Mortgage Repayment Burdens

The Central Bank have released a new paper by Yvonne McCarthy and Kieran McQuinn (link here) that uses data from the 2007 Survey of Income and Living Conditions (SILC) to describe how various types of households were coping with their mortgage burdens on the eve of the economic crisis. The paper also applies various techniques to estimate how these burdens may have changed since 2007.

I think this type of work is vital for gaining a better understanding of the extent of the upcoming mortgage default problem. It would also be crucial that data of this type be utilised if the government do wish to design a mortgage modification program, as discussed earlier here and here.

85 thoughts on “Mortgage Repayment Burdens”

  1. The most interesting comment is where they say on page 5:

    “Additionally, most assessments of the Irish housing market had by 2007 concluded that house price levels were significantly above those levels sustained by economic fundamentals, with estimates of overvaluation in the housing market typically AVERAGING IN THE 20 TO 30 PER CENT RANGE.”

    @Morgan Kelly

    Note the phrase: “AVERAGING IN THE 20 TO 30 PER CENT RANGE”

    No one disputes that in 2007 house prices in Ireland were overvalued. The question is by how much in 2007 and by how much now in 2010? We can either try to estimate by how much in an intelligent way, comparing with long-term trends and comparing with other countries, or we can adopt the Morgan Kelly approach of simply plucking some wildly exaggerated figure out of the air and repeating it endlessly in the media in order to scare the hell out of anyone thinking of buying a house. I opt for the intelligent approach below.

    Let’s err on the side of caution and say 30 per cent overvalued in 2007.

    That would mean they needed to fall by 23.1 per cent from their 2007 peak level to be aligned with fundamentals. But, according to the latest ESRI/TSB house price index, by December 2009 average house prices in Ireland had allready fallen by 31.5 per cent from their 2007 peak level.

    So, even allowing for some deterioration in economic fundamentals, it is clear that by end 2009 house prices in Ireland were more or less in line with those economic fundamentals. They were no longer overvalued.

    This is in line with the Demographia international survey of house prices in English-speaking countries , reported in Finfacts last month (link below), which showed that even by September 2009 house prices in Ireland were the second lowest of any of the English-speaking countries as a multiple of household income (the key measure). Only in the U. States were they lower. They were much lower in Ireland than in the U. Kingdom, Australia and New Zealand and equal to those in Canada. Since September 2009, the period that the Demographia survey related to, house prices in Ireland have fallen by another 6 per cent, while rising by 3 to 4 per cent in the other English-speaking countries.

    http://www.demographia.com/dhi.pdf

    So, it is clear that, at current levels, house prices in Ireland are no longer overvalued. They are in line with economic fundamentals and low in comparison with other English-speaking countries. I know from my own personal experience that house prices in the Republic of Ireland are now lower than Northern Ireland, where they have bottomed out and are starting to rise again.

    Under the normal operation of market forces, and allied to the fact that mortgage rates are very low, this ought to be leading to a resurgence in interest in buying houses. And, indeed, exactly that is now happening in Northern Ireland. But, in the Republic of Ireland, there has as yet been no such resurgence. Despite the fact that house prices are no longer overvalued, despite the fact that they are now lower than in comparable countries, and despite the fact that mortgage rates are extremely low, the housing market is dead. No one wants to buy. We need to ask why? Why are market forces not operating in the normal way?

    The obvious answer is fear. People are scared to death to buy a house because they are being led to believe by a number of scaremongering economists that, if they do so, they will make a massive capital loss in the next few years. Look at Morgan Kelly’s forecasts, repeated every month or so in the Irish Times. He forecasts that house prices in Ireland will fall by 80 per cent from their 2007 peak. That means, and wait for this, according to his forecast, they will fall by a FURTHER 70.8 per cent from their current depressed level – NOT 70.8 per cent from their peak level, but 70.8 per cent from their current level, even though that current level is now in line with economic fundamentals, is lower than in N. Ireland, hardly the most buoyant market for new houses, and is much lower than in mainland U. Kingdom, Australia and New Zealand. No wonder no one wants to buy a house at present. Would anyone buy something that they read in the Irish Times every month is going to fall in value by 70.8 per cent in the next few years?

    The best thing that the government can do to restore consumer confidence and spending in the economy is to directly challenge Morgan Kelly’s forecasts and drive home the message that house prices in Ireland are no longer overvalued, indeed are now lower than in comparable countries, even lower than in N. Ireland, and, therefore, that those purchasing a house now have no reason to fear that it will be worth a lot less in the long-term, certainly nothing remotely like the 70.8 per cent from current levels that Morgan Kelly predicts.

    We have seen just in the past couple of weeks the beneficial effects to the Irish economy of a restoration of consumer confidence. Throughout 2008 and 2009, new car sales and new commercial vehicle sales in Ireland fell off a cliff. Even as recently as last autumn, they were showing y-o-y falls of 50 to 60 per cent each month. However, early in 2010 this market has started to rebound as confidence flows back. So far in February 2010, sales of new cars and new commercial vehicles are up 50 per cent on the same period in 2009 (link below). This is the first significant green shoot in the road to economic recovery. I imagine it won’t get much media publicity until the whole of February’s figures are in, but it will certainly get a lot of media publicity then. The government now needs to engineer the same sort of rebound in confidence in the housing market as is occurring in the market for new cars and commercial vehicles, by vigorously challenging the apocalyptic forecasts of Morgan Kelly and others.

    http://www.motorcheck.ie/todaysstatsutm_source=twitter.com&utm_medium=twitter&utm_campaign=

  2. @Jto

    When people say over-valued relative to fundamentals in 2007, they mean fundamentals like GDP. And they mean relative to what the fundamentals were then, back in 2007.

    Well by this year, nominal GDP will have fallen by about 15 to 20 percent from its peak value. People have less money to spend on houses than they did in 2007. You might want to factor that in to your conclusion that house prices are now in line with fundamentals.

    I’d also note that less self-praise and a cooling off of your imaginary one-on-one debate with Morgan Kelly would do wonders for your reputation. People might actually take your points on board a bit more.

  3. I agree that this research work is important, very important. The reason being, that the Irish market is so small, and yet we want to encourage models for residential development, which are at least as good as any other good example around Europe. I think we can do that, but we just need to work harder at it, as I said, because the market is small and easily screwed up, in a multitude of ways.

    The thing is, we will never achieve an even supply of housing to the (small) Irish market. There will always be the unfortunate presence of a steep ramp-up of production, followed by the inevitable cliff edge.

    I took note of Philip Lane’s recent thread about Sweden, where they haven’t had a residential crash yet.

    http://www.irisheconomy.ie/index.php/2010/02/09/sweden-the-property-market-and-monetary-policy/

    I contributed something on that thread, which compares house building in Ireland to the economics of war time, in the allied and axis countries in WWII. My analogy works, in the sense, there is a period of non-production followed by a period of frantic over-production. Where the analogy of war time economics falls down actually, is where the Axis side built their Panzer equipment, which was engineer-ed to last a lifetime without failing. That Panzer tank, might last only a couple of weeks on the battlefield, so it was over-designed. The Russian side built a mass-produce-able tank, which was good enough to serve its purpose, and you could replace them as fast as they were destroyed.

    But the war time economics, is a good analogy to get a sense of the challenge presented by having sustainable, live-able communities in Ireland, that are affordable. BOH.

  4. @JTO
    Yep, self-praise is no praise and only detracts from the sensible points that you make. We’ve kinda worked out that you disagree with Professor Kelly. Time to move on.
    You make assertions about valuation. Price to income is one metric that is commonly used but as with all asset valuations there are plenty of others. I would assert that price-to-rent is a better measure. On that score, we certainly have not reached bottom yet. Residential Rental yields on an ‘equilibrium’ or ‘warranted’ basis (like asking what the right PE is for a stock) should be around 4 – 5% (at least – there is an argument that they should be even higher). That’s what they are in the UK and US. They are a lot higher in Germany. I reckon Dublin yields are right now in the 3 – 4% range. Admidtedly, that’s based on casual empiricism (a trawl through the many houses & flates on myhome.ie that are for sale and rent and a calculation of the implied yield, allowing for ‘high’ asking prices and rents). And absolute rents are falling – another reason for thinking we have yet to hit bottom.
    On your chosen measure, price to incomes, i know you won’t like this next argument, but with downward pressure on incomes, prices also have to fall to maintain equilibrium.

  5. I’m not sure I understand:

    Is the theory that in Ireland, even in a recession, nothing can fall below the long term average value?

    Usually the lowest is the minimum and the average is somewhere in between the maximum and the minimum. If it is now at the long term average, that would mean it has further to fall or?

  6. I suppose, the point I am making, is that from an economic point of view, if we were producing arms to win back the Ukraine from the Axis powers – then the model we used for house building in Ireland during the Celtic Tiger, would have been the ideal model to adopt.

