Will Irish house prices fall or rise?

Naturally, no-one knows in advance the exact yield, and therefore the exact fall in house prices, that will bring Ireland’s property market back into balance. However, we do know that we are not there yet, as the market overhang persists and the relationship between rents and house prices remains out of balance. We can also say that whatever the ultimate yield and fall in prices needed, Dublin looks best placed to balance earliest, while those places away from the main cities and from Dublin’s orbit have taken the smallest steps so far towards sustainable prices.


Suppose the yield that will bring the property market back into balance is indeed 6% and therefore that the fall in prices from the peak is between 55% and 60%. If that is the case, while parts of Dublin may be close to completing their adjustment, some parts of the country are perhaps no more than half way through their adjustment process. This important distinction will be hidden if we continue to talk about a national property market.

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Rating agency Fitch has said it expects further falls in both residential and commercial property prices in Ireland. It said it has already factored such falls into its analysis of the country’s rating.

The Permanent TSB/ESRI index for the second quarter of this year, suggests that Irish house prices have declined by 35.2% since their peak, but today Fitch said it believes this will likely understate the full decline.

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The other crumbling dam against mass mortgage default is house prices. House prices are driven by the size of mortgages that banks give out. That is why, even though Irish banks face long-run funding costs of at least 8 per cent (if they could find anyone to lend to them), they are still giving out mortgages at 5 per cent, to maintain an artificial floor on house prices. Without this trickle of new mortgages, prices would collapse and mass defaults ensue.


However, once Irish banks pass under direct ECB control next year, they will be forced to stop lending in order to shrink their balance sheets back to a level that can be funded from customer deposits. With no new mortgage lending, the housing market will be driven by cash transactions, and prices will collapse accordingly.

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