May 2020: Irish Property Market Updates

Residential

Ireland’s housing crisis has not gone away… This has become something of a Covid-19 response battlecry over the past few months. And it is true. Prior to Covid-19, there was a demonstrable shortage of homes in Ireland. This has not changed and as ‘normal’ activity resumes, this demand is likely to re-emerge. But there is a difference between demand and qualified demand i.e. the market.  40 percent of the tax base has experienced a shift in their incomes since March so it is fair to assume that the number of capable/qualified potential buyers has decreased. The latest CSO Residential Property Price Index shows a 1 percent year-on-year increase in home prices to March 2020, with prices now averaging €260,000. Homes in and around Dublin – and within commuting distance of the capital – remain the most expensive, followed by the southside of Cork city and commuter towns of Cok, including Kinsale, Ballincollig, Carrigaline. Property prices are now 17.9 percent lower than the peak of the market (circa. 2007).

In terms of market activity, close to 3,600 homes were sold in March 2020, which represents a 12.6 percent year-on-year increase. Newly-built homes account for just 18.3 percent of overall residential market activity.

It must be noted that these figures are historical only and unlikely to be indicative of 2020 market performance as the full impact of the Covid-19 pandemic is yet unknown. The National Property Price Register for April reveals a significant drop in completed sales, with 2,218 sales registered. This is less than half the number of transactions registered in the same month last year (4,542). There have been many forecasts touted in the media, with some lenders anticipating a price drop in house prices  of between 12 percent and – worst case scenario – 20 percent for 2020.

Mortgages

Charlie Weston, reporting in the Independent earlier this week, confirmed Central Bank expectations of demand reducing “to record levels” for personal loans and mortgages over the coming months. This is likely to result in a tightening of credit standards for all categories of lending for Q2, which will further impact house prices.

In a recently published Central Bank Economic Letter by David Byrne, Sarah Holton and Conor Parle titled ‘Bank Credit Conditions & Monetary Policy‘, the authors stated: “Irish banks expect the biggest ever decrease in demand for loans for house purchase and for consumer credit, reflecting the major impact of the public health crisis on households and on consumer behaviour”.

Significantly, several of the main mortgage lenders have stopped offering exemptions from the Central Bank macro-prudential lending rules that restrict borrowers to 3.5 times income and require a 20 percent deposit for homebuyers (10 percent for first-time buyers). The journalist reports that “Banks are also putting valuations on some properties that are at least 10 per cent lower than prices which have already been agreed by buyers and vendors, according to mortgage brokers”, which is a concerning trend.

Rental Sector

According to the most recent Daft.ie research, rents dropped by 2.1 percent from March to April, which represents the largest monthly drop in the sector since 2009. The average monthly rent nationwide in Q1 2020 stood at €1,418. The report also found a 40 percent increase in rental properties available last month, when compared to April 2019. In real terms, this equates to an additional 500 properties available to rent in Dublin over the last two months. Speaking about the report on RTÉ’s Morning Ireland, Assistant Professor of Economics at Trinity College Ronan Lyons said the lack of movement of people to take up new roles or education may have impacted the figures.

In terms of rent defaults, there is no clear picture emerging as yet, however, the Irish Property Owners’ Association (IPOA) has spoken out about the difficulties faced by both landlords and tenants right now.

Social Housing

It has emerged that social housing construction outputs fell short of its 6,242 target again last year, with only 5,771 homes completed in 2019. The Department of Housing has defended this figure by explaining that “the aim of adding 10,000 homes to the social housing stock nationally last year was reached by buying more properties on the open market”. New builds delivered by local authorities increased by 10 percent in 2019.

These targets are important metrics as the State looks to reduce its dependence upon the private sector to provide social housing. In 2019, €582 million was paid to private landlords under the Housing Assistance Payment (HAP) and the Rental Accommodation Scheme (RAS). Over 52,500 tenants across the country were on HAP in 2019, compared to 43,400 in 2018.

Commercial Property

Donal Buckley in the Independent reported that ‘Rents and capital values expected to fall in all commercial sectors’ over the next 12 months. This report was based on the latest RICS Commercial Property Monitor, which is essentially a members sentiment survey. 64 percent of respondents believe the market has entered a downturn. Unsurprisingly, respondents expect retail to be worst hit with a 10 percent drop in prime rents forecasted (13 percent in secondary locations). Offices rents are expected to drop by between 5 percent and 8 percent. Projections for the industrial sector are more positive at this stage, with rent drops from 2 percent to 5.5 percent anticipated.  Significantly, expectations for capital values were “downgraded sharply” relative to Q4, with all categories now displaying negative projections. It is worth pointing out that the impact of Covid-19 is a global issue and Dublin real estate performance compares favourably with many other major cities.

Also, Shane Fahy, partner and head of real estate at McCann FitzGerald, wrote an interesting analysis piece in the Irish Times this week titled ‘Property industry and insurers must grapple with risk’ about the impact of the Covid-19 restrictions on business that have been shuttered for the past two months, their landlords and the landlords’ lenders. These separate and distinct interests cannot be looked at in isolation. He writes about the insurance implications as follows: “real estate lawyers in common law jurisdictions have quickly reached a broad consensus around the legal realities of this situation… tenants are unlikely to be able to walk away from their lease obligations. Most leases have no force majeure provisions and the shutdown is unlikely to amount to ‘frustration’ … landlords and tenants will find that the standard definition of ‘insured risks’ for buildings insurance is of no assistance…”

Planning

Temporary changes to Ireland’s planning regime were announced earlier this month, in response to the ongoing pandemic restrictions, on the basis that these restrictions make timelines set out in the Planning Act unworkable. A new section, Section 251A, has been added to the Planning Act as part of the Public Interest (Covid – 19) Act 2020 to allow the Government to disregard the period between 29 March 2020 to 9 May 2020, for the purposes of calculating statutory timelines. This provision is valid until 9 November 2020 (subject to further extension). While the planning process will continue to function, planning applications will not progress through the first stage of the planning process – public consultation – during the so-called Emergency Period. Planning decisions are expected for applications that completed public consultation prior to the shutdown.

Construction

Construction Information Services (CIS) research indicates that Covid-19 restrictions disrupted the delivery programme for 60,000 new homes across 796 sites.

Writing in The Currency this week, Sean Keyes surmised that Covid-19 is causing three main problems for construction companies right now; cashflow, social distancing on site and the prospect of much reduced investment in the coming years. He goes on to point out the incredibly tight industry profit margins (the eight biggest Irish general contractors made an average net margin of 1.8 per cent in 2018) and how this is a problem for more than just the contractors. There will need to be a massive, collaborative effort to get construction activity ramped up after the official reopening day of 18  May. Health and Safety training has been given online; in theory, sites can resume activity while maintaining social distancing through measures like shift working in smaller crews and staggered break times. And, of course, with the installation of many, many new handwashing and hand sanitising stations. It will undoubtedly be a challenge. Construction is typically a volatile yet resilient industry, we can only hope that people are ready to rise to yet another challenge as we need this industry to pave the way to re-opening other sectors of the economy. Collectively, we need to get the next few weeks and months right.