Ireland: Dublin house prices are up 21% in the year to February 2015 after a price decline in the month according to the CSO.
In the month of February residential property prices fell by 0.4% nationwide. Despite this fall, residential property prices remained up 14.9% on an annual basis. In Dublin residential property prices fell by 0.7% in February. However, Dublin residential property prices were still 21.4% higher than in February 2014.
Dublin house prices fell by 1.0% in February whilst Dublin apartment prices increased by 2.0%. However, the CSO said 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 were unchanged in February. However, prices were still up 8.2% compared with February 2014.
Overall Decline: At national level residential property prices were 38.7% lower than their peak level in 2007. Dublin house prices were 37.6% lower than their peak, Dublin apartment prices were 43.3% lower than their peak and Dublin residential property prices overall were 39.3% lower than their highest level. Outside of Dublin residential property prices were 41.9% lower than their highest level in 2007.
Conall Mac Coille, chief economist at Davy, commented: "Today’s Residential Property Price Index (RPPI) fell by 0.4% in February following the 1.4% decline in January. Annual inflation is now 14.9%. These falls have been driven by the capital. Dublin house prices fell by 1.0% in February after a 2.1% decline in January. Nonetheless, prices are still up 21% on the year. So the slowdown in Irish house price inflation almost entirely reflects the frothiest parts of the market in the capital.
This slowdown is not surprising or undesirable. House price inflation rates in excess of 20% in Dublin cannot be sustained without affordability becoming stretched. At over 5x average incomes, Irish house prices no longer look cheap — at similar valuation multiples to the UK. Although Irish house prices are still 37% below peak levels, those peaks were unsustainable— compressing rental yields to 1-2% in some areas and with valuations at 8-9 times average incomes. Ideally, Irish house prices will now rise in line with nominal wages so affordability is not stretched further.
There are several explanations for the recent declines in prices. First, affordability was becoming stretched in Dublin. Second, the Central Bank’s new mortgage lending rules may have reined in exuberant price expectations – signalling that a new bubble will not be allowed to form. Third, the end of capital gains tax exemptions may have temporarily inflated demand mid-year, leading to price falls towards the end of 2014.
It is important to remember that the CSO index is a three-month average of completed transactions, so the recent negative price numbers actually related to agreed sales at the end of last year. Transactions in January and February 2015 were up 44% on the previous year — signalling little sign of a slowdown. If anything, this suggests that recent falls will be temporary. But it is too early to discern the ultimate dampening effect of the Central Bank’s mortgage lending rules on prices.
In summary, we do not believe recent declines herald the beginning of a sustained decline in Irish house prices. At 5 times average incomes, they are not cheap but not necessarily over-valued. Although rental yields have compressed towards 5%, for many investors this will still seem attractive relative to bank deposits or government bonds. The lack of housing supply, particularly in Dublin, will also support prices. In addition, the recovery in prices outside Dublin is at a far earlier stage. For now, wage growth has remained muted but will start to re-emerge as the labour market tightens, helping affordability. So we expect Irish house price inflation to slow through 2015, but there is unlikely to be a collapse in prices."
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