Ronan Lyons on Long-Term Economic Value

Ireland’s leading property number cruncher, Ronan Lyons, has a post essentially explaining how he would have done the LTEV calculations if he had been asked. Key conclusion:

the adjustment from current market value  should be downwards by 10% to about €44bn, and not upwards to €54bn.

62 thoughts on “Ronan Lyons on Long-Term Economic Value”

  1. As I say in the post (and I appear to be in good company, as the Minister for Finance said something similar on Morning Ireland this morning), there are lots of gaps in the information one would need to do this properly. If anyone does have better estimates for any of the numbers used in the blog post, do pass them on and we’ll see how things stack up.

    The two most surprising things for me are:
    (a) they only looked at yields for about 5% of the loan book
    (b) they didn’t allow for rents to undergo a significant downward adjustment in response to recent overconstruction.

    As soon as you breach either of those, by including residential property (as big a chunk of NAMA as commercial) and/or by allowing rents to fall, the €47bn up to €54bn hike from CMV to LTEV disappears.

  2. (a) they only looked at yields for about 5% of the loan book

    but they were GOOD yields….

    (b) they didn’t allow for rents to undergo a significant downward adjustment in response to recent overconstruction.
    See the thread Ronon on downward rent revisions. They are apparently BAD, so must be stopped.

  3. @Ronan

    A good piece. Some of the potential errors are ones which the NAMA valuation process is notionally designed to catch.

    As far as I can see €47bn represents the CMV of the bank assets, i.e., loans. I cannot see any solid figure for the CMV of the underlying security.

    Perhaps you could explain the genesis of the €88bn you use. Can we safely say it represents property values?

    Furthermore, I think it is risky to assume that the “associated loans” were all loans or interest for the purchase of investment property or development. Associated loans could well include loans cross collateralised on property but used to purchase assets other than property.

  4. @zhou_enlai
    Thanks for that – I did little more than take those associated loans and redistribute them across the land and development segments here, there and everywhere.
    I had originally the figures without the associated loans worked back in. The story is exactly the same, just on a slightly smaller scale (by construction).

    The €88bn was, AFAIK, the original value as mentioned in the document yesterday and I used it as I was trying to come up with some estimates of peak-to-trough falls.

  5. Interesting piece Ronan,

    Coincidentally if we assume an average inflation rate of 2% for the next 10 years the real value of €54bn is approximately €44bn. So maybe they have got it right!

  6. @Ronan

    Indeed the story is the same if the figures are smaller.

    It strikes me this morning that the documentation released yesterday does not disclose the difference in value between
    (a) CMV of underlying security (i.e., property) and
    (b) CMV of loans.
    Neither are we told the difference between
    (I) LTEV of underlying security and
    (II) LTEV of loans.

    The language used is very confusing.

    “Estimated current market value of underlying assets – €47bn”
    “If NAMA actually pay €54 billion as the acquisition value of the loans it would represent a 30% haircut on the book value of the €77 billion loans.”
    “NAMA estimates, based on the application of the statutory adjustment factors, that the long term economic value will present approximately 15% of an uplift on the current market value of the loans identified for transfer. ”

    To me this clarifies that €47 bn is the CMV of the Loans and not the property. €47bn + 15% = €54bn. Therefor “underlying assets” are loans!

    However, later the Supplementary Documentation states:

    “• The current book value of the total loans that NAMA has identified for potential acquisition is approximately €77 billion.
    • Of these loans approximately €9 billion is rolled up interest. When NAMA is determining the market value of the assets it will first exclude the rolled up interest –giving a net balance of approximately €68 billion.”

    “An asset value at origination of approximately €88 billion is assumed having regard to institution estimates of average LTV at origination and NAMA estimates of interest roll up.”

    Now this €88bn appears to relate to the value of security (not necessarily real property – land, construction or buildings) rather than loans.

    This can be deduced (assuming no coincidental numbers) because €68bn (loans less roll-up) is 77% of €88bn.

    The lack of clarity and the confusing use of language is very disappointing.

  7. @zhou
    “The lack of clarity and the confusing use of language is very disappointing.”

    I agree. I had to keep going back to different sheets in my spreadsheet, muttering things like “€12bn, €12bn, now where did I see that before…”!

  8. Not directly on point but I would be interested to hear the views of the contributors on this site on the fact that house prices in the UK appearto be on the rise again. Is this inconsistent with Morgan Kelly’s predictions re the aftermath of a property crash ? The UK certainly had a boom followed by a crash but recovery has been very prompt.

  9. @ Ronan

    Ronan,

    interesting analysis but I would make one point. I don’t believe the rental yield on residential property would currently be 3.0%. Taking into account recent falls in property prices (your estimate of 35% seems reasonable) I suspect that yields have in fact drifted up to around 4.5%.

    @3.0% a property in Dublin currently worth £240k would only be throwing off €600 in rent

    We will see further declines in rents (particularly in the residential sector) and your estimate of 20% may be an underestimate but I think you may have overcooked the decline in values a little.

    Having said that it is perhaps a little academic for two reasons –
    (a) the apparent reliance on yields to generate values for the whole portfolio make the whole NAMA valuation exercise a little spurious
    (b) those supporting NAMA seem determined not to let the facts spoil a good story

  10. @Concubhar
    Naturally, no-one knows for certain, but I think those like Morgan would argue along the following lines:
    Credit-fuelled booms happened in Ireland, the US, Spain, the UK, etc. That’s now over and house prices are trying to find their floor.
    Everything else being equal, that floor/plateau/”long-term economic value” will be lower in a country that was producing twice as many properties as it needed, than in a country with equally easy credit but without the supply side response (e.g. the UK).
    This suggests regional disparities within Ireland also, based on different degrees of oversupply in different counties.

