Property industry says prices will continue to grow as higher interest rates send global markets into reverse

The property industry here insists on Irish exceptionalism. Because of the mismatch between supply and demand, they insist the drag from higher interest rates won’t be enough to trigger a reversal in prices, like the ones we’re seeing in the UK, the United States, Canada, Australia, New Zealand (the list goes on).

In other words, the pressure on prices from the lack of supply is too strong to be trumped by higher mortgage costs (an obvious demand dampener). It’s a big call and maybe the industry is right. We’ll find out in a few months. The latest figures from the Central Statistics Office (CSO) show prices fell on a monthly basis by 0.6 per cent in January, anchoring the annual rate of inflation to 6.1 per cent, down from 7.7 per cent previously.

Year-on-year inflation in Dublin was put at just 4.3 per cent, while prices on a monthly basis in the capital fell by 1.1 per cent. And remember these figures stem from transactions that happened up to three months ago, in advance of the recent spate of mortgage rate hikes from providers here and in advance of the European Central Bank’s planned hikes this month and next. In other words, the dampening effects of higher borrowing costs have still to play out.

Many analysts believe the industry is underestimating the impact of these higher interest rates and that we will soon see a price correction of some sort.

“Some of the forecasts for growth this year seem wildly optimistic,” says Daragh Cassidy, head of communications at price comparison website Bonkers.ie. He suggests the affordability constraint imposed by higher rates will almost definitely send prices into reverse. His rationale is that those borrowing €300,000 over 30 years on a mortgage rate of about 2 per cent – the rate available at the beginning of last year – would have had a monthly repayment of €1,109 a month.

If rates go to say 5 per cent (they’re expected to go to at least 4 per cent) to keep the same monthly repayment of about €1,109, either the amount borrowed or property prices would need to fall by about 30 per cent. That strain on affordability will outweigh the current demand-supply dynamic, he says.

Source: The Irish Times, Thursday 16th March 2023