    Unfortunately, we were not fighting the Axis powers, in the midlands of Ireland, or anywhere else. I don’t want to get into Israel and tank production there, but it is pretty much what Ireland needs as a type of economic policy for its housing needs. BOH.

  7. @JohntheO
    😀
    You’re a funny man.

    You don’t think that long-term rent to price ratio (yield), long-term earnings to price, long-term inflation adjusted are valid methods to estimate where prices should be?

    The smallest overvaluation these methods show is 50%, the largest 80+%…

    As someone here has pointed out, Ireland in the nineteenth century was economically sound with a growth rate that was the envy of many, yet we are to believe that fundamental strength in the economy then was uncorrelated to house prices, but suddenly now it is?

    Either you are wrong about the previous strength of the Irish economy or you are wrong about how over-valued house prices are. You can’t be right about both…

  8. Oh and another thing, if the government wanted to give some confidence to people about prices, they could do so very simply. Publish selling prices for all housing transactions… it would then be clear what actual selling prices are, not what Estate Agents say they are.

  9. @KarlWhelan

    It is allready factored in. In my seventh paragraph I wrote:

    “even allowing for some deterioration in economic fundamentals…”

    Even if we take the upper value, ie 30 per cent, in the 20 to 30 per cent range which this report says is the amount by which houses were overvalued in 2007, then they would have needed to fall by 23.1 per cent to be in line with economic fundamentals. Allow for the 15 per cent fall in nominal GDP between 2007 and 2010. That brings the required fall by 2010 to be in line with economic fundamentals to 34.6 per cent.

    The ESRI/TSB index for December 2009 showed that they had allready fallen by 31.5 per cent by then. So, almost there even in December. It is now February. Assume (reasonably) that house prices have fallen by another 2 to 3 per cent since December (the rate at which they were falling in late 2009), and it brings the fall since the peak in 2007 to as near as makes no difference to the required 34.6 per cent. If house prices continue to fall at 1 to 1.5 per cent a month, by mid 2010 the fall since their peak in 2007 will be much greater than 34.6 and house prices will be below the level indicated by economic fundamentals.

    Of course, if we are going to bring GDP into it (and I agree with you that we should) most economists (e.g. ESRI, NCB) are now predicting GDP real growth of 3% to 5% from 2011 on. Plus probably inflation of 1 or 2% annually will have returned by then. So, on the basis of nominal GDP, if the economic forecasters are correct, house prices will need to rise by around 20 to 25 per cent from current levels by 2015 to stay in line with economic fundamentals.

    We can nit-pick all we like about the odd 1 or 2 per cent. The bottom line is that, both on the basis of this Central bank paper and the recent Demogaphia survey, house prices in Ireland are no longer overvalued. Yet, Morgan Kelly is forecasting a FURTHER fall from current levels of around 70 per cent, the publicity given to which forecast is crippling the housing market. Since Morgan Kelly doesn’t do debate, would any of his fellow-academics be willing to say if they agree with his prediction and, if so, be willing to show why in some statistical detail on this site? Or does Morgan Kelly hold the exclusive rights in academia to pronounce on house prices?

  10. It is good to see the Central Bank publishing this research. The methodological approach is extremely useful and gives a profile of households that are potentially in trouble.

    I would reiterate though that it is important for them to actually survey a sample of the current population and turn over the data quickly. This is the only way to understand the complex interplay between regional patterns of job loss and mortgage default risk. There is a strong case for an emergency module on the QNHS that would look more closely at job losses and mortgage distress. We are sadly lacking in data in both, which is damaging the public debate on the issue and contributing to institutional inertia.

  11. Isn’t the problem somewhere in the middle of the JtO vs the rest squabble above, ie house prices have fallen to a point where they are very affordable relative to average incomes, the one problem being that 200,000 less people have an average income compared to this time two years ago? Ultimately the jobs market will decide on the level of home buying in this country going forward. On that matter im more in the JtO camp than the Morgan Kelly camp, in that his 20% unemployment rate forecast now seems insanely pessimistic.

  12. @Yoganmayhew

    I have taken as my starting-point what this Central Bank paper, that Karl Whelan has introduced the thread with, says about house prices. It says on page 5 that estimates of the overvaluation of house prices in 2007 were “in the range 20 to 30 per cent”. That is what the CB paper says, not me. If you disagree with that, your disagreement is with the authors of the Central Bank paper. All I have done is to update their estimates to 2010, by applying simple arithmetic to the known figures for changes in GDP and house prices since then, which requires no great skill.

    I completely agree with what you say about the government publishing accurate figures for current selling prices of houses. Long overdue. But, if you are saying that the current average selling price is actually below the latest ESRI/TSB figure of 213,183 euros in December 2009, then that would mean that house prices were now actually lower than warranted by economic fundamentals, rather than merely being in line with them.

    I am puzzled by your comment:

    “As someone here has pointed out, Ireland in the nineteenth century was economically sound with a growth rate that was the envy of many.”

    Who was the ‘someone here’ who thought that nineteenth century Ireland was the envy of the world? Rev Ian Paisley perhaps?

    While the pre-1960 Ian Paisley might just possibly have come up with such a claim, I doubt that even he, in his more recent more moderate guise, would claim anything so daft. There was silly old me thinking that Ireland in the nineteenth century saw mass starvation, mass emigration, and its population fall from 8 million in 1840 to 4 million by the time the Viceroy was sent packing in 1922.

  13. @JtO:
    “The best thing that the government can do to restore consumer confidence and spending in the economy is to directly challenge Morgan Kelly’s forecasts and drive home the message that house prices in Ireland are no longer overvalued […].”

    Like people would believe the government?

    bjg

  14. 😳
    Counting back centuries is tricky… I meant to say the twentieth century!

    My point is that if growth rates in the latter part of the twentieth century were as healthy as you attest and house prices are a function of GDP and growth rates, why did they stay anchored in real terms? Could it be that expectations of house price rises ceased to be anchored to median earnings?

    On the PTSB index, it is, at this stage, a joke. The PTSB is practically closed to new business. It has failed to produce a 3-bed semi price for a year. A year! The most popular housing type in the country and they haven’t sold enough of them in a year to come up with a reliable figure. What are they selling then? Who knows!

    And I make median earnings, as I pointed to out to you before about the Demographia survey, to be around 25k in 2007, the last reference figures. Instead of median earnings, which are used for every other market surveyed, Demographia relies on the EBS/DKM affordability measure; a measure that is “The EBS DKM Housing Affordability Index is a measure of the proportion of after tax income required to meet first year mortgage repayments for an ‘average’ first-time buyer (FTB) working couple, each on average earnings.”
    http://www.dkm.ie/uploads/pdf/reports/EBS%20DKM%20Affordability%20Index%20Jan%202010%20FINAL.pdf

    I take it that you are a serious economist. I am a total amateur. However, if I were to go to my boss and say that I wanted to employ two starter programmers on average company earnings, he would quite rightly have me shot. Who looks at this drivel and thinks it is a good metric? Average earnings buying a starter home? 76k is the ‘average’ couple income? You’ve got to be kidding me.

    Only people looking for an answer that supports their argument. And that is why economics is bunk (so says this historian). None of you economist fellows deign to debunk each others commercial research. It’s all a little bit clubby.

  15. @JtO:
    “[…] house prices in Ireland are no longer overvalued.”

    Wasn’t there something about supply and demand in first year economics? If supply is greater than demand, aren’t prices supposed to fall? It was a long time ago, but I vaguely remember something to that effect. There seems to be a lot of supply at the moment ….

    bjg

  16. @JTO
    In 2007 most economists were saying that Irish house prices had gotten a little overvalued but we should expect a slight moderation or at worst a soft landing.

    Didn’t happen. Something else did happen. It’s called a major recession. Unemployment is up hugely, emigration has restarted, etc.

    Even if you take the methodology in the demographia report, you need to remember that there are lots more empty houses and far fewer people on the previous median incomes.

  17. @jto

    in 2007 were the following of concern to potential buyers?

    reduced bank lending?
    over supply?
    perception of future over supply?
    unemployment ?
    lack of reliable data?
    fear of interest rate hikes?
    fear of wage cuts?
    fear of job loss and future of the irish economy ?

  18. @ JTO

    I’m no economist or historian but in 2007 the following weren’t issues for the market.

    Lending (8 times income in 2007 and 100% mortgages…..now 5 times and 92%,that’s if you’re a permenant civil servant, otherwise ‘take a hike’)
    Over Supply
    Perception of over supply.
    Unemployment
    Deflation (including real wage cuts)
    Job security fears
    Euro zone debt fear(i know a guy that withrew a bid on a property last week because of Greece instability, I kid you not)

    I think that’s worth another 20% on your 30. So I’m going for 50%.
    Future of Irish economy fears.

