House prices continue to depart from fundamentals, highlighting ongoing affordability challenges

Sustained increases in Irish house prices since 2013 warrant ongoing assessment of potential overvaluation and emerging imbalances in the residential property market. New ESRI research released today (Friday, 4 September) examines these issues and assesses the broader health of the housing and credit system.

• We find a significant degree of overvaluation in the Irish residential property market, but one that is materially lower, and structurally different in nature, than the levels observed prior to the global financial crisis.

• Using a range of different economic models and benchmarks, we find that Irish house prices are currently around 17 per cent above the level that would be consistent with current levels of economic fundamentals such as incomes, interest rates and demographics.

• The findings represent an increase in the level of overvaluation since the most recent ESRI analysis using similar methods, which was published in the Quarterly Economic Commentary in December 2024.

• Unlike the pre-crisis period, which was driven by excessive credit growth and loose lending standards, the current episode of overvaluation appears to be primarily an affordability issue. House prices have risen faster than incomes, mortgage rates have increased, and not enough homes are being built to meet demand.

• The analysis also finds that the burden of house price overvaluation falls hardest on middle-income households, with the ratio of house prices to income furthest above its long-run average for this group.

• Indicators of household debt and the wider credit market remain well below the levels seen before the financial crisis, suggesting the financial system is in a considerably stronger position than it was in 2007–2008.

Commenting on the report, author Paul Egan of the ESRI stated: “Our analysis shows that Irish house prices are significantly above what economic fundamentals would suggest, driven by prices rising faster than incomes and higher mortgage rates, with middle-income households bearing the greatest burden.”

Commenting on the report, author Dónal O’Shea of the ESRI stated: “Overvaluation of residential property prices relative to income, interest rates and the age profile of the population is trending upwards. However, the level of overvaluation is materially lower than that observed in the 2000s and the current high prices are not accompanied by excessive levels of credit.”