    One final point: a fall of 50% and then a rise of 50% mathematically means an overall fall of 25%, so growth can certainly return but that doesn’t necessarily mean a return to the Roaring Noughties!

  11. Ronan,

    But in the long run, surely we move away from thinking about the number of houses that were built at the height of the boom as you argue, and more to a calculation of the average headship rate, demographics etc. This approach – even with resumed emigration – suggests that we are not excessively overhoused.

  12. Friend of mine just texted to say she is on the BOI investor call….NAMA or no NAMA, she reckons they are getting a pretty rough time!!!!

  13. @Ronnie, fair point, but the 40,000-50,000 ‘needed a year’ itself was about twice the long-run average of 25,000 or so, when we were a nation of emigrants.
    I’m not saying there’s no merit to the argument that Ireland is under-housed, but it’s difficult to tell that to people who see empty shells of estates on the edges of their towns.

    @JD, I would direct you to the last daft.ie rental report (and indeed each rental report) which includes towards the back a breakdown of yield by bedroom number and region. Only in Dublin city centre have yields gone to the 4.5% you talk about. West Dublin (and to a lesser Limerick) also have 4%+ yields, but most of the country is well below this, bringing the national average yield in at 3.3%.

    Now, these are based on asking prices and asking rents, so factor in your own belief about who is doing the better negotiation from the ask at the moment, tenants or home buyers and that will of course affect the yield slightly.

  14. Abject apologies if I have got any of the maths wrong, but here is how I interpret the forecasts of Morgan Kelly and Ronan Lyons in terms of what they will mean for actual house prices in Ireland in the next few years. And, so as to enable a judgement to be formed on how realistic they are, I compare them with forecasts for house prices in the U. Kingdom over the same period.

    (1) According to the ESRI/Permanent TSB monthly survey, the average house price in Ireland peaked at €311,078 in February 2007. And, according to the same survey, this had fallen to €238,828 by July 2009, a fall of 23.2 per cent.

    (2) Morgan Kelly has forecast that the average house price in Ireland will eventually fall to a level some 80 per cent lower than the peak level. This translates to €62,216 as the average house price in Ireland some time around 2012 to 2014, if Morgan is correct.

    (3) Ronan Lyons expresses his forecast in terms of the total value of residential property. He forecasts that this will fall from €12.4 billion in 2007 to €4.2 billion sometime in the next few years. This translates to a fall of 66.1 per cent. Or €105,365 as the average house price in Ireland some time around 2012 to 2014, if Ronan is correct .

    If Morgan or Ronan disagree with these figures, I will be very happy to substitute whatever figures they give me as their forecasts for the average house price in Ireland around 2012 to 2014. All I have done above is take their published forecasts for the percentage fall in the average house price in Ireland between 2007 and 2012-2104 and apply it to the known figure for the average house price in Ireland in the peak month of February 2007 (according to ESRI/Permanent TSB).

    Now, let’s compare these figures with those in the U. Kingdom.

    (4) According to the Nationwide monthly survey, the average house price in the U. Kingdom peaked at £186,044 (or €267,251) in October 2007. And, according to the same survey, this had fallen to £160,724 (or €185,735) by August 2009, a fall of 13.6 per cent in sterling terms (or 30.5 per cent in euro terms).

    (5) According to the Nationwide monthly survey, supported by all other surveys in the U. Kingdom, house prices there have been rising since April 2009. This week, Ernst & Young forecast that the average house price in the U. Kingdom would be back to its October 2007 peak of £186,044 by 2014. On the reasonable assumption of a euro v sterling exchange rate of 85p by then, this equates to an average house in the U. Kingdom in 2014 of €218,875.

    (6) So, if Morgan Kelly’s forecast comes true, then by 2014 the average house price in Ireland will be 28.4 per cent of that in the U. Kingdom. And, if Ronan Lyons’ forecast comes true, then by 2014 the average house price in Ireland will be 48.1 per cent of that in the U. Kingdom.

    I am not posting here to say that these forecasts are absurd. I’m merely trying to put them in context, by comparing them with the forecasts for house prices in the U. Kingdom. Over the decades, house prices in Ireland and the U. Kingdom have rarely deviated by more than 10 per cent to 15 per cent. More often than not, the average house price in Ireland has been higher than that in the U. Kingdom, for the very good reason that average household size in Ireland is 30 per cent higher than in the U. Kingdom (more children, less divorce) and, as a consequence, the average number of rooms per house in Ireland is significantly higher than that in the U. Kingdom. Yet, Morgan and Ronan are forecasting that, in a few years time, the average house price in Ireland will be either 28.4 per cent of that in the U. Kingdom (Morgan’s forecast) or 48.1 per cent of that in the U. Kingdom (Ronan’s forecast). As I’m not Mystic Meg, I can not tell if these forecasts will come true. All I can do at this stage is point out that they imply a deviation between house prices in Ireland and those in the U. Kingdom that has never before come remotely close to occurring.

    PS Happy to supply links to sources for all figures above – I have omitted them because I read here last week that posts with lots of internet links take much longer to get past the moderators and appear

  15. Regarding the debate above, concerning the rate at which the number of households (and hence the requirement for new houses) is increasing, a couple of points:

    (1) We wouldn’t be having this debate in N. Ireland, or in most other countries. Because, in most other countries, the CSO-equivalent (called NISRA in N. Ireland) publishes figures annually for the number of households. In Ireland, the CSO only publishes definite figures for the number of households for census years. So, the last definite figure for the number of households in Ireland is for April 2006, almost 3 and 1/2 years ago. No one can be certain what the increase in the number of households in Ireland is since then.

