Having seen a few years of double digit increases in house prices, mainly in Dublin, the recovery from the collapse of 2007 has begun to cool.

Davy Asset Management recently published their forecasts for Irish house price inflation and for new mortgage lending. Davy expects residential property price inflation to slow to 9% in 2015 and to 5% in 2016. Overall, they expect Irish house prices will rise only to 25% below their 2007 peak levels by 2019.

The reason they expect house price inflation to slow is because affordability has become increasingly stretched. At 5 times average incomes, Irish house prices are now valued at similar multiples to the UK. In addition, the new Central Bank rules limiting the amount of mortgage loans with high loan-to-income (LTI) and loan-to-value (LTV) ratios will help to slow house price inflation. In particular, although first-time buyers below €220,000 are still able to borrow at 90% LTV, the new rules allow little room for average leverage across new lending to increase further. This means that Irish house prices are likely to be anchored to nominal wage growth over the medium term. Given incomes move at a far more gradual pace than housing markets in general, the controversial new rules may have the desired effect of normalising our housing market, which is what to expect in a mature economy.

Davy also published forecasts for new mortgage lending. They expect new mortgage lending to rise from €3.7 billion in 2014 to €4.6 billion in 2015 and €8.6 billion in 2018.

The pick-up in mortgage lending will reflect not only higher house prices, but also improved housing market liquidity. There were just 42,700 housing market transactions in 2014, representing just 2% of the housing stock, suggesting that the average property changes ownership just once every 50 years. The 20,000 mortgage loans represented just 1% of the housing stock – the weakest level of mortgage lending since records began in 1970. Hence, Davy expects mortgage loans will slowly rise to 45,000, or 2.2% of the housing stock by 2019, in total €11 billion of new mortgage loans.