- Supply and Demand
- Interest Rates
- Great Expectations
The key with property – like all goods and services – is supply and demand.
The higher the demand, the higher the price. Think Ryanair when they find out where an Ireland away match is on. There’s only so many planes but huge demand so price rises. If more airlines lay on extra planes to that route, the price goes down. Supply increasing = price falling. If we could magically make 100k new properties available tomorrow, property prices would fall.
For most goods and services its relatively easy to decrease or increase the supply – make more computers, clothing, food etc. But with houses they take a very long time to increase supply.
This is one of the core “faults” in the housing market – supply cannot change quickly to meet new demands. The result is that you get rising house prices like we have seen for the last 5 years. The demand in the market comes from population changes and employment/income levels. If you think back to 2010, one of the reasons that the price falls were so strong was because of the high emigration levels we had (especially among household formation age) combined with high unemployment. Once the economy, and then later net migration numbers began to turn the corner, then so did house prices. The situation we had until recently was a strong economy, high population growth, and net migration – this was a strong increase in the demand (D) in the graph below (it moves right).
With supply increasing at a slower rate than demand – prices go up. That’s why you might see some strange price increases in H2 2020 – supply could fall more than demand falls – which means rising prices!
Interest rates used to be governed by the same laws of supply and demand that all other goods were. After all, interest rates largely reflect that supply and demand for money – or they used to.
How it worked pre-2008 was that people save money, banks then lend that money out. If Banks have lots of money (savings) than they can lend cheaply. If there is a sudden increase in demand for money (loans) then the cost of that money goes up = higher interest rates. This kept economies largely in balance.
Those days are now gone.
Enter Central Banks.
The interest rates around the world now have very little to do with supply and demand. Central Banks are artificially creating money and keeping rates low.
When rates are low it means your mortgage repayments are lower – therefore you can borrow more money as its cheaper to repay. Think about a €500k mortgage at 5.25% that’s €2,760 a month but if you can now get that for 2.25% that’s €1,911 a month. That’s a big saving. People can now afford to borrow more – which means an increase in demand – which you now know means high house prices.
As rates continue to go lower, it will drive demand and house prices up.
The real wild card that separates property from day to day goods and services is people’s expectations of what will happen in the future.
Remember the 2000s – you can’t go wrong with property – it always goes up – I bought for x price and now 10 mins later its gone up 30%!
Property elicits group think like nothing else in Ireland. Herd mentality is very popular here too. We copy what we see other people doing far too easily…… anyone for avocado?
If enough people believe that property prices will fall then what happens is sellers of property will wait until next year and buyers will also wait. Nothing then happens. Transaction volumes fall significantly as we may see. When somebody does need to sell a property, many buyers will have withdrawn from the market (less demand) and this then leads to lower offers = price falls.
The flip is true – remember the queues to get houses and the buying off plans – drove prices skyward – all caused by great expectations.
Peoples expectations play a key role in the market …. But beware who you listen too. Eircom shares anyone?