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Interest rates may be coming down. That’s not entirely good news in a frothy property market

Irish house prices have accelerated again - lower borrowing costs will add to the momentum

It looks like the European Central Bank is going to cut interest rates at its meeting in early June. This will be good news for mortgage holders, particularly those on tracker loans. But while borrowers may need an interest-rate cut, the Irish property market doesn’t. And rising prices and rents are leaving many younger homebuyers caught in a bind – whichever way they turn.

Unlike in many other countries across Europe, Irish house prices are continuing to rise and lower borrowing costs will add further fuel to a market that took the sharp rise in interest rates in its stride. Since ECB interest rates started to rise in mid 2022, Irish house prices have risen on average by 12 per cent. And after appearing to ease last year, house price growth has accelerated again going into 2024.

Falling interest rates will, of course, help prospective buyers too. But they are buying into a market with higher and higher prices, helped – in the case of those buying new homes – by increasing State support, with the Help-to-Buy scheme now being added to by the First Home Scheme, in that the State takes an equity stake. Boosting demand when supply is tight has a predictable result – higher prices. Nonetheless, part of the policy solution of a Simon Harris-led Government would be to continue the supports for homebuyers. The Help-to-Buy scheme is due to run out at the end of next year, but Harris said in his ardfheis speech that “under my leadership, this party will extend Help-to-Buy for a further five years”.

The main Opposition party, Sinn Féin, has promised to end Help-to-Buy and the First Home scheme, arguing that they are pushing up prices and benefiting developers. This is probably correct – the impact of these scheme on prices is controversial, but a 9.2 per cent rise in new home prices over the past year compared with a 1.6 per cent rise in second-hand homes tells its own story. And the vast bulk of new homes which qualify are in commuter country, outside urban centres. That said, unplugging the Irish property market from the intravenous drip of these schemes – now central to the finances of purchasers of new homes and the development plans of many builders – promises to be a tricky exercise.

In its remaining months in office, meanwhile, the Harris playbook is fairly obvious. Big up the increase in house building in the latest figures – commencements have jumped and completions could reach 35,000 this year – and promise more to come if the party is back in government. A key step will almost certainly be the extension of the waiver on development levies and water connection charges on new housing developments, which is due to run out on April 24th. This was introduced a year ago – knocking about €12,500 on average off the cost of building a new home – and it appears to have had a role in the latest surge in new building starts, some of which are trying to beat the deadline.

The CSO estimates that more than 40 per cent of 18- to 34-year-olds are living at home with their parents

However, Harris faces a bigger task in outlining a longer-term plan for how 250,000 new homes would be built over the five years starting in 2025 – as do the other parties who are making similar commitments. The Government is holding off announcing new formal targets until later in the year, informed by work under way in the ESRI. But at least Harris has conceded that a higher target is appropriate.

To inform this strategy, we still await the publication of the Commission on Housing report that is likely to be submitted formally to Minister for Housing Darragh O’Brien in the near future. It is expected to point out that as well as the need to build substantially more houses to account for population growth and immigration, there is also the question of providing for the “backlog” of the tens of thousands of young adults living at home because they cannot afford to rent or buy.

Harris promised in his speech to “move mountains to get the children out of the box room and into a home of their own”. And there are a lot of them. The CSO estimates that more than 40 per cent of 18- to 34-year-olds are living at home with their parents.

Ever higher prices and rents will leave many stuck where they are. As pointed out by the latest MyHome.ie survey, prices are being bid up by better-off buyers who have benefited from wage rises; the average income of a first-time buyer is €88,258, up 6.7 per cent over the past year. The implication is that many average- and lower-income earners are being left further behind. And that thousands of those in the middle ground can purchase only by maxing out State supports and borrowing near the maximum four times income.

The younger generation faces risks whichever way it turns. Rents are stratospheric and tenancies are now being clung to due to the protections given to existing tenants and the even higher cost of new rentals. Here, too, supply is the issue. Figures from estate agency Sherry FitzGerald have shown that, for much of the past decade, for every small private investor buying into the market, three have exited. Big funds are less in evidence, too.

For now the Government response is clear: keep piling on incentives for house-building and house-buying and hope for the best

But there are also longer-term risks of borrowing to the maximum to buy. Broker John Fahy of Pangaea Mortgages has questioned the longer-term market value of new builds bought with State supports – and cheaper “green” mortgages. What happens when they come on to the market as second-hand properties on which no such State supports are available under existing rules? As ever with the Irish housing market, it will all be fine until prices start to fall.

For now the Government response is clear: keep piling on incentives for house-building and house-buying and hope for the best. Some of the large amount of mud – or cash – being thrown at the wall in terms of incentives is sticking. And many are succeeding in buying a new home.

But the old issues of supply remains. The election campaign will see a gap between the “more of the same, only better” Government line and the promise of “change” from Sinn Féin and the Opposition benches. Billions will continue to be spent whoever is in power; as Leo Varadkar pointed out as he departed, we are paying a heavy price for underinvestment after the financial crash.

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