Bank of Ireland revises upwards its house prices forecast for 2003

Irish Property Review Confident in Potential of Buy-to-Let Sector

Dr. Dan McLaughlin, Chief Economist, Bank of Ireland Group has revised upwards his forecast for national second hand house prices in 2003 from 8% to 12%, according to Bank of Ireland's Irish Property Review published today (Tuesday, 26th August). The Review predicts that Dublin prices will increase by a further 14% by year-end. This would take average second house prices nationally to Eur270,000 and in Dublin to Eur363,000 by December 2003. New house prices will show smaller gains, but no sustained fall in prices is expected.

According to the Review, total housing supply is at an all time high in Ireland (predicted completion figure of 60,000 in 2003), however an inadequate supply in Dublin is contributing to the continuing growth in house prices both in the capital and outside. Dr. McLaughlin explains:

"House building in the capital rose by over 30% last year but this still resulted in only 12,600 completions, or some 22% of the total increase in supply nationally. With 30% of the Republic's population living in Dublin, the figures imply a need for even greater supply in the capital.

In addition, annual demand this year is expected to be around 50,000 and as such below this year's supply, however, there is a substantial volume of unmet demand accumulated since the mid-90s onward - which we estimate at over 20,000."

The Irish Property Review this quarter examines the topical buy-to-let sector and suggests that the risks currently associated with investment property might be overstated. "Nationally, rents are broadly unchanged from last year and although rents may have softened in the suburbs of Dublin, our own enquiries point to a firm rental picture in the city as a whole. The argument used by the house price bears that the buy- to-let market is oversupplied and that this will eventually spill over in weaker house prices misses one simple point - the buy-to-let investor is acquiring equity in his property."

An example of a two bedroom apartment in Dublin costing Eur320,000, demonstrates the potential of this market: "The gross monthly cost of servicing a twenty-five year mortgage would be Eur1,600 against a rent of say Eur1,200. So the owner is paying a net Eur400 per month for the mortgage, which would pay for a Eur80,000 loan. In other words, the investor in this example is effectively acquiring a Eur320,000 property for Eur80,000."

The Irish Property Review states that another factor influencing continued growth in the property market is improved affordability following a slight deterioration in 2002, due principally to an average mortgage rate in 2003 at nearly 0.9% less than it was in 2002. In addition, unemployment is still well below levels that might be expected to seriously dampen overall housing demand.

Olive Moran, Marketing Manager, Bank of Ireland Mortgages said: "The market remains robust due to improved affordability and the continued pent up demand, particularly in Dublin. Mortgage lending also shows unabated growth with gross lending expected to increase to Eur12.8bn in 2003 - an increase of 15.6% from last year."

A major factor in continued affordability is the interest rate environment and outlook. The Irish Property Review predicts that there is a possibility of an ECB interest rate move upwards by June 2004. Olive Moran recognises the choice facing many homeowners in today's environment: "The certainty which a fixed rate loan offers appeals to many but the risk of fixing at the wrong time of the cycle is understandably an issue of concern. The chances of making a mistake are a lot lower at or near the bottom of the rate cycle, which is where we are at the moment with lenders just starting to pass on increases in the cost of fixed rate borrowings.

Bank of Ireland is currently offering an extremely competitive one-year fixed rate at 2.60% - which is substantially less than the existing variable rate of 3.6%".

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The Review forecasts that 2003 will see a significant improvement in fortunes for the commercial property sector, with annual returns likely to exceed 10%. This compares to returns in 2002 of 2.2% - the worst figures in a decade. The reduction in supply coming on stream in 2003 is contributing to this increase, as is a reversal in the trend that witnessed a fall in business spending in Ireland and elsewhere since 2000.

The Irish Property Review is published quarterly by Bank of Ireland Mortgages and the Economic Research Unit of Bank of Ireland Group, led by Dr. Dan McLaughlin. Full details of the review are available on www.boilink.com.

Ends

Tuesday, 26th August 2003

For information contact:

Olive Moran
Marketing Manager
Bank of Ireland Mortgages
Tel: 6113525 /086 6622333

Mary Brennan
Corporate Communications
Bank of Ireland Group
Tel: 6043838