Overall sales increased by 10% compared to 2014 but a closer examination of the detailed monthly data from real estate firm Savills reveals a very different picture.
Year on year growth in housing transactions fell continuously throughout 2015, slipping from a positive 75% in January to an outright decline of 18% in December. The report explains that this reflects two major policy changes which impacted on demand.
Firstly, generous Capital Gains Tax (CGT) incentives for investors were removed on 31 December 2014. As this deadline approached investors rushed to complete deals, causing transactions to spike in late 2014 and early 2015 as some deals carried into the New Year. After that, however, investor numbers retreated to a more normalised level.
The second important policy change was the introduction of new mortgage lending restrictions by the Central Bank. Following a preliminary announcement in October 2014 buyers rushed to secure old style loan approvals in late 2014 and the opening weeks of 2015. These were deployed in the first half of 2015, boosting sales.
‘However the true impact of the macro-prudential rules began to emerge in the second half of 2015 as some people were priced out by restrictions on how much they could borrow. Indeed, these dynamics can be seen in the regional pattern of transactions growth,’ the report says.
Because investors were more focused on Dublin, this market saw the biggest uplift from the impending CGT deadline in late 2014 and early 2015. Subsequently, however, Dublin suffered the largest slowdown in sales as the frontloading of investment deals left a vacuum in 2015.
‘Similarly, because absolute price levels are higher in Dublin, the Central Bank rules are more binding in this location. This caused transactions to slow more sharply in Dublin than elsewhere when the rules impacted later in the year,’ the report adds.
The analysis report also shows that the rate of house price growth in Dublin slowed quite dramatically during 2015 from 21.6% in January to just 2.6% by the end of the year. It says that part of this was due to base effects as the average Dublin property is now €87,000 more expensive than at the low point of the market in the fourth quarter of 2012. ‘Therefore the same absolute price increase is now gradually leading to a smaller and smaller percentage change,’ it explains.
But part of the slowdown is also attributable to removal of the CGT incentive. ‘As investors had been more focused on Dublin than elsewhere, withdrawal of this tax break created a bigger vacuum in the capital,’ the report points out.
But the most important factor has been the Central Bank mortgage rules. The average property in Dublin costs around 54% more than that outside the capital. ‘Without a compensating wage premium Dublin buyers have traditionally been more heavily dependent on mortgage finance. Consequently the stricter lending limits have hit the Dublin market especially hard,’ it adds.
The report also explains that the negative impact of the macro-prudential rules on affordability has rippled up through the chain. For example, first time buyers, who are the most leveraged buyers, have become less active, and making it harder for traders-up to sell their properties and so on.
‘The result has been a sharp slowdown in price inflation in Dublin. Ironically, while they have dampened price growth in Dublin, the mortgage rules appear to have fuelled house price inflation elsewhere. By making the capital less affordable for buyers with higher borrowing requirements, these measures have displaced demand into the commuter belt,’ the report adds.
This has resulted in strong growth in asking prices in commutable locations such as Laois where property prices have increased by 15.6%, Kildare up 13.2%, Louth up 14% and Meath up 16.2%.
The analysis also says that continued population growth and sluggish construction activity led to a build-up of inflationary pressures in the Irish market during 2015. ‘However, in the Dublin market at least, these were contained by affordability constraints. As a result heat was displaced from the owner-occupied market in Dublin into the rental market and, further afield, into the commuter belt,’ it adds.
Looking ahead, the report says that with no near term prospect of a construction surge, inflationary pressures will continue to build through the remainder of 2016 and beyond. ‘In Dublin we expect the affordability barriers which contained these pressures during 2015 to gradually ease, paving the way for a resumption of faster house price growth in the latter end of 2016,’ the report points out.
‘We have now had five successive quarters of earnings growth and, with unemployment continuing to fall, this will persist for the foreseeable future. Over time this should make the Central Bank Loan-to-Value (LTV) and Loan-to-Income (LTI) rules less binding for owner occupiers. As the economy continues to recover, we will also see the return of cash gifts between family members continuing to assist first time buyers into the market,’ it explained.
‘We also expect to see the cash investor, who is less encumbered by affordability constraints, remaining active in the Dublin market. With the Central Bank mortgage rules diverting demand from owner occupation to the rented tenure, yields have become elevated. In theory investors will keep bidding for properties until prices are driven to a level that squeezes yields back to a fair long term premium over bond rates,’ the report says.
‘While we expect house price inflation to speed up again in Dublin, base effects mean that this is unlikely to happen until later in 2016. The opening half of last year saw strong transactions and price increases. Consequently year on year growth rates will face a stiff comparison until the second half of 2016,’ it adds.
It is expected that the budget constraints that drove house hunters out of town are likely to ease gradually over time. In addition, the option of moving out and commuting has been made relatively less attractive by recent strong price growth in commuter locations, the report says.
‘Both of these factors should see a more geographically balanced rate of house price inflation as we move through 2016 while in the regional markets Cork and Galway saw the strongest price growth in 2015. Demand will remain strong in these locations through to 2016,’ it concludes.