  19. @jto
    I am very dissapointed in you on this thread, I usually find your posts very informed and challenging. Using current average earnings as a sole fundamental for determining house prices is ballony. I would be more bullish on house prices if average earnings fell further and faster because this would show the economy adapting to support employment. At the moment those in employment are better off than they were in2007 if you factor in deflation. They main problem with house prices oversupply, debt, unemployment, large defecit which will mean gov reducing spending and raising taxes. How do we compare to the ‘english speaking nations on these counts’. We have not made the ajustment yet we have just replaced indebting ourselves through private borrowing to now indebting ouselves through public borrowing. Our high average earnings for those in employment is part of the problem not a justification for higher property prices. Correct me on my figures but we have a total debt of approx 400 Billion and approx 2Million in employment. This means we have debt of 200K per employee which is approx 8 times the median wage. How does this metric compare to other countries?

  20. Perhaps the following is relevant.

    I have no expertise in economics. But I want to buy a house.

    In 2006-7 we wanted to move house for family reasons. We looked at houses, we looked at prices in the area to which we wanted to move. I am, as it happens, well paid. But we decided there was no sane relationship between price and value. We reluctantly stayed where we are.

    Three weeks ago, assuming the dust has settled on the property market, I began checking prices in the same area. Standing outside one estate agent’s shop, reading the details, I actually burst out laughing at the asking prices. Even assuming the estate agents are lying and these prices have plenty of wiggle room, I’m just not in the game. Perhaps in a year’s time. Or, if JtO is right, perhaps not.

  21. Following on from Sam:

    -higher income taxes on the way.
    -Not to mention the up coming property and water taxs.

  22. @Just a punter

    I have interviewed a lot of people in this area over the past 3-4 months – from punters to politicians.

    Did a heartbreaking interview the other day with a lady in her late 60’s who has gone into negative equity (stunning house) – she had planned on downsizing and having some change left over to see her through retirement (can you believe one bank in Ireland actually gave this lady a mortgage in her 60’s?? I’ve seen the paperwork). She is now under pressure from the bank to sell at 60% (sixty) below it’s value at peak. She now has wealthy people coming to look at it to ‘add it to their their portfolio’ (there are always ‘oppotunities’ for a small group in tough times eh) who generally make an offer a further 25-40% below the now low asking price, citing that property prices have further to fall over the next two years so they “couldn’t possibly pay the asking price.” One of those trying to snap this bargain up was the head of a well known bank in Ireland!

    You are on the nail with your lists. It’s exactly how people perceive things to be – and as we all know, perception and fear always trumps data and fundamentals.

    @Others

    I didn’t know Morgan Kelly was prediciting 20% unemployment. What was that based on? Anyone got a link to some reading on it?

  23. @ Joseph

    re 20% unemployment. One criticism of Kelly and his big headline figures (20% unemployment, 80% house price drops) is that he hasn’t provided much data to back them up (“Irish Credit Bubble” notwithstanding). And before someone says that he might still be proven to be correct, his forecast was that unemployment would hit 15% last summer, and 20% by the end of 2009. What are we at now, at the start of 2010, 13%ish? I can’t provide a link to his article as the IT only provides free archiving back 12mths. Damn you, you IT money-grabbing so-and-so’s…

  24. A bit off topic, but regarding 20% unemployment:

    I am much more in favour of measuring employment (and looking at hours worked) than unemployment.

    The unemployment figures can be massaged by puttting people into FÁS courses and returning to education.

  25. @ JTO,

    In relation to the fear factor… its not just fear, but uncertainity.

    For example if one was hunting for a house, say upgrading you might be looking at stamp duty of 36K, say for buying a house in the region of 650K.

    Why would you pay 36K in stamp duty upfront now when possibly stamp duty will be abolished and a property tax introduced.

    If one could hold off buying a second hand house now, wait for stamp duty to be abolished, the saving of 36K in stamp dury would pay a property tax of 1K every year for the next 36 years.

    The Govt requires to show more leadership to let the market know where its future direction is.

  26. @ sporthog

    i think it is fear rather than just uncertainty we are talking about-particularily

    (i) when you see 780 jobs in a bank going during the week and the prospect of more job losses to come, and

    (ii) the fear in the public sector of more wage cuts to come

  27. @ TOD,

    Indeed the points you raise are very valid.

    Don’t forget the strong possibility of the Labour party being in the next formation of Govt.

    They have publically committed themselves to the total abolition of offsetting mortage costs against rental income. Indeed Vic Duggan (Spokesperson for Joan Burton) confirmed this on a previous thread in December 2009 on this forum.

    The Labour Party is clearly committed to the total destruction of the residential property market. 100% taxation on a loss, it’s going to be a blood bath.

    While JTO may be right on the economic facts with property in Ireland as it is now, he does not take into account the political reality of the opposition parties in Ireland, in particular the Labour Party.

  28. http://www.theatlantic.com/doc/201003/jobless-america-future

    US jobless figures are various nuyt the most quoted is merely 10%. The highest official rate at the moment, is 17.5%. It is getting worse. The above article is almost msm and frankly, I could not read it. All this misery now and to come for however long it will be, was easily avoidable. The US CONgress and presidency dismantled all the safeguards. One reason or motive is greed for those who gained from the bubble and may gain from the collapse. Another is social engineering.

    What are their desiderata?

    Mortgages are a source of income for banks and therefore the multiplier. But these repayments are being made to entities that are zombie and cannot lend. There is no multiplier except from the government. And we have seen that they are intent on balancing the budget! As they have borrowed to prevent lowering of house prices for as long as possible, guess what that means? They may avoid an overshoot but they create a Japan style economy.

    Except buyers of imports are cutting back. And they have increased the budget deficit by the need for repayments and interest thereon. Asking SPVs or John Cobley to pay them does not alter their guarantee and they ie us the taxpayer, will havce to pay up more taxation for this brave effort to command the waves not to come in. These repayments are thus a burden without a benefit. The banks, like zombies in the best Hollywood fashion, are eating our young, rather your young. We now need a good bank or maybe two and pronto. But all the government offer is NAMA.

    Please re read my posts on Detroit where the houses are very affordable. And getting cheaper day by day as people flee, as seen in the Grapes of Wrath. But California has problems too. But no new jobs. Except in China. At very competitive wage levels. Brave New World!

  29. Just going back to supply and demand. If Jto is right and house prices are not now overvalued but reflect “fundamentals” then we should be seeing an increase in activity in the property market as those who sat on their hands waiting for this moment jump in. After all not everybody is doing badly, just 13% unemployed (which means 87% employed) while others as we know actually received pay increases last year.

    Unfortunately we don’t publish any figures at all on this. In the US they do and it is being watched carefully as an indicator or not of recovery. It would be helpful in this debate to have sensible figures.

    One anecdotal example. In 2006 we thought about moving and were seriously considering buying a house in Cairn Hill in Foxrock. The house went for more than we could afford (I wasn’t going to borrow €500k!) at €1.3m. (It had been quoted at €900k). We kept watching and the houses went up to €1.6m at their peak. On myhome.ie a house in Cairn Hill is advertised for €845k. That’s nearly a 50% fall.

    You can rent one for €2,200 per month or €26.4k per annum that’s a 3.1% yield (ignoring stamp duty). A 4% yield which is low suggests an asking price of €660k would be fair. That requires a 22% further fall and coincidentally brings the house price back to where it was at the start of the noughties.

  30. @Sam, Justapunter, yoganmayhew and others

    Nowhere did I say in any of the above posts that house prices wouldn’t fall further in the short-term. Neither did I exude any bullishness on house prices in the short-term. They may very well fall further.

    My point was that they are no longer overvalued, whether measured against their long-term average or in comparison with other countries. That is different from saying they won’t fall further in the short-term, although it obviously has a bearing on the long-term outlook.

    According to the ESRI/TSB monthly report, average house prices in Ireland in December were 213,183 euros nationally and 189,643 outside Dublin. At yesterday’s exchange rate, that equates to approximately £185,000 sterling nationally and £164,000 sterling outside Dublin. That was in December. Based on the rate at which they were falling in late 2009, they are probably down another £5,000 sterling now. But, in County Down, house prices are currently around £220,000 sterling and have more or less stabilised or even started to increase at that level (link below).

    http://www.wheresmyproperty.com/prices/UK/CountyDown.htm

    Clearly, if house prices south of the border continue to fall at their 2009 rate, within a few months they will seem dirt cheap to anyone from N. Ireland. If Morgan Kelly wants to talk house prices south of the border down to the ridiculous levels he has forecast, let him. It just means that, within a year or two, I’ll be able to sell my house near Newtownards and buy two near Dundalk for the same price.

