Market Fundamentals

Our view is that the residential market has been approaching equilibrium for some time, with supply gradually catching up with demand. Indeed, as outlined below, residential construction has picked up sharply in recent years both in terms of completions and pipeline supply.

Table 1: New Dwelling Completions

TIME PERIOD% CHANGE
YEAR-ON-YEAR
201637.0
201745.2
201825.2
2019 18.5

Despite Covid disruption a further 8,258 dwelling units were completed in H1 20201. On average, over the last 10 years, 44% of residential output has occurred in H1. This implies well over 18,000 units could be delivered in the current calendar year. Indeed, this could be a conservative estimate as more than 56% of the year’s output could be done in H2 given the construction sector shutdown for seven weeks in Q2.

Looking in more detail at the short term pipeline, 9,538 units were under construction in Dublin at the end of 2019. If we subtract H1’s 2,497 completions from this number, but add back the 4,372 commencements lodged over the first 6 months of 2020, it suggests current work-in-progress of almost 11,500 units in the capital – comfortably a cycle high.

Interestingly, detailed monthly data from CSO show that, once the construction sector re-opened in May, new dwelling completions returned to near-normal levels. This suggests that social distancing measures that have been implemented on construction sites are not having a major detrimental impact on productivity, suggesting that we will continue to get a strong flow of new completions over the next 12-18 months.

The demand for housing is mainly driven by population growth. While remaining strong this has plateaued in recent quarters and may now ease back.

In the short-term, therefore, the convergence of supply and demand is likely to continue, leading to a more normalised market, once the current crisis passes.

Trading Activity

Trading activity was heavily impacted by lockdown in Q2, with 9,947 sales (-34.2% y/y). If anything the impact was somewhat larger in Dublin, with sales numbers back 37.6%. However, this sales contraction has occurred within a narrow time frame. The market was strong in Q1 with sales up by 14.3% y/y nationally and by 33.1% in Dublin y/y. As a result total sales in the first half of the year are only back 10% on 2019 levels. Perhaps more importantly, there are signs that activity began to recover after lockdown with 3,475 transactions in June, up 23% on the May figure.

However, in Dublin transactions in June were still 33% down on June 2019. These numbers reflect deals that went sale agreed in February and March approximately. Assuming that, had it not been for Covid, activity in February and March would have at least matched 2019 levels, this suggests that a significant number of deals that went sale agreed around the onset of Covid-19 have not progressed to closing. It remains to be seen whether this is because the buyers pulled out or simply because closings have been delayed by lockdown.

Pricing

The June HPI data show that growth in property prices have moved sideways over the last 12 months, edging-up by 0.1% Y/Y nationally, but with Dublin prices slipping by -0.7% Y/Y. This is in line with the observation that, pre-Covid, supply and demand conditions had become more balanced.

Residential agents across-the-board are reporting strong activity since lockdown was eased. So far the pricing of new homes schemes has held firm and the new homes sector will find further support from the fact that the maximum relief available under Help-to-Buy has been temporarily raised to €30,000 until the end of this year. We previously forecast that, overall, prices in Dublin would ease back by 5-10% in 2020.

Reflecting the strong supply side, the continued labour market distress arising from Covid, a challenging base effect, and the potential for Brexit to contribute further uncertainty, this remains our view. However, there are two important caveats. Firstly, reflecting agents’ feedback of strong activity and resilient demand, we may well see the outcome land at the lower end of this range. Perhaps more importantly, we do expect that inflows into the supply pipeline will pull-back somewhat in the coming months, leading to a slowdown in supply 18-24 months ahead, which will ultimately be supportive of pricing.


1Not including ‘hidden supply’ of 1,502 units which includes student beds, refurbished properties, and completed ghost estate units. Short term lets which have been converted into long term rentals – de facto a transfer of units from the hospitality sector to the mainstream residential market – are also not counted.