It feels like anarchy in the UK, but Ireland is on a safer path with house prices ​

Published in The Sunday Independent on July 2nd 2023.

It’s hard to fully portray the sense of all-pervading gloom on the UK’s economic prospects that has emerged in recent weeks. Investors’ fears that the UK is facing a prolonged period of stagflation, with price pressures forcing the Bank of England’s hand on interest rates, appear to have come to fruition.

The BoE decision in June – to raise official rates to 5pc, with further hikes to come – may help restore its inflation-fighting credibility. But it also risks a recession, heading into 2024, and it will certainly precipitate a fresh downturn in the housing market.

It’s bad news for Rishi Sunak. Millions of British households will face enormous pressure as they refinance their mortgage debts from rates of 1-2pc to above 5pc, just before they cast their votes in next year’s UK election.

One estimate is that by the end of this year, 670,000 UK households could see mortgage payments eat up 70pc of their disposable incomes.

How did they get to such a state?

The past month has undermined investor confidence that the BoE was on top of inflation.

In early June, data showing private-sector wage growth accelerated to 7.6pc in April made a mockery of the BoE Monetary Policy Committee’s (MPC) projections that pay growth was moderating.

Similarly, the news that British CPI inflation was steady at 8.7pc in May, with core inflation accelerating to 7.1pc, were both well ahead of BoE forecasts. These are eye-watering rates for any central banker, trying to bring inflation back to the 2pc target.

In this context it wasn’t surprising the BoE decided to raise rates to 5pc to tame inflation. In doing so, the MPC made no attempt to push back against market expectations that rates will rise to 6pc by the end of 2023.

It was hardly in any position to do so. BoE governor Andrew Bailey has admitted CPI inflation has been far stronger than expected and has launched a review of his bank’s statistical forecasting models. Markets can expect only tough talk on rates until concrete evidence emerges that core inflation pressures are dissipating.

Unfortunately, moves to reinforce the BoE inflation-fighting credibility come just at a time when the UK economy had already been losing steam. True, activity has held up far better than expected in 2023, mainly because of the post-pandemic rebound in consumer spending. However, June’s PMI survey at 52.8 suggested household spending is beginning to falter.

The elephant in the room is Brexit. The UK has the worst inflation problem in the G7 for a reason. The decision to leave the EU must surely underlies the UK’s acute labour shortages, its supply-chain issues, and the poor performance of its manufacturing and export sectors.

However, Brexit remains politically taboo. Despite lobbying from the manufacturing sector, Keir Starmer is unlikely to allow any talk of re-negotiating an EU trade deal this side of the general election – as he’s set on winning back Brexit-voting ‘red wall’ seats.

The UK housing market was already in a pretty precarious position. Mortgage approvals this year are down 30pc on 2022. The average mortgage approval for house purchase in May was down 6.6pc to £228,700 – showing how the squeeze on credit availability feeds into the housing market.

The BoE rate hike to 5pc will probably push the housing market over the edge. Many commentators had already been forecasting double-digit price falls. Summer now looks set to see even more declines.

Last week the average fixed rate on two-year mortgage products surged to 6.3pc. Average five-year fixed rates were little better at 5.86pc – the highest since Kwasi Kwarteng’s disastrous ‘mini-budget’ last year.

Property portal Zoopla’s latest report for June, published last week, suggests higher mortgage rates are already having an impact on the UK market.

Zoopla said residential transactions in June were being settled 3.8pc below the asking price on average – a sure-fire sign vendors are desperate to finalise transactions as the market deteriorates.

Zoopla’s figures showed the number of home sellers in June was 18pc above the five-year average – no doubt trying to get ahead of expected price falls – but homebuyer numbers were down 14pc.

So, will Ireland’s housing market go the same way?

Last week’s ECB forum struck a very hawkish tone, with Christine Lagarde warning rates will not only rise again in July, but likely again in September. This would push the ECB deposit rate to 4pc.

Ireland’s housing and mortgage markets have proven exceptionally resilient. May’s mortgage approvals figures showed volumes up 11.5pc, indicative of robust demand from homebuyers.

The average mortgage approval in May was €296,700 – up 3.8pc on the year. This should cause upward pressure on house prices in the second half of the year. The surprise decision of the Central Bank last year to loosen mortgage lending rules (specifically, raising the first-time-buyer, loan-to-income threshold from 3.5x to 4x) may be contributing to buyers taking on more debt.

That said, Dublin residential property prices have fallen for seven consecutive months to April, down 3.6pc from September’s peak. A good deal of froth and over-valuation in the capital was built up after the pandemic. It’s now unwinding. How long could this correction persist?

The new Eircode system means we can now better measure the extent of froth in the market. For close to 50pc of residential transactions completed in Ireland – an enormous sample – we can compare the final transaction price against the original asking price on MyHome.

In summer 2022, when the market peaked, transactions were being settled 6pc above the asking prices. In Dublin, the median premium was higher still at 7pc. However, as affordability stretched and the market began to soften in autumn, homebuyers grew unwilling to pay so much.
In Q1 and Q2 2023 the premium between the asking and transaction price was 1.4pc at the median – down sharply from last year’s highs, but still positive and steady through the first half of the year.

The message here is that pricing has softened, with some correction in transaction prices – but the market is still very tight and certainly not in freefall.

Within the distribution of transactions, only 5pc of vendors in Q2 accepted a discount greater than 10pc of the asking price – again, a very small proportion. Zoopla’s UK figures indicate that three times as many vendors (15pc of residential sales in June) saw a discount greater than 10pc of the asking price.

On three counts, Ireland’s housing market was always likely to out-perform the UK this year.

First, Ireland’s economic performance is far better than the UK’s. Second, the Central Bank’s surprise decision to relax mortgage lending rules loosened credit availability. Third, ECB rate hikes have been far less aggressive than the BoE’s, though their impact may still be felt in 2024.

So, while Irish house prices look set to be broadly flat this year, the prospect of a sharper double-digit correction, likely in the UK, still seems remote.