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House prices to rise for years to come

Tuesday, September 02 16:41:57

Ireland's property recovery is just starting and home price will see increases for years to come, according to Goodbody Stockbrokers today.

Irish property prices and rents will continue to achieve significant growth in the medium term as the rapid recovery in demand continues to outstrip supply in the market, according to the new report by Goodbody.

The property cycle has moved firmly into recovery, but despite very strong price increases in the last year in both the commercial and residential segments, that recovery is still only in its early stages, it said.

Residential prices grew by 13pc in the year to July 2014 (+23pc in Dublin) and are now close to fair value, putting the recovery in line with historical experience. Prices remain 42pc below peak levels after coming back by 17pc from the trough in 2012. Goodbody analysis suggests that growing supply shortages, especially in the Dublin area, will support further increases for years to come.

"However, we would not characterise this as a 'quality' recovery, as overall market conditions are not yet back to what we would describe as normal," the report said.

"Ireland is in the midst of its fourth commercial property boom in 30 years, as limited vacancy and supply drive rental growth in the sector. Yields have fallen in response, although they still remain attractive to government bonds, which have touched record lows in recent months. We expect prime Dublin office rents to reach E670 per sq m by 2018 - more than double the low of E320 per sq m in 2012."

"From an investment perspective, the current and expected supply/demand conditions bode well for returns over the medium-term," said Dermot O'Leary, Chief Economist, Goodbody. "From an economic perspective, one could describe this as 'an uncomfortable boom' because we have not yet seen a supply response commensurate with the growing demand that the sector is experiencing. For instance, house building is running about a third of fundamental medium-term demand, while there are no new offices expected to be completed to any meaningful extent until 2016/2017. With demand conditions (employment, office take-up, and economic growth) strengthening, supply shortages are emerging, particularly in the capital, pushing up prices."

The scale of the crash in the 2007-2012 period has damaged the construction industry's capacity to respond quickly to the new market conditions of the last two years, meaning price rises and rental growth should continue unabated for the next few years. But a lack of finance, weak balance sheets and high costs have hindered new development, exacerbating the mismatch between supply and demand in the market. Nonetheless we expect impressive growth in construction activity over the coming years, with output increasing by an average of 11pc per annum through the end of the decade, Mr O'Leary added.

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