    (2) However, the CSO does carry out a Quarterly National Household Survey (QNHS), the most recent of which was in 2009 Q1. I emailed the CSO this morning to ask them if they could give me approximate figures (from the QNHS) for the number of households in Ireland up to 2009 Q1. To my surprise, they responded positively. These are the figures they gave me for the number of households in Ireland:

    2006 Q1 1,501.8
    2007 Q1 1,528.5
    2008 Q1 1,582.6
    2009 Q1 1,632.7

    So, based on these, the number of households in Ireland was still growing strongly at least until 2009 Q1 (up almost 50,000 y-o-y in that quarter).

    In fairness, I should point out that the CSO added a comment that the figures for the number of households from the QNHS were not as accurate as those from the full Census that is held every 5 years (last one in April 2006), and should be treated with caution. Their exact comment was:

    “The QNHS can provide a best estimate for a point in time for number of
    households, however the data is not robust to infer a trend. When providing the figures we always warn users that the figures are not suitable for analysing number of households over a series of time , however as an estimate for a point in time it is the best estimate available.”

  16. John and Ronan-thanks very much for interesting analysis. On a related note, I haven’t seen much analysis in the media about the extent to which the woes of the banks and developers was attributable to the Irish government’s decision to allow workers from the accession countries to work here without restriction.

    I would guess that Ireland has experienced an almost unprecedented demographic shock in the past few years ie the enormous increase in demand for housing caused by the arrival of these workers followed by the collapse in demand as they returned home en masse.

  17. @JD

    Here’s a fact, but just a one off. I rented a property in Blackrock for 18 months from mid 2007. I paid €4,000 per month in rent. It was purchased in January 2007 for somewhere around €3m. Today they can’t let it for €3,000 a month. Yield was 1.6% when I occupied it. Based on a generous value today of €1.5m (and I really don’t believe it would get that) its yield would be 2.4% if it were resold and they could get €3,000 per month (which I doubt). I totally accept 3% residential yield as an accurate assesment based on experience.

    What I find fascinating in this is that if yield were to revert to long term norms (6%) then this property could be let €7,500 per month. No way!! So my own take is that we have further to go on price reductions.

  18. @ Concubhar O’Caolai

    I am resident in the UK and I too am perplexed by recent house price data which shows house prices on the rise again. The UK and Irish property markets were always going to correct but different factors are at work in both markets.

    By most measures UK average house prices were as overvalued as those in Ireland. But the UK is not now lumbered with a massive surplus of empty properties like Ireland has. According to work done by the good folks on the propertypin, up to 15% of all dwellings in Ireland are empty (admittedly, many of these are new builds in marginal locations). Moreover, sterling has suffered (benefitted from?) a substantial depreciation over the past 18 months vs the euro, dollar and yen which certainly made property less epensive for overseas buyers. I can also tell you that finding a family home near a good school in the SE of the country is a difficult now as it ever was.

    Nontheless, the recent positive house price data in the UK is taking place on extremely low volumes (mortgage approvals have only just begun to bounce of all time lows) and tax hikes will not take effect until next year.

    I still think that the UK market has a long way to fall.

  19. @JD, Ronan
    I just moved house into a rental. Based on the rent I pay and the asking price of the house right next door which is for sale the rental yield is 2.21%. Now even if the buyer negotiates a 33% discount to asking price, the rental yield will still only be 3.3%.

  20. @John

    Two points regarding your comparison with the UK.

    1) The UK did not have a supply side excess due to massive overbuilding. So their prices may well remain higher than Ireland due to simple supply/demand economics.

    2) You have mentioned many times before that house prices in the UK have turned around. What is this is just a mild bump and they turn down again and keep heading down for a while? Why do you discount that possibility from your analysis?

    As an addendum what is the track record of Ernst & Young’s house price prediction in the UK? Are they on average 5% off on predictions 5 years out? 10%, 20%, 50%? What was their prediction in 2004 for 2009?

  21. @Garo

    I don’t discount the possibility that house prices in the UK will ‘turn down again and keep heading down for a while’. It could happen. I think the odds are against it, but I certainly don’t dismiss the possibility.

    My main point was to highlight the difference between the forecasts for house prices in Ireland being made by economists here (Morgan Kelly and Ronan Lyons) and the forecasts for house prices in the U. Kingdom being made by economists there. In my opinion, one or the other group of forecasters will be proved wrong, because they imply a gap emerging in the next few years between house prices in Ireland and house prices in the U. Kingdom that has never before come remotely close to occurring.

    But, I don’t state categorically and definitely that our economists will be the ones proved wrong, and the U. Kingdom economists proved right. Maybe the U. Kingdom economists are living in a fool’s paradise regarding house prices there? Who knows? I certain don’t for certain. As you imply, their economists also failed to predict the 2007-2009 fall in house prices there.

  22. @John
    Don’t forget that while UK house prices may now have stabilised in sterling terms they are once again falling in euros….

  23. @John,
    I don’t disagree with your overall point – it’s easy to get caught up in the downward momentum (and this is a welcome change for someone who’s used to being called a vested interest!) – but I guess what I was doing here is putting on an Ireland Inc hat and saying “I want a fair deal for the Irish taxpayer”. This led me to say that as de facto investors in however many billions of euro worth of property, we should only do so with a decent yield.

    I think it’s possible to make a case that Ireland should only be look for a 5% yield, not 6%, based on likely ECB-driven medium-term costs of borrowing, but if I had billions of Irish taxpayers euro in my control, I’d be demanding a 6% yield. That’s what NAMA itself is doing for commercial property.

    Simply applying that to residential property has produced the result it did.

  24. @ Ronan,

    It looks to me that the government has confused loans and property, when saying that a 10% pick up in market values covers the 7bn gift to banks.

