The continuing rise in the over 25 population provides
a strong base for housing demand.
Rising immigration is key to sustaining the current
pace of house completions.
Immigration seems likely to accelerate because of the
freedom of access granted to citizens of the ten new EU countries.
Recently, this appears to be running at 11,000 per month.
Housing demand is projected to run at between 50,000
and 70,000 units per annum for the next 15 years depending on the pace
Increasing income and wealth are supportive of
investment in the existing housing stock and
in second homes. We estimate that more than 10,000 second homes are
being constructed per annum.
The rise in debt in Ireland appears sustainable
because ability to repay is robust, initial levels of debt were low
and the wealth and assets against which most of the debt is secured is
a multiple of the debt. Mortgage debt is only 25% of the value of the
Mortgage repayments are estimated to be about 31% of
disposable income in 2005. Even if
interest rates rise to 4%, this percentage would still be less than
35% of disposable income.
Mortgage debt as a proportion of the value of a house
declines rapidly even with modest house price inflation.
The following is an extract from
NCB Stockbrokers' The Irish Housing Market report that was
published on November 28, 2005.
Completions Running at a Fast Pace, Prices
New house completions in 2004 rose to almost 77,000
from around 50,000 per annum three years earlier. With data available
for the first three quarters of this year it looks as if completions
in 2005 will be around the same as last year's peak. This would mean
an average rate of new house completions in the three years to 2005 of
74,000 per annum. This is well above earlier estimates of the
sustainable pace of demand. The expectation was that house price
inflation would moderate in the face of the rise in supply and, in
fact, in the first half of this year it ran at an annualized pace not
much above 4%, compared to 11% in 2004. In Q3, however, there has been
a reacceleration to a 10% annualized pace. This is not indicative of
oversupply nor indeed are data on private rents which, having declined
between late-2002 and April 2005 have been rising at a 2% year-on-year
pace since August. There is no evidence of speculative building since
nearly all developments appear to be booked for purchase prior
The demographic sources for the continuing strength of
demand for housing are the continued rise in the population attaining
the age of household formation and immigration. Moreover incomes
continue to rise and wealth is increasing, leading to upgrading of the
housing stock, reductions in household size and the acquisition of
second homes. While mortgage debt has been rising sharply, this would
not appear to pose any problems for the housing market, as we outline
Growth of the Population in the 25 plus age
Chart 1 shows the broad relationship between changes
the numbers in the population aged over 25 and new house completions.
The projections for the population aged over 25 are based on the
assumption of a net inflow of immigrants of 40,000 per annum in the
years to 2026.
It is clear from this Chart that the large increase in
new house completions from 30,000 per annum in 1995 to 77,000 per
annum currently was associated with an acceleration of the growth in
the over 25 population from just above 30,000 per annum then to above
60,000 per annum currently. Since the baby boom in Ireland peaked in
1981, the numbers in the over 25 age group will grow more slowly from
here on but by 2011 the pace will still be above 50,000 per annum, but
could be higher if inward migration rises.
Migration is a key variable determining the demand for
housing. Net inward migration tends to fall or turn negative when the
economy is performing relatively poorly and to rise when the economy
is growing relatively strongly. The housing market tends to be
strongly correlated with both economic growth and immigration. Thus in
the 1980s there was poor growth, net emigration and, for most of the
period, a weak housing market. House prices rose on average by less
than 4% per annum between 1983 and 1988. Emigration averaged almost
30,000 per annum over that period.
Since 1996 there has been the opposite experience.
Economic growth has been strong. House prices began their ascent in
earnest in 1996 when prices rose 12%.
Perhaps not coincidentally, 1996 saw the first net
inflow of migrants since 1981. Since then, net immigration has
averaged 28,000 per annum. In the year to April 2005, net immigration
was more than 53,000 and the last three years have averaged 38,000 pa.
Our central medium-term view is that the Irish economy
is likely to achieve its potential growth of 5%-6% to 2011 and to
moderate somewhat thereafter. This pace of growth is likely to be far
above what will be achieved in most other EU countries. Unemployment
is much lower than in most of the rest of the EU. Therefore, the net
inflow of migrants should continue but the exact pace is hard
to judge. The accession of the ten new countries to the EU in May 2004
added 75 million people, mostly on
low incomes, to the pool
of those with fairly ready access to the Irish labour market, so we
may see a surge in immigration from these countries in the next few
Ireland, the UK and Sweden are the only countries to
have allowed citizens of the ten new countries free access to their
labour markets. It seems likely that it will be 2009 or even 2011
before the labour markets of the other 10 members will be open to
In the official data on immigration, the net inflow to
Ireland in the year to April 2005 from the ten new countries was
26,000. However, the number of applicants for PPS numbers in the
period May 2004 to September 2005 totalled 139,000. Such applications
are currently running at more than 11,000 per month. This would
suggest that net immigration has picked up very strongly in the course
of this year.
However, a point to consider in relation to housing
demand is that the gross immigration flow may be a more important
influence than net immigration. The average net inflow in the last
three years represented the difference between a 57,000 gross inflow
and a 19,000 gross outflow. It may well be the case that many of the
Irish emigrants do not free up much accommodation for immigrants
because they are mostly 18-24 year olds leaving family homes for
perhaps a brief period abroad.
A gross inflow of 57,000 per annum could result in
demand for almost 20,000 housing units per annum. This, together with
the "second home" phenomenon would help explain why house
prices have held up so strongly despite an average rate of new house
building of 74,000 per annum in the last three years.