IRISH CASE STUDY:
Chapter 14: Capital and Land: Completing the Analysis of Factor Markets

The Irish Residential Property Market
by Eleanor Doyle & Cian Twomey, Department of Economics, University College Cork.

The unprecedented boom in Ireland's residential property market continues apace. In examining the factors surrounding the buoyant housing market, this case deals with a number of issues covered in chapter 14 in particular, the concepts of rentals, interest rates, asset prices (14-2) and land and rents (14-8). A number of graphs illustrate the staggering increases in this market over recent years.

Increases in Irish house prices since 1993 have surpassed those in every other sector of the Irish property market. According to figures published in the Irish Permanent Index (see issue 25, second quarter 2000 at http://www.irishpermanent.ie/ipindex), house prices rose approximately 20% over the twelve months from January 1999 to January 2000. The boom is not confined to Dublin, as shown in the figure below based on data from 1993 to 1997.

Fig 1: Regional House Price Increases 1993-7 (%).
Source: Department of the Environment, 1998

Price increases in Galway and Waterford, have almost matched those of Dublin.

Fig 2: New House Price by Region Q3 1997 (IR£000).
Source: Department of the Environment, 1998.

The average price of a new house in the third quarter of 1997 was £85,000, 55% more than would have been paid just four years ago, at the start of the current economic boom. Significant discrepancies exist between different regions, with an average new house in Dublin costing up to £100,000 in 1997.

More recent trends are shown in Figure 3 for the period from 1997 onwards.

Fig 3: Regional House Prices, Dublin & Outside, Jan 1997 to Jun 2000, (1996=100).
Source: Irish Permanent Index, Issue 25.

House price inflation continued into 2000 both in Dublin and elsewhere. In the six months to June 2000 house prices (a weighted average of new and existing houses) increased by 10.5% compared to a figure of 7.3% over the same period last year. The average price paid for a new house in the second quarter of 2000 was £126,585. The average price of a house in Dublin city and county was £155,075 while it was £114,358 outside Dublin. It is too early to say the upward trend is set to falter but for the first time since the inception of the Irish Permanent Index the quarterly index for new houses declined by 0.7% on a national basis between the first and second quarters in 2000.

The forces underlying the developments in housing are complex and interrelated. Briefly, as with any asset, both demand and supply side factors are at work. In particular, housing demand responds to the economic environment, whereas housing supply is relatively fixed in the short term. Generally, as supply is unable to respond quickly enough to changes in demand, prices in the housing market tend to be quite volatile. Short-run market conditions react primarily to demand-side factors. Contributing to the current pressure is that nearly all these influences are acting in an upward direction on prices.

Asset prices react to changes in interest rates - when interest rates fall, or are expected to fall, the price of an asset will be bid up. This makes sense in terms of an individual taking out a loan (mortgage) to buy a new house - the lower the interest rate on the loan, the smaller the monthly repayments. Irish interest rates have fallen from around 11% in the 1980s to below 6% (APR) in 2000 although increases of up to half of one percent have been predicted shortly.

Demographic factors are also set to boost the residential market. The birth rate in Ireland rose steadily through the 1970s, peaking in 1981. Therefore, a large share of the population are currently in their twenties, taking up their first job, and seeking somewhere to live. This population pressure on the housing market is being reinforced by net immigration into Ireland, as enhanced job opportunities attract the return of many former emigrants and indeed new residents to Ireland.

A number of other economic ingredients are adding fuel to the fire: GNP grew by over 11% between 1998 and 1999, employment grew by 6% between February 1999 and February 2000. Combined with a range of government incentives, which act as a subsidy to house purchasers, and the extremely strong culture of home ownership in Ireland, demand for housing has reached an all-time high. The recent increase in general inflation coupled with expected interest rate increases could be predicted to have some repercussions on the housing market.

So, what of the supply side? The Irish construction industry has a pivotal role in the domestic economy, accounting for around 15% of GNP, more than either agriculture or tourism. In 1997, a record 38,842 houses and apartments were built in Ireland, a 15% increase on the previous year. The figure for 1998 was 42,349 and in 1999 reached 46,512. This translates into more houses per capita than any other country in the world, yet it obviously was not enough to prevent prices from rocketing as supply growth was less than the growth from the demand side.

Recent reports into the housing market by an economic consultant, Peter Bacon, included proposals to speed up the supply of new houses by providing incentives to owners of land zoned for residential property to use it. However, available land in desirable areas such as Dublin city is scarce and, therefore, at a premium. Builders are maximising their profits from this expensive land by building more up-market houses.

As already noted, the housing market, owing to the imbalance between demand and supply, has a tendency to be more volatile than the underlying economy. If, and when, the economy slows down, the housing pressure should ease quickly. Until then, potential purchasers are likely to have to fork out even more for that roof over their heads.