In the year to June, Irish residential property prices increased nationally by 10.7%. The CSO said today that this compares with an increase of 13.8% in May and a rise of 12.5% in the twelve months to June 2014. Residential property prices rose nationally by 0.1% in the month of June. This compares with an increase of 0.5% recorded in May and an increase of 2.9% recorded in June of last year.
In Dublin residential property prices fell by 0.4% in June. Despite this fall, Dublin residential property prices were still 11.1% higher than in June 2014. Dublin house prices fell by 0.3% in June whilst Dublin apartment prices fell by 0.4%. However, it should be noted that the sub-indices for apartments are based on low volumes of observed transactions and consequently suffer from greater volatility than other series.
Outside of Dublin residential property prices rose by 0.4% in June. Prices were up 9.7% compared with June 2014.
Overall decline: At national level residential property prices were 37.4% lower than their peak level in 2007. Dublin house prices were 36.6% lower than their peak, Dublin apartment prices were 42.2% lower than their peak and Dublin residential property prices overall were 38.4% lower than their highest level. Outside of Dublin residential property prices were 40.5% lower than their highest level in 2007.
Conall Mac Coille, chief economist at Davy comments: "The Residential Property Price Index (RRPI) rose marginally, by 0.1%, in June. The annual inflation rate has slowed to 10.7%, from 16.8% in March. Prices fell -0.4% in Dublin, declining for a second consecutive month (Table 1). This means that the rate of property price inflation in Dublin has now fallen to 11.1%, half the 23% rate recorded in March.
In contrast, prices rose by 0.4% outside Dublin, although with the annual rate of inflation falling back into single-digit territory at 9.7%. Although Ireland’s residential property price inflation rates remain relatively high, the bigger picture is that they have been broadly flat through H1 2015 (Figure 1), up just 0.4%. Looking forward, our recent report with MyHome showed asking prices rising slowly in Q2 2015, suggesting that transaction prices will remain weak in Q3.
Stretched affordability has contributed to slowdown, but positive wage growth will support prices over the medium term
The catalyst for the slowdown in house price inflation was the introduction of the Central Bank of Ireland’s (CBI) mortgage lending rules in February. These rules limit mortgages with a loan-to-value (LTV) ratio greater than 80% to just 15% of new bank loans. Mortgages with a loan-to-income (LTI) ratio in excess of 3.5x income are limited to 20% of new loans.
Our analysis suggests that 28% of new loans exceeded the CBI LTV limits in 2014, more than the 15% allowed to do so. That said, half of these borrowers were first-time buyers, who would have faced only a small 1-2 percentage point reduction in their LTV ratio. Nonetheless, the rules look set to stop Irish households bidding up house prices through ever more leveraged mortgage loans. Indeed, last week’s mortgage approvals data showed the average loan approval falling slightly to €191,150 in Q2.
Affordability was already serving as a constraint on the Irish housing market before the CBI rules came into force. Irish house prices are now 5x average incomes, a similar multiple to the UK. Valuations have become most stretched in Dublin, at 6x average incomes. However, there are increasing signs of positive wage growth in the Irish labour market. Rising incomes should allow Irish house prices to rise moderately over the medium term without stretching affordability further. Nonetheless, our forecast that house price inflation will slow to 5% by December is now looking overly optimistic."
Julie Tennent of Goodbody commented: "Annual house price growth continues to slow: Despite rising for the fourth consecutive month (+0.1% mom) annual growth in Irish residential property prices continued to slow in June with the annual rate falling to +10.7% from +13.3% in May. Tighter macro prudential rules, introduced in February and impacting over the last two months in particular, is clearly curbing price increases in contrast to last year. Overall, house prices remain 37% below peak nationally and 38% below peak in Dublin.
Driven by the second consecutive monthly decline in Dublin prices
The slowdown continues to be driven by Dublin where the macro prudential rules have a disproportionate effect. There prices fell by 0.4% mom, the second consecutive monthly decline, slowing the annual rate of growth in the capital to 11% from 15.2% in May and rates in excess of 23% yoy in H2 2014. Outside Dublin, prices rose by 0.4% mom, but the annual rate slowed to 9.7% yoy from the current cycle high of 11.9% yoy seen in May. Overall prices nationally are flat year to date with a slight increase in prices outside the capital being offset by a modest decrease in Dublin prices.
Transactions moderate in Q2
There are also signs that the increase in activity in the property market may also be beginning to moderate. According to data from the property prices register transactions in Q2 were 17% higher than for the same quarter last year. However, this compares to a 54% yoy increase in Q1 and increases that averaged 45% in 2014. While this must be caveated by the fact that the data for June is incomplete, and thus the Q2 number is likely to rise, the strong outturn in Q1 suggests that purchases were brought forward to pre-empt tighter lending conditions, or at the very least the uncertainty that accompanied their introduction.
Macro prudential rules will weigh further on prices in H2
The slowdown in prices and activity in recent months highlights the impact of the introduction of macro prudential rules. However, the weakening in the market in Q2 was also a result of the strong outturn in Q1 when purchases were brought forward. This makes the actual impact of the rules, and whether they are resulting in significantly tighter lending conditions, difficult to quantify at this stage although we expect house price growth to decelerate further in H2."