What Goes Boom – the Northern Ireland housing bubble in an international context

Yesterday’s reports that prospective purchasers were queueing to purchase properties at the new Belvoir Park development in South Belfast will have brought back memories for some of the housing boom of 2006-7, when it was a common sight to see people waiting overnight for an opportunity to purchase newly built apartments and houses. There have been other signs of a return to life in the local property market, such as a Royal Institution of Chartered Surveyors (RICS) survey that indicated that the housing market in Northern Ireland has outperformed other UK regions over the first quarter of 2005. Before everybody fires Umbrella by Rihanna on the stereo and starts partying like it’s 2007, I thought it would be worth putting the recent movements in house prices in a national and international context.

The boom and subsequent bust in Northern Ireland house prices was by some distance the most dramatic in the UK, and the fall from peak to the present in Northern Ireland has been arguably the most severe in the entire world. The graph below shows the movement in house prices by region in the UK and Ireland since the turn of the millennium. The exceptional nature of the Northern Ireland boom is apparent.

UK & Ireland Index

For the first half of the last decade, house prices in Northern Ireland generally tracked increases in the Republic of Ireland and in Scotland, showing modest growth but generally increasing more slowly than properties in England and Wales. Then, in 2006, whilst prices in Great Britain were increasing modestly, and prices in the Republic were beginning to taper off, a thing happened. Over the course of 18 crazy months, house prices in Northern Ireland increased by 76%. Then the financial crisis hit, and the spike in Northern Ireland reversed as quickly as it arose. However, whilst prices in Great Britain reached their nadir at the start of 2009 and have been increasing ever since (UK-wide prices are up 26% since Q1 2009), prices in Northern Ireland continued to fall, generally in line with properties across the Irish border. House prices in both Northern Ireland and in Dublin reached their lowest point at the end of 2012, and have displayed modest increases since then. Similar to the situation in London, albeit for completely opposite reasons, the property market in Northern Ireland has become divorced from the market in Great Britain.

The bubble of 2006-7 in Northern Ireland was extraordinary even by international standards. The global financial crisis started because of the failure of securities linked to property prices in the United States; it was the boom and the subsequent bust of US property prices that was the “Mrs O’Leary’s cow” that triggered the financial crisis and the Great Recession that followed it. However, by Northern Ireland standards, the crash in property prices was actually rather modest. The graph below shows how property prices performed in the United States since 2000. Note the different scale on the y-axis to the UK and Ireland graph.

US Index

Even in Miami, the area of the United States that experienced the biggest bubble in house prices, prices were up a mere 160% from 2000 to the peak, compared to the 248% jump in Northern Ireland.

The most dramatic boom in house prices globally over the last decade were the ones in the Baltic States and parts of Russia. The graph below shows the performance of house prices in selected European markets. Note the complete lack of movement in German house prices. The Baltic states of Estonia and Latvia experienced a similar boom and bust to Lithuania, but I wasn’t able to source historical house price data for Estonia and Latvia before 2005 (this may be one of the geekiest sentences I’ve ever written). There were boom and bust cycles in prices in Greece and in states of the former Yugoslavia, but again these were rather tame by Northern Ireland standards.

Euro Index

There are a range of metrics by which the boom and bust in Northern Ireland can be compared to the rest of the world. It didn’t experience the greatest boom, which happened in Russia and the Baltic States. Nor did it experience the greatest crash, measured peak-to-trough, as this happened in Las Vegas. Neither did it have the most anaemic recovery, which occurred across the border in Republic of Ireland (outside Dublin).

However, when all of these are combined, and the fall from the peak of the boom to the present day is measured, Northern Ireland experienced the worst crash in the world (marginally ahead of Dublin). The table below shows the top 20 markets by severity of the crash from peak to the present. Note that the fall in Northern Ireland (54%), from peak to trough, was more severe than the equivalent fall in Detroit (49%).

Crash Table

Turning round to the question of how prices might perform in the future, they certainly look in line with historical trends. House prices move in line with incomes in a given area. In their First Time Buyer Affordability Index, the Nationwide Building Society measure affordability as the percentage of an average take-home salary for a first time buyer, broken down by region. In Northern Ireland, the average mortgage is 26.8% of the average net salary, so it certainly looks good value compared to, say, London, where the average mortgage is 65% of income, a figure not far off levels in Northern Ireland at the height of the boom (74.8%).

UK Affordability

The issue facing the Northern Ireland property market is the fact that, in the medium term at least, incomes are likely to fall due to the retrenchment of the public sector. Northern Ireland has the highest percentage of public sector workers (29.4%) in the UK, and highest difference between private and public sector salaries. In Northern Ireland, salaries are 41% higher in the public sector than the private sector, UK-wide the average is 14% higher. Whilst house prices in Northern Ireland are in line with income levels, if incomes fall as high paying public sector jobs are replaced with lower paying private sector jobs, house prices are liable to fall or stagnate also.