    NAMA will only benefit from increased market value where they’ve repossessed a property. As a subset of loans should perform (ie. you get the principal back), this would require a larger increase in future values of foreclosed properties to offset this.

  25. Taking a quick bash at the Nationwide and Dept of Environment house price data since 1975, I make the average deviation between average new house prices in Ireland and the UK to be 21% and the average deviation for second hand houses to be 27% (I’ve averaged UK prices for modern and older second hand houses).

    Average Irish house prices (new and second hand) have been above those in the UK since the mid-90s (start of the Celtic Tiger) and also had a brief period above the UK, associated with the fiscal profligacy of the late 1970s. Otherwise, they have been below those of the UK. So I’m not sure that differences in household size have historically been a key driver of differences in average house prices.

    There’s quite a lot of scope for Irish house prices to fall further, without getting notably out of line with the UK.

  26. Perhaps (strike me down for naivety) we could start a petition asking for a NAMA spreadsheet to be made available, with all the aggregated information, preserving confidentiality but allowing the taxpayers and stakeholders of Ireland to examine what they’re expected to support.

  27. @John
    I would be interested in a comparison of Ernst & Young forecast of huose prices here vs their forecast for the UK
    maybe that gap would not be obvious

    Similarly what would Ronan or Morgan Kelly have forecast for the UK?
    I suspect a certain amount of “talking up” UK prices is going on – rather like the “talking up” which caused the bubble here in the first place – and is starting to be repeated. Just this morning (Morning Ireland) Brian Lenihan said it would be a disaster if property prices here continued to fall..

  28. The UK has had a serious housing supply problem for decades arising from planning restrictions.

    When Gordon Brown became PM, he made a lit of play about increasing the build rate.

    David Cameron, leader of the Conservative Party, had campaigned in one general election for no new building in his own constituency.

    Nimbies rule!!

    Ireland had a build rate of 21 units per 1000 population, relative to only 5 units per 1000 in the EU, in 2005. 

    However, Ireland’s housing stock was quite low at 410 units per 1000, relative to the EU average of 465 units.  Therefore, Ireland had been in catch-up mode. 

    New Zealand with a population of 4,100,000, comparable to Ireland’s and a population growth rate of 0.8% put in place 25,000 housing units during 2005 – a build rate of 6.09 per 1000 population.

    Market research company BIS Shrapnel said that Australia’s current build numbers at 147,000, a population of 20,387,000 and annual population growth 1.2% – indicates a build rate of 7.21 per 1000 population.

    Texas – with a population of 23,057,000 and an annual population growth rate of 1.8%, put in place 205,000 housing units during 2005. This was a build rate per 1000 of 8.89. The urban markets there are generally considered “in balance” – according to Dr Jim Gaines of the Real Estate Centre, Texas A&M University.

    Britain’s build rate per 1000 was an astonishing 2.45 per 1000 people.

  29. By now you might have worked out I don’t like averages. Went on to daft.ie and looked at houses where I live in D18

    Lambourne Wood 4 bed rental €2200 per month i.e €26,400
    Lambourne Wood 4 bed for sale €1.095.
    Yield 2.4%
    These houses were selling for c€1.6m at the top of the market. Allowing for a 5% yield then the house is worth €528k.

    Kerrymount Rise 4 bed Rental €1600 per month €19.2k per annum
    One for sale at €1.05m but that’s just plain nuts. That’s where they were 2 years ago.
    Another nearby for €725k. Yield 2.6%
    That means they’re worth €384k.

    Averages cover up a multitude. In Dublin 18 at least houses are still overpriced and could fall some 65% from their peak.

    That still actually brings them back to mid 1990s level.

  30. @Aidan McGrath

    I would doubt very much if Ernst & Young do forecasts for house prices in Ireland. And, I doubt very much if Morgan Kelly and Ronan Lyons do forecasts for house prices in the U. Kingdom.

    But, its an interesting point.

    IF ONLY there was some organisation that did forecasts for house prices in BOTH Ireland and the U. Kingdom. I’d be delighted if I could find one. If anyone knows of one, please post details. If there was one, I’d also be amazed if it showed a deviation in house prices between the two countries in the next few years that was anything like that in the separate and independent forecasts being made by economists in the two countries. If Morgan Kelly is such a clever clogs, perhaps some UK agency could hire his services to forecast house prices in London, Manchester, Birmingham, Leeds, Liverpool, Southampton etc in 2014. I, for one. would be most interested to see how they compared with his forecasts for house prices in Dublin, Cork, Galway etc in the same year.

    Let me repeat. I’m not saying catgegorically and definitely that Morgan Kelly and Ronan Lyons are wrong in their forecasts for house prices in Ireland. I’m saying that they will be wrong IF the forecasts by Enrst & Young (and other UK economists) for house prices in the U. Kingdom are correct, because house prices in the two countries are very unlikely to deviate to that extent.

    But, if Enrst & Young (and other UK economists) have got it totally wrong and house prices in the U. Kingdom fall to, say, £100,000 (€117,600 at a 0.85 exchange rate), then, obviously, there would be a much greater chance that the forecasts by Morgan Kelly and Ronan Lyons for house prices in Ireland would prove correct. However, if that happened, then UK banks and the UK Exchequer would be facing the same difficulties as Ireland is.

