EBS/DKM Affordability Index
Stability and moderation are the forecast for the housing market,
writes Dara Deering
Dara Deering is Head
of Retail Business at
EBS Building Society
Affordability is stabilising indicating that the hoped for soft
landing for housing could be here, writes Annette Hughes
A
FFORDABILITY for first-time buyers We do expect one further increase of 0.25 per
has remained stable over the summer cent this month, September. This will impact on
months and looks set to change only affordability towards the end of the year, but
Annette Hughes is a
Director of
marginally as we move towards year end. should be offset by proposed changes in mortgage
DKM Economic
First-time buyer affordability (a measure of the interest rate relief in the December Budget.
Consultants
ability of a first-time buyer to repay their Secondly, affordability has remained stable as
mortgage) has remained steady due to a number the housing market has moderated and house
of factors. Firstly, there have been no further price growth has slowed and in some cases
interest rate increases in mortgage rates since June declined. The permanent tsb/ESRI House Price
2007, helping maintain stability in affordability Index for the first six months of 2007 shows that
WHAT IT
rates. There have been eight interest rate increases house prices have declined by 2.6 per cent. The
MEANS
(of 0.25 per cent each) since December 2005. A average house price across the country for first
first-time buyer purchasing a home in November time buyers is now in the region of 270,000.
2005 would have made monthly repayments of This moderation in house price growth is due
1,027.44 on a 250,000 mortgage (over 35 to the housing market moving towards
years) compared with a first time buyer equilibrium as supply begins to meet the demand
purchasing now who would spend 1,313.19 for housing. During the first seven months of the
monthly on a similar mortgage, an increase of year 40,040 houses were completed, bringing the
285.75 (both of these values exclude mortgage number of houses completed over the last ten
interest relief ). years to almost 650,000. An expectation of
Housing affordability
is a measure of the
proportion of net
income required to
meet net mortgage
repayments for
first-time buyers on
average earnings.
A
NUMBER of developments in the As part of this process housebuilders have
housing market have impacted on housing responded to developments over the past twelve
affordability since the last EBS/DKM months by reducing the level of new housing
Housing Affordability Index published by Irish supply in the pipeline. Total registrations on new
Property Buyer in May 2007. These include housing starts in the period January to July this
positive factors for potential buyers, such as the year were 35 per cent down on the same period
modest reduction in house prices and the helpful last year. This will inevitably mean a much lower
reforms of stamp duty. More generally there was level of new supply in the market in 2008, which
the continued growth in employment, with a should help stabilise house prices to some degree.
further 77,000 jobs created in the year to While this adjustment is taking place, we are
February 2007, and the increase of around 5 per seeing a lower volume of transactions in the
cent in average weekly earnings across the market. The number of loans issued to first-time
economy in the year to March 2007. The one buyers and mover purchases was down by 18.2
24 IRISH PROPERTY BUYER SEPTEMBER 2007 WWW.IRISHPROPERTYBUYER.IE
negative factor has been the most recent hike in per cent in first quarter 2007 compared the same
European Central Bank (ECB) interest rates in period last year. The largest decline was recorded
June, although there seems to be a consensus by mover purchasers where the number of loans
emerging that we may be close to the end of the issued fell by 25 per cent. The value of mortgage
cycle of interest rate increases. lending to these two segments of the market was
It is no surprise that the overall market is down by 12.5 per cent over the same period.
currently characterised by one of uncertainty. Recent trends in house prices show that
Potential buyers are reacting to the news that average house prices nationally in June had
house prices have declined modestly over the declined by 2.6 per cent to 302,605 from their
past four months by adopting a ‘wait and see’ peak in January, according to permanent-tsb/esri
attitude. house price data.
The critical ingredient missing is confidence In Dublin average house prices peaked in
amongst potential buyers to actually go out and April this year but by June had fallen back by 2.5
buy a new home. per cent to 418,905. Looking at first-time buyer
However, what we are experiencing is an prices, which peaked in March, average prices
adjustment in the market as the housing cycle had declined by 3.5 per cent by the end of June
enters a new phase and the market adjusts to an to 270,093.
equilibrium position over the medium term. As a result, the annual rate of house price
published by Irish Property Buyer
During the first six months of
the year 38,978 houses were
completed, bringing the
number of houses completed
over the last ten years to
almost 650,000
“
changes to stamp duty and mortgage interest we move into 2008. We also expect the number
relief has also had an impact on house prices as of houses completed in 2007 to reach 80,000
first-time buyers have deliberately stayed out of compared to over 93,000 in 2006, a reflection of
the market until these decisions were made. the continued moderation in the housing market.
Although average house prices have declined This figure will move towards 60,000 over the
over the last six months, strong market forces next few years.
remain. There are still significant numbers of Recent research of first-time buyers conducted
”
people in house buying age; in the 2006 census, by EBS also shows that the majority of those
1.38million people were aged between 20 and 40 who have bought in the past year are not overly
years of age and Irish people typically buy their concerned about the stabilizing trend in the
We estimate that a working
first home between the ages of 24 and 35. Many market. Those who are concerned (38 per cent)
Dublin couple will be spending
of these people have yet to buy their first home. are younger and have purchased apartments.
