YOUNG IRISH PEOPLE are used to bad news on the housing front. But even with that in mind, the past week was a tough one.

First – property inflation is red-hot, with prices rising by almost 9% year-on-year.

This, of course, comes from a base of costs already being extremely high, increasing without a break for almost four years.

It’s a familiar story, albeit one which is depressing and anxiety-inducing for those trying to buy a home.

But the second piece of news was possibly even worse. 

A new study from property company Savills looked at nine developed countries, including the US, Australia, the UK and Canada, and found that Ireland is doing the worst job at building new homes relative to population.

Between 2015 and 2023, one house was built for every 3.8 people added to Ireland’s population.

This was the worst of the nine countries studied – Spain was second-worst, adding one home for every 3.4 people, while Germany was the best adding a home for every 0.9 people.

Ireland was found to rank particularly poorly due to a combination of a strong natural population increase over the period, a rise in immigration and relatively low levels of house building.

Why is this study so bad? Because it is yet another indicator that things don’t look like changing any time soon.

The two pieces of news coupled together show that despite all the talk about Ireland’s housing crisis, it’s possible that the scale of the problem is still being underestimated. 

Interest rates

For an example of how bad things are, let’s take a brief look at interest rates.

The European Central Bank hiked borrowing costs in late 2022 and 2023 in an effort to cool inflation.

This made mortgages more expensive, which should cool down house price growth.

Theoretically, people borrow less, so they can’t afford to pay as much for a house. All things being equal, inflation will cool significantly and prices could even fall.

This is essentially what has happened across Europe.

Since late 2022, when the rate hikes first came in, house prices across the EU as a whole have barely budged.

It is also what was largely predicted to happen in Ireland.

Property website Daft.ie said in January that house prices in 2024 would be “largely stable”. This was a pretty common prediction, with most analysts expecting rises of about 3.5% during the year.

And initially, it seemed the rate hikes would have a similar impact in Ireland as they did in the rest of the EU.

Price inflation cooled massively, dropping from 13% in July 2022 – the month of the first rate hike -  to 1.4% in September 2023 – the month of the last rate hike. 

But from there, Irish prices have gone on a tear. Why?

There are a few possible reasons.

Irish banks kept mortgage increases relatively low. This was partly because their prices were high even before the ECB rate hikes, and partly because they were subsidised by Irish savers not moving their money from pitifully low-interest savings accounts.

Also, the Central Bank’s eased mortgage lending rules came into force at the start of 2023, allowing people to borrow more money. 

Perhaps, unsurprisingly, the Economic and Social Research Institute (ESRI) found Irish house buyers are now taking on higher levels of debt than at any point since the Celtic Tiger, stretching themselves as much as possible to buy a home.

And the ECB confirmed its first rate cut in June, which likely gave house hunters further confidence. 

But fundamentally, the fact that Irish house prices have increased by so much in the face of such steep borrowing cost increases and analyst predictions to the contrary shows how the scale of the issue is likely not fully being grasped.

It is reminiscent of around the time of the Covid outbreak, when property values surged despite predictions that prices would fall by as much as 20%.

Backlog

A likely reason why the scale of Irish property price hikes continue to catch experts out is that the country’s housing backlog is basically never counted in official targets.

For example, say analysts predict that Ireland needs to build 35,000 homes a year just to meet demand.

And then say just 20,000 homes were built in one year – a 15,000 shortfall. That 15,000 deficit is not added to the annual targets from then on.

The aim remains to build 35,000 homes.

And Ireland has been missing its housing targets on an annual basis for more than a decade.

An ESRI study published last month said that Ireland will likely need about 53,000 homes per year to keep up with population growth in a ‘high migration scenario’.

But it acknowledged that this didn’t include the backlog built up over the last decade.

Just under 33,000 homes were built in Ireland last year and the government has now talked about building 50,000 homes annually over the next five years.

But these numbers likely won’t even keep the market standing still. Construction of 50,000 homes a year would barely keep up with the ESRI predictions of what could be needed and doesn’t even start to address the country’s housing deficit.

Many analysts base their predictions on government figures but the government is trying to hit an ever-moving target and has consistently low-balled how many new homes are needed.

Rate hikes arguably gave policymakers some breathing room, but with that shock now long shrugged off by house buyers and inflation surging, it’s crucial the government gets a handle on the true scale of the task as quickly as possible.

Daft.ie has shareholders in common with Journal Media