Sunday 22 July 2018

If it looks and acts like a bubble, then it probably is one

The 24pc jump in Dublin house prices over the past year looks increasingly like a bubble.

Average house prices in the capital rose by 23.9pc during the 12 months to the end of June, according to the CSO. The average second-hand house price in Dublin is now about €330,000, according to a recent report by estate agents Douglas Newman Good.

That's more than ten times the average private sector annual wage of €32,600 and seven times the average public sector wage of €46,700. No matter how you look at it, Dublin houses are now very expensive.

So why, after all we have gone through over the past six years, are homes in the city costing so much?

Part of the problem is an acute shortage of supply. We simply haven't been building new houses and apartments since the bubble burst in 2008. Way back in 2006 more than 93,000 new houses and apartments were built.

Last year the number fell to just 8,300, the lowest annual total since records first began in 1970.

The shortage of new houses and apartments coming on the market has been particularly acute in the greater Dublin area with less than 2,000 new houses and apartments being built.

Analysts estimate that about 8,000 new houses and apartments need to be built in Dublin every year.

However, the shortage of new houses and apartments being built is only part of the problem. Very few second-hand houses are coming on the market.

Last year only 27,500 houses and apartments changed hands.

When you consider that there are almost two million houses and apartments in the country this means that, at current transaction volumes, the average house or apartment could expect to change hands just once every 73 years.

Even a housing market that was barely ticking over should see most properties changing hands once a generation, i.e. once every 20-30 years.

That would translate into 67,000-100,000 transactions a year.

So why are so few second-hand houses coming on to the market?

Part of the blame almost certainly lies with the banks who have failed to move against virtually any delinquent borrowers.

At the end of March there were almost 82,000 mortgages on which no repayments had been made for at least a year.

While it is only right and proper than the banks should assist borrowers who are making a genuine effort to repay their mortgages, the vast majority of loans a year or more in arrears must be regarded as hopeless cases.


So why aren't the banks getting tough? Could it possibly be that, with the ECB stress test results due to be published in October, the Irish banks have a vested interest in keeping Irish house prices artificially high so that they don't have to increase their provisions against loan losses?

Whatever the reason for the banks' reluctance, the result is a very dangerous situation.

If it inflates like a bubble and looks like a bubble then it probably is a bubble.

For potential buyers the moral is clear: Don't buy unless you absolutely have to.

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