  31. @ Stuart

    bought my house in early 2005 for 375k (3 bed terrace in nice area in north county dublin), reckon its probably worth 350k right now (even before i did the maths below). Going rate for rooms here would be 400-500 per room per month (i have a double, and two nice singles, and two bathrooms, and no ‘box’ type rooms – also, that is what the landlord was actually getting for it back in 2004/5).

    Working through the figures, even if we take the lower end of rent:

    400 x 3 rooms = 1200 per month rent
    1200 x 12 = 14400 per year rent
    If that equated to a 4% yield, then house value = 360k, which seems about bang on.

    Even if we went to a 5% yield, we’d be looking at an imputed value of 288k, which incidentally would be almost exaclty 50% of where i reckon the peak value was.

    Lets look at worst case scenarios:

    I’d find it dificult to imagine a 3 bed semi/terrace’d letting a room out for less than 250 a month in any even basic or average suburban area. Thats a monthly rent of 750, and an annual rent of 9k, and an imputed value of 225k off 4% yield. Assuming 300 per month in a 2 bed apt, thats 600 a month, 7200 a year, and imputed value of 180k. These would all, in a worst case scenario, tally with 30-40% falls from peak value. Obviously important for all of these is the rental income, but i don’t think im being agressive by suggesting 250-300 euro a month for these.

    And incidentally, im sure you’ll agree there are far more nominal number of houses/apts in my price bracket examples than your rather higher end of the market. I’d be interested to hear of other examples as well.

  32. @ Joseph

    Most of us know people that are on the brink of loosing their house. Or people considering putting the keys in the letterbox and walking away. In a small economy where we all know someone who is horribly affected by the property market, how willing are we going to be to buy with all the pre-stated fear and uncertainty.

  33. @Stuart Blythman

    “If Jto is right and house prices are not now overvalued but reflect
    “fundamentals” then we should be seeing an increase in activity in the property market as those who sat on their hands waiting for this moment jump in.”

    I would agree with this if you inserted the word ‘eventually’ between the words ‘should’ and ‘be’ on line 2. What you describe is indeed happening north of the border, but not south of the border yet.

    My point is that market sentiment is affected, not just by real facts and figures, but by what media commentators say. Most people haven’t a clue about economic fundamentals or about whether house prices are in line with long-term averages, or whatever. All they know is what they read in the papers or hear on tv/radio. And what they read/hear at present is mainly the pronouncements of Davd McWilliams and Morgan Kelly, both of whom are predicting further falls of around 70 per cent from current levels (not from peak levels, but from current levels). Naturally, that makes them cautious and fearful about sustaining a massive capital loss, and this overrides any gut feeling they may have about whether they find houses currently affordable or good value, which is the normal basis on which people make purchasing decisions.

    In N. Ireland, we are blessed not to have the equivalents of these two scaremongers. In fact, hardly anybody in N. Ireland has ever heard of them. Consequently, people in N. Ireland are more able to make decisions based on what their gut feeling is telling them is affordable or good value, without the extreme fear of a massive capital loss that people south of the border are obviously feeling.

  34. @Eoin

    Some hard data on rents for suburban houses.

    We rented for one year a 3-bed semi in D6, close to D4. 1930’s large-roomed house, with large landscaped garden, garage, lots of trees, quiet suburban road, recently renovated, upgraded, and extended, new pressure HWS, gas CH, all plumbing and fittings less than six years old, polished floors, etc. In short a lovely upper-middle-class suburban semi, 17 min walking distance from Ranelagh Triangle and close to good schools.

    The family before us paid Euro 2,500 per month. We paid Euro 1,700 per month. The new and current tenant – we’ve now moved to a less exciting economic environment – pays Euro 1,500 per month. This house was on the market in 2007 for Euro 1.5 million. At 4% yield (which is, of course, low) on the current rent it’s “worth” Euro 456,000. Given the job profiles of our neighbours, at 4x gross income, it’s “worth” about Euro 400,000 – Euro 480,000.

    @jto

    Perhaps it’s time to give up the obsession with Morgan Kelly. In more than just broad strokes Morgan has been proven right about his fears about where an Ireland was going that had sacrificed its productive economy for one of run-away speculation. He is again being proven right, along with many of his colleagues, about the consequences for Ireland of the economic decisions that have made by government since the global financial crisis triggered the exposure Ireland’s grossly dysfunctional economy. And no, Morgan didn’t cause the collapse in Ireland’s economy. His ten Irish Times articles since 2006 (not quite one a month, but use of data is not your strong point) didn’t even cause the property-market “correction”.

  35. @JohnTheOptimist
    “It says on page 5 that estimates of the overvaluation of house prices in 2007 were “in the range 20 to 30 per cent”. That is what the CB paper says, not me. If you disagree with that, your disagreement is with the authors of the Central Bank paper.”

    I will start by saying I disagree with MK’s forecast of an 80% fall in residential prices. But the reality is that house prices still have a significant way to fall.

    I am not sure why you are becoming fixated on one single report by the Irish CB which is now over 2 years old.
    In Dec 09 the economist estimated that Irish house prices were still overvalued by almost 30% based on long term rental yields.
    http://media.economist.com/images/20100102/CFN683.gif

    While this is a good starting point I think there are other factors that need to be included in any future forecast.

    Firstly, rents in Ireland will continue to fall IMO.
    We have had a pause somewhat in the last few weeks but I think we will see rents fall another 20%+ over 2010 & 2011.
    As of today the average rent in Ireland was €800pm down from €807pm last month (-0.9%). I think we will see rents fall to the €700pm by the end of the year with a little more in 2011.
    http://www.irishpropertywatch.com/index.php

    So while Ireland may only be 30% overvalued now, factoring in a continuation of falling rents I think a better assessment would be an overvaluation of closer to 50% could be the reality.

    Secondly and probably more importantly, oversupply!
    I know there is plenty of debate around the exact figure but I think the latest research from the NIRSA is the most up to date and suggests around 300,000 vacant/semi-completed non holiday homes.

    While some level of vacancy in an economy would be considered “normal”, in the Irish case we are at least 150,000 to 200,000 above this level IMO.
    I would also add that what may have been normal when the economy was doing well and the property market was soaring will have been higher than what is normal when the economy and property market are doing poorly. Many of these will have been quasi-investments properties that would have been left vacant purely to gain from capital appreciation without the hassle of renting them. They may not look so good now and IMO many will return either as rental or property for sale over the next 18-24 months.

    Even using the lower estimate of 150,000 units, backed up by DKM report, and assuming that the “natural” demand in the economy is around 30,000 to 40,000 and that circa 10,000 will continue to be build either from self build or NAMA completions. We are only going to reduce the overhang by 20,000 to 30,000 per annum. That will give us an excess supply of property for 5 to 7 years on the lower estimate of “normal vacant” properties and 7-10 years assuming some of the “normal vacant” properties return to the market.
    This will act as a massive drag on residential property prices and rents over the next few years.

    On a final point I see no reason that house prices will not fall significantly below their “long-term economic value”, had to get that in :lol:, over the next decade. So while a fall of 40%-50% from current levels may bring us to a fair value we may fall below this level for several years.

    My own estimate is that property prices will fall by around 65% from peak. We have already fallen by about 40% which leaves us with another 40% to go from current levels.

    Morgan Kelly may have been wrong with his 80% prediction but he may be a hell of a lot closer than many commentators who predicted a “soft landing” back in 2006-2007.

  36. @JtO
    Can you mind me to somewhere that Morgan Kelly is predicting falls of 70% from current levels?

    In his Dec 09 “The Irish Credit Bubble” working paper he seems to be currently forecasting 66% from peak and 40% from current prices.

    http://www.ucd.ie/t4cms/wp09.32.pdf
    “Should lending criteria return to their late 1990s standards, our results indicate that the prices of new houses and commercial property will return to an equilibrium two thirds below their peak levels, with larger falls possible for secondhand property. This means that, supposing residential prices have already fallen 40 per cent from peak, prices still have to fall by about half from their present levels.”

  37. An apartment I moved out from in 2003 (Dublin city centre) was advertised out on Daft before Christmas for less than what I paid when I moved out.

    There are plenty of two bedroom apartments available for less than 1,000 EUR per month in Dublin City centre. Anyone with a job can easily negotiate down the advertised rent. For those who’d consider sharing a three bed with two people then the room rent is even lower.

    Most renters are willing to pay a premium for not living with their landlord. 400 eur for a single room outside of city centre while sharing with the landlord? Put out an ad and see how many replies you get.

    The 250 might not be the worst case scenario, I think it might be happening already.

  38. @ John The Optimist,

    In relation to your comparisons between the U.K. ( N.Ireland) and the Rep of Ireland I am not so sure that your reasoning is correct.