    On a personal note, I’m off tomorrow evening to visit my Irish cousin and her English husband near Croydon, Surrey. Both have just retired and are free to move anywhere. They are actually moving to another house nearby and their present house is currently on the market for £680,000 (or €782,000). If both Morgan Kelly’s and Ernst & Young’s forecasts prove correct, they could hang on to it for a few years, sell it in 2014 for around £800,000 (or €941,176), then move to Ireland and buy a similar house for approximately €265,000, making a tidy profit of €676,000. Even if Ernst & Young were over-optimistic and UK house prices stayed flat until 2014, but Morgan Kelly’s forecast for house prices in Ireland proved correct, the profit would be €517,000. If the consensus of opinion on this site is that this is indeed likely, I will recommend that course of action to them, and claim 20 per cent of their future profit into the bargain as a reward for suggesting it. But, somehow, I don’t think they’ll believe me.

  31. @Michael Hennigan

    You gave the population growth rates for New Zealand and Australia, but conveniently omitted the population growth rate for Ireland.

    For New Zealand, you said:

    population growth rate: 0.8% – build rate: 6.09

    For Australia, you said:

    population growth rate: 1.2% – build rate: 7.21

    But, the population growth rate for Ireand was:

    2.6% in 2006
    2.5% in 2007

    that is, 3 times that of New Zealand and over 2 times that of Australia.

    And, of course, in many EU countries, there has been no population growth at all in recent years, but population decline (Geramny for one).

    Houses are largely built for new people, so the build rate should correlate more to the population growth rate than to the actual population. And, as you said, Ireland was playing catch-up, as it had a low housing stock. Ireland was also playing catch-up in relation to new household formation, as divorce was only introduced in 1996. Taking all these into factors into consideration, it was perfectly proper that Ireland should have a very high build rate. I’d say a build rate of 21.0 was too high – around 18.0 would have been better (if you adjust the New Zealand and Australian build rates that you gave for the much higher population growth rate in Ireland, they would equate to approximately that).

    That, of course, doesn’t mean that such a build rate should be continued into the future. If the population growth rate is now much lower than in the half-decade up to 2006, then the build rate should indeed now be much lower than back then. But, that doesn’t mean that a high build rate was wrong in the years when the population was growing by 2.5% or 2.6% a year, although I agree that a build rate of 21.0 was too high and around 18.0 would have been better.

  32. There is another element here that needs to be taken into consideration.

    The last census showed that 1 in 4 properties in the state was occupied by just one person.

    Leaving aside the effect of divorce, I would argue that this is the type of social behaviour that economists cannot predict.

    With total freedom to come and go as she pleased, my own daughter at the age of 19, decided she needed her own space. Despite the fact at that time she was earning circa 30k, she got a mortgage with BOI for 298K.

    It would have been halpful if the census had provided a breakdown of the age groups in the 1 in 4 figure.

  33. @Stuart

    I understand why you don’t like averages. Chacun a son gout. But, surely, the calculations as to whether NAMA is viable or not will be based on average values, not those of houses at the top end of the market only.

    Anyway, I went to the same daft website as you. I was looking for a figure for the average monthly rent for a house/appartment in Ireland. It didn’t give one. But, it seems to be around €1,000. That is my crude estimate, just from observing the individual values for all the different categories and locations. Maybe someone can work it out more precisely. I’ve never fully understood how the price of a house can be calculated from the monthly rent. But, just following the calculations you did, I get the following.

    average monthly rent for house/appartment: €1,000 (very approximate)

    which equates to €12,000 annually

    so, on your (not mine) 5% yield basis, the average house price in Ireland should be €240,000.

    But, according to the ESRI/Permanent TSB index, that is almost exactly what it is (actually €238,000 in July 2009).

    Applying your calculations to houses that are 4 or 5 times the national average in price is hardly a sound basis for measuring the extent to which average house prices are out of line with rents.

  34. @Michael Harvey

    The census does give the breakdown you want. Its in tables 10 and 11 in this link.

    http://www.cso.ie/census/census2006results/volume_3/volume_3.html

    As far as I can see, it gives figures for males and females separately.

    Re the point about different percentages living alone in different age-groups, I did a very quick calculation (apologies if I got it wrong in my haste) and found:

    of age-group 30-34 (your daughter’s age-group), 17.2% of households were one-person households

    of age-group 65 plus, 41.3% of households were one-person households

    So, from this we see that, as the population ages and the proportion of the population aged 65 plus increases, the percentage of households consisting of just one-person will automatically increase. This, along with increasing divorce, is the main reason why average household size is falling and why the number of households (and, consequently, houses required) is increasing at a much faster rate than overall population growth.

  35. @John,
    Based on some fairly crude calculations on Census data from 2006 and 2002, assuming that the marginal requirement for housing is the same as the average, it looks to me like falling household size is driving a need for a build rate of about 3 per thousand. 2.6% population growth drives a need for about 9.25 per thousand.

    I think your model for fitting build rates to population growth in your post drawing conclusions from the ANZ data is too simple. In countries with low rates of population growth, most new builds are driven by the existing level of population rather than by growth. Some houses are demolished or abandoned, and need replacement to maintain the housing stock. In some cases, shrinking household sizes (as you mention in other comments yourself) or increasing holiday home ownership increase the existing population’s requirement.

    I have not worked the numbers on it properly, but based on the hypothesis that the marginal household size will be the same as the average (2.81 in 2006), growth of 2.6% in the population will increase the build rate required by about 9.25 per thousand over that required under an unchanging population size. Add maybe another 5 per thousand (based on the ANZ data) to service the needs of the existing population size, and I get a total required build rate, at 2.6% per annum population growth, of about 14.25 per thousand.

  36. Fumbled and hit submit while still editing.Please ignore last two paras, which I was deleting. Was going to say we should probably add another 2 or 3%, for a total requirement of about 15% when population was growing at 2.6% per annum.

  37. Before we wrap up for the day, I would just like to note that I think it’s really interesting that this discussion of long-term economic value which started out talking about yields on property has finished off talking a lot about demographics.

