It is useful when a study provides detail about something which appears clear to most people, but is hard to put in context. This is the case with the latest study from the Economic and Social Research Institute (ESRI), which looks at the current level of house prices and compares them to the state of the economy.
Its central finding, working on data from the second half of last year, is that house prices are 17 per cent overvalued. This is a significant amount – almost a fifth – though given the affordability crisis it comes as little surprise. It is, however, less than the 40 per cent overvaluation which applied in 2006, before the housing bubble burst.
The ESRI finds that there is not the same credit bubble now as there was back then, when banks were giving out 100 per cent mortgages at multiples of people’s incomes, endangering both themselves and their customers. Now, overvaluation is being driven more by a lack of supply on one side and ongoing demand on the other. And as such it could continue for quite some times.
As the researchers point out, this is reflected in significant affordability problems which may now be worsened by rising interest rates. Interestingly, the analysis finds that the burden of house price overvaluation is falling hardest on middle-income households. It is here that prices are most out-of-line with incomes. And it is here, of course, where some of the Government’s key housing challenges lie.
The State has had to step into the market to try to boost supply in many areas through a whole range of costly interventions. Supply has risen, but remains inadequate. Prices remain unaffordable for many. And so too do rents, with the latest report from the Residential Tenancies Board confirming the jump in the cost to new renters after the Government’s policy shift earlier this year.
There are issues to be tackled across the board – in social housing, in developing affordable properties, in providing options for those who want to trade down and so on. But one of the crunch issues is helping those in the middle ground – now identified as suffering the sharpest affordability problems. They do not generally qualify for social housing – where in any case there are long waiting lists. But they generally do not earn enough to buy in the private market, at least not anywhere close to where they work, unless they take on a property requiring a major upgrade.
The provision of cost rental properties is one useful approach, the State is struggling to provide these at a reasonable rent. The Government also aims to increase the supply of “affordable” housing to purchase and help people to buy them. But there is still a long way to go here.
New supply is welcome across the market and apartments with rentals over €2,000 per month may get taken up by higher income earners. But they are not much use to the middle ground.