The Irish property market powers up again – but is it forming another bubble?
For those working in the Irish property industry, remembering the financial crisis can be painful.
The Emerald Isle suffered more than most other European countries in the dark days of 2009, with the global recession wiping 50pc off house prices in some areas and commercial development virtually grinding to a halt.
Many property companies were so highly leveraged that when the value of their assets fell they found themselves struggling to meet debt repayments. The Irish government was forced to create the National Asset Management Agency (NAMA) to acquire property development loans from Irish banks in a bid to improve the economy.
Throughout 2009 and 2010, the entire gain of the so-called Celtic Tiger years was erased in a matter of months. But after years of decline, Ireland has seen another period of rapid growth. A report from the Organisation for Economic Co-operation and Development in June said that property prices were rising rapidly on the back of a strong economy and a shortage of housing supply.
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Meanwhile, property-related loans are also increasing as lenders become more confident about the state of the market. The job market is also stronger: the OECD noted that unemployment in Ireland had fallen rapidly in recent years, dropping below 7pc this year, having been as high as 15pc in 2012.
But is all this happening too fast? Experts are worried that Ireland’s property market may be on an inevitable curve back to bust.
“The sharp rise in prices and lending raises concerns that another bubble may be forming, and the authorities should stand ready to tighten prudential regulations if needed,” the OECD has warned.
The outlook for Ireland is more uncertain than it has been for a couple of years, with Brexit, rising interest rates, and increasing protectionism all posing a threat to the country’s economic model. Ireland, like the UK, needs more homes. Annual housing completions peaked in 2006 when 88,419 homes were built; last year that number was just 14,922. The lack of supply pushes up prices – the cost of homes is rising by an average of 12pc each year.
However, there are signs that the development market is picking up again, which could curb unhealthy growth. Plans to start building, known as commencements, rose from 2,949 in the first five months of 2016 to 7,533 in the first five months of this year, indicating that more homes will appear in the coming years. Although the lending market has improved, banks are not entirely in the clear. The number of non-performing mortgages among home owners is still high, according to Moody’s, and loans still in long-term arrears, 720 days or more, still make up the majority of the total.
But again, there are signs of a recovery: negative equity per borrower has fallen to 6pc, compared to 17pc in 2013. Gone are the days of adverts for 100pc mortgages pinned to Dublin walls. The lack of housing could come to a head in the next few years as urban centres, especially Dublin, continue to expand. The city is currently experiencing rapid population growth of 1.7pc each year, meaning that housing is unlikely to keep up with demand in the short term.
This could have an impact on the job market too. Companies keen to locate members of staff in and around Ireland’s capital have boosted an office development sector, which has otherwise delivered almost no new buildings in five years, a situation almost unheard of for a capital city in the western world. As a result, the first buildings that were started once the worst of the recession had receded are only now being completed, meaning vacancy rates are extremely low, especially in Dublin’s central business district.
Of the office buildings currently being built in the city centre, 46pc of space has already been let ahead of the developments’ completion. This rush for space has been compounded because, while many buildings are going up, lots of older stock is being demolished, explains Andrew Cunningham, head of property agency Savills’ Dublin office.
“With Dublin city centre having become so built up over the past two decades, older properties are having to make way to allow for this new development to take place,” he says.
More than 345,000 sq ft (32,000 sq m) of new office space was finished in the second quarter of the year, but almost 430,000 sq ft was de-commissioned in the same period, he says.
This sets the current economic situation apart from the previous cycle, Savills’ research shows. Development is more targeted at where businesses want space, the firm argues, meaning that there is less risk of oversupply and empty buildings that do not produce income. And the list of companies eyeing Dublin for the next base is growing rapidly. While some of this demand may be linked to Dublin’s position within the European Union, allowing businesses to retain a presence in the bloc after Britain leaves, the city is also a cheaper option than many other major centres.
Recent estimates put the number of large firms that have announced they are moving to the city, or expanding their existing offices, at 59, while major businesses known to be considering a move number at least 14. These include French bank BNP Paribas and law firm DLA Piper. Pat Gunne, chief executive of Irish property company Green REIT, knows better than most that riding out a cycle is possible. He joined the firm in 2009 when it had formed a new investment arm.
“The extent of the collapse was the most dramatic in the developed world,” he says. “In that context it has been quite a dramatic recovery.”
He explains that office rents are now at 2007 levels, but insists that the country is not heading for another meltdown. “The development community is less focused on debt and more focused on equity, so we’ve got a much healthier capital structure,” he explains.
“We’ve also got a market and an industry that is much more influenced by international players compared to the last cycle where it was an all-Irish game.”
Ireland is better at looking outwards than it used to be, he insists, although he is concerned that the lack of homes could curb the otherwise healthy commercial office market. He also suggests that Ireland needs more investment in infrastructure such as roads, schools and healthcare, in order to make sure the entire system works in harmony.
There are some fundamental differences between the Ireland of 2007 and today’s market, not least the country’s desire to be less parochial. But if Ireland is looking out more, at the moment, there are a few nervous eyes looking back.