Is Ireland in a property bubble?

Cormac Lucey explains the three reasons why Ireland’s property market does not have ‘bubble’ status this time around.

I recently received “a private request” from a junior work colleague. She was wondering whether she and her partner should buy a residential property even though she was worried that “the market is overheating, and it is not a good idea to buy anything right now”. Has Irish property returned to bubble status? I’m afraid that I have some form on this question.

Back in April 2005, when I was working as political advisor to then Justice Minister Michael McDowell, I had used a pseudonym to write in Magill magazine that “We risk maxing out on debt and thereby making ourselves vulnerable to any short-term economic set-back. The closest parallel may prove to be the Japanese economy. They too experienced a growth miracle built on a credit bubble induced by politically-determined interest rates. Their bubble was pricked in 1991. If their experience is anything to go by, the bursting of the Irish bubble would be a nightmare. The economy would prove impervious to monetary and fiscal stimulus, as individuals and corporations sought to curtail spending in order to reduce their bank borrowings. A downward spiral of asset prices, forced liquidations and further falls in asset prices could result. Growth would prove elusive and the financial sector would be in permanent crisis.” Sadly, I was right even if it took another few years for that to become clear. But there are three strong reasons why I don’t believe that Irish residential property is in a bubble today.

First, there has been little or no credit growth pushing Irish property prices up. Irish residential property prices peaked in April 2007 and then collapsed to just 46% of those levels (in June 2012) only to recover to 93% of their peak value in September. But lending for house purchases has dropped from its bubble era peak without ever really rebounding. It peaked at €125 billion in March 2008. Since then, it has fallen by over 40%. As of June, it was down at €73 billion, a miserable 0.4% above the minimum reached in March 2020. If financial bubbles are generally credit-fuelled, how can Irish residential property currently be in a bubble after experiencing only deleveraging over the last decade and a half or so?

Second, it is cheaper today to buy and own a house than to rent it. A key test of whether we are in a bubble or not is the relationship between the annual expense of renting a house and the burden of servicing a mortgage on that same house. It was far cheaper to rent from 2000 to 2007 as the property bubble reached its climax. By 2006, mortgage rates were about 7% while rent yields (annual rental income divided by property value) were only half that. That meant that a fully debt-funded interest-only buy-to-let landlord was receiving only half of their interest expense in rental income.

What is the position today concerning rent yields and mortgage rates? According to CBRE’s Q4 2020 Marketview report, prime residential rental yields in Dublin were 3.75% late last year. Recent Central Bank figures show the average mortgage rate on a new mortgage was 2.72% in September, down marginally compared to 12 months earlier. Even though we face the second-highest mortgage rates in the Eurozone, it is still cheaper to buy than to rent. This is the second strong argument that we are not currently experiencing a residential property bubble.

The third clinching argument that we’re not in a new property bubble is behavioural. Since I got vaccinated last summer and the pandemic restrictions eased, I have attended several dinner parties in south County Dublin. In sharp contrast to 2005-2007, not once did property prices feature as a topic of discussion. This indicates the absence of a popular property mania today, such as the one we experienced at the tail-end of the bubble.

Cormac Lucey is an economic commentator and lecturer at Chartered Accountants Ireland.