2023 was billed at the outset to be a milestone year for the property market in Ireland.
After hefty price increases in the early part of the decade, as the property market defied earlier predictions of a collapse in values amidst the pandemic, this was the year when rising interest rates would show their initial effect.
In truth, the impact on the residential market to date has not been as dramatic as might have been expected.
The biggest hit from rate hikes has been to the commercial office market which is shaping up to be the big property – and perhaps even the big business story – of 2024.
Residential market
The year started off with a drop in property prices with the Central Statistics Office figures for January showing prices nationally falling by 0.6% in the month.
The annual rate of increase in prices continued to slow down and that trend persisted as the year progressed.
Indeed, it is a trend that has shown signs of tenacity since the market peaked with an annual rate of growth of over 15% in March of 2022.
The market also continued to follow another established pattern, with price increases outside of Dublin far outpacing those in the capital.
As the year went on, Dublin prices started to fall with prices contracting at an annual rate of 2% by September.
That was the sharpest decline in prices since 2012 when the market was still mired in the after effects of the financial crash.
Recovery ahead in Dublin?
The CSO figures for October – published in recent weeks – captured something of a recovery taking hold with the annual rate of price increase demonstrating a rebound.
Even Dublin prices were showing signs of stability.
However, the CSO figures, by their nature, contain something of a lag.
They are based on actual transaction prices derived from stamp duty returns that must be filed within 44 days of a transaction completing.
Price monitors that are based on asking price for properties had captured something of a turnaround in the capital in the second half of 2023.
One such report from MyHome.ie captured annual asking price inflation of just over 4% nationwide in the third quarter with Dublin prices up by 3% and 4.9% in the rest of the country.
In the three month period alone, asking prices in Dublin were up 1.3% with an increase of 0.4% recorded elsewhere.
While a similar study from daft.ie captured a lower rate of annual price inflation – 1.4% – in Dublin in the third quarter, both reports point to a recovery of sorts taking hold in the capital and a solid market in the rest of the country.
“The period of falling house prices we saw earlier in the year has come to an end,” economist Conall MacCoille, who authors the reports for MyHome.ie, noted.
“Competition for homes is heating up, which is evident in the 3% premium over the asking price that buyers were prepared to pay in September, up from 1% at the beginning of the year,” he concluded.
The Institute of Professional Auctioneers noted a similar phenomenon with its members seeing a pickup in activity since the end of the summer.
IPAV noted that interest rates were having an effect, but that was being negated by the high proportion of non-mortgaged – or cash – buyers in the market.
“Higher interest rates and lack of availability of suitable properties are impacting socially in that home ownership has become a pipedream for many, ” Pat Davitt, the chief executive of IPAV, said.
Indeed, it is the supply side of the equation that appears to be having the biggest impact right now.
Supply
The supply of properties for sale comes from two main sources. There is the new build market and the supply of older stock being brought to market by those moving or selling a vacant home such as a rental property or an inheritance.
Both sources of supply dried up during the pandemic with building sites being largely shuttered for public health reasons and prospective vendors sitting out the uncertainty brought about by the pandemic.
Those factors combined may indirectly have contributed to a property price surge owing to stiff competition for the few units available.
The supply of second-hand stock had improved as pandemic restrictions were lifted, but there was a marked fall off as 2023 progressed.
For example, in March of 2022, there were fewer than 10,000 properties available to purchase, according to daft.ie, compared to 26,000 in October of 2019 – just before the pandemic hit.
By October 2022, supply had improved to reach 17,000 units – but that turned out to be a recent peak.
The numbers have fallen since then in a slow but steady fashion to reach 12,200 in September of this year, according to the measure from daft.ie
A combination of depressed supply and relatively strong demand is once again supporting prices, it appears.
“Supply is indeed weakening – although not dramatically – at least not yet,” Ronan Lyons, Economics Professor at Trinity College and author of the daft.ie price reports noted in the most recent report for the third quarter of 2023.
“In other words, the rise in prices seen in the last six months may be driven in part by a lack of supply, but both prices and quantities suggest that, so far at least, demand is holding up reasonably well, despite everything,” he added.
New builds
The other side of the supply equation is the flow of newly built properties to the market.
With public health restrictions curtailing projects during the pandemic, the volume of new homes being completed went from just over 20,000 in both 2020 and 2021 to close to 30,000 last year.
Completions are on course to exceed 30,000 units this year – just shy of the oft-mentioned 35,000 unit completion target that is notionally needed to keep pace with demand.
Some, however, argue that the annual completion targets should be much higher, which appears to have prompted a review from the Department of Housing of the projected housing need.
Although the industry is on course to do so, hitting the current targets is proving challenging.
“Difficulty sourcing skilled trades, combined with steep increases in materials costs and a more challenging financing environment are all placing pressure on costs in the sector,” Gerard Brady, chief economist with Ibec, pointed out in the group’s recently published economic outlook for 2024.
Ibec expects completion volumes to increase in the coming years on the back of strong Government demand alone.
