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A glance at changes in property, house and real estate prices in ireland.

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The Dublin differential – some warning signs for Government. The last 12 months has been one of changes in Ireland’s housing market.

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Ireland Housing, Ireland Real Estate, Ireland Apartments, Ireland Hotels, Ireland Tours, Ireland Entertainment, Ireland Dining, Ireland Flights, Ireland Car Rental, …

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Compared with much of western Europe, Ireland has very high rates of home ownership. Whereas less than one-tenth of units were owned by their occupants …

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“The consequences of the [Irish] property boom may not have fully played out yet. Overall vacancy rates remain high,” it said. The gloomy view …

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Houses prices in the Republic of Ireland (2000-2010)

Nationwide

Dublin

The property bubble in the Republic of Ireland was an unsustainable bubble in the price of real estate from the 1990s to 2008 in a period known as the Celtic Tiger. As occurred in some West European states, the property bubble peaked in 2006, with a combination of increased speculative construction and rapidly rising prices, stabilized in 2007 and then ‘burst’, coming to end in 2008. By the second quarter of 2010, house prices in the Republic of Ireland had fallen by 35% compared with the second quarter of 2007, and the number of housing loans approved fell by 73%.[1][2]

The fall in domestic and commercial property prices contributed to the Irish banking crisis and as of February 2013, prices continue to fall. House prices in Dublin are now down 56% from peak and apartment prices down over 62%.[3]

House prices have so far returned to pre year 2000 levels. Mortgage approvals have dropped to 1971 levels.[4] As of December 2012, more than 28% of Irish mortgages are in arrears or have been restructured and commercial and buy-to-let arrears are at 18%.[5]

From 1991 to 2001 the Republic of Ireland’s real GDP growth averaged above 7% and there was an large expansion in the workforce. From 1990 to 2000 Irish GNP per-capita rose 58%, bringing it above the EU average.[6] The pace of expansion in lending to households from 2003-2007 was among the highest in the euro area[7] with German banks having US$208.3 billion in total exposure to Ireland.[8] These factors led to house prices increasing by 17% between May 2000 to May 2001 alone.[9] In August 2000 an International Monetary Fund (IMF) report contended that Irish property prices were almost certainly heading for a collapse in the medium term, since “no industrial country in the last 20 years had experienced price increases on the scale of Ireland without suffering a subsequent fall”.[10] From 2000, approximately 75,000 housing units were built every year as detailed by the Department of the Environment, Community and Local Government[11] with sufficient planning permission being granted so that by 2005, there was enough zoned land to accommodate 460,000 new homes as housing density figures continued to rise each year.[12] House prices went on to more than double between 2000 and 2006 with tax incentives being a key driver of this price rise[13] and the Fail-Progressive Democrat government subsequently getting much criticism for these policies.[14] In 2004 the independently produced Review of the Construction Industry, commissioned by the Department for Environment, estimates that 12% of the workforce were employed directly in the construction industry.[15]

Interest rates set by the European Central Bank (ECB) are only guided by low inflation targets in the Eurozone. Some [16] felt this was and is too narrow an objective, leading to decisions on interest rates that are inappropriate, e.g., in a country with record levels of employment, rising house prices and consumer spending.

Contributing factors

Increased prosperity

Since 1994, the Irish economy had benefited from considerable inward investment from the multinational sector. Irish education standards were perceived as high relative to those existing in other English-speaking countries. Improvements in the technical education area also played a key role in upskilling the Irish workforce.[17] The combination of high education standards, and high capitalization ratios in the investment projects resulted in considerable improvements in labour productivity in the economy as a whole. This resulted in increased wage levels in the traded sector of the economy.

