• Year on year decline nationwide remains steady at 12.2%
• Drop in Irish property values continues to be notably more severe than US or UK
• Monthly rise in Dublin house prices probably a statistical quirk…
• … But larger adjustment and more fundamental support means we should watch for hints that a protracted and uneven bottoming out process could be beginning.

The CSO’s new residential property price index shows a 1.2% drop in Irish property prices between April and May that translates into an unchanged 12.2% decline year on year.  The May data are consistent with continuing weakness in the housing market as a whole but also hint somewhat surprisingly at tentative evidence of a bottoming out in Dublin house prices that contrasts with greater weakness in the property market outside the capital.

The cumulative fall in Irish property prices since the 2007 peak now stands at just under 41%.  This drop is notably greater than that seen elsewhere.  In part this is because the downturn was preceded by more rapid price increases in Ireland but also because the broad economic climate has been markedly weaker than elsewhere in recent years.  The Case Schiller House Price Index shows a cumulative 31% drop in US house prices since the 2006 peak while the Halifax House Price Measure shows a drop of just under 20% in UK house prices since a late 2007 peak.  Diagram 1, which looks at how property prices have changed since the peak in Ireland, the US and UK, emphasises both the greater scale of the decline in Irish property prices and the consistently weaker trend evident through 2009 and 2010.

 
The most notable feature of today’s CSO data is a surprising rise in Dublin house prices between April and May (+0.4%).  It would be premature to suggest this points towards a turnaround in Dublin property market conditions.  Most economic data series display occasional random movements that are at odds with the underlying reality.  It will take some time to familiarise with the sort of substantial quirks from the new Index may throw up.  Occasional monthly property price increases have been rare but not entirely absent from Dublin data for recent years.  There was a marginal increase reported for Dublin house prices in August 2010 and in both August and September 2009.  However, May figures were relatively weak in 2009 and 2008.  So, the rise in today’s data doesn’t seem like a seasonal bounce.

While the bounce in Dublin’s house prices is most likely explained as ‘statistical noise’ rather than a marked change in circumstances, it should be recognised that property prices in Dublin have fallen notably further than elsewhere since the peak - 47.4% against 37.7% - in marked contrast to price trends in the principal cities in the US or UK.  In addition, oversupply in the typical 3 bedroom semi segment would be notably less pronounced in Dublin than in many other areas.  In this context, the May data show a continuing fall in Dublin apartment prices.  Finally, it might be expected that the breadth of employment opportunities around the capital would support the prospect of an earlier turn than in some other areas.  For these reasons, the improvement in Dublin house prices in May could be consistent with expectations of a protracted and uneven bottoming out process in the Irish property market that would give rise to contrasting fortunes in different market segments.  We think the May data probably owe more to statistical quirks than a turnaround, given the scale of uncertainty in relation to income and credit prospects that prevailed across the Irish economy in early 2011.  However, upcoming house price releases will be watched closely for evidence that a more positive interpretation of property market conditions is warranted.

KBC Bank Ireland plc,
Sandwith Street,
Dublin 2.