Irish housing market: Prices rising rapidly in the run up to Brexit

After house prices rose sharply, the Irish real estate market suffered a spectacular crash in the wake of the international financial crisis: in comparison with many other real estate bubbles, prices in Ireland fell both more quickly and more severely. Within five years, they had plummeted by more than 50%. Following the price correction, houses and apartments cost on average only 45% of their peak levels of 2007 on a nationwide basis; in some market segments prices were as low as 10 percentage points below this level. However, the market recovery was also different from other national real estate markets with burst bubbles. Instead of a gradual stabilisation, the collapsed market experienced rapidly rising prices again. In 2015, the powerful upward trend tailed off. Stricter lending conditions played a significant role in nearly halving growth to a current level of 8% per year.


Yet, how could this swift about-turn on the Irish housing market happen? Initially, first-time buyers on the hunt for a bargain took advantage of Dublin prices which had fallen by more than half as a way of getting their foot on the ladder cheaply. Even more important for the reversal in the trend was, and remains, the potent economic recovery which has resulted in high rates of economic growth and a brisk reduction in unemployment. Accordingly, this has had a positive effect on consumer trust, which is so important for willingness to buy. In addition, the significantly improved financial situation among private households is accompanied by greater affordability on account of low interest rates and hugely reduced consumer prices. However, the lively demand for housing is also based on the fact that population growth is rising again in the face of insufficient housing, above all in the Dublin region but also in other towns and cities. After all, construction collapsed to a tenth of the completion figures seen during the boom, which were massively excessive. However, even if new build activity is gradually rising again, it is not enough to cover the increasing housing requirement. The bottleneck on the Irish housing market is therefore set to actually worsen.


The factors behind a sustained increase in prices are likely to remain an influence in the current year and beyond. Demand will continue to be supported by first-time buyers who stand to benefit from both slightly eased lending standards for mortgages as well as tax rebates within the framework of the “Help to Buy” scheme. Slightly rising interest rates could dampen demand only a little, as housing will not be quite as affordable, although a sharp decline is not expected given the predominantly positive real estate market environment.


However, two developments do have the potential to negatively affect the market more strongly. While there is little expectation of interest rates rising rapidly, the chances that Brexit and any connected pressure will not exert an influence in Ireland are extremely small. After all, the UK’s withdrawal from the EU has the potential to act like a cold shower on both the Irish economy and the housing market. Both countries’ economies are closely linked by joint history and geographical proximity. Around one-sixth of Ireland’s export trade is conducted with the UK, far more than in other EU countries. However, negative effects of Brexit, which is expected to be completed in 2019, could emerge before then. Macroeconomic growth, which is currently still strong at around 5% per year, could fall to “only” slightly above 2% as early as next year. Finally, it remains to be seen how strongly the UK’s decision to go it alone will affect the Irish economy, and in turn, the Irish housing market. In this regard, private households could decide to tighten their purse strings more severely, should the economy start to falter, while real estate demand should be dampened less harshly.


For the time being, the current sound economic basis is set to experience another slight boost in price dynamics on the housing market, supported by first-time buyer demand. However, from 2018 onwards, the expected economic slowdown could cause the rate of price increases to fall from high to mid-single digit percentage growth. The actual development will, however, depend on how Brexit negotiations proceed. One risk aspect which could significantly intensify the consequences of a downturn of the property market is that the level of private household indebtedness remains high.

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