Families now taking on Celtic Tiger-level debts to buy home, ESRI report warns

Following the steep rise in house prices, “the ratio of mortgage repayment to income has risen quite sharply in recent years”, the report published today says.

ESRI researchers have already calculated that overvaluation in the housing market stands at 8pc-10pc. Although not at Celtic Tiger levels, this is still regarded as somewhat dangerous, because it increases the risk of a correction at some point.

“Broadly speaking the market isn’t at quite the stress levels it was in 2008 but there are one or two developments worth keeping an eye on, and one is the household debt service ratio,” Professor Kieran McQuinn of the ESRI said.

“This is the ratio of mortgage repayments for new properties to household income. It gives you an idea of the potential stress that new mortgage holders might be experiencing as they enter the market.”

Broadly speaking the market isn’t at quite the stress levels it was in 2008

In the second quarter of this year, the ratio stood at 33.3pc, the highest it has been since the second quarter of 2008. The ratio fell sharply during the crash, due to the collapse in house prices.

“It stablished from 2011 to 2020 but it has been growing recently again,” Prof McQuinn said. “It’s worth keeping an eye on, because these households are potentially more susceptible to employment or financial shocks.”

He pointed out that because of the nature of the credit market, households drawing down mortgages over the last 10 years tended to have more secure or higher-paid employment, so they may not be as susceptible to economic shocks, such as loss of employment, as people were before the crash.

“We are facing into a period of easing interest rates, which should help the debt-service ratio, but it will also have a stimulatory impact on house price growth,” he added.

The ESRI report points out that the rising household-debt ratio, and rising house-price-to-income ratio, puts a question mark over whether some sections of the population will be able to buy homes.

The Central Bank of Ireland must be particularly vigilant and prudent

“While credit growth is not as significant a factor as it was in the pre-Celtic Tiger era, there is recent evidence to suggest the growing contribution to recent house prices of changes in the loan-to-income ratio,” the report says.

“Consequently, the Central Bank of Ireland must be particularly vigilant and prudent in any review of the mortgage measures in its macroprudential policy framework.”

Overall, the ESRI forecasts that the Irish economy will grow into 2025, with the domestic sectors performing particularly well. Modified domestic demand (MDD), regarded as the most accurate measure of underlying Irish economic performance, is expected to grow by 3.2pc this year and by 4.1pc next year.

Today's News in 90 seconds - 12th December 2024

In terms of housing output, the ESRI said it is sticking by its forecast for 33,000 units to be completed this year. “Nevertheless, there have been over 49,000 commencements to date this year, and if these follow a typical investment pattern, the number of completions should be close to if not above 40,000 for 2025,” it says.