Irish House Prices Overvalued By 17%, Says ESRI

0:00The last word. With life pharmacy, over 100 local pharmacies nationwide that are always here to help life pharmacy live better together. In a moment we talked to Marion Finnegan, the chief executive of Sherry Fitzgerald Group, one of the country's largest state agents, but first we have talked to Paul Egan, senior research officer at the ESRI because today the ESRI issued a report which estimated Irish property values to be our prices to be 17% overvalued. Paul, thank you very much for joining us. Tell us how have you come to the conclusion that Irish property prices are 17% overvalued? Hi Matt. Well, basically we've kind of been looking at Irish house prices over the last number of years. We've kind of seen considerable increase in house prices. So we thought it was kind of prudent to take carry out an assessment of potential evaluation and other emerging and balances in the residential property market.

1:02So we basically use a range of different economic models and benchmarks that we've used before the institute and we find that house prices are currently around 17% overvalued as you said. So that would be above the level that would be consistent with the level of economic fundamentals which are usually things like incomes, mortgage interest rate, demographics and the level of supply. But isn't the value of a house or an apartment while people are prepared to pay for it? What the market is at any particular time. So if you consistently have people paying the prices that they're paying now, can you say that they're really overvalued? Well, I suppose we have to have a sustainable level of house prices as well and going back to true history, we would have these economic models that say house prices should basically fall in line and what incomes interest rates supply and demographics are. So you would basically get what's kind of like an implied house price based on the level of income interest rates, demographics and supply. And if that's below the actual house price, then you have a measure of overvaluation.

2:05And that's just one method that we use. There are a number of other kind of statistical filtering techniques as well. But across the board, no matter what technique we applied, there was a degree of overvaluation. We got a range of between 10 and 24%. So that's 17% that you reported earlier would actually be the average across the four measures that we use. If you go back 20 years though, if you go back to 2006 and the height of the Celtic Tiger madness, you had at that stage an estimate of a 40% over evaluation, which was proven I think to be correct within a few years. So does that mean 17% isn't too bad by comparison or does it mean that we're actually going to see what happened 20 years ago, repeat itself, that we have a bubble that's going to burst? Yeah, well, you're absolutely right. If we were to look at this estimate or the run these projects or these techniques in say 2006, you would have had values of 35, 40% overvalued. Obviously, we're at 17% now, but it has risen because we did this exercise in 2024.

3:09It's the end of 2024. It was around 10% so it has risen since then. I think importantly, it's different and structurally very different from the situation that you mentioned in 2007. So in that period, we saw measures of overvaluation that was driven by rapid credit expansions, lose for lending standards and on sustainable household days. These conditions are in present today because we actually, in the same report, we've done an analysis on those items as well. We see that household debt levels are much more sustainable. The macroprimension rules that the central bank have introduced are keeping lending in the residential America and at much more sustainable footing. What we have does in the affordability problem where prices are being pushed off by the shortage of homes. You see what happens then, too, the increase or the rising interest rates mean that the implied house price should be lower and the house prices haven't actually come down, so that's where the wage between the actual and the implied house price comes from.

4:09Brian Finnegan is the difference between 20 years ago and now also that 20 years ago we were building far too many houses and apartments fueled by the credit bubble whereas now we're building too few. Yeah, you've got it in one. That's exactly what it is. I think what we were building back in 2004, 5 and 6, we were building too many, but much more importantly, we're building too many of the wrong type in the wrong location and probably undersupplied in certain locations. But it was a credit driven bubble, if you like, on this occasion, I think what we're seeing and quite the years arrive quite rightly pointed out is the level of price inflation is out of sync with what you would expect with our level of economic growth, interest rate cycles and therefore you wouldn't anticipate the level of price growth that we've seen over the last couple of years would have been sustained, particularly given the geopolitical challenges that are there and the reason it has been sustained is that supply side pressure which simply are not building enough. Now we're building a lot more than we were in 2012, 2013 as we emerged from the recession,

5:11we were building about 5,000 houses last year that had increased to 36,000. There's an expectation that would be exceeded this year, certainly if you look at the first half of the year figures, but that's still well below what the market requires and therefore we're not replenishing the stock and therefore we're seeing that very high level of price inflation. I think what's particularly interesting in this cycle, which was very unusual and surfaced in the current the last time, is that on this occasion the supply side impact has actually really been felt a lot more in rural areas rather than in the capital. So in every other cycle that we've seen, let the market up or indeed let the market down. What we're seeing now is rural Ireland is what's driving the greatest level of house price inflation and that simply reflects the fact that we haven't been building anything like enough houses outside of the large urban centres and they are really feeling the pressure. So we're seeing a lower level of house price inflation in Dublin, but a much higher level of house price inflation in some areas approaching 10% in the rest of the country and that's where pressure is really taking hold.

