Affordability index 2008

AFFORDABILITY INDEX

Good news for first-time buyers. Affordability Index shows that it's better to live in your own house then renting. It's because of the slowing prices and thanks to new mortgage interest relief from budget 2008.

I remember 2 years ago I couldn't dream about buying decent 1 bed apartment in the city centre, it was only in the commuter cities. Now everything is changing...

This improvement is due to continued decreases in house prices and follows the introduction of the new mortgage interest relief bands in Budget 2008.

"The PTSB/ESRI House Price Index has shown that house prices fell by a further 0.7 per cent in January this year, bringing the average house price for first-time buyers to 257,222 euros, compared to 279,399 euros in January last year, a decrease of 22,177 euros in the last twelve months. Although the rate of decline in house prices will slow throughout the year, it is expected that by December, house prices may have declined by as much as 5-10 per cent. This decline will bring the average price for a first-time buyer’s home to the region of 232,000 euros to 244,000 euros, once again improving affordability further for first-time buyers. House prices have decreased over the last year as demand for housing in the market has slowed. This is due to two key factors.

Firstly, increased levels of supply of housing. Over 80,000 new homes were completed in 2006 and 78,000 in 2007. With strong levels of supply, house prices started to slow as the market reached a state of equilibrium as shown in the chart above.

We estimate that between 45,000 to 50,000 houses will be completed in 2008, as supply continues to decrease in response to falling demand, and that in the years to come completion figures will average around this level.

Secondly, many first-time buyers (and other buyers) decided to step out of the market before the election as they waited for promised changes to stamp duty. With both of these factors causing house prices to decrease, affordability for first-time buyers has seen a strong improvement.
During 2007 we saw another factor come into play. Average rents increased by just over 11 per cent, this was mainly due to increases in demand as purchasers rented while they waited before purchasing their first home.
Central Statistic Office figures for February 2008 have shown that although rents continue to increase, they are doing so at a lower level than before, which would suggest that some buyers may already be returning to the market.

Finally mortgage interest rates also impact affordability for new buyers.
During the period from December 2005 to June 2007, the European Central Bank (ECB) increased lending rates eight times by 2.00 per cent in total. When ECB rates increase, so too do standard variable rates and tracker variable rates in Ireland. At the last increase in June the average standard variable in Ireland was 5.33 per cent. The average standard variable rate is now 5.39 per cent due to the impact of the credit crunch on the cost of money. We expect that during 2008 (more likely in the latter half of the year) that the European Central Bank will reduce rates by possibly 0.50 per cent. Should this happen, it is likely that it would be with two decreases of 0.25 per cent. Both of these decreases would further improve affordability for first-time buyers by reducing the monthly cost of a mortgage repayment.

In summary, we expect affordability to improve further for first-time buyers this year on the back of slowing house prices and expected decreases in mortgage interest rates. However all of the factors in the market combined should make it easier for first-time buyers to get onto the first step of that property ladder.

Buying is more cost effective in the medium term, writes Annette Hughes
Notwithstanding the improvement in housing affordability, the current uncertainty over the future prospects for house prices is generating a dilemma for potential first-time buyers, who are faced with the decision whether to buy or rent property at this time. We consider the choice faced by first-time buyers below. " To read more please CLICK HERE.

The latest EBS/DKM Affordability Index is published by Irish Property Buyer magazine and can be found at www.irishpropertybuyer.ie