House prices in Carlow could be overvalued by 7% or more – ESRI

Residential house prices in Carlow and across Ireland could be overvalued by 7% or more, according to the Economic and Social Research Institute (ESRI).

In its latest Quarterly Economic Commentary, the ESRI said the increase in savings by households during the pandemic may have been used in the market.

The report stated that another reason for the overvaluation could be the increasing share of non-household purchasers, such as institutional investors or local authorities.

It said the recent surge in savings and wealth is not sustainable over the medium term, and that the rate of house price increases will moderate.

“Even if the increase in prices can be explained by these developments, it is clear, going forward, that the recent surge in savings and wealth is not sustainable over the medium term,” the report said.

“Therefore, changes in house prices will become realigned with movements in income over this period.

“This means that recent increases in house prices are likely to moderate substantially over the short to medium term.”

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Kieran McQuinn, research professor at the ESRI, said the estimation was carried out to the end of 2021.

“So given the very strong pace of house price growth in 2022, we’d say it’s (the overvaluation) at least 7%, if not more, at the present time,” he told RTE Morning Ireland.

“Clearly, I think the Irish market, like a lot of international housing markets, have experienced a kind of surge in prices over the last year or two.

“I think that’s mainly due to, in large part, the kind of growth and savings levels that people experienced during the pandemic.

“There’s a lot of evidence to suggest those savings work their way into the housing market, people use them obviously for deposits etc.

“But it has led to a surge in prices which has led prices to be above and beyond what we would expect them to be given the general state of economic conditions.

“Obviously, there’s headwinds coming down the market. We have rising interest rates, so I think that will cool the market considerably over the next period of time.”

The report also found there will be a slowdown in the growth of the economy and decline in living standards, but the country will avoid a recession.

It also expects inflation to average 8.1% this year and to average 6.8% next year.

Mr McQuinn said the Irish economy has been very robust and resilient, despite the international pressures and challenges, namely the pandemic and the war in Ukraine.

“It’s clear that the economy has continued to grow very strongly throughout the first half of 2022. Nonetheless, I think there is evidence that the pace of growth is beginning to slow somewhat,” he added.

“I guess that’s tied in with the persistence of the inflationary pressures that are there.

“A significant element of macroeconomic uncertainty and the prospect of a global recession, which seems to be increasing.

“So all of those factors will lead to the economy experiencing a more moderate rate of growth next year, but we still believe on balance at this stage that the economy will continue to grow next year.

“There is a very strong dynamic in the Irish economy. What we are seeing, which I think is interesting, is the very strong performance of certain sectors, in particular the ICT and the pharma sectors.

“They’ve kind of remained somewhat immune to the kind of international pressures in recent years and that has allowed the Irish economy to, in some respects, kind of buck the international trends and continue to grow.”