What’s negative about rising property prices?

Friday 29 November 2013 11.56

Who benefits from rising property prices?

By Business Editor David Murphy

The surge in Dublin property prices is making some people feel uncomfortable. They fear it could lead to cheerleading about the market.

After all, it was that glorification of unsustainable prices which partly caused Ireland’s chaotic crash in the first place.

This prompts an interesting question. Are rising property prices a good thing?

The simple answer is: Yes for sellers and No for buyers.

But it is more complicated than that.

The first point is that despite a 15% rise in Dublin over the past 12 months, nationally prices are down by 47%.

The price rises we’re seeing are from a very low base.

Take the example of a home bought in the capital for €400,000 in 2007.

By 2012 it could have been worth €200,000. After a 15% price rise it would be worth €230,000 – so it would be still worth €170,000 less than what the buyer originally paid.

This goes to illustrate that the recovery will have to continue for many years to address the negative equity problem blocking thousands of families from moving home.

By any measure, Ireland has had an enormous property crash.

However, many house-hunters in the capital are astonished to find themselves struggling to buy a home despite the collapse in prices.

The mortgages on offer have steeper monthly repayments than they can afford to make.

This is partly due to the fact that banks have scrapped tracker mortgages and today’s buyers are offered loans at higher interest rates.

But there are some economic benefits from rising prices.

Firstly it will encourage builders to recommence construction – providing jobs to thousands in that sector who are currently unemployed and won’t get work elsewhere.

It will also encourage banks to lend – when prices were falling lenders were nervous about extending home loans because there was an increased risk of buyers going into negative equity.

Rising prices also show increased confidence in the economy.

For NAMA, a taxpayer-funded property company which has 10,000 apartments, it means a stronger chance of selling enough residential units to meet its bailout targets.

Rising prices will also lift some people out of negative equity and potentially help the arrears crisis.

While these are positive factors as a result of recovery, nobody wants a return to the craziness of the boom years.

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