    Unfortunately, the NAMA document did not do likewise.

  38. Karl

    I’ve just watched you on Primetime and am very disappointed at your performance. I know you are vehemently opposed to NAMA, fair enough. But please, let’s differentiate the problems facing the country because it is just so important.

    By mentioning the 400m borrowing per week as you did in the context of the NAMA debate (allied to the comments of the SIPTU representative), you reaffirmed the the general impression that most people have that the bank bailout is the cause of this borrowing and the resulting levies, cutbacks etc.

    It isn’t.

    Do you believe the budget deficit, that 400m borrowing per week you mentioned on the show, is the responsibility of the banks or developers or NAMA?

    In addressing this deficit and how it arose, should the unions bear any responsibility?

    I think they are massively culpable, and I also believe the SIPTU representative on the show doesnt realise this, and feels that her members are suffering levies and other tax increases because of the bank guarantee and NAMA. That will make the necessary adjustments more difficult to pass or accept.

    For example, given the disparity between public and private sector pay, one logical and moral (much more obviously moral than nationalising the banks or abandoning NAMA) adjustment required is an immediate 30% cut in public sector pay. Given the value of job certainty and the massive pension advantage, that would just leave another c30% to go over time, assuming private sector pay levels dont drop.

    Can I ask you and your followers what they think should be done about the deficit, or does it matter?

    And there is a link to NAMA in that NAMA long fingers the solution to the banking problem, with the help of the ECB. Given our already massive current borrowing, that is vital. Could we fund the cost of nationalisation or a more substantial recapitalisation of the 2 main banks while the deficit is already so large? Maybe some bank economist could comment?

  39. @John
    “the calculations as to whether NAMA is viable or not will be based on average values, not those of houses at the top end of the market only”

    I am hoping that the average genuinely reflects what Nama is taking over. The average for the country is just that a mix of the highs and lows, one bed apartments to huge houses, from the middle of Mayo to D4.

    The houses I picked were nowhere near the top of the market where I live. All around me are developments that will be landing on Nama’s books. There are at least 10 blocks of apartments within a 3 mile radius of my house where the developer paid top dollar for the land and has to charge accordingly. Most are empty. There is a development of largish houses just up the road from mine where they wanted €4m each.

    But to give a mix, I checked out Athlone on Daft.ie

    Some place called Woodville Cornamaddy – you can rent a 4 bed for €850 (€10,200 per annum) or buy for €292k. That’s a yield of 3.5%. Taking the 5% yield gives a value of just €204k.

    Or Silverquay Northgate Street 2 bed apartment – rent €775 (€9300 p.a.), selling price €345k. Yield 2.7%. A 5% yield values it at €186k.

    Averages are meaningless. I haven’t found an example yet where I can find a house to rent and also for sale where the yields approach 5%.
    By the way 5% is considered low – I understand 7% is considered more reasonable for the risk. If I applied 7% the prices get worse. Investors buy property to get a return that’s why the yield is important.

    All I’m saying is the assumption that house prices have bottomed is not borne out by the above figures. Brian Lenihan says they will go through each property loan one by one. The figures may change dramatically for the banks when they do.

  40. @ John

    The main point I was making was that UK house prices have been underpinned by severe supply problems.

    As for Ireland in the coming decade, economic prospects will determine demand.

    Economists who argued that population growth would be the key driver of prosperity were popular as boom cheerleaders but emigration is likely to be the solution to the big surge in unemployment rather than the so-called “smart economy.”

    Employment in the tradable goods and services sector fell in the period 2000/2007.

  41. @John,
    Your estimate of €1,000 for the average rent is significantly higher than it currently is.

    Based on the latest IPW (daft) figures the average asking rent in Aug 2009 was €875
    I would imagine the actual achieved rent is somewhat lower maybe €850
    http://www.irishpropertywatch.com/viewPost.php?Post_ID=149

    Once you factor in expenses, management fees, vacancy rates and taxes the €850 could be reduced below €800.

    €800 X 12 / 5% = €192,000

    There is still significant excess supply of rental properties so I would predict that rents will fall for at least the next 12 months. Possible by another 20%.
    Maybe Ronan L could give a better estimate but I think 20% is fairly realistic.

    In 12 months time the average house price based on the other inputs could be as low as €150k.

    €640 X 12 / 5% = €153k.

    That is a full 35% below the current market.

  42. @John,

    According to the Daft rental report (see above), nationwide average rental yield is 3.3%. Nationwide average house price is €238,000 (ESRI/Permanent TSB index, July 2009).

    Assuming rents do not fall any further and yields improve to 5%, that implies an average price of €238,000 x (3.3/5.0) = €157,000.

    For 6% yield, average price would be €131,000.

    I think these target prices are also quite reasonable from the standpoint of affordability and average household income levels.

  43. Ronan,

    Could you help us all and provide a graph of residential yields over the last 25 years to complement the yields in the Governments supporting NAMA documentation? No pressure, mind.

  44. If the country is to recover its competitiveness commercial property values and wages must fall. Artificially propping up either one is a big problem but propping up both will doom the country to poverty for decades. Eastern Europe has the competitive advantage now and as their economies grow they will not be a source of immigrants. Immigration will be from the more impoverished countries and will not be the boon to the economy that the well educated Eastern Europeans were. I do not see how a country saddled with excessive debt in all sectors and guaranteed increasing gov’t deficits for the next decade can grow. I see corporate taxes under siege when residential property is taxed so as the gov’t can stay barely afloat. Even more troubling I see interest rates trending back to normal placing a greater burden on both gov’t, business and consumers. NAMA to me is a short term strategy that might get the gov’t re-elected but exacerbates our lack of competitiveness with predictable results. The downward spiral has barely begun.