It points to data showing that the State or state-funded bodies are buying, financing or leasing around 40% of new housing annually.
The rates effect
The European Central Bank started raising interest rates from their record lows in July 2022.
By the end of 2023, rates had increased by a full four and a half percentage points – the fastest pace of increase in decades.
While some expect that the ECB has now reached the peak, and that rate cuts may in fact be imminent, the banks have not yet passed on the full extent of those rate hikes and were slow to pass on the initial increases to customers.
That gave many mortgage holders the opportunity to lock into fixed rate arrangements, which thousands of mortgage holders did in their droves in the latter part of 2022.
The purpose of rate increases is to take some demand out of the economy by effectively making credit more expensive which should logically have some impact on the property market.
The effect has been relatively muted, though.
Rising rates have undoubtedly depressed affordability in the Dublin market where prices are highest, which may go to at least partly explain the fall in prices in the capital captured in the official figures.
However, the rates effect has been partly negated by looser Central Bank lending rules – which moved the first time buyer lending threshold move out to four times income – and the Government’s aforementioned demand-side initiatives as well as State schemes such as the Help to Buy and First Home schemes.
Ibec points out that the increase in rates has prompted a shift in market dynamics amid an overall decrease in housing sales in the last year.
Apartment prices, it pointed out, have been rising consistently across the country – up about 2% annually.
And prices for new-builds are continuing to rise on the back of higher demand from competing sectors – including the State – and rising construction costs being passed on to buyers.
Office market woes
The pandemic brought its own dynamic to the property market.
If the residential sector oscillated between price surges and a marginal downturn in places, the office sector is a changed landscape.
In 2019, the Dublin commercial property market was booming with capital values back at pre-crash levels and rents were making healthy strides.
Demand for office space appeared to be limitless and building ramped up to match up that demand.
The pandemic, though, radically changed the outlook for the commercial property market.
The shift to hybrid working patterns looks like it is here to stay and companies are adjusting their office space needs to fit this new picture.
Office blocks, that were at the planning stage pre-pandemic, are now springing up around the city with severely impaired ability to offload the space.
Capital that has been sourced to fund those developments is getting more and more expensive in the higher interest rate environment.
And tech companies – one of the main clients for new office space – have been scaling back their footprints substantially by reducing headcounts and, in some cases, subletting the space that they had committed to.
The depressed state of the market is evident from the figures.
According to property consultants HWBC, during the first six months of this year, take-up in Dublin’s office market was 678,000 square feet, which is below the long-term half-yearly average.
Average deal size has reduced to 7,500 square feet, it calculated, with a total of 91 deals in the first six months.
“While the market hasn’t stalled, reduced activity reflects occupiers’ cautious approach to space requirements,” Paul Scannell, Head of Offices at HWBC, said.
Perfect Storm
It has all converged in something of a perfect storm for the commercial property market with the strain already becoming apparent.
A sprinkling of receiverships have been reported in recent weeks while most investors appear to be riding out the storm and waiting for an upturn to take hold.
The choppy waters look like they might continue into next year.
The office vacancy rate in the capital currently stands at around 12.5% – just above the long-term average of 11%.
John McCartney, Head of Research with BNP Paribas Real Estate and a veteran of the commercial property market, believes the vacancy rate could go to 16% next year.
According to HWBC, around 3 million square feet of new office space is expected to be completed by the end of 2024, leading to an increase in supply and a rise in vacancy rates.
However, reduced activity on the new office planning front means that a correction should be underway leaving the market ripe for recovery as demand picks back up in the coming years.
“We anticipate a market sentiment shift in the first half of 2024 as capital values stabilise, and new supply slows down,” Paul Scannell said.
John McCartney said developers had certainly heeded the signals of rising vacancy and softening lease terms to turn off the supply tap.
“Completions will fall by 25-30% this year, and the 2024 pipeline is lower again,” he said.
“Indeed, with speculative commencements off the table for next year, this slowdown in office building may persist until 2027,” he concluded.
As for older office space, the gap in values and rents over newer stock is widening, making it more difficult to shift these units.
Talk of repurposing for hotel or residential purposes or student accommodation is growing louder, as is the prospect of demolition.
Looking ahead
While uncertainty looks like it will continue to pervade the commercial property sector, the residential market looks to be on course for “business as usual” in 2024.
The days of double digit percentage increases in prices are likely well behind us, but fairly healthy strides can be expected in the year ahead as demand will continue to outpace supply.
The areas of particular interest will be if the Dublin market stages something of a comeback, as indicated in the MyHome and daft.ie reports.
And the ongoing impact of rising interest rates on the market will be keenly watched.
While interest rate cuts from the European Central Bank are regarded as very likely in the coming months, the chances of those translating into lower interest rates on mortgages are slim given that banks have not passed the full whack of rate rises onto their mortgage products.
That can not but have a continued dampening impact on the market. But given the scale of increases that we have seen in recent years, some continued moderation in price increases may not be a bad thing for the market overall.
