centre proximity and good facilities will perform well, while outlying areas with poor facilities in which thousands of houses are being built will be flat, or might even see prices fall back a little," he said.
He added that new house prices would come under "some pressure" next year.
Both Mr McCoy and Mr Power said they did not believe there would be a collapse in house prices. Mr McCoy pointed out that supply still had to catch up with demand, even if the gap had narrowed over the past two years.
Sherry FitzGerald chief economist Ms Marian Finnegan had a more buoyant take on the market. She said that the overall rate of increase for 2003 would be 15 per cent, and predicted that it would slip back to 10 per cent next year.
She added that the "frenzy" had gone out of the market and said there would be a much slower rate of increase over the next few months. "Overall, the market is moving at a slower pace," she said.