Eurozone membership and ECB interest rate policy

Ireland joined the initial launch of the Euro on 1 January 1999 in accordance with the 1992 Maastricht Treaty and gave control of its monetary policy to the European Central Bank in Frankfurt, Germany in accordance with the 1998 Treaty of Amsterdam. The Euro contributed to the post 1998 investment rate in countries that previously had a weak currency[18] through the creation of a more integrated financial markets[19] though there seemed little or no evidence that the introduction of the Euro increased the efficiency of capital allocation.[20] The introduction of the single currency with European Central Bank interest rates being lower than what national interest rates would have been had Ireland not joined the Euro meant that those buying property were encouraged to borrow larger amounts of money. As prices continued upward financial institutions offered 100% loans. Newspapers carried advertising for properties urging people to get onto the property ladder as property was seen as a one way bet. Over time, the scale of residential mortgage debt reached proportions that was of concern to the Irish Government and the Irish economy. The increasing cost of property and the need to borrow money to acquire Irish property has resulted in substantial increases in the total level of private sector debt, due to property investment in the Irish economy. This became of increasing concern to the Irish Central Bank, which had issued many warnings, in an effort to affect consumer behaviour.[21] Inflation was higher in Ireland than elsewhere in the Eurozone.[22]

Demographics

One of the greatest myths surrounding Ireland’s property bubble relates to demographics. It is often stated that Ireland had a baby boom from 1965 onwards, when in fact Ireland’s birth rate remained at the relatively constant rate of 21.5 per one thousand from the 1940s up to the 1980s. Whereas parts of Western Europe saw a ‘baby boom’ in the 1960s, Ireland experienced nothing of the sort, simply because its birth-rate was already high by Western European standards.[23] In other words, there was no 1990s ‘spike’ in Ireland’s population because of the birth-rate, as the birth-rate had been at the same level for decades. The demographic argument was promulgated by such people as David Drumm of the scandal-ridden Anglo Irish Bank.[24]

When unemployment was high, such as in the 1980s, young Irish graduates and labourers worked in neighbouring EU countries, and sometimes illegally in the United States. However improving economic prospects at home induced many to return from 1994 onwards. This return migration peaked in 1999.[25] From 2001, migration from other countries became an increasingly influential factor in the demand for residential housing. From the mid-1990s, increasingly difficult labour markets for graduates in continental Europe, and the requirements of many service companies for graduates with language skills, has resulted in inward migration from Spain, Germany, and France. The accession of new members in Eastern Europe, into the EU resulted in many people from Poland, Lithuania, Latvia, and the Czech Republic also participating in the Irish labour market. However by 2006 160,000 Irish people remained unemployed, 21% of all school leavers including those that completed the Leaving Certificate, were unemployed, the construction industry employed one eighth of the population, above the European average.[26]

Feel good factor

The fact that property valuations were steadily increasing tended to create a systematic feedback loop, where rising prices affected the psychology of market participants, causing further increases in prices. Public sector pay deals like the benchmarking program conducted by the Fianna Fail-Progressive Democrat government, tended to spread the feel good factor to the state sector, causing further competition in the market, with people in state jobs competing with workers from the private sector, whose long term job prospects were not as secure.

Rising property values in Ireland, and prosperity acquired from property trading, became a strong factor influencing Irish people, to invest in overseas property.[27] The main focus of such activity had been the newly admitted members of the European Union. Irish corporate concerns also became substantial investors in London, Berlin, Paris and American cities.

In July 2007, estate agents in Dublin were reported to be offering incentives such as six months’ worth of mortgage payments to prospective buyers, in an attempt to avoid lowering the recorded sale price.[28]

Planning policy

Irish planning policy has been the subject of much debate between academics and political parties. A critique of Irish Planning Policy would include references to the lack of systematic planning, insufficient ‘joined up thinking’, and considerable pandering to vested interests and local concerns. Property valuations have been inconsistent across the state. The most influential factors are often the performance of the local labour market and the availability of sufficient quantities of serviced development land. The largest urban areas have experienced the most growth, with the property bubble more pronounced in Dublin than elsewhere, especially in the areas beside Dublin Bay, where planning is most restricted and the amount of accumulated wealth is highest.

Irish planning policy has failed to create high density residential housing schemes near transport infrastructure, with the exception of the Adamstown[29] and Ashtown areas in the western and inner northern suburbs of Dublin respectively. The fact that Dublin occupies a footprint the same as Berlin[citation needed], with one third the population, and both have equal space devoted to parkland is an example of how low density housing dominates. This causes problems in providing justification for heavy usage public transport infrastructure.

