Property insights with Johnny Gannon
The ESRI says Irish house prices are 17 per cent overvalued. It is a striking headline. But it invites a conclusion the report itself does not support: that prices are somehow wrong, and that if you wait, they will come right.
A price in a market is not an opinion. It is where a willing buyer and a willing seller meet. When there are more buyers than homes, the price rises until enough buyers drop out. That is not overvaluation. That is a barometer, and it is reading scarcity.
The ESRI, to its credit, says as much. In 2006 it calculated a 40 per cent overvaluation, and that one was real, because it was built on banks lending 100 per cent of the purchase price and sometimes more. The Central Bank’s mortgage rules have closed that door. This time, the ESRI says, the gap between prices and incomes is an affordability problem: incomes have not kept pace, borrowing costs have risen, and not enough homes are being built. That is a verdict on supply, not on value.
So the idea that the market is due a correction, and that a young couple in Galway should sit tight and let it happen, is a false hope. Britain is the warning. Its housebuilding has lagged household formation since the 1990s, a structural deficit now 30 years deep. Over that period British house prices trebled in real terms and the ratio of prices to earnings climbed from three and a half to more than eight. Waiting did not fix it. Nothing suggests Ireland is on a different path: we build roughly 36,000 homes a year against a need closer to 60,000. Prices may plateau. They will not fall while supply is this thin.
The real story in the ESRI report is who is paying for that scarcity. The strain is worst not at the bottom of the income scale but in the middle. These are households earning too much to qualify for social housing and too little to buy at today’s prices. The average price nationally passed €454,000 in June, almost double the 2011 figure. Wages have not doubled.
Set that beside the Central Bank’s wealth figures from a week earlier. Irish households now hold €1.4 trillion, twice the 2007 peak, and more than two-thirds of it is property. The top 10 per cent hold 47 per cent of it. The bottom half hold less than 10 per cent. Undersupply is not a neutral condition. It is a transfer of wealth from those who do not own to those who do, quarter after quarter.
That is why so much energy is going into the bank of mum and dad, and why the campaign to lift inheritance tax thresholds in the budget has such feeling behind it. Parents are stepping in because a couple on good salaries, working hard and saving hard, can no longer close the gap on their own. That is a symptom, not a cure.
The cure is to make the market work for people who work. A State credit guarantee so small builders can get finance and build the mid-priced estates Galway is short of. Mortgage insurance so a couple with a clean rental record can borrow at a sensible loan-to-value without the taxpayer taking an equity stake. Rental payment history accepted as evidence for a mortgage. A grant for downsizers to release family homes. Long-term fixed rates so a household knows what it will pay for 20 years. Every one of these with a sunset clause, so they restore the market rather than replace it.
The number to worry about is not 17 per cent. It is the gap between 36,000 homes built and 60,000 needed. Close that, and the valuation question answers itself. The budget on October 6 is the place to start.
Johnny Gannon is the founder of Fair Deal Property, auctioneers and estate agents, Galway. For advice on buying, selling or developing, call 091 394 593 or visit www.fairdealproperty.ie
