Why are property prices in Ireland rising so sharply again? – The Irish Times

As a rule of thumb, when interest rates rise, property prices fall or at least the development of the property market slows down.

That used to be an iron rule in economics. Not anymore. Real estate markets around the world have survived the effects of higher borrowing costs unscathed. Many are back in boom mode.

Since the European Central Bank (ECB) began a cycle of ten interest rate hikes in July 2022, property values ​​in Ireland have risen by 10 percent. In Dublin, prices have risen by an average of 7.5 percent.

Property price inflation here has risen for ten consecutive months (from 1.1 percent in August last year to 8.6 percent in June). In Dublin, the annual rate of increase is even steeper (9.3 percent).

So why don't higher interest rates have a more dampening effect? ​​There are several reasons for this.

Since the financial crisis of 2008 and the subsequent period of historically low interest rates, more homebuyers have opted for fixed-rate mortgages, effectively protecting themselves (and the broader market) from interest rate fluctuations.

Currently, 50 to 55 percent of mortgage holders here have fixed-rate contracts. According to real estate agent Sherry FitzGerald, 69 percent of all new loans for home purchases in the first half of 2024 were fixed rates of over one year. The comparable figure for the first half of 2003 was 21 percent.

Fixed rate contracts encourage homeowners not to move as they would have to take out a new mortgage, potentially at a higher interest rate. This explains the very low turnover rate in the Irish market.

From the ECB's perspective, the higher proportion of people on permanent contracts (not just here, but across Europe) has dampened the impact of monetary policy. That is why Europe and Ireland experienced only small technical recessions last year due to Frankfurt's aggressive monetary tightening.

In addition, there are several local Irish factors that disrupt the traditional relationship between interest rates and property prices.

Last year, 50,234 people bought their own homes in the Republic of Ireland, but according to Banking and Payments Federation Ireland (BPFI), only 35,229 had mortgages taken out. This suggests that around 30 percent of homes were purchased with cash and without a mortgage.

Many of them are reportedly using cash from previous sales or are dipping into savings. Some are probably expats returning from abroad. In any case, they are not hampered by the higher cost of borrowing.

Perhaps the biggest problem in the Irish property sector concerns purchases made by non-private households: purchases made by the State (local authorities and recognised housing associations) and institutions or funds.

While higher interest rates have hurt institutional activity, government agencies may be buying even more than before due to government policy directives.

Last year they bought nearly 6,000 new homes, driving up demand and prices. The figures do not include units purchased by the Land Development Agency (LDA).

If we exclude government and institutional purchases and individual construction, only a fraction of the new homes coming onto the market are offered to real estate agents (less than 10,000 of the total of 33,000 last year).

In addition, there are generous government subsidies for home purchases in the form of the “Help to Buy” and “First Home” programs, which are constantly being expanded.

These incentives are intended to provide more supply to builders and developers while closing the price gap for potential buyers. At a macro level, they also support prices.

Another factor is income. After a period of rapid disinflation, real wages are rising again, offsetting the impact of higher interest rates on people's ability to borrow. Looser credit conditions have also helped buyers. In 2022, the central bank raised the cap on the required credit-to-income ratio for first-time buyers from 3.5 to 4.

The Republic's population is also growing faster than expected, mainly due to immigration. According to real estate company Savills, the population grew by 3.8 people per newly built housing unit between 2015 and 2023, or almost four to one.

This is by far the worst of the nine countries examined, said John Ring, head of research at Savills. Ireland's ratio is 80 percent worse than that of the United Kingdom (2.1) and twice as high as that of Australia (1.9).

“While it is true that there is a housing shortage in many countries around the world, it is important to recognise that the situation in Ireland is very different from other countries,” said Ring.

Predictions that the ECB's ten interest rate hikes would trigger a housing market collapse have proven to be far from the truth. Property prices are determined by numerous factors, but never before have interest rates had such a small impact.