Ireland house prices raise fears of a new bubble

No. 36 Burford Drive might be any family's ideal home. With its five bedrooms, three and a half bathrooms, and high-quality kitchen, this terraced house in landscaped grounds on the site of a former golf club in the Dublin suburb of Dun Laoghaire was attracting strong interest from potential buyers one recent Sunday afternoon.

Six months ago, homes in this new development sold for just under 600,000 euros ($815,500). Now the asking price is 10 percent higher. Yet potential buyers appear unfazed. "It is cheaper than the house we live in," says Mark Cheesmore, a 51-year-old telecoms engineer who is viewing the house with his wife Emer and their eight-year-old son Liam.

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A few miles away, in the suburb of Rathfarnham, the rise in Dublin house prices in the past few months is even more visible. At Stocking Wood, a development of new houses off the M50 motorway, prices have risen from 429,000 euros in March to 489,000 euros for the latest phase to come to the market.

If any country should have a nose for an incipient house price bubble, it is Ireland. Between 2008 and 2010, it experienced one of the world's most spectacular property price crashes. From the peak in 2007 to the trough in 2011/12, house values collapsed by 60 to 65 percent.

The turnround is eye-catching. According to the Central Statistics Office, residential house prices in Dublin rose 22 percent in the year to May. The last time Irish house prices were rising so fast was between 2002 and 2005, the years immediately before the crash. This is sparking talks of a new price bubble – mostly, so far, around the dinner table.

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Still, says Mark Fitzgerald, chief executive of Sherry Fitzgerald, an estate agents: "Even if prices are up 20 percent they are still 40 to 50 percent below where they were." As the economist Dan O'Brien observed in a newspaper column recently, the price crash has been so traumatizing that "we have gone from being blasé about the risks of property price increases in the pre-2007 period to being paranoid about them now."

Ireland's property bubble in the 2000s was caused by a mix of speculative building, cheap development and mortgage finance, competitive lending by banks, and perverse incentives to keep the property market buoyant because tax revenues depended on it. None of these factors is present today. The latest round of property price inflation is being driven, experts say, by the legacy that the unwinding of the bubble has bequeathed.

The most obvious toxic legacy is a shortage of supply. Hubert Fitzpatrick, director of housing at the Construction Industry Federation, says only about 1,800 new residential units will be brought to the market in Dublin this year, compared with "sustainable demand" for 8,000.

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The main reason for this, he says, is lack of access to development finance. In the boom years, Irish banks fell over themselves to lend 100 percent of a project's cost to property developers. Seared by the collapse, they now grudgingly hand over 60 percent, at most. Developers must put up the other 40 percent themselves – and it is not easy to find.

The result is an imbalance between supply and demand the likes of which Dublin may not have witnessed before. Says Ken MacDonald, managing director of Hooke & MacDonald, an estate agency: "I've been through a lot of cycles since 1965, and I have never seen such a disparity. I don't see it getting into any kind of balance for another three or four years."

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The risk for Ireland is that this will give plenty of time for the current price inflation to become bubblier. The government says it is determined not to allow this to happen again. And yet its critics charge that it may be no more immune to perverse property market incentives than its predecessors, given the economic, social and political significance of home ownership in the Irish psyche.

In May, ministers outlined a strategy for the recovery of the Irish construction sector. Not only would there be more homes built; they would be better than the dross the speculative bubble often delivered. That initiative, however, contained a mini version of the UK's controversial Help to Buy scheme, offering mortgage insurance guarantees to first-time buyers.

The scheme is arguably too modest to inflate prices much. As Ronan Lyons, an economist and housing market expert at Trinity College Dublin, says: "Bubbles don't happen overnight." Nevertheless, he cautions, rising prices contain their own logic. "Prices are rising as a result of supply shortages. The longer that remains the case, the higher prices will go."