Irish house prices overvalued by 17% ‘with middle-income households hit hardest’

Irish house prices are overvalued by about 17 per cent with the burden falling “hardest” on middle-income households, a new report has concluded.

The analysis by the Economic and Social Research Institute (ESRI) said there had been a sustained increase in house prices since mid-2013, which had resulted in real house prices approaching their pre-financial crash levels.

Real house prices measure how the price of housing has changed when adjusting for inflation, illustrating the change in purchasing power.

While the report does not conclude that the market here is on the brink of another crash, it said there were now “heightened concerns regarding potential overvaluation and the emergence of imbalances within the Irish residential real estate market”.

The report estimated where house prices should be on the basis of economic fundamentals such as income, interest rates and demographics, concluding they are overvalued by 17 per cent.

This was up from 8 to 10 per cent in 2024, marking “a gradual upward trend in overvaluation in the 2020s”.

The current level of overvaluation compares to a peak of more than 40 per cent seen back in 2006 just before the crash.

“Unlike the pre-crisis period, which was driven by excessive credit growth and loose lending standards, the current episode of overvaluation appears to be primarily an affordability issue,” said the ESRI.

“House prices have risen faster than incomes, mortgage rates have increased, and not enough homes are being built to meet demand,” it said.

The deterioration in affordability was “most acute” at the median or midpoint of the income distribution, it said, with households in these income categories experiencing “the largest deviation from their own historical norms”.

Despite the affordability pressures, indicators of household debt and the wider credit market remain well below the levels seen before the financial crisis, the report said, suggesting the financial system is in a considerably stronger position than it was in 2007–2008.

This was partly attributed to the Central Bank of Ireland’s mortgage rules, introduced in 2015, to prevent the type of reckless borrowing and lending seen during the Celtic Tiger period.

“Our analysis shows that Irish house prices are significantly above what economic fundamentals would suggest, driven by prices rising faster than incomes and higher mortgage rates, with middle-income households bearing the greatest burden,” said report author Paul Egan.

According to the Central Statistics Office, the average cost of a house nationally was €454,066 in June this year, 97.9 per cent up on the 2011 average (€229,358).

However, the agency cautioned that neither median nor mean prices were appropriate for measuring the evolution of property prices as the mix of dwellings sold in different periods can change over time.

The latest official barometer of house prices here indicated that inflation slowed to its lowest level in 2½ years in June as a combination of increased supply, higher borrowing costs and uncertainty caused by the Iran war cooled the market.

The annual rate of price growth was put at 5.6 per cent nationally and 4.6 per cent in Dublin.