After a tumultuous 2020 and a somewhat messy 2021, many of us felt we deserved stability this year. Eight months into 2022, however, stable is perhaps the last word one could use to describe this year. The war in Ukraine, rapidly rising consumer prices, supply chain challenges and a 50 basis point rise in interest rates have all tested both our economy and our market. housing.
Looking at the residential real estate market over the year so far, perhaps the biggest fallout from the current global challenges lies in the construction sector. After a recovery in construction activity in 2021, bolstered by the easing of public health restrictions, housing start activity has slowed this year. After peaking at nearly 35,000 units started in the 12 months to March 2022, subsequent months have seen a steady decline as significant construction cost inflation hampered activity. This slowdown in activity will impact construction output in the second half of 2022 and, perhaps most worryingly, in 2023.
Such a slowdown in activity, occurring at a time when the population is growing rapidly, is particularly frustrating. The release of preliminary 2022 census figures underscores the scale of the housing crisis. These data highlight the need to build over 50,000 new homes each year until 2036 if we are even to bring Ireland in line with the European average in terms of household size. The required number of new build homes is more than double what we currently deliver.
The rental crisis continues to be at the heart of Ireland’s housing deficit. After a difficult decade of limited investor activity and an exodus from our existing owners, it now appears to have deteriorated further in 2022. According to our internal research, 37% of sellers in the second quarter of this year were investors selling their property. This is the highest proportion ever recorded and highlights the persistent dysfunction of the rental market.
Moreover, rent inflation has continued to accelerate in recent months. According to the consumer price index sub-indexes, private rents have increased by 11.9% in recent months, the highest annual growth rate over a five-year period. This is particularly tedious because, unlike the complex nature of the wider real estate market, there are many well-documented solutions to the rental crisis. These solutions, however, were ignored by policy makers for more than a decade. The time has come to act in the face of this debacle.
Despite all of the above – or perhaps because of it – the second-hand residential market has shown considerable stability since the start of the year. In line with last year, commercial activity remains healthy. Excluding block sales and new homes acquired for social housing, 12,200 housing transactions were recorded in the Residential Property Price Register during the first quarter. Activity levels improved again in the second-hand market, with around 10,600 sales recorded in the first quarter, marking the strongest first quarter since at least 2010.
We are also starting to see a reappearance of price stability. Our latest index shows that the average value of second-hand homes in Ireland increased by 1.6% in the second quarter of 2022, the slowest quarterly growth rate for over a year.
That said, the overall rate of growth remains high. In the first six months of the year, average values increased by 4.5%, matching the rate recorded in the first six months of 2021. In the 12 months to June, average values increased by 9.6%.
The difficult nature of Irish property history is by no means unique; indeed, there are growing imbalances in the housing market in many developed countries. However, there is no doubt that Ireland’s housing crisis is rooted deeper than most. That said, rising interest rates and volatile consumer confidence should lead to a moderation in the pace of house price inflation in the coming months and into 2023. At this point, we expect inflation of 4-5% in the Dublin region. full-year market, with higher headline inflation in Ireland of between 6% and 8%.
In the immediate term, everything points to a busy selling season in the fall. Traditionally, the market slowed down during the summer months, reopening in late August. With the disruptions of the past two years, the usual summer lull has dissipated, although the number of new properties coming on the market has slowed this summer.
However, early indications are that inventory levels will be replenished in the coming weeks, with an improving volume of used homes and new homes coming to market. And although the frantic bidding evident in the early weeks of the year has waned, demand remains strong, with a noticeable urgency from buyers to transact faster in the face of rising interest rates. As always, market performance will not be consistent, but at this point we are expecting a busy season.
Marian Finnegan is Managing Director of Sherry FitzGerald