Economic theory would tell you that when interest rates rise sharply house prices fall and
vice versa. But with property prices seeming ignoring these old rules what can we expect
property prices to do now that rates globally are set to fall?


During Covid people became very accustomed to extremely low interest rates and many
people (wrongly) believed that these rates were now the new norm. The mortgage interest
rates being offered by Banks in Ireland were a once in 200-year event. The lowest rate was
1.90%. There is a very good chance you may never see this again in your lifetime.


Historically there is usually a strong correlation between mortgage interest rates and house
prices. When rates go up this means that your mortgage repayments will be higher and less
and less people can afford these higher and higher repayments. The result is that there is
lower demand for housing = lower prices.
Given all the focus on inflation in the last two years its worth reminding ourselves of the two
pillars on which the price for every single product or service in the world are built on.

Supply and Demand

In reference to housing we are all very familiar with the supply story – not enough and
increasing too slowly – no debate needed here. But it’s the demand side that’s most
interesting. You could argue demand for housing is 100% as everyone needs somewhere to
live. That puts it in the same category as food…. But unlike food, houses don’t grow on
trees. With supply as good as fixed this means the price of housing will be determined by
how much people can afford to pay.


How much people can afford to pay has two components. Mortgage Interest Rates and
Salaries.


Whilst about 50% of all properties are bought with a mortgage and 50% cash, the reality is
that the vast majority of those 50% cash buyers had a mortgage at some point in their lives
and that mortgage interest rates dictated how much they could afford to pay for their first
house. Almost everyone is impacted by mortgage interest rates.
An example. If I want to buy a house and I can afford €2,000 per month – This roughly
means that my mortgage monthly repayment needs to be €2,000 per month or less for the
Bank to approve my application.
With a mortgage rate of 2% I could borrow ~€600k and the repayments would be just less
than €2,000 per month. So, If I had €100k as a cash deposit then I could bid up to €700k on
that house.


Now the mortgages interest rate comes into play. If the rate increases rates by 2% and my
Bank now charge me 4% – I can only borrow €450k and still be at €2,000 per month or less.
This has the impact of decreasing the amount I can pay for a property by €150k!!
So why have house prices continued to rise when rates have gone up ?

Enter Salaries.


The Great Unspoken of Irish Politics. Irish people are actually making good money. The
media narrative of the cost-of-living crisis impacting everyone is heavily overstated. The
facts are that since 2022 there has been a 50% rise in tax units (couples or individuals)
earning over €100k. There are 357,000 such tax units now in Ireland. This could be
~500,000 people earning €100,000 per year and more. Nearly 1 in 5 of all people employed.
That’s a major growth surge.

Remember bank lending starts with a multiple of your salary so with surging salaries you are
going to see surging house prices. The scale of the salary increases has been sufficiently
strong so that the aforementioned mortgage interest rate increases have barely dented
property prices upward march – Even with the wobble in the tech sector in 2023.
With clear skies on the employment horizon, mortgage interest rates set to fall and an
election buying budget on the way the path to yet higher property prices seems clear.
Nationally we are headed to 10% growth in 2024 with many parts of the country already
exceeding this mark.


Forget about Brexit / Covid / Inflation – the real driver of the Irish property market is the
multinational moneymakers.