“Is the property market overheating?” – Secretariat Comment for The Sunday Independent

Below is the full text provided to The Sunday Independent by Dr Cathal FitzGerald of the NESC Secretariat. The question posed was “Are our house prices now at boiling point?”. An edited version of the text below featured in the edition of the paper dated 14^th July 2024.

 

The first thing I’d say is that what most people and most politicians are worried about is affordability, not overvaluation or overheating. And understandably so. Many homes are simply unaffordable. That’s one of the reasons Ireland saw the largest increase in Europe in the share of young people living with their parents since 2012. Affordability is an everyday concern for people, and one with terrible consequences.

That said, economists worry about both affordability and overvaluation, also for good reasons.

I think an old-school economist might say that houses in Ireland today are not overvalued, and that the price is exactly what it should be. They would argue that “we are starting from a deficit of 235,000 homes, future demand is for at least 50,000 houses per year, and supply is around 35,000. Demand is way above supply, especially in urban areas. So if the market says a home in Dún Laoghaire costs €620,000, then that’s its correct value. On top of that, the fundamentals are sound: population growth, economic growth, wage growth, savings growth during the pandemic, and general price inflation”.

Thankfully there are not too many old-school economists around. And I think if any economist said the words “the fundamentals are sound” today, after Ireland’s experience since 2007, people might run a mile.

The reasons why economists are concerned about overvaluation is because they are worried about a bubble, and absolutely terrified of a crash. We know from international experience – and from Ireland during the Celtic Tiger – that looking only to market supply and demand, and to the so-called fundamentals is a fool’s game.

Property markets are complex and don’t behave the way you might expect. We know that poor policy decisions and inappropriate regulation were a big problem in 2000s. And groupthink and overconfidence play their part. On top of this, getting a policy intervention in the property market – and the timing – right, is like trying to catch a spinning knife. Even if a policymaker thinks he or she has an intervention that might improve supply or reduce prices, a mere mention of that change could halt supply while developers wait and see what happens.

All of this is to say that understanding the property market and overvaluation is hard. In fact, the market is so complex that to say ‘houses are overvalued’ or otherwise is really not that helpful. If prices continue to rise at a rapid rate, it is probably fair to say that some houses will be overvalued, perhaps due to their location further away from centres of longer-term job growth.

Certainly we know all too well the dangers of building large developments in rural locations across the country. At one point we had 3,000 ghost estates built during the Celtic Tiger. We still have 75 today, and half of them still have no one living in them.

But we also know from the crash that, even if some houses are overvalued, certain things are different now. For one thing, we now have better controls on credit, whether its loan-to-value limits for people getting mortgages, or tighter rules and supervision of the banks giving out those loans. Borrowers might dislike some of those rules, and I know these differences from 2007 are no consolation to those suffering because of sky-high house prices. But they do offer some comfort to those worried about overvaluation and property crashes. And those crashes harm everyone. I think the main thing to do is to approach pronouncements and generalisations about the housing market with extreme caution, and look to the evidence from the Housing Commission, NESC, the CSO and others.