Interest rate cuts could add further fuel to the fire of the real estate industry
Housing has always been a national obsession in this country and is covered in detail regardless of price trends. The latest house price data from the CSO for June confirms the upward trend that has been established over the past few years.
The data does not make for pleasant reading, as rapidly rising property prices cannot be considered an economic or social good, as they simply drain resources from the real economy and reduce the purchasing power of property buyers. In addition, rising property prices also drive up rental costs.
National average residential property prices rose 8.6% in the year to June – the highest rate of growth since October 2022. Average property prices outside Dublin rose 8.2% and average prices in Dublin rose 9.3%, the highest rate of growth since August 2022.
We currently find ourselves in a situation where national average prices are 10.8 per cent above the peak of the property boom in April 2007, prices in Dublin are only 0.7 per cent below their unsustainable peak of February 2007 and prices outside Dublin are 11.5 per cent above their peak of May 2007.
One of the interesting features of the Irish property market in recent years has been the strong upward trend in prices despite a dramatic increase in interest rates between July 2022 and September 2023. In July this year, the average mortgage cost was 78.6% higher than in July 2021.
Normally, one would expect such a rise in mortgage costs to have a dampening effect on property prices. However, the Irish market is characterised by strong natural demand, a serious supply deficit and a predominance of cash buyers, or at least buyers with large deposits.
Predictions are always difficult, but looking at how the real estate market will develop over the next few years is unlikely to be particularly optimistic, unless you believe that rising real estate prices are a good thing.
The underlying supply-demand deficit is unlikely to improve significantly unless there is a large net migration and/or an economic collapse. There are not many reasons to expect this in the next few years. The other probability is that the ECB will cut its interest rates further in the coming year.
The ECB cut interest rates by 0.25% in July, naturally with a conservative and cautious outlook to temper expectations. However, recent economic and market events lead me to believe that the ECB will have to continue its easing measures.
For a variety of reasons, equity markets have been in a rough patch recently and while they have calmed down, they still appear volatile and potentially vulnerable. The nervousness in markets is partly due to economic concerns in the US, but other factors are also at play, such as the perception of an AI bubble.
If market weakness and volatility return, the Federal Reserve is likely to cut interest rates more aggressively starting in September. In the case of the ECB, the arguments for more aggressive easing are primarily economic in nature.
The ECB is likely to cut interest rates again in September, and over the course of next year, rates could be cut by at least 1.5%. Such a rate cut would improve affordability and stimulate demand – assuming, of course, that the monopolistic banking community decides to further widen the net interest margin.
I think the 2025 budget should be clear that the most appropriate action would be to increase supply in a more meaningful way, rather than the scattergun approach that is typical of Irish budgets.
