The Irish economy is facing a significant challenge in meeting the demand for housing. According to underlying demographics, at least 30,000 new residential units need to be built each year. However, the supply has been falling short of this level for quite some time. Last year, there was a sudden increase in new supply, reaching 30,000 units.
The recently released 2022 Census data revealed that population growth has been outpacing the growth in the housing stock. Although there has been a decrease in the number of vacant homes, the growth in occupied dwellings averaged 23,000 between 2016 and 2021. This indicates that significantly more than 30,000 units need to be built annually to meet the current and pent-up demand.
There are several challenges that hinder the further boost in housing supply. These include higher building costs, shortages of workers, increased uncertainty regarding the economic outlook, rising interest rates, availability of funding, and delays in the planning process. Recent indicators suggest that the construction sector may fall short this year. Commencement notices have been averaging around 28,000 on a 12-month basis in the first half of the year, and the total number of dwelling units granted planning permission in early 2023 was 16% lower than the previous year.
Both the Central Bank and the Economic and Social Research Institute forecast that 27,500 and 27,000 units, respectively, will be completed this year. For 2024, the projections range from 29,000 to 30,000 units. These figures indicate that the housing supply is likely to remain below the required level in the coming years.
The most recent data from the Central Statistics Office shows that house prices experienced a slight decline of 0.2% in May. Furthermore, the year-on-year house price inflation significantly slowed down to 2.4%. Despite this, the demand for housing remains solid, especially in the first-time buyer segment of the market. The number of new mortgage approvals in the first half of 2023 was approximately 5% higher compared to the same period last year.
Looking ahead, rising interest rates could potentially dampen homebuyer activity and put further downward pressure on prices. As a result, it is expected that house price growth will continue to moderate throughout the remainder of this year. In fact, there is a possibility that prices could end the year lower. However, due to the ongoing supply shortfall, any declines are likely to be modest.
In conclusion, the Irish housing market is facing significant challenges in meeting the demand for housing. Despite an increase in supply last year, it remains below the required level. Various factors, including higher building costs and shortages of workers, are hindering further growth in housing supply. While house prices experienced a slight decline, demand remains solid. However, rising interest rates may impact homebuyer activity and put downward pressure on prices. The ongoing supply shortfall is expected to mitigate any significant declines in prices.