By Conor Lambe, Economist at Danske Bank
In Northern Ireland, one area which was particularly impacted during the global financial crisis was the local housing market. After a number of years of price rises in the early 2000s, Northern Ireland house prices decreased every year from 2008 to 2013, according to data published by Land & Property Services and the Northern Ireland Statistics & Research Agency. From peak-to-trough, the average house price fell from almost £225,000 in the third quarter of 2007 to around £97,500 in the first quarter of 2013, a fall of 57 per cent.
However, in recent years the Northern Ireland housing market has been recovering, with the average rate of annual price growth since the first quarter of 2014 exceeding 7 per cent. A number of months ago there were some concerns that uncertainty resulting from the Brexit vote could lead to housing markets throughout the UK seizing up. But the impact over the last ten months has not been as severe as some feared.
Looking forward, I expect property prices in Northern Ireland to rise again in 2017 for three main reasons.
Firstly, the local housing market is still in recovery mode. In the UK, the average house price reached just over £190,000 in September 2007. It surpassed that level in 2014. Whereas in Northern Ireland, house prices are still 44 per cent below their 2007 level.
Too sharp a return to previous peak prices would not necessarily be a good thing. Recent data from 2014 onwards shows an upward trend in local property prices ranging from a high of 8.7 per cent annual growth in the fourth quarter of 2014 to a low of 5.7 per cent at the end of last year. However, these numbers are a far cry from the annual growth rates of over 50 per cent that were witnessed during the first half of 2007.
Secondly, the low interest rate environment is providing support to borrowers. The UK policy rate is currently at an historic low of 0.25 per cent. Inflation is rising but this is mainly a consequence of exchange rate movements, rather than rising wages and excess demand in the economy. This was evident in the latest labour market data which showed that, for employees in Great Britain, annual real wage growth excluding bonuses in the three months to February 2017 was just 0.1 per cent.
Therefore, with Brexit negotiations on the horizon, it is expected that the Bank of England’s policymakers will look through this higher inflation and keep interest rates at their current level for a while yet. And when rates do eventually begin to rise, it is likely to be at a slow and gradual pace. When interest rates are relatively low, mortgage repayments are more affordable for many households. Therefore, current monetary policy is likely to be having a positive impact on demand for housing in Northern Ireland.
Thirdly, some of the drivers in the Northern Ireland housing market are currently contributing to upward pressure on prices. Local house prices remain relatively affordable, so people are not being priced out of the market in the same way that they might be in London and the South East of England. Demand for houses seems to be outstripping supply which leads to rising prices. And data from the Council of Mortgage Lenders showed that in the final quarter of 2016, mortgage lending increased in Northern Ireland, while it fell in the UK. This implies that finance is available in the local market for credit-worthy borrowers looking to buy a home.
However, it would be wrong to say that there are no issues with the potential to adversely impact the Northern Ireland housing market in 2017. The Brexit process is now underway and there is considerable uncertainty around what the UK’s future relationship with the EU will look like, and what the associated longer-term impacts on, for example, employment levels, wage growth and living costs, might be. This heightened uncertainty about the future could deter some potential homebuyers now, and indeed the latest data shows that annual house price growth in Northern Ireland did slow in the third and fourth quarters of 2016.
This slowdown could well continue so all eyes will be on the next release of Northern Ireland House Price Index data in mid-May, which will show how house prices moved in the first quarter of this year. As things currently stand, 2017 is expected to mark another year of recovery in the Northern Ireland housing market.
This article was published in the News Letter on 9th May 2017.