• 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 of immigration.

• 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 housing stock.

• 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. 

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 to commencement.

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 below.

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 years.

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 these countries.

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.

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