The Celtic Tiger image of the Irish economy has had a predictable impact on the Irish property market, according to Alan Cooke, chief executive of the country's leading property body, the IAVI (Irish Auctioneers & Valuers Institute).

The IAVI has a bi-lateral co-operation agreement with the 720,000 strong National Association of Realtors in the United States and is Ireland's principal member of FIABCI (The International Real Estate Federation). The IAVI is also a member of the International Valuation Standards Committee, the European Group of Valuers Associations and the European Property Agents Group.

For those living abroad, with a hankering to either return to Ireland or to buy a property there now, in the expectation of returning at some future date, the price spiral of Irish property prices in recent years bodes ill. The days of the idyllic thatched cottage overlooking the ocean for IR£40,000 (US$54,000) are long past.

Statistics

With all due regard to the old expression "lies, damned lies and statistics", the latest Government figures show that in the last quarter of 1998 the average price of a new home nationally was IR£106,514 (US$143,300) with second hand homes averaging IR£116,403 (US$156,600).

In Dublin, new homes now average IR£132,941 (US$178,800) and second hand homes IR£148,745 (US$200,000). It is now more expensive to buy a home in Dublin than in most of the other European capitals.

Why has this happened? Why have official average Dublin house prices risen by approximately two thirds (67%) in just two years from December 1996 to December 1998? What are the prospects for the immediate future?

Background

The Irish Government appointed Dr. Peter Bacon, a noted economist, to undertake a major study into the reasons for rising house prices in Ireland with a view to making recommendations to curb the spiral. Dr. Bacon's first report emerged in the spring of 1998 and resulted in a special Finance Act being passed giving effect to many of his proposals.

The market did not react immediately, but by the latter half of 1998 there was anecdotal evidence showing that the price pressure on the key element from a Government viewpoint, starter homes, was beginning to be alleviated.

Members of the IAVI reported that buyers visiting show houses or apartments for new homes were, towards the end of 1998, able to return two or even three times before having to make up their minds about a purchase. This contrasted starkly to the picture in late 1997 and early 1998 when long overnight queues or line-ups formed to buy new homes off plans with, on occasion, money changing hands simply to move nearer the front of the queue.

Surely, some argue, the level of price growth experienced in recent years is simply unsustainable. In the view of the IAVI such growth rates are unsustainable in the long term. However, this does not mean that the Irish property market, in particular the housing market, is facing a crash.

Demographics

One of the key factors identified by Dr. Bacon during his studies (a second followed in late 1998 with further proposals adopted by Government early this year) was that of rapidly changing demographics - i.e. the actual makeup of Irish society was changing rapidly.

The Irish population is young by international standards, with the peak of our 1980s baby boom only now in the latter years of their second level education. This factor alone will boost demand over the next 6-8 years as these young people emerge as workers and consumers of all products, including property.

In line with other European countries, Ireland now has divorce on the statute books although legal separations have been a fact of life in Ireland for many years. Young people are "leaving the nest" at an earlier age and setting up home alone, often with no plans for marriage - the spur that would normally have led to their parents' departure from their own homes a generation ago.

The sad old tale of Irish emigration has been transformed into a vibrant tale of substantial net immigration. Many tens of thousands of former Irish emigrants are returning home with money and skills to take their share in the booming Irish economy that is growing at rates several times the EU average. They are being joined by non-nationals bringing needed skills to a successful economy competing at the cutting edge of modern commerce.

Internally, the migration from rural areas towards major cities continues unabated as Ireland switched from a historically agricultural based economy to one driven by IT, construction and tourism. This internal migration has only been partially offset by genuine efforts to decentralise the work of Government Departments and State Bodies.

All of these factors placed huge strain on the level of demand that rose to unprecedented heights, particularly in the cities. The construction industry has for several years now built record numbers of new homes.

With a housing market of approximately 1.1 million homes, a construction level of something over 40,000 new homes annually should match demand in normal circumstances. But circumstances are not normal and, as a result, the value of homes grew out of all proportion to either normal inflation or salary increases.

By the beginning of 1999 it appeared that the short-term effects of Bacon's first report had abated and price inflation kicked in again.

The difficulty facing Government is that many of Bacon's proposals involve drastically increasing the supply of new housing - the ultimate cure for the markets current imbalance. But this involves changing attitudes to major issues such as road infrastructure, planning and zoning, the provision of essential water and sewerage services, height restrictions and densities. Densities in Ireland have been traditionally low at about 8-10 houses per acre, in part at least creating the land shortage now facing us in our cities.

The Immediate Future

Some harbingers of doom predict for the Irish housing market the type of crash experienced in the 1980s in southern England. The vast majority of economists, however, see no reason why demand will not substantially outstrip supply in the Irish housing market for several years to come.

While, undoubtedly, the actual rate at which house prices are increasing must reduce, prices themselves, according to these same economists, are not likely to actually downturn in the foreseeable future.

The lowest interest rates for decades, a booming economy with record Government budgetary surpluses annually, an extremely strong IT sector (Ireland is the second largest exporter of software in the world and is the European headquarters for most of the United States' leading IT companies) and a young population will all sustain demand into the future.

What we must ensure is that lending norms are maintained so that, when interest rates inevitably rise above their current bargain basement level, borrowers are not in difficulty. Barring that, it should take a general and marked downturn in the international demand for IT and related products and services over the next few years before the Irish market property will come to a standstill.

Those interested in the Irish property market could do worse than check on the IAVI web site, Ireland's leading property site, at www.iavi.ie where, under the front page heading "Buying Property in Ireland", a wealth of information on the methodology of the Irish property market can be found.

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