ONE of the most popular topics of conversation this year and indeed every year is the property market. It affects all our lives in some way or another, whether one is an existing or an aspiring homeowner, tenant or investor. Whether you are a buyer or a seller, you are entitled to accurate information and analysis of the market.

The public is being bombarded with a succession of differing versions about the health of the housing market.

This is creating confusion, uncertainty, an erosion of confidence and is causing prospective buyers to hold back from purchasing. Buyers have not gone away or emigrated, many have just held off until they have confidence to buy. This in turn is putting pressure on the rental market, with rents rising by 20% per annum in some parts of Dublin.

The residential market in spring of last year was overheated and dangerously so.

Vendors' expectations of what their property was worth jumped well ahead of what could be realistically achieved.

Fortunately, sanity has been restored and today's market compares very favourably with the more stable markets of 2004 and 2005, rather than the inflationary market of 2006.

In fact, what is happening right now in the Irish residential market is exactly what is desirable at this time. The current market environment is far more orderly. Sellers are not going wild flooding the market. Asking prices have come back to more realistic levels, while rental values are rising steadily, reflecting the underlying demand for somewhere to live that has been central to driving the property market forward during the past decade.

In the last 10 years, there have been persistent inaccurate and negative predictions put out on the health of the market: these did no favours to aspiring home owners, who held back and invariably ended up paying much more than they could have first bought at.

The housing market is far more mature and firmly based than it is given credit for. Property is by its very nature a medium-to long-term buy and is pointless to analyse from a short-term perspective.

It is misleading to compare the Irish property market to the negative experiences of countries that have nothing in common with the Irish situation in terms of economic stability. Historically, international property markets experienced periods of strong growth followed by periods of depressed activity during the 1970s, 1980s and early 1990s. However, this largely reflected the boombust cycles that were a common feature of many countries' economies.

Things have moved on significantly since then. The integration of the global economy and an improved understanding of economic management amongst central banks and other policy makers has helped to minimise fluctuations in the business cycle internationally.

Confidence is the rock upon which any market is built, whether it is property, equities, minerals or commodities.

Activity and consequently price is determined by the level of confidence amongst both buyers and sellers.

Stamp duty

Confidence in the residential market has been damaged in recent months due to some unbalanced and negative commentary on the property market, emanating from, among others, a number of academics with little experience or direct knowledge of how the Irish market functions. Added to this was the uncertainty over stamp duty in the lead up to last year's budget and the recent election, resulting in many purchasers delaying their decision to buy in anticipation of a change in stamp duty.

Fortunately, the stamp duty issue has been resolved with the complete removal of stamp duty for first-time buyers on second-hand homes and on new homes irrespective of the price and floor area. This finally brings closure to the issue and is already resulting in renewed activity as many of those buyers that have been sitting on the fence re-enter the market. This, along with the escalation in rents, will prove to be the catalyst for a modest resurgence in sales this autumn.

Affordability

One of the reasons first-time buyers remain active in the market is the favourable affordability environment.

While the cost of borrowing has gone up due to the increases in interest rates, a number of other factors have helped to balance out the affordability equation: increased mortgage interest relief as part of Budget 2007; wage growth averaging 5.5% across all sectors of the economy; rising disposable incomes due to successive cuts in income tax rates, widening of the tax bands and increases in tax credits; subdued property price inflation; and intense competition between the mortgage lenders.

As a consequence, affordability is actually in a better position now than it was towards the end of last year.

Research from Hooke & MacDonald shows that a first-time buyer couple, with both at work, and purchasing a new home would be required to allocate 21.6% of their combined monthly net take-home pay towards their monthly mortgage repayment in the second quarter of 2007 compared to 25.3% in the first quarter of 2006. These calculations are based on a 92% mortgage over 35 years using the average variable rate and taking into account mortgage interest relief.

This is in contrast to figures published this week by the Department of Environment, Heritage and Local Government that suggested that 31% of net disposable income is required. However, this calculation is based on a 20-year mortgage, which does not reflect market realities given that most first-time buyers are drawing down 35-year mortgages.

The reality is that few people will actually end up paying their mortgage for a period as long as 35 years.

Instead, a first-time buyer will generally opt for this longer term in the first few years of their mortgage, helping to keep their monthly repayments low.

As time moves on, so do their earnings and even if they keep pace with the rate of inflation, this still allows them to increase the amount they are paying each month on their mortgage and therefore reducing the term outstanding.

