By Conor Lambe, Chief Economist at Danske Bank
Throughout March, I’m going to be travelling around Northern Ireland to speak at a number of business events. Unsurprisingly, many of these events will be focused on Brexit. But that’s not the only topic I’ll be discussing. I’m also going to be speaking about the Northern Ireland housing market and the outlook for house prices in 2019. So how is the local housing market performing?
The latest data shows that it’s doing pretty well. Between the last quarter of 2017 and the final quarter of 2018, house prices here increased by 5.5 per cent. This marked the 21st consecutive quarter of year-on-year price rises and also represented the fastest rate of house price growth of all the regions of the UK.
It’s worth noting that these price rises were broad based – the price of detached houses, semi-detached houses, terrace houses and apartments all increased over the year to 2018 Q4, as did the price of both new properties and existing dwellings. There were also year-on-year increases in house prices across all eleven Local Government Districts in Northern Ireland.
Of course, we always need to be careful about what we consider to be a ‘good performance’ for the housing market. As witnessed in Northern Ireland in the not too distant past, very high and unsustainable house price rises can lead to major problems. But the average annual house price rise over the last two years of 4.2 per cent appears to be a more sensible rate of increase, especially given recent stronger rates of wage growth.
Turning to the year ahead, like most things, the performance of the housing market will be dependent on the outcome of the Brexit process. But assuming that a no-deal Brexit is avoided and the UK leaves the EU in an orderly manner, I expect the housing market to perform relatively well again over the course of 2019.
In reaching this conclusion, I have considered six key factors which are likely to impact upon the housing market – earnings growth, affordability, interest rates, the availability of finance, housing supply and Brexit.
Given the good performance of the labour market, earnings growth in Northern Ireland is relatively strong. The latest data from both the Annual Survey of Hours and Earnings and the Labour Force Survey shows that wages in Northern Ireland are on the up, while the 2018 Q4 Danske Bank Northern Ireland Consumer Confidence Index revealed that almost a quarter of people identified rising wages as the factor that had the largest positive impact on their confidence levels. This strong wage growth should continue to have a positive impact on demand for housing this year.
Housing in Northern Ireland remains relatively affordable. Of all the regions of the UK, only the North East of England has a lower average house price than Northern Ireland. The house price to earnings ratio is considerably lower in Northern Ireland (4.8) than it is in England (7.9) and Wales (5.8). And data from UK Finance for 2018 Q4 shows that the mortgage to income ratio for first-time buyers in Northern Ireland was 3.03 and for home movers was 2.69. That is lower than the 3.66 for first-time buyers in the whole of the UK in December 2018 and the 3.45 for home movers. This relative affordability means that the housing market in Northern Ireland is more accessible to people looking to buy a house than it is in other parts of the UK.
Low interest rates are also continuing to support demand for housing. While the Bank of England’s Monetary Policy Committee (MPC) has increased interest rates a couple of times over the last 18 months, and signalled that future rises are expected, the MPC has consistently indicated that interest rates are likely to rise only gradually. Therefore I think that, on balance, the current interest rate environment remains broadly supportive of demand for housing.
Another determinant of the demand for, and price of houses, is the availability of finance. Again, data from UK Finance gives us some information in this regard. In the fourth quarter of 2018, the value of mortgage lending to first-time buyers in Northern Ireland was 19.2 per cent higher than a year previously and the amount of new lending to home movers increased by 13 per cent. This suggests that finance for housing is available in Northern Ireland for credit-worthy borrowers.
Like the rest of the UK, Northern Ireland is in need of more housing stock with survey evidence continuing to suggest that there is a lack of supply in the local market. This lack of supply is continuing to put upward pressure on prices and this will likely remain the case this year. However, against this backdrop, it is encouraging to note that the number of new dwelling starts in 2018 was the highest since 2007 and the number of completions was last higher in 2009.
While all the points discussed above are broadly supportive of further price rises, there is one important factor that is having a negative impact. The uncertainty caused by Brexit is likely leading some people to behave cautiously when it comes to buying a new home. With economic chaos in the event of a no-deal Brexit still a possibility, and uncertainty around the long-term relationship between the UK and the EU expected to persist, demand for housing is likely to be held back somewhat by high uncertainty levels this year.
To sum up, in 2017 house prices in Northern Ireland increased by an annual average rate of 3.8 per cent. Last year, the increase was 4.6 per cent. With earnings growing strongly, local house prices remaining affordable, low interest rates supporting demand, finance available to those that can afford it and supply constraints persisting, even in the face of Brexit-related uncertainty, I expect house prices in Northern Ireland to increase again in 2019.
This article was published in the News Letter on 5th March 2019.