The real estate cycle has three distinct phases: boom, bust, recovery. The depression phase, which we are about to enter, generally tends to be met with denials. We’ll be told that prices can’t go down, not with current demand demographics backing them up.
We will be told that Ireland’s chronic shortages make it an exceptional case internationally. But these old tropes have never outgrown the boom-and-bust dynamic.
The industry also has a vested interest in talking about the sector to attract investment. As we saw in 2007-2008, this can continue quite late in the day, in the face of noticeable deterioration in metrics.
The economic case for a drop in values doesn’t make sense, not if you think housing is a simple case of supply and demand. But the property doesn’t fully adhere to those rules. People tend to buy, developers tend to build, when prices rise.
The opposite is true when prices go down. Perception plays an important role. Increasingly, economists are moving closer to the view that price expectations may be the main determinant of headline inflation.
Property is also a highly financialized asset, fueled by trillions of euros of speculative cash. Most of the current development in Dublin is being financed by international funds seeking returns in the build-to-let sector. And the backing of these funds is the great financial experiment of the time, quantitative easing and low interest rates.
However, there are clear signs that the current dynamic is ending and that the Covid-induced price increase has reached a tipping point with higher costs of living and higher interest rates now likely to act as a constraint on buyers. .
In Toronto, one of the hottest real estate markets on the planet, house prices fell for the second month in a row in April.
The median home price in Canada’s largest city fell 6.4 percent to 1.2 million Canadian dollars (about 885,000 euros), according to the Toronto Regional Real Estate Board.
That was the biggest monthly drop since April 2020 when the market largely froze due to Covid-19 lockdowns. The number of houses sold in Toronto decreased by 26 percent. Vancouver exhibited similar declines.
The turn seems to be related to the Bank of Canada’s aggressive rate hikes. Since early March, the central bank has raised the benchmark interest rate from 0.25% to 1% in a bid to rein in runaway inflation, with markets expecting the rate to rise to at least 1.5% in June. New Zealand, which saw one of the biggest house price increases during Covid, is experiencing a similar setback, also due to interest rate hikes.
The same dynamic is emerging in the United States. And remember that these countries are experiencing severe housing crises, marked by a shortage of supply and unaffordable price metrics. The decline in home ownership rates in New Zealand has become a major political issue.
The only thing missing here is interest rate increases, but they are on the way. With euro zone inflation at an all-time high of 7.5 percent, almost four times the European Central Bank’s 2 percent target, pressure is mounting on Frankfurt to act and several lawmakers are already pushing for “normalization.” ” faster.
The head of the ECB, Christine Lagarde, and our own Central Bank Governor, Gabriel Makhlouf, have indicated that a sequence of interest rate hikes could start as early as July. Markets are pricing in 90 basis points of rate hikes for the rest of the year, that is three to four 25 basis point moves between now and Christmas.
But there is another weave in the tapestry, one that is arguably more Irish-related, that will also act as a cooling agent. After a decade of near-dormant construction, homebuilding is taking off.
The number of new houses built in the first quarter of 2022 was the highest since the Celtic Tiger era.
The Central Bank forecasts that some 25,000 new homes will be built this year, rising to 30,000 in 2023 and 35,000 in 2024. The 35,000 figure is roughly the estimated level of demand in the market, although some argue it is higher. This should put further downward pressure on prices.
Most real estate agents here have not recalibrated for these new dynamics and are still forecasting healthy price growth for the rest of the year and beyond. But they were also the ones who thought that the Covid would see the market tank.
A cooldown of some kind is perhaps inevitable given the appreciation in values and the fact that there are limits to affordability. The trough phase of the cycle is usually determined by how big the boom phase was.
The greater the rise, the greater the fall. Despite what you may think, Ireland hasn’t had as big of a Covid bubble in house prices as some other countries, so the escalation may be more moderate, but it’s close.
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