What Now ?
Property Market prices have remained strong with certain segments (FTBs price level) seeing price increases as demand continues to outpace supply. With the ECB rate now 3.75% there will theoretically be an impact on prices – but this is yet to materialize. Even in countries like the UK, where rates haven risen faster and the economy is weaker, we have not seen material declines in prices. With the Irish economy at near record employment levels its hard to see a material impact downward on prices happening in the near term – especially below the €500k level. Those who are holding off buying may be disappointed.
1. Interest Rates :
The ECB has increased its rates to 3.75% from 0% last year. We expect that rate to reach 4.25% by the end of the summer. The Irish Banks have passed on only about half of these increases and we believe the other half will arrive before the year is out. This will mean mortgage rates in Ireland will be between 5% – 6%. The impact of this…. someone borrowing €300k over 30 years last year could have gotten 2% – so monthly repayments would have been €1,100. At 6% this will be €1,800 a month. That’s nearly €250,000 more over the life of the mortgage.
2. Economy / Housing Demand :
The upper end of the market has seen some downward pressure as second time buyers who might have a nice 2.2% fixed rate are very slow to leave this house to trade up to a much, much bigger mortgage. What this has meant is that activity at this level of the market is significantly down with Estate Agents reporting far less second hand properties coming to market. This will only continue as rates rise. This might actually have the strange impact of keeping prices high as supply will be lower than normal.
But the economy and employment levels continue to be much better than many had predicted. With huge money flowing into the government coffers, you can expect a give away budget that will keep inflation and employment high – thus supporting house price levels.
3. What’s next?
Inflation – its not going to go away !
The “consensus” from Central Banks is that inflation will fall away quickly in the next 6-12 months and rates will begin to be cut at this stage. We don’t think so!
Interest rates are designed to slow the economy by sucking money out – if you pay an extra €400 a month on your mortgage due to higher rates then you can’t go on holidays/shopping etc with that money. This reduces demand in an economy, which then helps lower/stabilise prices.
But the government in Ireland are just going to pump extra money in to offset this slow down. Mortgage interest relief (as is looking like it might be introduced) just reduces the impact of the rate hikes. Meaning you need more of them! Tax cuts and spending increases just increase demand which increase inflation and there is a whopper giveaway coming this year. You can not reduce inflation by giving tax cuts and increasing spending. Inflation will remain above 2% until something bad happens.
Rate Predictor – can you beat us ??
AIB average mortgage rate July 2023 : 5.25%
Inflation in Ireland in July 2023 : 6.6%