Finance

The NI housing market rally – etched in stone or scratched in the sand?

Soaring prices, a sharp ramp up in the number of transactions and a fevered market where asking prices regularly top 20% over the asking price.

Such a descriptor could be used to lead a story on the Northern Ireland residential property market today, or indeed nearly 15 years ago during the peak of the boom years preceding the credit crunch in 2007.

The market certainly felt similar, with buyers then, as now, adopting a sense of urgency to bag the right property and sellers able to call the shots, but just how close are today’s conditions to that unprecedented time?

It is a question which is certainly worth pondering given the well-publicised slump which was to follow, with house prices across the world falling sharply from 2008 onwards.

Northern Ireland was particularly hard hit, with residential prices collapsing around 60% on average as the lending spigot was turned off overnight to all but the safest borrowers.

A quick look at historical prices shows that in most areas of the UK average house prices have not just recovered to pre-credit crunch levels but have resumed an upward trend to new highs.

Northern Ireland too has been on the rise with prices jumping 9% over the last year alone, according to the latest Residential Property Price Index, the most accurate measure of the market which uses actual transactions to peg prices.

So, are we back into dangerous territory as far as the housing market is concerned and close to the precipice again?

Unlikely, according those in the know.

Take, for example, the fact that with an average house price currently of £153,449, the region is a long way from the all-time average house price peak hit in the third quarter of 2007 of £224,670.

It’s worth emphasising that gap once more by pointing out that 14 years ago house prices in Northern Ireland were 32% below current levels.

Take inflation into consideration and the premium is even more steep with 2007’s peak coming in at £303,000.

House prices now are nearly half the level they were in 2007. Nearly half.

So, there is one good reason why the current rally isn’t becoming an identikit market to the boom times.

But there are plenty more, as a quick email to one of the economists who has been charting the boom and bust of the Northern Ireland economy during those rollercoaster years will elicit.

Richard Ramsey, Chief Economist, Northern Ireland, Ulster Bank

“It is different this time around,” he said, summing up the market succinctly. “The scale of the price rises being experienced today are still very tame relative to 2005-2007.”

Unsurprisingly, much of the difference comes from the credit market, although perhaps counterintuitively credit is now even cheaper than it was before with a bank rate of today of 0.1% a far cry from the 3.5% in the summer of 2003 or 5.75% in the summer of 2007.

The real difference, Mr Ramsey said, lies in the fact that more expensive credit was available to a larger section of the population in the period up to 2007 that it is today with the likes of self-certification mortgages – where applicants didn’t have to prove their income – which quickly became the infamous sub-prime mortgages.

He pointed to the fact that although the sub-prime market was well known as a reason for the downfall of the US market, it was also a factor in Northern Ireland too, hence the boom in available credit and the buy-to-let property trend where multi-property landlords were commonplace.

Nowadays, the situation is very different.

“The property boom in the noughties was really an investment boom where people were buying investments,” he said. “Housing was just a vehicle for that.

“The latter part of the boom in 2006/2007 was driven by speculators, property flippers etc. This time around the boom is people buying homes (some second homes) but not investments.

“Buy-to-let is not the same attractive proposition as it once was.”

The reason for the latter assumption is that the rental market benefitted in the years from 2000 to 2007 from the arrival of workers from Eastern Europe, something which has been curtailed by Brexit.

Conversely, the migrant flows are from Great Britain to Northern Ireland tend to be returners wanting to buy property, not rent, particularly at the higher end of the market and eventually helping to push purchase prices higher.

That demand for larger properties can be seen in the statistics.

Today terraced properties account for only 26%/27% of sales – as opposed to 36% in 2005/2007 – while detached properties are the dominant category for house sales in the last few quarters at 33%, slightly ahead of semi-detached and terraced in third place.

“This highlights a key difference than the demand is strongest at the higher end/larger properties whereas the noughties boom was at the lower end and smaller properties,” Mr Ramsey said. “It is not just the share of the market that is impressive for detached properties, but also the volume.

“The fourth quarter of 2020 and first quarter of 2021 were the best fourth quarter and first quarter for detached property sales on record. The second quarter was the second best second quarter on record behind the second quarter of 2006.”

Some niche economist statistics perhaps but a good example of the change in the structure of the market.

Other reasons why the current rally differs from 15 years ago is that competition from the banks is not as fierce, scarcity of stock is more of an issue (there were 51,000 transactions in 2006/2007 compared to just 25,400 for the last financial year while the pandemic meant that housing completions – new builds – hit a record low in the second quarter of last year) and the capacity of large house building firms which were commonplace back then has yet to be replaced.

So, it appears that while the housing market in Northern Ireland may appear to be in a period of boom times, the fundamentals suggest the rally is built on stronger foundations that in the lead up to the credit crunch.

But just as calling the collapse of the market then would have taken a crystal ball then, so to its short, medium and long-term direction from here.

“Given that Northern Ireland’s property prices are one of the most affordable regions in the UK coupled with the new era of working from home, we are likely to see a steady stream of people from outside Northern Ireland avail of the current quality of life arbitrage opportunity,” Mr Ramsey said. “On what scale remains to be seen.

“This external source of demand further adds to the existing supply constraints as houses freed up in GB aren’t available to buyers within the local market. Strong demand and an under-supply of adequate stock looks set to underpin house prices in the near future.”

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