  45. Ah Ronnie, I though you’d never ask!
    It’s actually linked to in the article under discussion, but you can go straight there by clicking this link:
    http://www.ronanlyons.com/2009/06/19/yields-on-residential-property-point-to-scale-of-the-challenge/

    It’s for Dublin (an Ireland graph is certainly possible) and goes from 1997 on, as that’s the best I can do, based on CSO data available online. I imagine they have a series on rents going back to the 1970s but it’s all a question of getting access to it.

  46. @Dreaded Estate

    As I said, the €1,000 figure was just a rough estimate for the national average, as the daft website doesn’t give one. Or, at least, I couldn’t find one in my quick visit to it. I just observed that about half the cells in the daft table were above €1,000 and about half below.

    Re your forecast of €153,000 as average house price in a year’s time. We just have to wait and see. It implies a monthly fall of 3% for the next year, compared with about 1% since house prices began to fall in early 2007. But, who knows? Maybe the rate of fall will indeed accelerate sharply in Ireland, at the same time as its declining in other countries? But, it will need to for your forecast to come true.

    Out of interest, if we apply the same methodology to house prices and rents in the U. Kingdom, what would they indicate that average house prices over there should be? And, would they have predicted that house prices over there would start to rise again in April last? Just curious. I genuinely have no idea of the answer.

    @AFY

    I took the 5% figure because that is what Stuart used in his calculations. He was applying his calculations to the rents on individual houses. I took his 5% figure and applied the same calculation to the national average (which I put at very approximately at €1,000 – see above comment)

  47. Price (median is only reliable value to use) of domestic property must be considered in context of:

    1. Location: inner urban; mid-urban; outer urban; ex-urbes and rural variations.

    2. Nature of property.

    2. Median income values in these locations is critical.

    Property Price Estimate Calc:

    for 2 earners; take income of ONE x 3 = property price

    for 1 earner; take income x 2.5

    all other methods: entrails, tea-leaves, wishful speculation, historic look-backs, inter-country comparisons, etc. will give misleading or even useless results.

    Now if you have had a property price bubble, then you will have a price decline back to close to where the price rise originated – say 1995ish prices.

    You must consider the context of the bubble – massive inflation of credit. This is now finished and will not (never?) resume – debt levels are too high and mortgage defaults are increasing (and just wait until interest rates go over 6%!).

    Conclusion: Domestic property prices (as opposed to their virtual values) will plummet; at rate of -1% per month, for next 5-7 years. They ought to decline faster, but residential property prices are very ‘sticky’ on the way down; they go ‘slow, slow, quick, quick, slow’.

    For what its worth: Commercial property is heading into real trouble. Massive losses.

    Brian P

    ps. I will be completely confounded if inflation (money supply) does increase sharply. This is real possibility given the current QE stimuli that are in progress. Keep a close watch on oil prices.

  48. Some more hard data re yield and 2007/2008 property prices.

    We live in D6 in a “comfortable” 3-bedroom semi. Our rent is Euro 1,700 per month. We moved to this house about 6 months ago because our previous landlord – living overseas – was not prepared, upon lease renewal, to drop adequately our rent. He now rents his house for less than we offered him.

    Our current rental-house was on the market in late 2007 for 1.4 mil, then 1.2 mil in early 2008, then 1.15 mil in mid 2008. It was then taken off the market, unsold. In 2006/2007 similar houses in the street sold for over 1.2 mil. It seems clear to me that Morgan will very likely be proven correct in that Irish property hyper-inflation of the past 10 years or so will to a very large degree be reversed via property deflation, and “normal” trend lines (largely in alignment with general inflation) will be likely be reached, and indeed there may even be a period of trend-line undershoot (we have witnessed this effect ourselves in a city outside the EU).

    We live on “modest” professional salaries, and the house we live in is not on a par in quality (though its location is good) and size with houses we have rented or owned in overseas cities, despite it costing us more per month as a fraction of take-home pay. Ultimately, it has to be the case that affordability, in rent and mortgage, for the socio-economic group that lives in a particular location, that determines the price of property above the cost of build and provision of services.

    Irish property would appear to still have a long way down to go, and clearly this is not a bad thing overall for the Irish economy (despite the considerable distress that is being, and will further be, experienced by persons who bought – without a “trade-in” sale of a property – in the boom-is-getting-boomer years).

    The idea that the “market has bottomed” and that 1% per annum property inflation will follow from today is quite clearly fanciful. NAMA will obviously cost almost everyone who lives here for the next decade or more … and it will probably a lot.

    One can also reasonably speculate that both the genuine uplift to the Irish economy experienced during the 1990’s, and the sharp dip being experienced now in disposable income, will both (somewhat paradoxically) work to align Irish family sizes with EU norms. Thus natural population growth will tail off to sub-replacement levels, and without the allure of jobs and good incomes, immigration is unlikely to take off again any time soon, and net emigration may well be the prevailing feature for the next decade.

  49. @John
    Sorry on re-reading my post it came across as a little misleading.

    The average rent I have quoted was from the €876 on August 23rd based on the average of all properties listed on Daft. Down 6.5% from €934 in just two months.
    I think a prediction of a 20% fall in the rental market over the next 12 months is fairly realistic.

    But I didn’t mean to suggest that property prices would fall in €153k next year.
    What I was highlighting is that due to the oversupply in the rental market rents were likely to continue to fall.

    Based on a 20% fall in rents the LTEV of the average Irish property could be €153k in about 12 months. Nearly 40% above current prices.

  50. I can guarantee anyone reading this blog that if you sold these NAMA assets in the morning you would be lucky to get 25bn for them.