    Property is depressed in the Republic for several reasons, not just because of Morgan Kelly or David McWilliams.

    If you carry out a google search about housing shortage in the UK you will have a rash about a mile long on your browser.

    Property in the UK appears to be holding steady and even rising in some areas. This is due to a shortage of housing and a rising population.

    While I accept your comment that the Irish tend to be very media led (which is unfortunately true) I don’t accept your comparison of housing between the UK and Ireland. Market fundamentals still play a role, not just media hype.

  39. According to a Royal Institution of Chartered Surveyors (RICS) report, despite the Irish housing boom, Ireland still has worse housing conditions than other countries with similar living standards, with floor areas per person of around a fifth less than the western European average, even though a large number of dwellings (45%) are detached houses.

    The corrupt land rezoning system has managed to make land scarce in a country that is 4% urbanised.

    The average new house size in Australia and the United States is about 2,200 square feet, Canada and New Zealand 1,900 square feet and both the United Kingdom and Ireland an extraordinarily low 815 square feet and 930 square feet respectively. New British housing is now only 15% larger than the former East German slab developments, of which one million have been vacated, since the reunification of East and West Germany.

    Liam Carroll’s Gas works’ apartments were selling for €400,000+ in 2007 and owners had to park bicycles on the balconies.

    Not only were people taken for fools on prices but apart from some improvement on insulation, quality was also compromised.

    The apartment sector will remain decimated for years. Try selling a unit without even 1 car space now when there could be several others up for sale in a block.

    During the boom, international surveys suggested that Irish housing was among the most expensive in the world.

    This was a survey from 2006:

    Global Survey: Cost of typical management level house in Dublin, Ireland, could buy 9 similar houses in Houston, Texas, 3 in Amsterdam, 2 in Sydney and almost two in Tokyo:

    http://www.finfacts.com/irishfinancenews/article_10007747.shtml

    The PermanentTSB/ESRI index tracks mortgages on lower priced houses and it’s clear from looking at Daft.ie that some of the price expectations remain inflated for so-called “good” areas in Dublin.

  40. @JohntheO
    “My point is that market sentiment is affected, not just by real facts and figures, but by what media commentators say. Most people haven’t a clue about economic fundamentals or about whether house prices are in line with long-term averages, or whatever. All they know is what they read in the papers or hear on tv/radio. And what they read/hear at present is mainly the pronouncements of Davd McWilliams and Morgan Kelly, both of whom are predicting further falls of around 70 per cent from current levels (not from peak levels, but from current levels). ”

    Now you’re talking bunkum.

    Most of the politicians we have routinely say we are “at the bottom”, “prices can only go up”, “there’s never been a better time to buy”, “affordability is at its peak”.

    In the last two years I’ve heard every one of RTEs main radio hosts parrot the same.

    And where does this stuff come from? Our ‘leading economists’, estate agents, property commentators, lifestyle experts, gurus…

    It’s always the right time to buy according to the rubbish that is spouted by these leading lights of the property machine. There have been a few lonely voices in the “it’ll end in tears” camp. Few believed them when they were saying it, despite the damascene “we knew it couldn’t last”, “we all lost the run of ourselves”, “nobody could have seen it coming”, eh, sorry, that last one’s part of the other meme (it’s not our fault)…

    We have had one idea going in this country for the last ten years – you can’t lose on property. It has been promoted by almost everyone who was in a position to stop it and by many, many ignorant people who knew nothing of what they were talking about and rode the wave up. The wave has crashed onto the beach and the carcasses are rotting in the sun.

  41. JTO Babelfish translation: If we can keep them in the dark (again) and feed them sxxt (again) they will get fooled (again)

  42. @Eoin.
    Your rental calculations are ignoring voids, maintenance, etc.
    If you assume at least one month a year void, plus maybe a grand a year at least on average maintenance, your imputed values fall quite a bit.

    Other than that, there’s no shortage of rooms renting for €250 a month or less in “North County Dublin”.

    Here’s the daft search.
    http://www.daft.ie/searchsharing.daft?s%5Bcc_id%5D=ct1&s%5Ba_id%5D=ga4&s%5Bmnp%5D=&s%5Bmxp%5D=250&s%5Broom_type%5D=single&refine.x=6&refine.y=15&refine=Refine&search=1&s%5Bsearch_type%5D=sharing&s%5Bfurn%5D=&s%5Brefreshmap%5D=1&search_type=sharing

    Rooms come up in Swords, Malahide, Balbriggan, etc..

    Then, for rental income, you’d need to consider tax too. If you’re living in the house you might not need to pay tax. If you’re not resident in the house then you may well end up paying tax on the rental income too. (Personal tax is complicated, so may impact different people in different ways)

    @JTO, houses in Ireland may not – on average – be terribly overvalued. I won’t argue the point for the moment. However, I do suspect that large parts of Dublin are still living in la-la land.

  43. There has to be time when people want to own their own dwelling house and not just rent it regardless of economic sentiment. It is all very fine for people here to say dont buy a housing unit because prices may fall further. Will they compensate people they are advising not to buy when they rise in price ? Buying a family home is a long term decision and if young people particularly those in their thirties are going to wait until people here decide it is safe to buy a home well then I really worry for these people in their old age as they will still be sitting on substantial debt after they have retired. It seems that the whole country thinks it is expert on house property including those in UCD who claim some Divine expertise.

  44. I haven’t been following the above discussion much I admit. But here is something, land taxes. Why? Allow me. What I found really disturbing about the boom in residential in Ireland – was advertisements started to use things like LUAS as a selling point. LUAS became something which could add thousands onto a selling price. That was a public project, paid for by public taxes. You shouldn’t have to pay thousands more for that public transport facility, built into the price of your own home. That is what was disturbing to me in Ireland – the fact, you could end up paying for decent transport services 2 no. times. The government was paid the first time, and the land owner or speculator was paid the second. Buyers even queue-d up, and enjoyed paying twice. They thought they were ‘clever’ or something, because they were paying for something twice. Logically, it doesn’t add up. But homo economicus and all of that eh?

    The other fact, is that LUAS ended up going through areas with no one living in them, on the RED line. Because the government could not afford the land to put the service along a line, that was actually of benefit to more densely populated areas. Again, this is all wrong. That land, which was along a proposed LUAS line suddenly jumped in value. This shouldn’t happen. We should be able to price, things like public infrastructure out of the deal. It shouldn’t be ending up on the bottom line of mortgages people are expected to pay. Anyhow, this is all a big subject and I don’t want to get too much into detail. I just wanted to throw it into your mix here. BOH.

  45. One other thing – the Railway Procurement Agency, in charge of building out the LUAS track infrastructure in Dublin, like to use a slide at the ends of their lectures – it shows about 20 no. Danninger cranes owned by Liam Carroll, working out at the Tallaght LUAS terminus. Heck, the 1,500 resi units there, never moved off the market. But heck eh? Anyhow, the RPA, Railway Procurement Agency, being the engineers they are (instead of land economists) point to the fact – look, we build some track, and it adds value to land, and investors/developers move in. Sure I can see their point. But they are not seeing the whole entire picture either. Like I said above, LUAS was a publically funded transport infrastructure, and people shouldn’t have to pay through the nose, to afford property served by it. Heck, the taxpayer already got hit too hard to buy up ‘land’ for the RED line etc, on a low density areas. It’s complex, I know, but think about it. BOH.

  46. @Ray.
    People who decide not to buy a house should not be compensated if prices rise, any more than people who do buy a house should be compensated if prices fall (unless the advice they followed was provided on a professional advisory basis and was negligently or culpably wrong – in which case the advisor’s personal wealth or professional liability insurance should cough up).

    As for people ending up in their old age and “still sitting on substantial debt”, I’m similarly sad for people who are now in the prime of their lives and sitting in huge negative equity, or out of work, and often unable to start families because they did buy houses at loony prices and can’t sell up and move on. Being sad for them still doesn’t mean that I believe other aspiring families or aspiring retirees can be morally forced to pay for someone who made different decisions, in either case.

  47. Hugh Sheehy says:

    “Being sad for them still doesn’t mean that I believe other aspiring families or aspiring retirees can be morally forced to pay for someone who made different decisions, in either case.”