Whilst queues outside new property developments may evoke sepia-tinged memories of the heady days of 2007, a collective curbing of enthusiasm may be necessary when the house price market is viewed through a wider historical lens.

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  • Reader

    Maybe we had the worst boom and bust here because we have the most affluent idiots? (public sector is so very large here).
    And does anyone remember the ‘money tree’ foolishness?

  • Jag

    Can anyone remember any policy initiatives by our army of politicians at the Assembly elections in 2007 to deal with the property bubble. Northern Rock still hadn’t gone bellyup in the UK, but as far as I can recall, there were no Cassandras amongst our political class warning about a collapse in property prices, and the consequences for society.

  • Catcher in the Rye

    The assembly has no power over fiscal or monetary policy.

  • murdockp

    Don’t forget the impact of rates which are higher that thier UK comparable for the same value of property.

    The NI property market will only prosper once emigration stops and people decide to stay here. Until then it is all built on foundations of sand.

  • NMS

    Again, interesting information, displayed brilliantly.

    A few comments/questions,

    1) Since the trough, the Irish market has been dominated by cash purchasers, who still make up around 40% of those actually signing deals. The need for the Irish banks to reduce the size of their loan books has ensured that fewer new loans have been issued. The Central Bank’s restrictions on Loan to Value seems also to have successfully controlled the nascent boom in prices in Ireland. Finally Irish households remain excessively indebted by all measurements making it a problematic market for any new entrants.

    2) What was the role of Irish (Southern) buyers in the NI bubble? Even as prices hit their heady heights, NI prices were still, in cash terms far below those of Dublin, did this influence the market at the peak ? There is little likely population growth in NI, let alone much chance in the growth of higher paying employment, the opposite is probably true, as you rightly point out. Who is going to be in a position to buy or pay new mortgages?. Where is the funding for purchases coming from,as the NI market is dominated by the same zombie banks as Ireland?

    3) Finally, there is no such place as the Republic of Ireland. Ireland is a republic. The name of the State is “Éire is ainm don Stát nó, sa Sacs-Bhéarla, Ireland.”

  • Brian O’Neill

    Yeay we are world number one at something! 😉

  • Reader

    NMS: Ireland is a republic.
    Well, most of it is. But 6 counties are part of the UK instead.
    Until you southerners can come up with a name that you like and that isn’t ambiguous (e.g in an article about house prices), the rest of us will continue to improvise.

  • Zig70

    There will be short memories all round again soon. I had reports of gazumping again from a solicitor. You can look as foolish when the market is going up and you bet on it being a bubble.

  • Devil Eire

    Your whinge isn’t even backed up by the example you chose.

    In the actual article NMS was referring to, ‘Ireland’ could have been substituted for ‘Republic of Ireland’ in both cases where it was used without any loss of clarity:

    “For the first half of the last decade, house prices in Northern Ireland generally tracked increases in Ireland and in Scotland, showing modest growth but generally increasing more slowly than properties in England and Wales

    “Neither did it [Northern Ireland] have the most anaemic recovery, which occurred across the border in Ireland (outside Dublin).”

  • sk

    Here’s a thought. The northern-most part of this island is actually Malin Head, in county Donegal. So, technically speaking, northern Ireland isn’t actually in Northern Ireland.

    How’s that for ambiguous?

  • Reader

    Northern Ireland is entirely in the northern half of Ireland, which seems to me to be a more meaningful distinction.
    [Edit] I’m also finding it difficult to believe that you sometimes have difficulty in working out what “Northern Ireland” is referring to.
    And, if you really do call Malin Head “Northern Ireland”, do you actually know where “Southern Ireland”, “Eastern Ireland”, and “Western Ireland” are, or would you need to do a bit of research?

  • kalista63

    I do remember Sammy Wilson shouting down those who predicted the collapse, saying that they were talking down the economy.

  • chrisjones2

    They dont. Its like Prods use of Londonderry. We all use Derry amongst ourselves except when we want to annoy themuns

  • sk

    “Northern Ireland is entirely in the northern half of Ireland”

    Half of Ireland? My, don’t we have big ideas about ourselves.

    The most northerly part of Ireland- ie, northern Ireland- is not in Northern Ireland. So we’ll change our ambiguous nomenclature when you do.

    And don’t get me started on “Ulster”

  • sk

    I didn’t think you guys talked at all when we’re not around- just grunted dourly at eachother 🙂

  • Am Ghobsmacht

    It’s more of a loud stare than a grunt SK.

    If we’re particularly annoyed you might see a sharp sideways jerk of the head. Followed by pointing at the now empty cup of tea…

    (I think I accidentally voted yer comment down, soz, didn’t mean tae).