Soaring house prices in Dublin spark fears of new property bubble

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The spectre of property speculation is stalking Ireland once more, as soaring house prices in Dublin bring warnings that the country is in danger of repeating the mistakes that brought the economy to its knees during the financial crisis.

Property prices in the Irish capital are rising by an average of €6,600 a month, according to the country's Central Statistics Office, which puts them 24.4% higher than last year. But as demand for new homes now outstrips supply across Ireland, the body representing mortgage holders warns that the country is becoming obsessed again with inflated house prices.

The Irish Mortgage Holders Organisation (IMHO) points out that the legacy of the boom-to-bust years is still weighing on thousands of households. Figures from Ireland's central bank show 35,000 homeowners unable to pay their mortgages for up to 24 months, and 135,000 households in mortgage arrears, despite an economic upturn and expectations that GDP will grow by 2.5% this year.

IMHO founder David Hall said: "People crippled by debt and paying new austerity taxes such as property tax and upcoming water taxes are watching with shock at the new development of property porn. We see commentary after commentary that prices are rising and negative equity is reducing, yet this is no comfort to those crippled in debt. A reduction in negative equity might be of benefit to banks who consider repossessing homes. But increases in property prices do not help with a family's affordability in paying their mortgage."

Hall accuses Ireland's banks and property industry of fuelling a fake mini-boom. He claims it is designed to increase the paper assets of Irish banks before they face stress tests from the European Central Bank in October.

"This property bubble being developed by vested interests needs bursting and bursting sooner rather than later," he added. "The financial system owes a gratitude to the Irish citizen for keeping it afloat and now it needs to back off irresponsible promoting of a property bubble, which could land many citizens in deep financial trouble again."

But economists at a Dublin-based investment bank argue that the real problem in the resurgent Irish property market is supply rather than increasing demand. Philip O'Sullivan, chief economist at Investec Ireland, says high VAT rates on new homes, as well as other taxes, are the central reasons for poor supply in the market. He points out that construction of new housing units in the republic is running 25% lower than the yearly average over the past four decades. In 2013 only 8,301 housing units were built in Ireland, and the figure is not expected to exceed 9,000 this year.

O'Sullivan says: "The reality is that the effective cost of bringing a new unit to market in most of Ireland is higher than the achievable sales price at this time. This is why completions are running at about a quarter of their long-term average, while many of the units finished in the recent past involved the completion of semi-built developments from the bubble era."

He adds that a reduction in local authority charges on construction sites would increase the supply of private housing, and VAT could even be temporarily suspended to allow builders to meet rising demand. "Underlying demand is robust, so the main challenge is to find ways to encourage new supply," O'Sullivan says.

According to government statistics, the average cost of a Dublin home now stands at €349,000, a rise of €71,000 on last summer. But the picture outside Dublin is much less robust: residential property prices in the rest of Ireland have risen by only 2.3% compared with June last year.

O'Sullivan says the Irish central bank in Dublin has already promised to introduce measures to cool the market down if it reaches boom-years levels again. He adds that mortgage credit lending is 93% down on the rate of bank and building society lending to borrowers during the boom.

However, the warning from the IMHO about Ireland becoming re-addicted to "property porn" is a reminder of the cost the country paid for the house-price bubble from the late 1990s to the early 2000s, when parts of Dublin were among the most expensive real estate on the planet.

Property tycoons and business figures borrowed billions of euros from banks to buy into a market that seemed to be going in one direction – up. But when the financial crash of 2008-9 wiped out property prices, Irish entrepreneurs like one-time billionaire Sean Quinn lost their fortunes. And the banks they borrowed from, such as the notorious Anglo Irish Bank, had to be rescued by Irish and later European taxpayers from total collapse.

Since then there has been a painful atonement through public spending cuts. Last December the Irish government confirmed that it would be the first bailed-out eurozone state to leave its international rescue programme. This came three years after the country avoided bankruptcy thanks only to the International Monetary Fund, the European Central Bank and the European Union with a €67.5bn (£54bn) loan. It was accompanied by sombre warnings that the nation remained heavily indebted and austerity must continue. But finance minister Michael Noonan appeared to foresee this year's troubling housing revival. "We can't go mad again," he said.

Powered by Guardian.co.ukThis article was written by Henry McDonald in Dublin, for The Observer on Sunday 24th August 2014 00.05 Europe/London

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