    You have definitely hit on something there Hugh. I think you are making sense, and I would like to spend more brain power, analysing it if I could. However, as regards economics, there are certain battles tailore made, for the economics input. The funding of public transport infrastructure being one case I mentioned above. Whereby, the transport infrastructure adds value. We don’t have to wait for any ‘market sentiment’ or any other assorted waffle, that ‘Irish Auctioneers and Valuers Institute’ is forced to fall back on – to be seen to say something. Water supply infrastructure, which Joe Higgins spoke about today on radio, paid for by taxpayers. That adds value to a home. Again, it is not reliant on something nebulous like ‘market sentiment’. I mean, ask anyone in a ghost estate in the midlands, who hasn’t got footpaths, lighting or sewers. Ask them, what would ‘add value’. I can guarantee it isn’t much to do with market sentiment. Rather than getting sucked into some conversation that the IAVI, Irish Auctioneer and Valuers Institute wants to have – get smart people, and especially economists. Find out what really adds value, and you will find, most of all it is infrastructure paid for by public moneys. We get efficient and smart about how we run public projects, and pay for them through taxes on land – not through train fares and such – I mean, the minute the ‘red line’ of the train route, or water main, flood prevention, or whatever it is, when it is drawn on the map – the government captures that gain in value, no someone else. And the public don’t end up paying twice. Get smart-er people. That is the way. That is how the ‘smart-er economy’ functions. It needs economists, good ones. BOH.

  48. Should read: “when it is drawn on the map – the government should be able to capture that gain in value, not someone else.” By the government, I mean, the local authority, and therefore the local taxpayer who funds further public works, to make the situation better for other mortgage holders elsewhere. BOH.

  49. Karl and co.,

    I know plenty of vested interests took a swipe at it (and you), but would it be possible to do a ’46 Economists – Part II” – maybe with 92 Economists this time? At least now, we have the IMF and the Banks all stating that NAMA won’t get credit flowing again, so it might get more traction from the public, media and politicians.

  50. @ Hugh

    yes, im ignoring voids. My example was a direct response to someone else’s (Stuart’s) very basic example. As i said, if you have different figures, including “standard voids”, please provide them. I still think some of my basic figures will hold up. Also, your link didn’t appear to work (the first offering was 370 per month in D14). As i said, i i wasn’t being particularly aggresive with the 250/300/400 a month examples, i can as easily find places going for 400/500/600 per month less than 1km from my place.

    @ Garo

    i know a girl, a friend of mine, who was paying 500 per month for a very average room in a random 3 bed semi-d out in killiney (near the N11), and she eventually haggled him down to 400. She subsequently moved out to Loughlinstown where she is now paying 400 per month for an average room in an average house. As i said above, if you have examples, please provide them, as Hugh was good enough to do, but random incredulousness adds very little to the debate.

  51. 1&s%5Bsearch_type%5D=sharing&s%5Bfurn%5D=&s%5Brefreshmap%5D=1&search_type=sharing

    There you go! 125 counter examples in Dublin.

  52. Eoin,

    your friend was right to move out:

    http://www.daft.ie/searchsharing.daft?s%5Bcc_id%5D=c1&s%5Ba_id%5D=249&s%5Bmnp%5D=&s%5Bmxp%5D=&s%5Broom_type%5D=own&refine.x=26&refine.y=17&refine=Refine&search=1&s%5Bsearch_type%5D=sharing&s%5Bfurn%5D=&s%5Brefreshmap%5D=1&search_type=sharing

    The advertised rents are lower than what the landlord was asking for.
    Given the oversupply (undisputed?) then the relative negotiating strength has changed a lot since 2005. Advertised rents might end up as the agreed rent but most people renting know that they can negotiate it down.

    Some examples:
    A friend was living in a one bedroom apartment in Temple bar. He paid 1000 EUR rent for that in 2003. More or less the same as the asking rent is now.

    Another friend got a one bedroom apartment in the centre of Dublin (across the river from Temple bar), rent he will be paying is 10% lower than advertised rent. In total it is 25% cheaper than the previously mentioned apartment. Haven’t seen it but I suspect it might not be as nice though.

    I can’t remember who were using the phrase “living in ivory towers” here on irisheconomy. I’m getting the impression that the majority here are not renting, haven’t been renting for a couple of years and as such might have lost touch with what is happening on the ground.

    Renters have the upper hand in negotiating rents. Advertised rents are as reliable as advertised prices for homes. Would anyone here consider paying asking price for a new home?

  53. @ Garo

    thats fair enough. Change the search to €300-500 per month and you get a couple of thousand hits.

    (a) i think its fair to call your example an outlier vs mine
    (b) i even allowed for the 250 per month example in my maths above.
    (c) looking through Daft there are still lots and lots and lots of room costing 400+ outside the city centre.

    @ Jesper

    of course i agree that the advertised rents are probably easy to negotiate somewhat lower if you’re actually interested in the place. However, like i said, i know lots of people who are paying in the 350-450 range, giving the imputed values of above. I know of no one who is paying in the 200-250 range that would be required for some of the more agressive price-fall forecasts

    @ YM

    “Eh, he said it was a possibility”

    Ah now come on YM. He takes 60% as a given, 70% as a probable and 80% as a “real possibility”. If you’re going to let him away with that as merely “a possibility” then he could suggest all manner of economic forecasts and throw away the ones he got wrong as “possibilities” and keep the ones he gets right as genius forethought. If he wanted to clarify it as a very much outlying forecast he could have done, but he didn’t. He has also repeatedly compared Japan and Irish farmland price falls with our current property problems, both of which had 75-80% falls on some metrics. In the same way that he gets the plaudits for being right so far, he has to take the hits if he ends up being wrong on some counts.

    By the by – he looks for housing rental yields of 8-10% – has this ever occurred in this country (ie a country with 65%+ property ownership).

  54. @Pat D
    “Do Christians not have a tradition of debt forgiveness? We have the houses, we have work to be done and we can share it out. Why don’t we do that? ”

    Christians also have a tradition against theft. In the modern context, where debt is not a loan from a permanently rich man to a probably poor man but is rather a loan from one “normal person” to another “normal person” (albeit a rich banker brokers this loan) debt forgiveness is largely equivalent to theft.

    Person A put their savings in the bank. Person B borrowed the money to buy a house. Person C sold the house, walked away and put the money in another bank. Person B then doesn’t pay back the loan, but wants to stay in the house that they bought. Debt forgiveness would mean that Person A (in reality lots of A’s) get shafted. Person B would keep the house and Person C would keep the money – apart from the fact that they’re probably also Person A in some other deal.

    These three people are all “normal people”. Person A isn’t some Rockefeller able to tolerate having their savings stolen. Now, the rich banker also deserves some criticism in this, but that doesn’t mean there’s no primary moral imperative for Person B to pay back the money or to suffer the type of consequences that debt forgiveness seeks to make Person A suffer instead.

    Unfortunately, intellectualism and financial justice are not easy bedfellows. The existential question in finance is simply “Show me the money.”

    As for Marx, I hope he’s sufficiently well staked to the floor of his coffin that he’s not able to spin in his grave.

    Now, if you want to get all intellectual, go ahead.

    Of course, if you want to talk about Kondatrieff waves it might be interesting to read van Gelderen in the original Dutch where some of the anti-Marx remarks come across more directly than in translation…not that I buy everything van Gelderen said either.

  55. @ Yoganmahew, JTO,

    Property has obviously fallen in value, we are all agreed there.

    However there are different classes of property, Commercial land, agricultural land, Residential land etc.

    In addition in the section of residential property, there are different classes of houses again. Private residential property at the top of the market has taken a big hit, some are down 50%, you know the type origianally priced at 2.5m, now going for 1.2m etc etc. There are a number of these examples around.

    However as one moves closer to the lower price range, say a 3 bed semi in Carlow originally going for 250K in 2007. Does anybody believe that house will drop to 50K (80% drop)? No way. Owners are not going to give away a house for nothing. This example of a house going for 250k at the height of the boom would now be down to about 170K or so. Even if the asking price is 215k you know you can bargain them down. But you are not going to haggle them down to 50K.

    Having said that I heard of a builder who was looking for a loan of 300K recently. On going to the bank he was offered 3 properties, each property was originally valued at 300K in Monaghan, but he was getting them for 100K each. Obviously the bank just wanted shot of them. But the builder was in the trade, he would have to sell them on for maybe 140K each etc. There are always unique examples.

    So predictions of price drops of 80% is not universally true for all properties, it depends what class of market you are looking at.

    The devil is in the detail as they say…

  56. Break it down into a number cases. As I suggested above, there are many, many cases in which the negative equity problem could be relieved substantially. To a point where people were look at 50k negative equity say, rather than 100k or 150k. (Not completely eliminated, but improved to the point where it is less hope-less for mortgage holders) We do that now, by the government investing in infrastructure, projects etc which do add value to the property. It might be something basic, like a working sewer system. Or something more ambitious like public transit.

    I believe, there are certain situations, where the bank should take a write-down on its mortgage loans. For instance, where a bank offered a mortgage of say €800k to buy an apartment, on a LUAS line. A sizeable portion of that loan amount, (say €1-200k for arguments sake) was based on the fact the residential unit was convenient to a public transportation network. Paid for by the taxpayer. Much property along LUAS lines was bloated up in price, because the buyers didn’t understand, they were having to pay for the same infrastructure twice – one through taxes and then through mortgages. Not fair to the mortgage holder.

