Will property prices fall this year? The impact of rising interest rates

After several years of ultra-low interest rates, mortgage rates in Ireland are on the rise. By a lot.   

Since last July the European Central Bank (ECB) has embarked on an aggressive path of monetary tightening which has seen it increase its main lending rate from 0% to 3%, with a further hike to 3.50% almost guaranteed in March and an increase to 3.75% likely by the end of this summer.  

If the main ECB rate reaches 3.75%, it's likely that the best mortgage rate available in Ireland by the end of the year will be around 5.65% (this is becasue the minimum 'spread' or difference between the main ECB rate and the best rate on the Irish market in recent years has been around 1.90%. Though competition might keep it slightly lower going forward).   

However this rate will likely be a 'green' rate for those buying a home with a BER of A or B or for those with over a 40% deposit. The average rate for the average first-time buyer or mover will likely be closer to 6%. 

But how will this impact on property prices and people's ability to repay their mortgages and will it lead to a fall in prices? 

We decided to investigate... 

Where are we now?

Near record inflation throughout the world over the past year has caused central banks globally to increase their rates aggressively.

For example rates in the US are now at 4.75%, in New Zealand they're at 4.25%, in Australia they're at 3.35%, and in Sweden they're at 2.50%.  

The ECB has already increased rates by three percentage points to 3% with more hikes on the way. And although the main lenders here have been slow to pass on all of the ECB rate hikes (Bank of Ireland has only hiked its fixed rates by one percentage point for example) this is unlikely to last. 

Although the big rate hikes in Australia, Sweden and New Zealand have already led to an outright fall in property prices, most experts are forecasting continued price growth in Ireland. Albeit at a much lower level than recent years. This is mainly due to strong population growth, high immigration, a strong economy and a continued mismatch between housing supply and demand. The easing of the Central Bank’s mortgage lending rules at the start of the year is also seen as being supportive of price growth.

However the impact of rising interest rates on mortgage repayments will be immense - with repayments potentially rising by over 60% for first-time buyers unless property prices fall dramatically.     

For example a first-time buyer or mover borrowing €300,000 over 30 years could potentially have got a mortgage rate around 2% until the middle of last year. This equates to a repayment of just under €1,109 a month. 

However borrowing the same amount at 5% will cost €1,610 a month or around €500 extra. Borrowing €300,000 at 6%, which is where mortgage rates in Ireland are heading, will cost almost €1,800 a month or almost €700 extra each month compared to someone borrowing the same amount at 2% around a year ago.

Those are big sums of money.

Here's a look at how much extra it costs to borrow €300,000 at various interest rates.  

However, rather than pay more (as there is a limit to how much extra buyers can pay each month) they may instead be forced to borrow less. Which is why we might see property prices fall...

Borrow less?

If mortgage rates in Ireland rise to 5%, to keep the same monthly repayment of around €1,109 as in our example above, either the amount borrowed or property prices would need to fall by around 30%. If mortgage rates rise to 6%, the amount borrowed or property prices would need to drop by almost 40%.

Put another way, borrowing just €185,000 over 30 years at 6% costs you the same each month as borrowing €300,000 at 2%.   

Here's a look at how much either property prices (or the amount borrowed) would have to fall by in order for repayment levels to remain broadly similar to last year. 

Will property prices fall?

bonkers.ie is not saying property prices will fall by the amounts above, as there are many other factors to take into account, and this is just a representative example, but it goes to show the huge impact a rise in interest rates of just a few percentage points will have on monthly repayments and affordability over the coming few years.

In recent years forecasts for property price growth have centred largely on the mismatch between supply and demand. And in Ireland, to a slightly lesser extent, the Central Bank’s mortgage lending rules, which were eased at the start of the year. 

This was fine when interest rates were steady, or even falling, as they did between 2011 and the middle of 2022. But now that rates are rising rapidly this factor needs to be taken into account. 

However, the impact of rising interest rates and therefore reduced repayment capacity seems to have been almost forgotten about. 

What could support prices?

An option for first-time buyers (and movers) is to stump up a bigger deposit, thereby borrowing less so being less exposed to rising rates. But with record rents and near record inflation, this is easier said than done.  

And of course cash buyers, who remain a big part of the market, won't be affected by changes to interest rates. 

And with the supply of new homes (at under 30,000 a year) still well below the level needed to meet demand, this will support price growth.      

The most recent CSO property price data shows prices in Dublin fell 0.2% in November compared to October. Though they still rose outside of Dublin. However, all things considered, given the information above, it's likely prices will fall nationally both this year and next.

However they're unlikely to fall far enough to compensate for the higher mortgage rates. Meaning things will still be tough for first-time buyers. 

Help and support 

It's not all bad news. 

If you're a first-time buyer there is help out there to support you on your journey to getting your first home! 

• The Help-to-Buy scheme can assist you with getting the necessary deposit for your first home.
• The First Home scheme can help you bridge the gap between the amount you can borrow under the Central Bank's mortgage lending rules and the amount needed to buy a home.
• And here are six steps to help you get your mortgage deposit together.
• Finally, when applying for a mortgage, here are the main mistakes to avoid.