Batt O'Keeffe (Cork North West, Fianna Fail)

I welcome the opportunity to address the House on developments in the housing market and to hear the views of Members on a topic that is of great importance not only to my area of responsibility but to the overall economy.

The past year or so has seen significant changes in the housing market. A key point I want to make is that recent trends in aspects such as house prices and housing output involve, essentially, a return to a more normal and sustainable pattern and will not necessarily have negative results as some media comments might suggest.

Why then one might ask is there so much talk about a housing market slump and pleas for the Government to reduce or abolish stamp duty? Part of the answer is media hype, but many commentators have also made the mistake of comparing current data with the exceptionally inflated levels to which house prices, lending and sales had risen in 2006 rather than with more realistic longer-term trends. Not surprisingly, particular interests that had become accustomed to very high returns from an inflated market are feeling some discomfort, which is being voiced in pleadings for Government concessions on stamp duty. I will return to this later, but first I would like to present some facts and comparisons that provide a valid assessment of the current state of the housing market.

Regarding house prices, the official figures for the second quarter of 2007 — based on returns from all lending institutions — show that average second-hand house prices nationally fell by under 2% since the start of the year and that the new house price average increased by around 6%. The Permanent TSB-ESRI index in August indicated an overall reduction of 3.3% in average house prices nationally since the start of 2007. Sherry Fitzgerald estate agents recently reported that the average price of a second-hand property nationally had reduced by 4.5% in the year to date.

A recent report by the Internet site Daft.ie showed a reduction of around 2% in asking prices of houses generally since July but a very slight increase in the past 12 months. MyHome.ie recently reported asking prices overall down 0.7% in the third quarter of 2007 on the preceding quarter and 1.4% below their peak 12 months earlier.

Perhaps the most important fact — which many commentators have missed — is that average new house prices nationally in the middle of this year were still 27% above what they were at the start of 2005 and second-hand house prices were 20% higher than the 2005 comparison. Similarly, the Permanent TSB index at August 2007 was about 18% higher than at the start of 2005. After some 12 months of a cooling in the housing market and endless prophecies of doom, there is no evidence to date of a collapse in house prices. Instead, the statistics show a long-term trend that is strong but healthier now than last year.

In regard to the volume of sales in the market, Members will have seen numerous claims along the lines that "nothing is selling". Returns to my Department from the mortgage lending institutions do not support this. For example, during the first nine months of 2007, more than 66,000 mortgage loans were paid out and almost 76,000 new mortgages approved. These figures include around 33,000 payments and 32,000 approvals for newly built dwellings. Adding purchases funded without mortgages or through commercial loans, it is evident that, although the volume of transactions has certainly reduced, the housing market is still very active and far from collapse.

As with house prices, it is instructive to compare this year's lending figures with the trend prior to the explosion of lending in 2005. The volume of loan approvals in the first nine months of 2007 was less than 5% lower than in the first nine months of 2004. This suggests that the level of activity in the market is largely returning to a more normal long-term pattern.

The other key housing market indicator is the level of new house completions. New house output to the end of September totalled more than 56,000 units, on target for an outturn in the region of the projection in the DKM construction industry review and outlook of up to 77,000 units this year. If achieved, that would be one of the highest levels of output ever. House building activity remains very strong, producing more than five times the rate of output of our nearest neighbour, the UK; our rate of output is 18 per 1,000 population compared with about four per 1,000 in the UK.

Commentators predict further reduction in output in 2008, with forecasts generally ranging from 60,000 to 65,000 units. That would represent a significant reduction on the 2005 and 2006 levels when output over the two years combined reached almost 175,000 units. That rate was well above international levels and not sustainable on an ongoing basis. However, as in the case of house prices and loan volumes, the anticipated future output trend is not out of line with the longer-term pattern and what is likely to be a sustainable level of output, especially if allowance is made for the likelihood of a degree of over-curtailment by developers in the short term. For example, it would be higher than anything achieved prior to 2003 and in line with estimates of around 600,000 residential units over nine years underlying the Government's policy statement earlier this year.

What conclusions can be drawn from recent trends? Some prophets of doom will claim, even if the housing market has not yet crashed, that it will do so in the future. There are no certainties. Economic performance will be the key determinant of the future development of the housing market and circumstances can change, but aside from the possibility of some significant economic setback, for example, in a global context, the prospects look positive.

Several months ago, I commented in an article on the housing market that a transition to a more balanced and mature market in output, purchasing, lending and prices was under way. The data I have quoted from a range of sources lend clear support to this analysis. To assess accurately the current state of the housing market, it is necessary to see recent changes in the perspective of developments during 2005 and 2006.

The 18 months up to the third quarter of 2006 saw dramatic house price escalation. Underlying demand for housing was already high owing to strong economic performance and the high intake of workers following EU enlargement. The impact of these fundamental factors on demand and prices was greatly magnified by a large expansion in mortgage lending since 2005, with 100% mortgages, 35 and 40-year terms and interest-only mortgages. The buying frenzy was further fuelled by hype about buyers being excluded from the property ladder. With the glut of credit in the market and many buyers bringing forward purchases to avail of 100% loans, it was not surprising that overheating occurred.

