House prices take off even as supply increases

As the pace of construction of new homes increases (it reached a new post-crash milestone last year), we are not seeing a softening of headline price inflation as many would have hoped but a hardening of it.

New home completions came in at just under 33,000 units last year, six times the rate they were being built a decade ago. But the biggest residential construction surge since the Celtic Tiger era is not lessening the affordability gap but instead coinciding with an acceleration in property prices.

The latest residential property price index from the Central Statistics Office (CSO) indicated that prices rose at an average rate of 7.3 per cent in the 12 months to March this year. This was the seventh consecutive month to see an increase in annualised price growth. In Dublin, residential values rose at annual rate of 7.2 per cent.

Property prices do not conform to the simple laws of supply and demand. People tend to buy, developers tend to build, when prices increase.

Property is also a highly financialised asset, driven by trillions of euro of speculative cash. Most of the current development in Dublin is being financed by international funds chasing returns in the build-to-rent sector.

And the disconnect between incomes and house prices (average house prices here are now about 10 times average incomes) is not going to be reversed by increased supply – the hope that aspiring homebuyers and policymakers have been hanging their hats on. This is what the market, even those profiting directly from it, is telling us.

“We’re now faced with a challenge in every developed economy where housing cannot be delivered at four to five times the industrial wage … that’s just a reality,” Cairn Homes boss Michael Stanley noted recently.