Bank of Ireland's quarterly analysis of the Irish property market, the Irish Property Review* published today, reveals a housing market that is balancing out. The fall in supply is negative for Irish economic activity but ultimately supportive of house prices by bringing the market back into balance.

*May 2008 issue had not been uploaded on server at time of our posting.

The average price of a home was at €281,600 in March of this year – back at early 2006 levels. Rents in contrast have risen substantially by 22% in the three years to March 2008.


"While prices have fallen for the past year, rents have risen considerably, implying that the marginal buyer is currently a renter in the face of the past deterioration in affordability and in response to uncertainty about the outlook for interest rates and house prices," said Dr Dan McLaughlin of the report's findings.

However affordability is set to improve this year and next, due to the expected rise in incomes in Ireland with earnings expected to rise by 4.9% this year and 4.5% next year. The Irish Property Review assessed the impact on the housing market, using the affordability model, which captures the annual cost of servicing a new 25 year mortgage relative to average income. This year's model shows affordability improving to 37.1% in 2008 and 35% next year.

The report says that the demand for new mortgage lending continues to fall with loans for houses down by 29% so far this year. The pace of decline may start to bottom out as the year unfolds but for 2008 as a whole gross mortgage lending is expected to fall to €29 billion.

In a reflection of uncertainty in the market the report predicts house completions to reach 50,000 at best, this compares with a peak of over 88,000 houses completed in 2006.

The Eurozone economy has also started to slow and the consensus growth forecast now projects GDP growth of 1.6% in 2008, followed by another year of sub-trend growth in 2009. This should put downward pressure on inflation and hence prompt the ECB to lower rates, just as it did during the last cyclical slowdown in 2001-2003.

"As much as the market mood has changed, we still believe the repo rate will fall in 2008, in response to a steady slowdown in economic activity and retain our forecast of a half-point reduction, albeit pushing the first cut in to the third quarter" said McLaughlin.

As for the commercial property market the downturn is now at its most pronounced with returns set to fall this year by 5% as yields readjust rapidly to the new economic environment.