The proposals outlined in the Programme for Government to further increase mortgage interest relief for first-time buyers (most probably as part of Budget 2008) will help to maintain the favourable affordability environment, even if interest rates increase again before the end of the year.

Most people would prefer to own their own home and pay off a mortgage rather than pay rent with no return. For example, a first-time buyer couple could buy a new twobed apartment in Dublin's suburbs for 330,000, which would cost 1,244 per month based on a 92% mortgage with a 35-year loan term, an interest rate of 4.75% and taking into account mortgage interest relief. Yet it would cost between 1,300 and 1,400 a month to rent out the same apartment.

For the time being, supply in both the new and second-hand market is ample, particularly outside Dublin and will give buyers plenty of choice. Forward-looking indicators of supply over the short to medium term (registrations, commencement notices and the Construction PMI Survey) all point to a decline in homebuilding activity, yet this has yet to materialise into a decline in new home completions. In fact, the 32,881 completions recorded in the first five months of this year at a national level are up 2.5% on the same five month period last year.

Completions While the annualised level of completions is expected to decline in the latter half of this year, this will be at a more gradual pace than some are forecasting and a final outturn of 76,000 completions is forecast for the end of this year.

Even though this represents a decline of 14% compared to the total number of new home completions in 2006, it is still an impressive rate of construction and represents an increase in the total housing stock of around 5%.

Oddly enough, some parties have interpreted a decline in new home building as equating to a downturn in the market.

This is incorrect. If anything, the market is functioning exactly as it should and is gradually returning to a growth path that is sustainable over the medium to long term. It is very disciplined and is behaving rationally. The decline in supply will help to underpin prices, though the demandsupply gap in parts of Dublin is set to widen in the coming years.

House prices

The figures for May 2007 from the Permanent TSB/ESRI index show year-on-year house price inflation at 2.6% nationally and 7.6% in Dublin, down from 14.5% and 14.9% respectively compared to a year ago.

This trend in price moderation is set to continue and is very welcome.

The months ahead are likely to show month-on-month price changes fluctuating between positive and negative and while year-on-year growth rates may enter negative territory, this is likely to be only a temporary situation.

Fortunately, most developers decided not to increase prices since mid-2006, which has been very beneficial for first time buyers.

To date, there has been a political and administrative failure to face up to the root cause of rising rents and rising prices, namely the shortage of supply caused by an inefficient and anti-development planning system. The supply constraints in key locations need to be resolved, in order to improve accessibility for first time buyers and young families to the property market in the medium to long term.

This is by far the single most pressing issue in the Irish property market and needs to be tackled immediately if we are to avoid any future periods of rapidly rising prices that will make it even more difficult for young people and families to buy their first home.

Surveys show that land which is zoned and has services is being developed as soon as planning permission is obtained and no hoarding exists. Government interference by imposing controls over building land would actually be counterproductive, the same as any previous interference with the property market, such as the Bacon measures.

The future

What will happen in the residential market over the next 12 months? The likelihood is that purchasers will return in fair numbers to the market in the autumn, attracted by the better value and choice available compared to previous years.

Prices will remain moderate but should edge slightly upwards, especially in Dublin.

As one who has been involved in the Irish property market for 40 years and has experienced every type of market scenario, I am totally convinced that the market is currently in good shape and that anyone buying now will do very well in the years ahead.

There is no better investment than Irish property at present, and I believe that I will be proved right in this conviction.

Positive indications

Overall, the underlying drivers of demand for property . . .the economic environment and demographic changes . . remain very supportive. Data published by the CSO last week show that GDP grew by 7.5% in the first quarter of 2007, with GNP rising by 6.4%. The latest data from the Quarterly National Household Survey shows that 76,800 new jobs were created in the year to the first quarter of 2007. A number of key indicators . . . retail sales, external trade, manufacturing activity, commercial property, civil engineering . . . all point to another strong performance from the Irish economy.

The increase in private sector credit and mortgage lending should be seen in the context of the substantial asset wealth that has been accumulated by Irish households, particularly during the last decade. Total outstanding mortgage borrowing stood at 130.2bn in May 2007, yet the value of the existing housing stock is currently in the region of 560bn.

The Irish property market is showing considerable maturity and this is good news for the industry, the national economy and prospective homebuyers. The new government legislation on stamp duty exemption for first-time buyers, combined with the significant increases in tax allowances has ensured that the market has now bottomed out, restoring confidence in time to stimulate activity and ensure relatively lively autumn and spring selling seasons.

Ken MacDonald is managing director of Hooke & MacDonald