The increase in property prices has also resulted in high prices being paid for development land. Irish property valuations are highest in Dublin, where the valuations are being driven by confidence, the highest salary rates in the Irish economy, and heavy US private sector direct investment. Valuations are most pronounced in locations that are perceived as the fashionable residential locations. This has resulted in the redevelopment of many sites to build apartment complexes in the Dublin 4 district.

The valuations in this district have become the most expensive in Ireland. The sale of the Veterinary Surgeon site, in Dublin 4 by University College Dublin (UCD) for a price of €171.56 million occurred in 2005. This accounted to a cost of almost €85 million per acre, or €212 million per hectare. This record was beaten in 2006, by the sale of another site, again in Dublin 4, also owned by UCD, in 2006, for €36 million. This equates to €95 million per acre, or almost €240 million per hectare .[30] There were several sites in the same district which made similar prices. These proposed development projects will prove difficult, if not impossible to initiate.

Impact of rising prices

Another side-effect of high urban housing valuations was a drift into rural hinterlands to live in lower cost housing. This has happened on a substantial scale in the greater Dublin area, in counties Wicklow, Kildare, Meath, Louth, and Carlow. This resulted in infrastructural pressure being placed on rural villages, and provincial towns as residential developments exceeded the pace of infrastructural development, and services for a growing population. It has lead to locals being unable to live in their own area, due to prices rising at a rate greatly in excess of local wages.

Another effect of this development is the increased commuting times for people living in locations that are distant from the large employment centres. This has increased demands on the transport infrastructure, with the Irish public transport company CIE being asked to upgrade capacity in a short time. Ireland’s increasing carbon dioxide emissions due to increased road traffic are also causing Ireland to breach previously agreed commitments contained in the Kyoto Accord. These breaches will result in direct cost to the Irish exchequer. The Irish state budget for the fiscal year 2007 contains a number of initiatives and incentives to improve energy efficiency in other areas and reduce the overall cost of this measure in the future.

To address a perceived lack of planning on the part of Irish state bodies, and to develop poles of growth in the regions, the Irish government initiated the National Spatial Strategy. This was initiated to spread urban development to region centres. However, this contained many promises that were not feasible. It also resulted in standstill due to disputes over local concerns.

The Irish government’s Decentralisation Plan for the Civil Service was created in 2004 and was based loosely on the model previously implemented in Denmark. One of the expected results of this move is to reduce the share of Irish state investment in Dublin, and thereby alleviate the difficulties experienced by first time house buyers in the city. Because the age profile of civil servants is older than people employed in Ireland’s private sector, this would effectively result in older people making way for younger people in Dublin.

This would also result in an overall reduction in the cost of doing business in Dublin, and thereby preserve its attractiveness as a location for direct investment. However this was only partially successful with the first location to fill its allocated quota being the one nearest to Dublin, Trim. Many civil servants have expressed a wish to reside in other urban centres with sufficient third level institutions, for example Galway. Implementation of the Decentralisation plan is considerably behind schedule, and it remains to be seen how this will eventually completed.

Role of the media

In July 2007 Irish Independent journalist/comedian Brendan O’Connor urged people to buy property, even as the bubble was clearly bursting.[31] In April 2011 journalist Vincent Browne admitted that the Irish media had played an important role in adding to the frenzy of the Irish property bubble.[32]

Crash predictions

In February 2000, William Slattery (then former Deputy Head of Banking Supervision in the Central Bank of Ireland) predicted a property price fall of 30%-50% possible if credit growth not curbed.[33]

The International Monetary Fund in 2000 stated that no industrial country in the last 20 years had experienced price increases on the scale of Ireland without suffering a subsequent fall.[34]

The International Monetary Fund in 2003 stated that residential property in Ireland was overvalued.[35]

The Economist news magazine suggested in June 2005 that a large bubble exists in the Irish market.[36]

The Economic and Social Research Institute in Ireland said that a bubble probably existed.[37]

The OECD and certain senior Irish officials[who?] of the Central Bank of Ireland agreed in November 2005 that Irish Property is overvalued by 15%. However this was only released to the public by The Irish Times shortly afterwards.[38] The Central Bank denied that they had deliberately withheld this information to avoid triggering a crash, and in April 2006 said the housing boom may be “unsustainable” and poses a “significant risk” to the economy.

