Irish House Prices Overvalued, ESRI Warns
The Economic and Social Research Institute (ESRI) has issued a warning that Irish house prices are overvalued by up to 10 percent, raising concerns about the sustainability of the current market. The think tank’s latest quarterly bulletin highlighted the rapid acceleration of house price increases this year, suggesting a potential for a “painful correction” similar to the aftermath of the 2008 financial crisis.
ESRI Analysis: Overvaluation at 8-10%
To assess the current market, the ESRI analyzed house prices against various economic and demographic factors like income, population, credit, and interest rates. Their findings indicate an overvaluation of 8 percent to 10 percent, while acknowledging that this figure is lower than the levels seen during the global financial crisis.
“That’s not as high as it was during the time of the global financial crisis but it does mean that it merits attention,” said Kieran McQuinn, an ESRI researcher. “The larger the degree of overvaluation, the greater the risk of a significant correction.”
Rising Mortgage Debt and a “Premature” Policy Change
Moreover, the ESRI pointed out a concerning trend – an increase in average loan-to-income ratios, meaning many households currently carry “elevated” levels of mortgage debt. This makes them more susceptible to financial shocks or job losses, raising questions about their ability to maintain mortgage payments.
The institute also noted the Central Bank’s decision to increase the loan-to-income ratio limit for first-time buyers in 2022 from 3.5 times income to 4 times, a move they previously labeled “premature” and a potential driver of price inflation.
“Consequently, the Central Bank of Ireland must be particularly vigilant and prudent in any review of the mortgage measures in its macroprudential policy framework,” the institute stated.
Home Supply Lagging, Prices Remain High
The current supply shortage in the Irish housing market is further contributing to the problem. New home completions are projected to remain stagnant at around 33,000 for 2024, falling short of the estimated underlying demand of over 50,000.
While there have been 49,000 housing commencements this year, suggesting potential for an increase in completions in 2025, the current imbalance highlights the ongoing affordability challenges for many in Ireland.
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