Unprecedented levels of house prices combined with a doubling of interest rates seriously damaged affordability, leading inevitably to a weakening in the volume of purchases and in prices. What happened over the past 12 months has, essentially, been an unwinding from unsustainable price levels and a rolling back of the irrational escalation that occurred during the previous 18 months. Recent reported cuts in asking prices towards the higher end of the market merely show how inflated some segments of the market had become.

The ESRI's latest quarterly economic commentary predicted the annual average price of a new house in 2007 is likely to be 3% lower than in 2006. This would suggest that house prices generally at the end of the year could be expected to be in or around where they would have been had the market continued on a path of moderation in the 2005 to 2006 period.

Amid hype and speculation about market slumps, crashes or hard landings, many commentators seem to have lost sight of the fact that moderation in house prices has given first-time buyers a welcome chance of owning a house without resorting to excessive levels of mortgage debt. It is now a buyers' market, which is good news for both first-time buyers and people trading up.

Those who comment in negative terms about house price moderation should reflect on where a continuation of the price escalation that prevailed up to a year ago might have led. I question comments about the value of people's homes being affected by market softening or uncertainty. Such comments seem to imply that house purchase is some sort of speculative venture or, possibly, a source of paper wealth to fund consumer spending. The promotion of 100% loans and interest-only mortgages also reflected an expectation of continuing house price escalation, with house purchase seen as a means of building up equity from a zero starting point. There has now been a welcome retreat from these practices and recent events in financial markets globally should further discourage such attitudes from becoming embedded in the housing market.

House purchase is fundamentally about getting a place to live. The fact that house prices are no longer escalating does not create uncertainty for home owners, nor does the reduction in the average price index diminish the intrinsic value of any household's home. Similarly, a person's home is not put at risk simply because average prices may have levelled off or even if they reduce somewhat. The concept of negative equity is not relevant to most home owners. Recent research shows the majority of first-time buyers do not intend moving from their homes in the short term. Most buyers are not, therefore, likely to be affected, even if there is a short-term fall in house prices. Even those trading up are better off in a climate of price moderation because the net additional cost will not be as great as it would be if there was still rampant house price inflation.

Affordability of repayments is the key issue for most prospective and recent buyers and the doubling of mortgage interest relief in the last budget — to €16,000 for married or widowed persons — has been very beneficial to them. The agreed programme for Government contains a commitment to provide, in budget 2008, for further increase in mortgage interest relief, bringing the ceiling as high as €20,000 for couples and widowed persons. These measures, together with indications of a levelling off in interest rates, provide a considerable measure of assurance to existing mortgage holders and make house purchase more attainable for prospective first-time buyers.

House price moderation may not be such good news for those who charge fees for their services as a percentage of the overall house price or for institutions whose annual growth figures were boosted by the cycle of bigger loans, higher prices, and further increased lending. Auctioneers now need to sell the market more vigorously and get across the message that there is now better value to be had. Builders will no longer find units flying off the plans. They will not find people queuing outside their building sites. Instead of focusing on how they can shore up prices, one hopes they will concentrate on providing good value through greater price resistance in relation to land, inter alia. Mortgage lenders need to follow a prudent but reasonable approach rather than simply trying to boost growth figures in the short term. At the same time, it would be unhelpful if any over-reaction by lending institutions were to contribute to cyclical weakening in housing output, just as it helped to fuel price escalation in the over-heated market of 2005-06.

Owners trading up or down should realise that, by reducing unrealistic price expectations, they can gain at the other end of the transaction. I expect auctioneers to play their part in delivering this message even if lower transaction prices will inevitably mean lower commission in the shorter term.

Housing output is running at a lower rate than was expected at the start of the year. Last January, the CIF was reported as expecting more than 90,000 units to be constructed in 2007, which would lead me to question the basis for recent forecasts from the same source that housing output next year could be well below what most reputable commentators are predicting. Output this year is still likely to come in at a very respectable level. It also should be noted that while output generally is down, it is quite strong in some key centres, with increases, for example, in Cork city, Dún Laoghaire-Rathdown and south Dublin, while some other areas of high demand are also performing above the national average.

The industry needs to manage the adjustment in output in a measured, orderly way, avoiding a possible cycle of under-production and supply-demand imbalance. It is important to distinguish short-term demand in the housing market, which is very susceptible to factors such as interest rate changes and price expectations, from longer-term underlying demand determined primarily by economic and demographic factors. Recent reduction in house building probably has been influenced to a great extent by short-term factors, whereas the prospects regarding underlying demand for housing remain very strong. Underlying demand should continue to be underpinned by economic and demographic factors and by reducing household size and scope to increase further a housing stock that is still below EU norms.

The demographic trends are worth emphasising. Projections for the purposes of the national spatial strategy indicate an additional 1 million in population within 15 years. Census figures indicate that the population of those aged between 25 and 34 — the key household formation group — grew by more than 100,000 in the four years, 2002-06, an increase of 17%. I am also informed that there is currently a new baby boom under way, at levels last seen in the late 1970s.