Most economists think that property prices are unsustainable because rental yields have fallen below the risk free rate of over 3.5% offered by Government bonds.[39]

The Economic and Social Research Institute issued a statement on 18 April 2007 in light of the RTÉ documentary on 16 April 2007 stating that the only activities there is economic certainty in is cigarette manufacturing and undertaking.

An advertisement for 100% mortgages seen outside Dublin (17 July 2007).

Many estate agents and banks continued to offer and promote 100% mortgages in the market until recently.

Downturn

Eventually demand for residential property fell in early 2007, resulting in price decreases for March 2007 of 0.6%, and for April 2007 of 0.8%. This led to an expectation of a drop in house prices on a quarterly basis for the first time since 1994. Houses in the commuter belt in Greater Dublin fell earlier, due to a combination of increased supply in the Dublin urban area, increasing interest rates and continuing infrastructural deficiencies in rural communities. Prices in large urban areas were static, though demand dropped noticeably. However, a significant proportion of these new builds are unoccupied. Economic commentators give a figure of approximately 230,000 vacant properties. Of these up to 115,000 or so may be holiday homes.[40] Figures exist for completions because the Electricity Supply Board provides information on the number of properties newly connected to the electricity network and from data supplied by local authorities and from the Dept of the Environment and the Central Statistics Office. Newspaper articles provided anecdotal evidence of declining valuations with respect to the guide prices, and the agreed prices for Irish residential property, since October 2006. The decline in property prices was tracked by the ESRI House Price Index,[41] which reported prices starting to fall in the second quarter of 2007. Construction employment dropped according to Live Register statistics for May 2007.[26]

There had also been reported cases of mortgage fraud where borrowers overestimated their income to enable them to borrow more. There was a worry that these people “could fall into serious debt if Ireland had a property crisis like that in Britain in the late 1980s”.[42] This experience has resulted in the “sub-prime residential mortgage fallout” in the United States. In December 2006, the Irish state-owned broadcasting organization, RTÉ, broadcast an investigation in a Prime Time documentary which unearthed evidence of financial details of prospective customers were being sold by mortgage brokers to auctioneers. Such information would enable auctioneers to maximize the price attained from prospective buyers. This issue, and further allegations in this area, are currently being investigated by the Office for Data Protection.

In the summer of 2007 the Economic and Social Research Institute(ESRI) issued its Quarterly Economic Commentary predicting that Irish public finances would fall into deficit in 2007, and house prices would fall by 3%.[43] A research paper by UCD Professor Morgan Kelly, published by the ESRI alongside the Quarterly Economic Commentary, suggested that the “same people who told us we would have a soft landing are saying we will crawl out … we have bottomed out. We have not. We are very far from the bottom of the property market.” Up to 60 per cent could be wiped off the real value of houses over the following eight years to 2015 if the Republic’s housing market followed the same pattern as those in other countries[44] .[45]

These reports were met with hostility by the political establishment; on 4 July 2007 Taoiseach Bertie Ahern stated at a conference in Donegal that he did not understand why people sitting on the sidelines, “cribbing and moaning” about the economy, did not commit suicide.[46][47] Many bank economists, media commentators, estate agents, property developers and business leaders went on the record to state their belief that the Irish property market was healthy,[48] and that any decrease in house prices was indicative was a soft landing only.

