• Sharp drop in June testifies to weakness of domestic activity and housing market in Ireland in early 2011.
  
• Uncertainty, squeeze on purchasing power and credit constraints still hitting transaction levels.
  
• Sharp drop in Dublin prices may be a correction following small rise in May.

Irish residential property prices posted a large 2.1% monthly drop in June to stand some 12.9% lower than a year earlier.  According to the Central Statistics Office, the cumulative drop since the September 2007 peak in Irish house prices is now 42%.  The monthly drop in June was the largest since May 2009 and came after comparatively small declines in the two preceding months.  As a result, the average monthly decline in the second quarter of 2011 at 1.4% was very similar to the average drop of 1.5% seen in the preceding three months.

It is not possible to say definitively whether the sharper drop reported in June points towards increased weakness in the Irish property market of late or simply represents a statistical catch-up following slightly smaller declines in preceding months.  That said, it is clear that the Irish housing market has remained depressed through the first half of 2011 as heightened uncertainty, weak domestic economic conditions and rising interest rates all weighed on potential demand while credit supply remained constrained.

The CSO house price data are based on mortgage draw-downs.  As a result, today’s number relates to purchasing decisions made between three and six months earlier.  For this reason, the CSO data tend to provide formal confirmation of other evidence rather than acting as a leading indicator of housing market conditions.  The June CSO Housing Price data relate to purchasing decisions initiated in the immediate aftermath of the bailout and a very tough budget which together with a general election would likely have sharply restrained purchasing intentions. 

The weakness in today’s CSO house price data is consistent with the particular weakness in mortgage approval numbers for the first quarter and a range of anecdotal evidence on housing market activity.  The sharp down in mortgage approvals in early 2011 – purchase related approvals were down 45% on the first quarter of 2010, implies that transaction levels have been very depressed of late.  So, the weakness in the housing market is probably reflected to a greater degree in volumes rather than prices.  However, sellers may have had to reduce prices further to ensure sales.

One of the more notable aspects of the June release is the relatively sharp adjustment in Dublin prices – down 2.4% on the month compared to a 1.9% drop outside the capital.  This contrasts markedly with the rise in Dublin prices seen in the previous month and may suggest a technical correction following the surprisingly good May figure.  At another level, today’s data may also speak of greater flexibility in pricing in the Dublin market that may reflect notable differences in market structures – in the Dublin market, a comparative greater number of potential buyers may mean the prospects of a sale could be improved significantly by relatively modest further discounting.

In summary, today’s numbers confirm continuing weakness in the Irish housing market that is reflective of broader difficulties in domestic economic conditions as well as particular problems in relation to the ability of potential house purchasers to commit to and fund long-term financial obligations.  The particular weakness in the June house price data accords with a significant amount of anecdotal evidence that suggests the housing market adjustment is likely to continue until a convincing turnaround in domestic economic activity and employment is clearly established.

Austin Hughes
KBC Bank
Sandwith Street
Dublin 2.
http://www.kbc.ie/