Supply-demand storm keeps on brewing for property
There's little doubt that 2021 will be a standout year when it comes to property price increases.
Although the official figures had only extended to October by year-end, annual price inflation was running at a very hot 13.5%.
It was the highest rate of increase in property prices in six years, at a time of year when price gains normally start to soften.
Most analysts now agree that price inflation for the full year is likely to exceed 10%, with Davy upgrading its forecast to 13% growth in 2021.
Who would have predicted that we would be in this scenario when the pandemic hit?
Certainly not the professionals. Most agreed that we would be looking at property price hits of in excess of 10% back in March of 2020.
And they weren't alone among their international peers.
Most analysts had expected major global property markets to be hit with recessions of varying degrees only to be proved wrong with prices increasing at a rapid pace.
Although there is a multitude of factors influencing property prices, the one major driver here is a clear supply-demand mismatch.
Supply improved through the year from the low point in 2020 when putative house vendors decided to sit the pandemic out and held off putting their properties on the market.
However, by the end of the year, there were signs that supply was back at an all time low in almost every part of the country, except for the capital.
According to a report from the property website daft.ie published this week, the total number of properties available to buy online on December 1st was sitting below 11,500.
That was close to half of the pre-Covid average of 22,500 in 2019.
"Compared to the early 2010s, when there were more than 50,000 homes for sale around the country, it's a different market entirely," Trinity College Professor Ronan Lyons, author of the reports for daft.ie pointed out.
However, the Institute of Professional Auctioneers & Valuers - IPAV - believes that the shortfall may not be as dramatic as the figures suggest.
It says its agents have been reporting a steady supply of stock to the market, particularly as the year came to a close, but they're not advertising them on property portals.
"There is less need to because agents have eager mortgage approved and cash buyers on their books for properties that come to market," Pat Davitt, chief executive of IPAV explained.
He predicts more of that in the year ahead.
"In the current market vendors know they can sell their homes without having to wait on those who have not been vetted as 'ready to go' by agents and some of whom may not be intending to buy but are perhaps researching the market," he added.
Sellers can perhaps afford that luxury in an environment where the pandemic has put them in the driving seat.
But it's unlikely to be that way forever.
One thing that's working very much in the seller's favour at the moment is the shortfall of new homes that need to be built to keep up with demand.
New homes getting back on track
There are varying estimates as to how many homes need to be built every year to keep pace with demand in Ireland.
The Central Bank has pitched it at around 35,000 units a year for the coming decades, although some analysts think it is likely much higher than that when different types of tenure - owner occupier, private rental and social housing sectors - are taken into account.
We're currently just about exceeding 20,000 units every year.
Although still quite a distance from where it needs to be, it's not a bad outcome in the context of the pandemic-induced shutdowns of construction for extended periods this year and last year.
However, while the construction of new homes has been getting back on track, the market is still heavily reliant on the supply of existing homes, it appears, with new builds not featuring prominently in the transaction figures.
In the year to October, for example, over 85% of all housing transactions were on existing homes, according to Brokers Ireland.
Either the supply shortfall of new houses is so vast or new homes are just simply out of the reach of many buyers, in particular first-time buyers who can avail of the Help to Buy scheme if they purchase a newly built home.
The ageing face of the first time buyer
Given the supply shortfall and the rapid pace of price increases, it's probably not surprising that the average age at which people buy their first home is getting later in life.
An analysis of the market conducted by the Banking and Payments Federation of Ireland in recent months concluded that just over a quarter of first-time buyers of homes were aged 30 or under last year.
That represents a halving of the proportion in 2004 when six in ten people taking out mortgages for the first time were in that age cohort.
And although they're getting older, they are - where means permit - becoming increasingly reliant on parental assistance to get a leg up on to the property ladder.
Bank of Mum and Dad comes under scrutiny
One issue that came to public prominence this year was the extent to which house buyers of all hues were getting assistance from family to make their purchases.
The so-called Bank of Mum and Dad hit the headlines after the Finance Act contained a measure to change the tax treatment of such loans and transfers.
