Unless one of the side effects of Covid-19 is the complete distortion of the fundamental rule of economics which is that all prices are a function of Supply and Demand, the current hypothesis that we’re expecting a house price crash is as unstable as the ‘Orange Menace’ currently residing in the White House telling everyone to inject Domestos to kill the virus.
It’s only equalled by the lack of any chat on the impending fall in the Rental market which is facing some serious headwinds driven by the same laws of Supply and Demand.
Let me start by saying that I am not about to propose that house prices will not go down. They probably will and there is a logical reason for that. I’m just proposing that they won’t fall off a cliff and that any drop will be amplified by a media determined to find a cloud inside every silver lining.
Summary for those of you looking for the headlines!
- House prices will not collapse as there is too much pent-up demand, no where near enough supply and the people who tend to buy homes are still willing and able to buy them.
- Rents will fall as there will be an increase in Supply and a fall off in Demand as the people who tend to rent won’t be coming to Ireland or will have lost their jobs as a result of the Covid Crisis.
House Prices:
When it comes to these things most economists, both armchair and professional, live to fight the last war. But this isn’t 2009. There will be no Ghost Estates. We’re not overburdened with debt as we have 50% less personal debt relative to take home pay than we had heading into 2008 (see Figure A). There will be no need for ‘fire sales’ of residential property as most builders today operate closely on a build to order basis so are not burdened with excess housing stock. These same builders operate on a typical profit margin of 15% so unless the cost of labour and materials drop significantly, it simply isn’t feasible for them to build new homes at reduced prices. And they won’t.
What do I think we will we see? I think a small reduction (3–4%?) is possible across the market over the next 3–6 months. This will come from an initial opportunism on behalf of buyers trying to negotiate prices down aligned with motivated Vendors looking for a quick sale. We will see the number of transactions decline as only those needing to sell will succumb to the reduced offer. This will lead to headlines of ‘house price crash’ but when the sample size is 20% of a normal market even the armchair economist has to allow for sampling error.
We’ll then see a 6–12 month period where both sides are caught in a version of a ‘Prisoners Dilemma’. Vendors and Builders will only sell/build if the buyers put down the Irish Independent and pay what they can afford to pay at or near the asking price for the property on the basis that that is the price the Vendor/Builder needs to justify selling it. If either decides to put their own interests first, they both end up worse off. I’m backing common sense to prevail and for prices to stabilise at close to this -3% figure.
This can be countered by the numbers of Mortgage applications. The ‘approvals’ number made all the headlines in May but what did people expect from the Banks? Were they really going to be become “flaithulach” during the uncertainty of a global pandemic? Of course not. Those figures also failed to mention the fact that most banks were struggling with having most staff ‘Working From Home’ which led to understandable delays in processing Mortgage Applications. As I write this the data for June is not yet out but I’ll eat a large slice of humble pie the approvals figure isn’t up considerably on May’s and within 10% of June 2019.
We’ll then hopefully have a vaccine and begin the road to recovery which, lets be honest, involves a lot more important issues than house prices!
Rental Market
This is the market that I believe will fall. And it’s for the very same reasons as outlined above. Supply and Demand.
Supply:
We’ve already seen the Dublin rental stock increase by 40% since this time last year (see DAFT Q1 2020 report)
This is primarily driven by AirBnB properties coming onto the market and a number of rental agreements falling through due to the dramatic impact of the Covid crisis due to the imposition of lockdown and the inability of tenants to view and move into the new property.
I believe we will see more properties come into the market as those who have lost their jobs, predominantly in the service and retail sectors that had been renting, will simply move back home as they cannot afford to rent any longer.
Demand:
This is really where the price shift will come from. A disproportionate amount of the rental market was driven by immigration into predominantly the Hospitality and IT sectors. Whilst IT is the least likely to be affected by Covid 19 it’s unlikely that we will see the kind of growth in this jobs market in the near future.
When there is the matter of the sectors most affected by the Covid crisis: Hospitality and Retail. Both would have a large proportion of employees who rent rather than own or live at home. Whilst we hope to eventually get back to normal levels of activity in these sectors there is a long road ahead. The fall off in demand from these sectors alone will wreak havoc on the Urban rental markets in particular which will in turn affect the entire market.
I believe this combination of increased Supply and reduced Demand will see rents dropping by up to 25% in some markets.
Summary:
Ignore the noise. Supply and Demand drive every market and don’t lose sleep about ‘negative equity’ returning to haunt us. Be mindful before investing in a residential property in Dublin until we see the medium-term effects of Covid 19 play out.
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