The uneconomical cost of building represents a major threat to the health of a property market that has only recently returned to normality, according to Real Estate Alliance.
The price of an average three bedroom semi has risen by just 1.32% nationwide in the first three months of 2015, with prices dropping by over -6% in one area of Dublin, according to a national survey carried out by the group.
The Real Estate Alliance Average house index concentrates on Ireland's typical stock home, the three-bed semi, giving a picture of the property market in towns and cities countrywide.
The average semi detached house nationally, including Dublin, now costs €187,153 the latest REA survey has found – a rise of 16.23% over the past 12 months.
However, the average house has risen by just 1.32%, or €7,005, across the country over the December 2014 figure of €184,713 – and the lack of a supply of suitable housing is a feature of the market across the country.
“There is an acute lack of supply of three-bedroom family homes because it is still not financially viable in many areas for builders to construct homes and make a profit,” said REA Chief Executive Philip Farrell.
And while Dublin led the way in the market recovery last year, prices have fallen by -0.28% in Dublin city and county in the opening quarter, where the average semi-d now stands at €352,500.
“Following the Q4 slowdown, Dublin is now feeling the joint effects of the abolition of the Capital Gains Incentive and the and the introduction of increased deposit requirements by the Central Bank,” said Philip Farrell.
“However, in areas of the capital where average values are below the €220,000 threshold, strong demand still exists from both first time buyers and investors.”
In Skerries, North Dublin, prices have dropped by €20,000 in three months, with the average semi detached home now costing €290,000.
REA agent Dermot Grimes says the Central Bank’s new deposit rules have definitely had an impact in the market, but buyers are also happy to take their time.
“Prices have come back to mid-2014 levels. The market has stagnated due to the immediate impact of the new lending restrictions, allied with the emergence of a more cautious buyer who is prepared to wait for the right house,” said Mr Grimes.
In Rathcoole, REA McGee report a €10,000 drop in prices since December to €320,000, while REA McDonald in Lucan state that prices have fallen by -1.79% in the west side of the city due to lack of supply of suitable housing.
However, while demand for smaller 3 beds and apartments is strong, Barry McDonald from REA McDonald expects the market to rebound with signs of building sites in full swing fuelling demand.
In a complete shift in the market, the biggest increases over the last year have come from what is termed Tier Three – the country areas, outside of the pale and the major cities, which have gone up by 17.28%, ahead of Dublin city’s 17.18%, and 14.82% when Dublin city and county are combined.
Taking a view over the past six months, property price rise rates in the rest of the country (5.1%) have more than trebled that of the capital (1.55%).
In the opening quarter this year, there have been significant increases in Carlow (7.50%), Kilkenny City (7.41%), Waterford City (5%) and Wexford (8%), while the rise in sterling has seen a jump in property prices in Bundoran in Donegal of 7.69%.
While uncertainty in the market over the Central Bank’s new lending deposit restrictions has played its part, Real Estate Alliance believe that supply in the market is the biggest issue that the Government needs to address.
“Our survey is taken around the country, and in almost every case, supply is the defining factor,” said Philip Farrell.
“For example, there will be a demand for 10,000 new homes in Dublin this year and there will only be 6,000 built.
“In country and commuter areas where the average value is below €200,000, supply of new homes will remain reduced even if lands become available due to profitability issues for developers who need houses to sell for above that mark.
“This is caused by the current high cost of construction which is exacerbated by the significant taxes which are payable on a new home (28% of the cost) and the recently increased building regulations.
“Until the costs of building are lowered, or the market takes an unlikely jump, we are looking at being unable to satisfy the demand that exists in the market.
“We are also seeing a series of micro markets opening up within counties such as Meath where Trim (12.9%) has shown a massive rise in the past three months while Ashbourne has actually fallen (-0.71%) in Q1.
“Ashbourne had previously shown growth in the early part of 2014, while Trim is now firmly in the focus of a new wave of commuters and showing its first significant rise.
“It now takes six weeks to sell the average house in Dublin, a week longer than it did in September 2014, while the situation in Tier Three (the rest of the country) has reversed, with time to sell dropping from seven weeks to six on average.”
The rise in mortgage buyers has continued across the nation, with cash purchasers falling from 50% of the market in September 2014 to 42% at the end of March 2015.
In Dublin, 70% of purchases are now funded by mortgages, an increase of 13 points from six months ago.
However, in the Tier Two areas of the commuter belt and the major cities, cash buyers form 43% of the market, down to combination of cheaper prices and the influence of the strength of sterling and returned emigrants.
“With the new regulations coming in, we are seeing commuters starting to move out further again in almost a second migration,” said Philip Farrell.
“In these pockets of localised demand in the commuter belt, we are seeing first time buyers now starting to look at the further extremes of Tier Two due to the fact that they will always fall under €220,000.
“Many of these have loan approval from 2014 which is due to expire in the next few months and we are seeing a “use it or lose it” scenario where we have a stock of new housing in commuter areas.
“Investors are starting to look at rental properties again, which we can see in areas such as Tallaght (+4.55% in Q1) with more affordable house prices but significant rental demand.
“Rental demand is only going one way due to many people being in a holding pattern and an Increase of 10-15% in 2014 could quite possibly be matched in 2015.
“This is happening in a more consolidated way as the amateur investor has been largely removed from the market.”