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.

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

Some say to just shut down failing banks when problems start
And fire the boards and CEOs but, we don’t have the heart.
It’s easier to patch and mend and temporize away
Immediate cost is tough, we favour gradual decay

Bailout! (Bailout)
Bailout! (Bailout)”

http://www.merlehazard.com/Merle_Hazard/BAILOUT.html

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.

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.

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.

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.

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)

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.

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.

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.

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.

A table of rental yields by area is available on page 12. Highest average yield is 4.6% in Dublin City Centre, most other areas are in the mid 3% range.

http://www.irisheconomy.ie/index.php/2009/09/18/migration-is-endogenous/

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.

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.

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?

Unfortunately, the NAMA document did not do likewise.

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.

Thanks for that.

I am slowly coming around to your way of seeing this.

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.

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.

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.

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.

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.