By late 2011 house prices in Dublin are were down 51% from peak and apartment prices down over 60%.[49] Residential property prices nationally fell by a further 13.6% in 2012 from the beginning of the year 2012 to July 2012.[50]

The crash in 2009

As predicted in earlier reports dating from 2006 and 2007, a property price crash hit Ireland by the first half of 2009. It coincided with the 2009 recession, and both had started to develop in late 2008 following the global economic slowdown and credit control tightening. By June 2009, it was reported that around 40% of the price escalation that had occurred during the property bubble years (“Celtic Tiger Part 2”) of 2001-2007 had been lost. As of 2012, house prices are below the 2001 prices and more than the entire gain during the Celtic Tiger years has been erased.[51]

There were several groups and organisations that were blamed and that also accused others of causing the crash. Some of the more notable ones were:

The Construction Industry Federation: blamed part-time builders for the bubble [52]

The Financial Services Consultative Consumer Panel, which was tasked with monitoring the performance of the Central Bank of Ireland, said that most consumers have lost “significant amounts of money” due to the inadequacies of the financial regulatory structure. It also criticised the “deficient” response of the regulator to threats to consumers, including the property bubble.[53] In response they said “It is clear that the actions we took were insufficient and were not taken early enough,”[54][55][56] Following the failure of existing regulatory structures to prevent excessive lending to the property sector,[57] consultants which were brought in to review their operations said that “regulatory expertise was lacking in some areas.”[58] Former Taoiseach, Bertie Ahern said his decision in 2001 to create the Financial Regulator was one of the main reasons for the collapse of the Irish banking sector and “if I had a chance again I wouldn’t do it”.[59]

The Central Bank of Ireland admitted in November 2005 that they had estimates of overvaluation of 0% to 60% in the Irish residential property market. The Irish Times has revealed minutes of a meeting with the OECD where they indicated that property was overvalued but was fearful of precipitating a crash by “putting a number on it”. Their 2009 Annual Report had virtually nothing to say about how and why the Irish banking system was brought to the brink of collapse.There were four Central Bank directors on the board of the Financial Regulator, yet the Central Bank maintains it had no powers to intervene in the market.[60] The Central Bank had the power to issue directives to the Financial Regulator if it thought it was conducting its business in a way that was contrary to overall Central Bank policy aims.None was issued.[61] The Central Bank told the Oireachtas Enterprise Committee that shareholders who lost their money in the banking collapse are to blame for their fate and got what was coming to them for not keeping bank chiefs in check, but did admit that the Central Bank had failed to give sufficient warning about reckless lending to property developers.[62]

The banks: were accused of too loose lending practices, contributing not just to property prices spiralling out of control but also increasing the debt burden of the average citizen as they were to be later bailed out [63]

In general, it was assumed to be a combination of factors that were both external and internal that affected the country. Further revelations of the corruption within the banking sector, particularly Anglo Irish Bank, have continued to affect the credibility of Ireland’s presence within the international finance and business community.[64]

During the property bubble, a disproportionate number of people were employed in the construction industry. As that has contracted and other manufacturing moved offshore, unemployment by May 2009 was at 11.4%,[65] and had reached 14.3% by September 2011.[66] The Ireland-based ESRI (Economic and Social Research Institute) estimates it will reach around 17%.[67]

Impacts

Approximately 31 per cent of mortgaged properties, or 47 per cent of the value of outstanding loans, are found to be in negative equity at the end of 2010.[68]

As of September 2011, Central Bank figures show that 8.1% of private residential mortgage accounts are in arrears for more than 90 days – up from 7.2% at the end of June 2011.[69]

As of August 2012, more than 22% of Irish mortgages are in arrears or have been restructured.[70]

In the first 10 months of 2011 8,692 houses were completed. This compares to 76,954 in 2004, 80,957 in 2005, 93,419 in 2006, 78,027 in 2007, 51,724 in 2008, 26,420 in 2009 and 14,602 in 2010.[71]

The Irish National Debt has significantly increased: Ireland’s ratio of General Government Debt to GDP at end-2009 is estimated to have been 65.2%. The revised estimate for General Government Debt to GDP ratio at end-2010 is estimated to have been 92.5%. The forecast for General Government Debt to GDP ratio at end-2011 is estimated to be 105.5%.[71]

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