It must be a nervous time for developers. On the one hand, house prices are rising rapidly. They rose in April at a faster rate than at any time in the past six years. On the other hand, the OECD reckons that there's a 50:50 chance that the Irish housing market will suddenly slow. So, if the market continues along its present merry way, developers stand to make very good profits while, if it falters, they must expect a hefty loss. It's rather like a game of pass-the-parcel. They don't want to be holding property when the music stops.
Nationally, house prices have almost doubled in the past five years, moving from an average of €175,000 in the first quarter of 2000 to just under €350,000 in the final quarter of last year. Dublin prices have also doubled, to reach an average of €450,000 at the end of last year. A further rise of about 10% is expected this year, adding €35,000, or more than a year's average industrial wage (€30,000), to prices in the country and €45,000 in Dublin. This means that a house could cost 12 times average industrial earnings in the country and almost 16 times in the capital.
Graph 1 - Click to Enlarge
Historically, this figure is very high indeed, as the affordability figures in Graph 2 show. Affordability is taken as the annual cost of servicing a new twenty-five year mortgage
relative to average income. This figure has averaged 28% over the past thirty
years, with a high of 39% in the early 1980s (when mortgage rates were around
15%) and a low of 20% in 1994. Since then the figure has moved up steadily to an estimated 31.5% in 2005 and is expected to reach 35% nationally this year. It is already more than that in Dublin. According to Goodbody Stockbrokers, a typical two-income Dublin household needed to spend 35.5% of its disposable income in 2005 to service the first year of its 25-year mortgage. In 1995, it would have had to spend only 21.2%.
Graph 2 - Click to Enlarge
This creates real problems for people trying to raise a 10% deposit for a house. For the country as a whole, the deposit amounted to 38% of household disposable income in 1994-1995, but this ratio reached 63% in 2005.
Another way of measuring housing affordability is to compare the median house price with the median income. Over several decades and in many countries, the median house has cost roughly three times the median income. Now, in Britain, Ireland and several other markets, house prices have risen sharply in relation to the median income with the result that Demographia, an organisation which tracks house prices using this measure, rates Dublin house prices as 'severely unaffordable'. “The present extent of housing unaffordability is unprecedented, both historically and across markets” it states. “Most housing markets have exhibited median multiples of near 3.0 or less in the past and many still do.”
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