The latest NI housing statistics, transactions, starts and completions for Q2 2021 were released this morning by NISRA Property prices, transactions, starts and completions all rose year-on-year in Q2 2021. Estate agents and house builders have experienced a ‘V-shaped’ recovery but how long will the good times last?
Accelerating – Northern Ireland’s Residential Property Price Index (NIRPPI) reported its ninth successive quarter of growth in Q2 2021. During the three months to June prices accelerated by 2.9% quarter-on-quarter, taking the standardised price of a residential property in Northern Ireland to £153,449 – a 12.5-year high. The latest quarter’s growth spurt marked the fastest quarter-on-quarter growth rate in five years. Meanwhile the annual rate of residential property price inflation accelerated from 6% in Q1 2021 to 9% in Q2 2021. The latter represented the fastest pace of price growth since the tail end of the last property boom in Q4 2007 and is more than 2.5 times the rise in local private sector rents over the last year (+3.4% y/y). Northern Ireland’s residential property inflation is running ahead of the Republic of Ireland (+5.6% y/y) but is below that of the UK (+10.9% y/y). Local residential property prices have now increased by 57.5% relative to their trough just over eight years ago (Q1 2013). But despite this growth, the standardised residential property price (£153,499) is still 32% below Q3 2007’s freak of £224,670. The latter doesn’t take account of inflation. Adjusting for inflation, Q3 2007’s peak was £303,000 in today’s money – nearly double the price of houses almost 14 years later.
Second hand market – Inflation figures today revealed that the UK’s second hand car market (+14.4% y/y Jul-21) is dramatically outpacing the new car market (+2.5%). It is a similar story – though less extreme – within the local residential property market. The price of existing properties increased by 9.9% y/y in Q2 which was double the rise for new dwellings.
Detached from reality? – The pandemic has acted as a price accelerator particularly amongst the largest homes and certain parts of Northern Ireland. Detached property prices increased by 12.1% y/y in Q2 which marked the fastest rate of growth in 13.5 years with prices now at their highest level in almost 13 years. This has been due to what has been dubbed as ‘the race for space’ with households looking to trade up to larger homes with more space (e.g. incorporating home offices, an extra bedroom, garden etc). Unlike the previous residential property boom of 2005-07, which was dominated by sales in the terraced market (Buy-to-Let / investment boom), detached properties are accounting for the greatest share of transaction activity. There were more detached properties sold in Q1 and Q2 than any other property type. That is unusual with home-movers rather than first-time buyers driving the market. Sales of detached properties during the first half of 2021 have more than doubled (+111%) and are 43% above the corresponding period in 2019. In H1 2021 detached properties accounted for 33% of sales, followed by semi-detached (32%), terrace (27%) and apartments (8%). Back in 2005-07 the terraced property market accounted for 36% of all residential sales but accounts for just 27% in 2021.
Quality of life arbitrage – COVID-19 has awakened a new source of demand with GB homeowners (particularly in London and the South East) looking to sell-up and trade-up to large detached properties in some of Northern Ireland’s most expensive postcodes. The new era of working from home means that the mantra of ‘Location, Location, Location’ has changed. Location relative to your workplace or employer for swathes of the workforce is no longer as important as in once was. Whereas location relative to the coast / rural areas / environment has become more important. This is opening up opportunities for NI ‘ex-pats’ to return home. Essentially we are seeing quality of life arbitrage whereby people can improve their standard of living by working in a higher wage economy but living in a more affordable economy. Similarly in Northern Ireland, proximity to Belfast has become less important for telecommuters which partly explains the increased demand in other parts of Northern Ireland, notably the Causeway, Coasts and Glens. It is also interesting to note that the price of rural properties (+10% y/y) has outperformed urban ones (+8.5% y/y) .