    Then there is another case. Liam Carroll paid in the region of €500k for the most decrepit cottages in the Dublin docklands region. For better houses, maybe a bit more. These houses were required, to assemble land together, out of the pieces to make development land, on which new building could occur. Carroll would not go to €1 million for the worst residential properties. Even though, the mortgages were available to buy homes in the docklands area, for that amount. Obviously the banks overheated the residential mortgage market in some areas.

    Some entered the residential mortgage market, not for the purpose of buying a home, but to hold developers to ransom. In other words, NAMA I and NAMA II kind of property activity intersect in some points. In that case, I argue, it is not like the property beside the LUAS line. Where the bank should take the write down. In the case of ransom properties in the docklands, the mortgage holder took the risk, and should accept the consequences. BOH.

  57. “We do that now, by the government investing in infrastructure, projects etc which do add value to the property. It might be something basic, like a working sewer system. Or something more ambitious like public transit.”

    In other words, we borrow now to relieve problems in critical areas, where it would only cost more in the long run – when things inevitably go bad – and you do get a real wave of default(s) and associated problems. It costs a heck of a lot of money to clean up a Ballymun, or a Moyross, 20 years down the road. I think, it is scandalous to have to spend €1.7 billion in Limerick regeneration. That is a sizeable chunk of pork belly for the construction industry in my opinion. Not subtracting in any way, from the obvious merits of the regeneration project either. BOH.

  58. @Michael Hennigan

    Why are you using the 2006 Demographia report in a debate on whether or not house prices in Ireland are overvalued? Fair play to you though for Finfacts being the only media outlet that published and analysed the recent Demographia report, which is the benchmark for comparing house prices in English-speaking countries. The mainstream media ignored it. And no mention of it in any of David McWilliams weekly newspaper columns, although analysing and comparing house prices internationally is supposed to be his forte. So, you’ll be familiar with its findings. What it found was that median house prices in 2009 Q3 as a multiple of median incomes (the key yardstick) were as follows:

    Australia 6.8
    N. Zealand 5.7
    U. Kingdom 5.1
    Canada 3.7
    Ireland 3.7
    U. States 2.9

    So, clearly, even by 2009 Q3, house prices in Ireland were quite low compared with other English-speaking countries. In addition, house prices in Ireland have fallen by over 10 per cent since 2009 Q3, while rising in most of the other English-speaking countries. If these trends continue, heaven only know what the next Demographia report, presumably for 2010 Q3, is going to show. House prices in Ireland will probably by then be by far the lowest of any of the English-speaking countries and, quite possibly, no more than half those in the U. Kingdom.

    Dublin house prices were the most expensive in Ireland. However, even these were low compared with other large cities.

    Vancouver 9.3
    Sydney 9.1
    London 7.1
    Swindon 6.3
    Belfast 5.5
    Edinburgh 5.3
    Dublin 4.7

    So, house prices in Dublin are now lower than in Belfast, and even lower than in bl**dy Swindon, a dump if ever there was one, and one-third lower than in London, and almost one-half lower than in Sydney and Vancouver. And that was in 2009 Q3. Since then house prices in Ireland have fallen another 10 per cent, while rising in almost all the other places.

    @Dreaded_Estate

    We are not primarily forecasting house prices in the short-term on this thread. Your forecast of a further 20 per cent fall may or may not prove accurate. You’ve a good record on this matter, so I’ll take your word for it for now.

    Rather, we are simply trying to analyse whether or not house prices in Ireland are any longer overvalued. I say they are not and have given the figures from the recent Demographia report in support. The figures from The Economist that you link to seem to be from around mid 2009. Even then, many countries (Finland, Spain, Sweden, Australia) showed much greater ‘overvaluation based on rents’ than in Ireland. But, as I am sure you’d be the first to point out, house prices in Ireland have fallen by about 15 per cent since since mid 2009, while rising in most of the other countries. So, currently (ie as of Feb 2009) house prices in Ireland are clearly no longer overvalued. That doesn’t mean they can’t fall further in the short-term. If your forecast of a further 20 per cent fall proves accurate, then, by late 2020, they’ll have gone from being ‘no longer overvalued’ to ‘severely undervalued’.

    The reason for quoting from the Central Bank report is because it is that report that Karl Whelan introduced the thread with.

  59. @JtO
    You are right the economist report is from approx mid 2009.
    And although prices have fallen by about 15% since then, rents have fallen by a further 15%. From €934pm to €800pm
    http://www.irishpropertywatch.com/viewPost.php?Post_ID=146
    So the overvaluation identified by the economist back then still exists and will get worse as rents are falling as quickly as prices at the moment.

    I think house prices in Ireland are still overvalued.
    I am not forecasting that prices will fall by 20% in the short term to below their LTEV.
    I am forecasting that prices will fall another 40% from current prices, about 30% to get to LTEV and another 10% of that due to a possible overshoot.

    It is all about the over-supply/empties JtO.

  60. @JTO,

    what is the median income quoted in the Demographia report?

    what is the average income according to CSO?

    Why is the difference so big?

    @Eoin,

    I can only speak for myself and the people I know who were/are renting. None of us would pay 400EUR for a single room outside of Dublin City centre. 400 EUR for a double room with ensuite bathroom would be closer to the mark, if it was offered without living with the landlord. Living with the landlord then the offer would be 300EUR and even then I’m not sure if the lower price would be worth it.

    People prioritise things differently. If I had been in the situation of your friends I’d have teamed up with one or two of them and using the negotiating strength to get a better deal. Either in the suburb or in the city centre.

    You believe your house is worth 360k. An anonymous poster claim it is worth a lot less. In your position I’d doubt as well. You can check yourself by posting ad about renting out one of the single rooms and see how many replies you get.

  61. @ Anyone

    Daft is currently listing a total of 59,670 residential properties for sale in Republic of Ireland. It has 19,676 rentals. Some of these may be the same properties.

    Where is the remainder of the 300,000?

    (Genuine question btw, not expressing any opinion!)

  62. http://www.thepropertypin.com/viewtopic.php?t=28024

    gave u the property pin link as it is a better source of information than the irish times (theres a link to the irish times article at the start), the discussion is basically a report from UCD is showing the number of empties are at over 300k but the information has been common knowledge for a number of years by those following the market.

    Or indeed just walk around the new estates. Seriously walk around the north docklands in Dublin. just walk around, during the day have a look at the number of half built apartment blocks, walk around at night, look at the number of empties, built but no sign of life…..

  63. @Garry,

    That property pin thread seems to include properties for sale or rent in the NI also. First graph lists almost 85000 properties for sale on Daft at Feb 2010 – when the ROI figure, as I said above, is in fact 59000.

    If the UCD report is to be accepted, then it still leaves the question of the other 240,000 properties, which are not currently listed for sale (at least not on Daft). Can they all really be in “cold storage”, waiting for NAMA?

    Something smells off to me.

  64. @Chameleon,

    I think you see the magic of NAMA 😉
    Properties are being held off the market to keep the value high. Keeps the asset at cost instead of the lower market value. Keeps companies and banks solvent that way. Its like the roadrunner cartoons, he can run on air & doesn’t fall until he looks down and sees there is nothing below. Never look down -> never fall. Works in cartoons, we’ll find out if it works in real life….

    Also, in Daft, one entry can be for several units & it is only partially compensated by desperate sellers with multiple entries.

    It would be nice to know though 🙂

  65. “Since posting on the number of under-construction ghost estates in Ireland last week, we’ve been asked how many vacant houses there are in Ireland. There is no exact figure released by any state agency, but by using Census 2006 and Dept of Environment, Local Government and Heritage, and making a couple of assumptions based on our analysis of these data, we can come up with an estimate – 302,625. This figure includes vacant houses available for sale, vacant houses available for rent, vacant houses that are not on the market, under-counted second and holiday homes, and abandoned properties, but does not include 49,798 holiday homes recorded in 2006 census. This is not a measure of availability but vacancy (some of which is available to the market now, and some of which will become available when prices rise/demand returns, some of which will not become available).”