    What do I base my calculations on? I base them on experience of building, knowing what is happening in the industry and looking at the quality of the assets to be transferred to the tax payer. It is not just the buildings, the sites they are sitting on have halved!

    Some of these assets might look o.k. when they are finished but there is still no demand for them. Demand will only materialize as a result of an economic stimulus.

    Board Snip, NAMA, CoT or the december Budget are the opposite of stimulus and each one of them will bludgeon the economy. Lots of small builders will not finish anything because they know there is no demand whatsoever for the finished product. why burn through even money on an asset that may look better but is still a dead duck in the water. You cannot sell it, you cannot rent it. If you can rent it, then, it is for a lower rent than your competitor is offering and in some of these cases your “competitor” will be NAMA if, it goes through!

    NAMA is obviously a great stimulus package for bank shares but not the economy? Stimulus in the future is even less likely since NAMA has mopped up all available and potential credit.

    NAMA figures and propositions were based on nothing more than vested interest and the formulae being used by the vested interests. They started with the idea of paying over the odds because to do otherwise would trigger nationalisation which, as we know, is Lenihans worst nightmare. Pumped in already is 11bn into Anglo, 7bn AIB and BOI combined. Now we have handed out another 7bn free gratis( yes, a 5% clawback) All told that is 25bn most of which is already gone in.

    The rest of the bailout money i.e. the 47 bn has still to be delivered. What have we got back so far? Expect more of the same.

    I consider the government valuations to be nothing more than voodoo economics. They started with an end proposition which entailed where they wanted to go i.e overpay, don’t nationalise, at any cost! In other words, they began at their destination then produced the roadmaps (valuation models and statistics) to get them back to the start point which was the announcement of NAMA.

    Lenihan has not factored in rents falling as pointed out and eroding asset “values” still further. (the government now have a vested interest in keeping rents high!) nor do we hear anything about depreciation on buildings.

    Neither, has he factored in the inevitable rise in interest rates on NAMA bonds nor has he revealed the cost of running the monster NAMA quango. Quangos hire other agencies with our money to tell us what a good job they are doing on our behalf.

    He understands that banks should be “exceptionally grateful” but does not comprehended that banks will de-leverage and will not be giving out loans any time soon. Since when do banks give out loans based on being grateful? If it was not so silly it would make you laugh.

    NAMA was supposed to restore credit lines. It won’t.

  51. Thanks to all contributors. I’ve learned more from reading this than listening to the sub-intellectual drool oozing into my ears from the radio monkeys over the last 6 months. I never bought into the boom swindle. I just looked at the Take 5 section in the Irish Property Porn section and realised, years ago, that the Emperor had no clothes. I’m saving up and I hope to buy outright some land in a few years. Mortgage comes from the Old French “dead pledge,” apparently meaning that the pledge ends (dies) either when the obligation is fulfilled or the property is taken through foreclosure. Or that you pay it off at age 70 and then die. What’s the point of that? Mortgage could also be translated as ” Death Gauge”. Not for me.

  52. On Pat Kenny’s new show last night a representative of Threshold said that they were finding that people were being refused mortgages for under €130K despite fulfilling all criteria. She suggested that the banks were doing this for two reasons:
    (a) NAMA, and
    (b) The effect on sales as a result of foreclosures.

    Pat Farrell of the IBF dismissed her out of hand, but it would be good if a journalist looked her up and investigated.

  53. Ronan,

    Excellent analysis. But the government faces an asymetric choice when pricing those NAMA purchases.

    Consider the risks facing the government if it overpays for assets – as it plans. The consequences would be:
    (a) bank solvency and liquidity immediately boosted by more than they should be,
    (b) the share of the banks owned by the state – post emergency – would be lower than otherwise as the need for further government purchase of bank equity would be reduced. Private shareholders get a free ride, and
    (c) the prospect of nationalisation would be reduced.

    Consider the risks facing the government if it underpays:
    (a) bank crisis prolonged.
    (b) fresh equity issues have to be planned.
    (c) possibility of court challenge as banks could argue that assets are being compulsorily acquired at below true value and that this represents confiscation.
    (d) increased prospect of bank nationalisation.
    What would happen then to the management of nationalised banks after the next election when Eamon Gilmore might be Finance minister? He will legitimately point out to social housing needs on the one hand and an overhand of residential propoerty on the other. Within a decade, we could move from dodgy banks to sick banks to political banks.

    The backdrop to all this is that the Irish Central Bank is currently advancing €98bn in funds to the Irish banks as part of the ECB’s emergency liquidity support scheme. As other threads on this website have made clear, this will not last forever. We must plan a replacement.

    From the government’s position, it would appear better to “over-succeed”, pay the banks too much and get the banks back into financial health asap than to fail and let the crisis linger beyond the point that the ECB steps back. If the government “over-succeeds” it can always levy the banks on the far side of this crisis.

    For those who argue that this is a bail-out for FF’s friends in the banks / builders etc, consider this. The politics of bank rescue are toxic. FF is taking a huge hit as punters see the banks being rescued as they are left to sink. The “politically cute” thing for FF to do would be to exit government and lead the opposiition to the “monetarist cutbacks” of the resulting FG/Lab coalition.

    Hard as it may be to believe, FF under Cowen is doing its best to solve the crisis, even at the expense of his party’s electoral future. It’s fun to argue the toss over NAMA asset valuations. But the risks associated with underpaying vastly exceed those of underpaying. And the amounts involved (say €55bn) are dwarfed by the liquidity support we are already receiving from the ECB (now €98bn, was €130bn in June).

    It is this support and the question of how we operate without it which deserves as much focus as the question of valuing the assets NAMA is to acquire. To date it has received precious little public attention from the Irish economist class.

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