Although the measure was ultimately withdrawn, it shone a light on the extent to which this practice was taking place and the impact it might be having on property price inflation.
According to mortgage broker Michael Dowling, there's no question that it's fueling price rises.
"If you've 3 or 4 people bidding on the same house at €400,000 or €500,000, and one can take €50,000 out of the hat to make the difference, that's going to impact prices," he said.
And the loans are getting bigger all the time.
In his three decades in the business, he said he has seen parental contribution going from between €10,000 to €30,000 typically to between €50,000 and €60,000.
"€100,000 wouldn't surprise me," Mr Dowling said.
In an era of housing shortages, those who can afford to top up their offer for a property with parental cash are sure to get the keys to the house or apartment at the end of the day.
Those without are restricted by mortgage lending caps.
Should the caps be altered or scrapped?
The Central Bank is in the process of conducting a major review of its mortgage lending rules with the outcome expected next year.
Currently pitched at a maximum of 3.5 times the income or joint income of applicants, much pressure is understood to have come to bear as part of the public consultation to alter this requirement, allowing some leeway for lower earning applicants in particular.
According to a report in the Irish Times in recent weeks, prospective home buyers who earn less than €60,000 may be subject to a higher limit of up to 4.5 times income when the review is completed.
There are alternative suggestions, such as one from Brokers Ireland which calls for the loan to income ratio to be changed from a multiple of gross salary to a percentage of net disposable income.
2021 was a year of radical change in Irish banking with no less than two lenders announcing their intention to depart the market here.
While Ulster Bank's impending departure had been widely flagged, KBC's came as a bolt from the blue.
And while that might have signalled a retrenchment in the mortgage market, it was met with some surprisingly decent offerings, driven mainly by non-traditional lenders.
Avant continued too make strides in the market with its sub-2% fixed rate which was introduced in the autumn of 2020.
And it upped the competition stakes with the introduction of the first 30-year fixed rate mortgage in the market with rates starting at 2.85%.
Finance Ireland introduced fixed rate offerings of up to 25 years with rates starting at 2.65%.
While they're marginally more expensive than the rates being offered on shorter duration fixed rate mortgages, they could turn out to be very attractive in the context of the current inflationary environment with Central Banks in the UK already raising rates and the US Federal Reserve signalling three rate hikes in 2022.
On the other hand, we've had a low rate environment in Europe for much of the last decade and the European Central Bank has signalled that it's in no rush to raise interest rates in response to an inflationary environment that it views as 'transitory'.
This, Brokers Ireland believes, is the irony for younger people trying to get a foothold in the property market in the current market.
"It is a tragedy and very bad from the point of view of social cohesion that younger generations and those on average incomes cannot achieve home ownership at a time that there has been positive upheaval in the mortgage market with historically low interest rates, even if way ahead of the euro area average, and the ability, for the first time, to lock in these rates for fixed periods of up to 30 years," Rachel McGovern, Director of Financial Services at Brokers Ireland said.
"It would add to the tragedy of the situation if such low rates were no longer a feature of the market by the time supply comes close to meeting demand," she added.
The year ahead
With a tentative forecast of property price inflation of around 5% next year, analysts are starting to revise upwards that outlook in light of the latest figures.
But so far they're not looking at anything like what we've seen in 2021.
However, the problems that have beset the market are likely to persist to a large degree.
While the supply of new homes will be playing catch up for many years to come, the likely absence of any lockdowns of the construction sector should see next year's completion number exceeding the better-than-expected outcome for 2020/21.
"Covid-19 has shaken up Ireland's housing market - that is for sure," Ronan Lyons said.
"While supply seems set to improve over coming years, easing pressure in the market, we will no doubt see more signs of a system under pressure before things turn," he concluded.
And the interest rate environment may further present challenges, not just to buyers, but to mortgage holders generally - if not in 2022, then perhaps in subsequent years.
Just another factor playing into the perfect storm of weak supply and surging demand - a storm that shows no sign of abating in the near future.