There are also high numbers of people coming Many first-time buyers also remain optimistic
around 30 per cent of their net
to Ireland with many of these immigrants also about the market – two thirds believe that the
income on their mortgage at
buying homes in Ireland and supporting the value of their house will increase in the next year.
the end of September
market.Employment in Ireland is also strong, With one more interest rate increase expected
Housing affordability has
maintaining strong affordability levels for first- this month, September, coupled with changes in
stabilised since
time buyers. By the year’s end we expect to see mortgage interest relief promised, we expect very
January 2007
house prices fall marginally compared to prices at little change to first-time buyer affordability for
the end of 2006 and then remain unchanged as the remainder of the year. G
inflation nationally had decelerated sharply to less
than 1 per cent in June from almost 11 per cent
in January.
CHART 1: AVERAGE MORTGAGE INTEREST FOR HOUSE PURCHASE LOANS
By 13 June this year, the housing market had
TURN TO
experienced eight increases in the mortgage rate
in response to the eight increases since December
2005 in the ECB variable interest rate of 0.25
PAGE 26
per cent each.
As a result the average mortgage interest rate
has increased by around two percentage points
over the last 20 months to around 5.5 per cent
this month, September (see chart 1). The last
time the mortgage rate was at or above this level
was over the period June 2000 to August 2001.
During that period, the average mortgage rate
peaked at around 6 per cent over the seven
months October to April 2001. It is interesting
WWW.IRISHPROPERTYBUYER.IE SEPTEMBER 2007 IRISH PROPERTY BUYER 25
that over the five months August 2001 to
January 2002 average house prices declined by
3.1 per cent nationally and by 4.1 per cent in SOURCE: CSO
Dublin, before resuming their upward growth
“
path in February 2002. possible increase in December. We have
Regarding the prospect for future increases, included one further increase in September in
the general consensus is that the ECB will move our short-term projections for housing
again this month, September, resulting in affordability.
the mortgage rate increasing further to
around 5.6 per cent. Beyond September,
the prospects are less clear with some ®
”
analysts suggesting that there will be no
further hikes in the current cycle. AS A result of developments over recent
Others suggest that there is likely to be one months, our measure of housing affordability,
further increase in December, as the ECB moves the EBS/DKM Housing Affordability Index
again to stem inflation and the most recent published by Irish Property Buyer, has been
period of above trend growth in the Eurozone stable since the beginning of the year, and
economy. It is too early to be definite about a continued on page 26
EBS/DKM Affordability Index
HOUSING AFFORDABILITY TRENDS DEC. 2005 – JUNE 2007 WITH PROJECTIONS TO SEPTEMBER 2007
ACTUAL ESTIMATES
Dec'05 Dec'06 Jan'07 Mar'07 Jun'07 July'07 Aug'07 Sept'07
Average Mortgage Rate % 3.63% 4.81% 4.86% 5.08% 5.31% 5.33% 5.35% 5.55%
NATIONAL FIRST TIME BUYERS
Monthly Repayments ( ) 1,018 1,323 1,262 1,288 1,267 1,263 1,258 1,267
As % of Net Income 21.6% 26.4% 24.4% 24.9% 24.5% 24.0% 24.0% 24.2%
Ave. House Price (000s) 249.5 279.0 279.4 279.8 270.1 268.7 267.3 266.0
DUBLIN FIRST TIME BUYERS
Monthly Repayments ( ) 1,295 1,741 1,624 1,667 1,664 1,658 1,652 1,680
As % of Net Income 25.7% 32.5% 29.5% 30.3% 30.3% 29.6% 29.5% 30.0%
Ave. House Price (000s) 309.6 359.0 359.5 360.5 351.9 350.1 348.3 346.5
remains better than the position at the end of improvement is due to our assumption that the
December 2006. couple’s gross earnings increase by a further 2.5
This stable trend in housing affordability, per cent in July under the terms of the current
which is a measure of the proportion of income national pay agreement, Towards 2016.
required to fund a 90 per cent mortgage for a Taking our average first-time buyer working
first-time buyer working couple, is due to two couple in Dublin, we estimate that they were
factors working in opposite directions: the spending 30.3 per cent of their net income on
increase in the average mortgage rate in March their mortgage by the end of June and will be
and June on the one hand, and the recent spending approximately the same amount by the
decline in house prices up to June, on the other. end of September.
These stable trends should reassure potential The macroeconomic situation remains very
buyers over the coming months. strong but economic growth is expected to
By the end of June the average first-time moderate in the second half of the year, due
buyer working couple nationally was spending partly to a contraction in new house building.
24.5 per cent of their net income on a 90 per While this will mean a lower rate of
cent mortgage, compared with 26.4 per cent at employment growth, jobs growth should
the end of December 2006. Assuming average continue to support housing demand. As we
house prices decline by 0.5 per cent per month approach the end of the cycle of interest rate
up to this month and there is a further increase increases, bringing some stability to mortgage
in the mortgage interest rate, we estimate that rates and house prices, this should help restore
that same working couple will still be spending confidence amongst potential house buyers,
around 24 per cent of their net income on their thereby ensuring a soft landing in the housing
mortgage at the end of September. The market. G
CHART 2: EBS/DKM HOUSING AFFORDABILITY FOR PERIOD TO JUNE 2007 WITH
ESTIMATES UP TO SEPTEMBER 2007 (MONTHLY TRENDS)
26 IRISH PROPERTY BUYER SEPTEMBER 2007 WWW.IRISHPROPERTYBUYER.IE