6:12And what about then the lack of availability of second-hand houses as well in departments is that making things worse even as we have a somewhat better supply of new bills. Yeah, they filter into each other so the new bills would be what replenishes the stock and allows people to transact within the second-hand side. But if you don't see an alternative option available for you then everyone remains within the one fixed market which is the second-hand market. And that stock level is at about 0.7% of the stock is available for sale at any one time which is critically low. You would expect at least six months stock which would be more like three or three and a half percent of the stock available for sale. So it's very, very low. And as you say that's what's really pushing up the prices, particularly outside the key urban areas. Something else, Paul Egan, that you look at in your ESRI report which is very interesting is what I suppose we have come to know when it comes to income taxes and things like that as the squeezed middle. But you've identified particularly a cohort of people who might in previous generations

7:15on the basis of their jobs and salaries have been able to buy their own homes. But now who can't and who don't qualify for social housing either? How much of a pressure is that likely to create politically? Yeah, so that was one piece of analysis we did as well. So besides the kind of benchmark model that I described when I was talking about the aggregate market, you can always look at price to income ratios and look at the deviation of the price to income ratio over time from its long-run median. So we actually did that. We did that at the aggregate level to compare to our aggregate model. We also did that at a distribution level. So we looked at the level of overvaluation using this measure at a different distribution level. It basically means that the gap between the home cost and what people kind of forward has widened. But what our analysis showed, which was quite interesting, was that for households around the middle of the income distribution, you described as the squeezed middle earlier,

8:16the ratio of house prices to the income is further above its historical average than for higher income households. So that's basically telling us that higher earning households have had stronger income growth over the last number of years, which have kept close or pace with rising prices. Now they are still overvalued, but they're not overvalued by the same extent as the middle income households who have not had that cushion. And I think in particular, seeing increase in mortgage rates since 2002 has made things a bit harder in terms of how much they can borrow, which is kind of an interesting finding as well, just the distribution impact of the overvaluation. And Paula could get worse, so then couldn't have if interest rates rise later in the year as many people are speculating their will and it to next year as well. Yeah, exactly. I mean, rising interest rates will obviously reduce the size of more house, kind of forward for given income, which again, puts pressure on households in terms of repayment and getting

9:16under the property ladder in the first place. Part to you, Marion Finnegan, is there another distortionary factor in that now there were some people who either have large deposits in the bank, which they are giving to their children to help them put down deposits for a house or who may be releasing equity from ironically their own overvalued homes to support their children in buying theirs? Yeah, that's, I mean, I suppose that's been a factor of the market for most of the last number of generations. There are those who can afford to support others and therefore that makes their cushion that little bit easier. And then there are a whole cohort of people who don't have that available to them and that puts even increasing pressure on them. But I suppose, and it's slightly outside this particular conversation, but it isn't just unique into the bi-sector. There's equally similar challenges in the to rent sector. So all of this feeds into our competitiveness, which means that even though what I would say is we have made a lot of progress in terms of addressing this and you know, one could

10:18say the government are not making an effort. I mean, there are, I think, at last kind of 46 different measures taken by the government in order to address the supply side crisis and the fact that we're only really in the last year or two, seeing really positive upside benefits from that shows you how deep and critical the crisis is in the housing market now. And so we do have a road ahead in terms of of creating stability. There's no quick fix here. So unfortunately, this feature of a very difficult market in terms of affordability and a very difficult market in terms of rental affordability is likely to persist in the short term despite the very best efforts, but we still have to continue with those efforts. It doesn't mean they're not working. It just means they're going to take longer to have a big impact. Last week, Marion, there was a report from the Central Bank of Ireland, which estimated the value of property owned by Irish households at not far short of one trillion euro. Would it be a bad thing if the valuations did fall by 17% back to a more realistic level?

11:22Or would it be then that that would cause all sorts of grief from those who would feel that their own wealth had been even if not necessarily earned, but created because of these circumstances was being undermined by a revaluation downwards? I think that if we're looking for a solution for this, that isn't going to sound like if it was 17% less, it would be out value. But if there are no more houses available, it would be a very short term element in the marketplace. So 17% lower is where we were about two years ago. We still had a housing crisis. What I would suggest two or three years ago, what I would suggest is the only solution to this is that we actually build more of the right type of houses all over the country. Otherwise what we'll start to see now or what we're beginning to see now is increased stability actually in the most expensive locations of the country on these two and corridor and further instability all over the rest of the country. So the only solution to solving this affordability is to allow the supply levels to come up to create competition in the marketplace for the properties in the second hand side and

12:25to create stability for prices. Well just back to you, Dr. Paul Egan, as the last one, as senior research officer in the SRI. Do you foresee circumstances in which the current valuations will fall? Could there be more further global economic shocks? Maybe a stock market burst in the US because of an AI bubble, an employment shock in Ireland? Or do you think that these valuations remain where they are simply because of the imbalance of supply and demand? Well I think if the imbalance remains, like you said, and just to kind of echo what's already been said, that an increase in supply is one of the key ways of getting prices down to a more sustainable and closely equilibrium level. But I suppose what you've highlighted there does show the danger of having house prices that are overvalued. If there was an employment shock, like some of the ones that you mentioned, be it from global events or even more domestic events, then that could obviously could have serious knock on effects in terms of people's incomes and their ability to repay mortgages, etc.

13:30Thank you very much Dr. Paul Egan, senior research officer from the SRI and Marion Finnegan, chief executive of the Sherry Fitzgerald Group. The last word. With life pharmacy, over 100 local pharmacies nationwide that are always here to help, life pharmacy, live better together.