In the mix – It hasn’t just be the mix of different property types that has revealed interesting trends it is the actual mix of properties by value. The top end of the market (i.e. more expensive properties) has been experiencing much higher rates of price inflation. The headline 9% y/y rise in residential property prices refers to price movements amongst standardised property price. The median property posted price rises of just 5.6%. But average prices have increased by over 17% y/y which implies that the more expensive properties have recorded even steeper increases in prices. This is borne out when looking at the simple average price of detached property purchases. These have recorded gains of 24% y/y in Q2 2021.
Coasting ahead – Properties in the Causeway Coast and Glens recorded the steepest acceleration in prices over the quarter (+7.6% q/q) and over the last year (+16.9%). This arguably reflects a surge in second-home purchases and the rise of working from home. The latter means living (& working) in this area is now more feasible than it was before the pandemic. Ards & North Down property prices slowed the most between Q1 and Q2 (+0.7% q/q) but prices were still 12% higher than a year ago. Anecdotally there have been reports of the ‘Gold Coast’ within North Down (i.e. Cultra, Holywood & Helens Bay) becoming a Mecca for NI ex-pats returning home from GB. Newry, Mourne and Down is the only other area of Northern Ireland reporting double-digit price inflation at 11.3% y/y. Belfast prices rose by a mere 7% y/y with Derry City and Strabane recorded the lowest price increases of all at 6% y/y.
Supply constraints – The supply side always plays second fiddle to the demand side and house prices. But the former is contributing significantly to the latter. Northern Ireland house completions (house building not sales completions) posted a record rise of 190% y/y in Q2 2021. This sounds more impressive than it is as Q2 2020 was a lockdown-induced record low. There were 1,000 fewer completions in 2020 (6,420) than 2019 (7,425) so supply is playing catch-up. Q2’s outturn of 2,003 housing units was the second highest Q2 over the last decade but is less than half the completions that occurred during Q2 2006 at the height of the house building boom. So housebuilding has had a good start to the year with 3,788 completions (+55% y/y) but viewed against pre-pandemic levels of H1 2019, completions are up a modest 5%. So the current demand (excess) supply (deficient) mismatch won’t change anytime soon. Indeed it is likely to get worse given the soaring cost of building materials and supply chain disruption. It is arguably the worst time to be building a house in a generation due to the material shortages, inflation and uncertainty / disruption. Looking at housing starts (note it takes broadly 9 months for a start to become a completion) it is worth noting starts fell 17% y/y in 2020 to a 6-year low. 2019 wasn’t a great year either with starts down 16% y/y. This highlights that undersupply was a problem pre-pandemic. Housing starts have rebounded by 50% y/y in H1 2021 and are up 16% versus H1 2019 (pre-pandemic). Yet the latter hardly signals a rip roaring recovery and doesn’t suggest that a meaningful pick-up in housing supply is imminent. Note that starts in Q2 were lower than the corresponding quarter in both 2017 and 2018. A rebound in housebuilding may also prove more difficult to sustain. Alongside severe skills shortages, the construction and housebuilding sector are severely affected by supply chain disruption. A shortage of building materials, a lengthening of supplier delivery times and significant price rises. All of this acts as a headwind to increasing supply quickly and a tailwind for further price rises.
Outlook – 2021 is undoubtedly set to remain a sellers’ market. 2022 is likely to be different when the economy becomes weaned off the recessionary painkillers. But in the meantime the house-price momentum in the local market looks set to continue. Traditionally house price to earnings ratios are used as a benchmark for assessing affordability and whether a property market is over/under valued. House price to median Northern Ireland earnings will become even more irrelevant in many property hot-spots. Demand – and therefore prices – in some areas are being increasingly driven by the wages of people who don’t work in Northern Ireland but live here or intend to move here. This feature of the property market is expected to grow in importance over time. Given that Northern Ireland’s property prices are one of the most affordable regions in the UK coupled with the new era of working from home, we are likely to see a steady stream of people from outside Northern Ireland avail of the current quality of life arbitrage opportunity. On what scale remains to be seen. This external source of demand further adds to the existing supply constraints as houses freed up in GB aren’t available to buyers within the local market. Strong demand and an under-supply of adequate stock looks set to underpin house prices in the near future.