    See http://irelandafternama.wordpress.com/2010/01/18/an-estimate-of-vacant-housing-in-ireland/ and subsequent posts

    bjg

  66. Could I possibly address 1 no. point to all of you. You will recall, during the height of the Celtic Tiger, stories of Irish developers who journeyed out to Africa to build homes for poor communities in that part of the world. Irish developers who did well here in Ireland, but realised the importance of contributing something back to the world, in the form of charitable work and help with management of projects in developing countries. The fundamental point to bear in mind is as follows. You help to create a supply of good new homes to poor communities in Africa. You use community labour and you get the job done. That’s wonderful. What next then? Well, you offer back the opportunity to this community, to purchase the homes at say a reasonable price, say €5,000.00. Okay, now here comes the interesting part, so pay attention everyone. The homes are gradually served with public utilities, communications, power and so forth, over a period of time. The next thing, the home occupiers realise – wow, these homes have accelerated in value, beyond their wildest imaginations. They are now worth €80,000.00. What do they do? Well, yes, you have guessed it. Many do sell and move to less well constructed and serviced homes on the outskirts. Perhaps they buy up several shanty properties and become quasi-landlords in their own right in the slum settlements. Settlements which have less legal footing or no legal footing – that is why they will never be serviced – at least for a long, long time.

    What happens is the first wave, obtain a huge windfall. That is the good part of these schemes. Yeah, that first trance of ‘wealth’ does disperse amongst the original community, when ownership of developments gradually transfers to middle classes. But then, what happens is the original well-constructed and well-serviced settlement, falls short of gaining the finance it requires to maintain and adequately provide for itself. A vicious kind of cycle of decay, deterioration and neglect sets in after a time. Because the intitial tranche of wealth ‘escaped’ from the new settlement as it were – rather than being retained there, in some form of property taxation – to assist in keeping the services to a level of quality desireable. My point being, here in Ireland too, we do the same thing often. We build fantastic new environments, and for a while, it seems as though they are worth more and more. Then they run into funding difficulties and you are stuck between a rock and a hard place. Even the best kinds of new eco-friendly and sustainable developments are missing this crucial layer. The crucial funding by which the public amenity value can be maintained for future generations of occupiers. We have an opportunity now in Ireland to try and improve this, and get the economic model underlying development fixed – if we really want to. BOH.

  67. http://www.independent.ie/business/irish/mortgage-lending-fell-50pc-in-fourth-quarter-2064301.html

    Hmmm……. anyone ever heard of a similar fall? Clearly sensible that fewer people risk their capital in a depression. Sense at last, in fact. It should continue to fall. Is it a gross figure or net of repayments?

    Not a good sign for bad debts in lending institutions nor for dividends. Commercial property may also lose some value. All to the good when considering competitiveness though….. Got to compete with those Chinese factories where the wages are less than 75 Euro a week……

    So at least the economists in IBEC will be smiling! A little worried at how long it is taking. Japan is so slow, it would be a bad idea for those who have wasted capital to try to keep values high for more than say two decades.

  68. @Chameleon I cant provide other links because Ive forgotten most of them…

    All I know is there were plenty or warning signs back through the years when it was obvious inventory was building up but nobody in power wanted to join the dots.

    I recall a census a few years ago when it was common knowledge the country was full of empty houses as those distributing the forms couldn’t contact the occupiers….. It was a big enough issue to receive national comment but was quietly ignored.
    Back then the thing to do was buy, leave empty and sell… (capital gain outweighed the risk/cost of having to deal with tenants)
    Holiday homes would obviously have made up a chunk of that but the thing is holiday homes are also investments; if things get tight, it can be sold or rented.

    So it could be 250k, 300k or 350k empties but its a hell of a lot more than 50k.

  69. @Dreaded_estate

    “Firstly, rents in Ireland will continue to fall IMO. We have had a pause somewhat in the last few weeks but I think we will see rents fall another 20%+ over 2010 & 2011.”

    Now today RTE reports: “Rents show first fise for two years.”

    http://www.rte.ie/business/2010/0216/daft.html

    As you know infinitely more about the housing market than I do, I will leave it to you to analyse whether this is seasonal, a freak, a blip, a pause, or whether previous forecasts will have to be revised.

  70. @JtO
    No I will stick with my forecast, I think this is just a pause on the way down.
    This isn’t news to me JtO as we are tracking rents in real time and from the bit you have quoted you can see I referred to it.

    Interesting to note that from the latest daft report that yields have barely budged even with the 40% price falls we have had to date.

    Q42007 3.2%
    Q42008 3.4%
    Q42009 3.5%

    So even though we have seen significant prices falls it has almost been matched by rental falls.

    A long term yield of 5% to 6% is conservative IMO, NAMA thinks 6% is reasonable.

    If you assume a 5% yield then we will need 32% falls to return to equilibrium, if you use 6% then the property prices need to fall another 45%.

    And all that assumes that rents have stabilized and I don’t think we have reached that point yet.

  71. @JTO,

    maybe I should leave it to DE to reply, I can offer some information:

    In the bad old days, the asking rent could be lower than the agreed rent as the landlord showed his solidarity to tenants by having bids and accepted the highest. The worst excesses of the boom wasn’t seen in the ads.

    Now the renters are repaying the solidarity shown to them and are asking for lower rents every time the rent is up for review or when negotiating a new lease.

    In addition there have been and are gifts on offer for quite some time for new tenants in the ads, these are not reflected here & asking rent is again only asking rent.

    Not sure if multiple units on offer in the same ad are weighted? Or if they are not, if it would make any difference on the outcome.

    With the quality of data available I wouldn’t bother with 1% change in either direction. It can be a blip, it can be a change in trend.

    Those who believe it to be a trend, I’d love to hear your explanation to the rise 🙂

    A couple of thoughts about the desirability of high rents:
    Lower rents leads to more money available for spending. On the other hand, the landlords have less to spend. The difference would be:
    Tenants spend it, thus increasing economic activity.
    Increased rent paid to the landlords leads to more money going into the black holes in the economy known as insolvent banks, thus reducing economic activity. Moneyprinting is then done because there isn’t enough economic activity due to money disappearing into the black holes.

    Just to be clear: Black holes are things with intense gravital pull which once caught in, nothing can escape.

    High rents good or bad for the economy?

  72. Supposing the recession is due to lack of spending & supposing the lack of spending is due to high charges for use of assets thus sucking money out of the economy. The logical conclusion that could be drawn could be that lowering the charges would restart the economy.

    Unfortunately that would reduce the value of said assets.

    Assetvalues has been inflated to unsustainable levels. Money is printed to ‘fill’ the value. Unfortunately the money is liquid and leaking out so assetvalues are not inflated up & the ones controlling the liquidity (the banks) are taking a part (too big part for the function they are providing) & hoarding it for themselves.

    The way the banks take it and hoard it is that the banks are now making money on getting cheap money from the central banks and lending it out at a profit to the governments. Some say it is easy to make money doing that so paying someone for their supposed skill might not be an accurate description.

    Government will be forced to borrow for its spending as long as the economic activity is low & activity will be low as long as asset values are high. Asset values are held high as otherwise the banks will become insolvent. Vicious circle.

    Forcing a business to charge more than its customer can pay so that the owner of the asset can pretend to be solvent will not solve anything. The business will still go under and the value of the asset will still fall. It will just take longer.

    Too bad many of the assets were bought with borrowed money. Unencumbered assets should easily be able to produce good profits now 🙂

    & my apologies for going off on a tangent 😉

  73. Some interesting theories there Jesper, thanks for sharing them with us. I had a sit down and read through them (printed on paper) after tea time this evening. Sometimes, I find with the longer contributions, it just doesn’t work to read them off the screen.

    A good tip to all, if your printer can fit 2 no. word document pages of text onto 1 no. A4 sheet – there is a setting sometimes in the printer settings, that you can make a single word document page, an A5 size, and 2 no. A5’s per A4 – what you get in your print out, is basically, something like a paper back book page. You can fold it in half, and it works just like a book actually, that you can read on bus etc. I find, if I haven’t followed a blow-by-blow development of a thread discussion – the print out method, is the only way to get some overview of what is going on in the discussion.

    It is amazing the amounts of arguments, and sub-themes, that one can identify in a thread, if one changes to printed words – stuff that you would rarely even pick up while trying to read the text off the screen, like I am doing at the moment. BOH.

  74. Just commenting briefly on John the Optimists earlier comments, the major urban markets of Ireland are not yet “affordable” (i.e at or below 3 times gross annual earnings) but still “moderately unaffordable” overall.

    The major question that needs to be asked is – what political steps are being taken by the Irish Government, to ensure housing affordability is restored and the country is not put through another planning induced housing bubble again?

    The Annual Demographia Surveys ( http://www.demographia.com ) clearly illustrate that housing bubbles are unnecessary. In this years Survey, we illustrate the massive differences between Sydney and Melbourne in Australia and Atlanta and Dallas Fort Worth on the other.

    Political progress is being made in New Zealand (refer writers website http://www.PerformanceUrbanPlanning.org ) to deal with these housing bubble problems. Lets hope we see the same thing happening in Ireland before long.

    Hugh Pavletich
    Co author – Annual Demographia Survey
    http://www.PerformanceUrbanPlanning.org
    Christchurch
    New Zealand

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