Central Bank Governor Philip Lane told the Oireachtas Finance Committee yesterday that house prices could fall over the next two to three years. His remarks were in stark contrast to figures released by the Central Statistics Office this week which showed that house prices in the year to March rose by nearly 13%.
Conall MacCoille, chief economist with Davy, noted the key thing that Professor Philip Lane said is that house prices "could fall". He said there are some headwinds that will hit the housing market potentially over the coming years. "The first of those is Brexit. If there isn't a deal and we get a cliff edge Brexit, that will be bad for Ireland's economy generally but also for the housing market," the economist said.
"The other headwind is funding costs for banks. The ECB is going to raise interest rates, that could potentially affect funding costs and increase the amount people have to pay in terms of their mortgage. And the third issue is that house prices are not cheap and there could be a correction at some point," he said.
"I suppose if you look at the housing market overall, lending is under control. There are a lot of cash buyers and investment trusts buying up property, particularly in the capital. We've seen double digit house price inflation for the past few years, I don't think we are going to see that continue indefinitely. I don't think that house prices are necessarily going to fall,but we are not going to see the same increases that we've seen in the past," Mr MacCoille stated.
If one looks at the housing market right now, there is room for people to borrow more under the current rules, particularly outside of Dublin where people aren't stretching themselves to the same extent as in the capital, according to the chief economist. Generally Ireland has had very strong house price cycles, and Governor Lane is keen to indicate that house prices aren't a one-way bet, that they could slow, that they might even fall if Brexit goes badly.
Mr MacCoille said with the lack of supply and with demand so much greater than supply, "if anything people are likely to buy even more under the current rules and that will keep on pushing up house prices".
He said there is a range of possibilities, and the most likely one is that house prices will continue to rise rapidly. But he added that there is a danger that if Brexit goes badly, if interest rates are to increase as supply starts to come on stream in 2019 and 2020, you might even get price falls in a very adverse nasty economic scenario. "That's what no one is expecting in the central case but there are risks."
Could what Governor Philip Lane said at the committee have an affect on the housing market? Mr MacCoille doesn't think so. "It's hard to see house prices slowing rapidly. I think people are expecting that in Dublin because affordability is stretched. I suppose people listening to this interview today asking are house prices going to fall back. I think when we look at the housing market, that's not our view," he concluded.
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