Daft Report for 2010:Q1

The latest Daft report is out, including a commentary from Brian Lucey. The analysis of asking prices is, as always, interesting and useful. However, given the evidence on how long it is taking units to sell, it seems clear that asking prices are still above what would be required to produce a normally functioning market.

The recent receiver-driven apartment sales in Mullingar that attracted considerable buying interest (Independent story here) perhaps provide an insight into the gap between asking prices elsewhere and what would be needed to attract demand. The two-bed units in Mullingar were priced to start at €82,000 and I seem to recall that the median two-bed in this scheme was selling for €90,000. For what it’s worth, a non-scientific comparison shows that the average asking price for two bed units in Westmeath in the Daft report is €162,000.

25 thoughts on “Daft Report for 2010:Q1”

  1. Whilst the DAFT reporting records a fall of 4.1% in residential property ASKING prices since the NAMA valuation date of 30 November 2009, Lisney’s report which is the subject of an article in the Independent today shows a 13/14% decline in rents on Grafton Street since November and rents are falling at an annualised rate of 44%.

    Given that only €6bn of €81bn of NAMA loans have in fact been purchased (with the latest that Anglo will be several weeks before the first tranche is transferred), is it not time to demand that the valuation date for the remaining €75bn of loans be set to April 2010. NAMA was supposed to protect taxpayers’ investment and that was supposed to be the over-riding objective. Nothing in the legislation stops them from changing the valuation date and the evidence is that if they did we would be €bns better off, not withstanding further bank recapitalisations.

  2. With the exception of a small number of areas in the US, by comparison, Dublin asking prices remain absolutely ridiculous.

    A 4-bed semi-d on Priory Drive in Blackrock for €795,000; a 4-bed bungalow for €1,325,000.

    A house on Carysfort Ave, which Michael Lowry later bought, was sold at auction for £200,000 in 1996. It apparently needed some repair but it indicates the price level at that time.

    The economy is back to 2003 and the prospects are much worse than then.

    The worst market must be a Dublin apartment with several other units for sale and little if any storage space.

  3. Everyone knows there’s an overhang of properties which aren’t on the market. Thus all participants are nervous and under confident with even lower liquidity than we might expect during a recession.

    There’s a phony war/Mexican stand off at present – the natural property market is not functioning. I think novel measures are required to jolt it into action.

    For example we could declare June “Auction Month”… so in May punters would view properties (or book plans) and in June there’d be a mass auction conducted over the internet. I’m not speaking of a vanilla auction – e.g. where participants bid against each for one property – rather a more sophisticated auction which lets information from all bids flow back to all participants. Thus something lasting perhaps a week or two

    But… let alone some attempt to create informational efficiency like the above… there’s still a refusal to publish actual sale prices… enough said

  4. “Everyone knows there’s an overhang of properties which aren’t on the market. Thus all participants are nervous and under confident with even lower liquidity than we might expect during a recession.”

    So just as the labour market has discouraged workers which reduces the reported unemployment rate, are there discouraged house sellers?

    Has the housing literature made use of the Mortensen Pissarides matching model? If not it seems there is a paper just crying out to be written.

  5. @ Karl

    “….given the evidence on how long it is taking units to sell, it seems clear that asking prices are still above what would be required to produce a normally functioning market’

    Negative equity and recourse lending is a rotten combination. My sympathy to anyone in that situation, but it is surely important to see how the noose was tied. It is accepted that house prices went through the roof after our banks got unlimited access to Eurozone wholesale credit.

    What is not so well understood is that our property market makers and servicers took positions, over and their market making role. Leverage, tax breaks, buy-to-let, glossy advertising etc were the head shop products of the housing bubble. It wasn’t all Seanie or the bankers.

    We have had a much needed reality check, but the property sector has set their face against a ‘normally functioning market’. The price drop is already perceived as very threatening to the status quo.

    Would an increase in market activity compensate for the necessary loss of equity positions taken by market makers themselves ? They don’t seem to think so, which is why there is no disclosure. Looks like we only do rising markets in Ireland. Followed by a long period of whistling in the dark.

    I am not sure if we ever had a ‘normal housing market’ but house prices are still way out of line with earnings. If they don’t adjust, there will be no recovery in employment or SMEs. Long term u/e is associated with crime and civil unrest, so we entertain it at our peril.

    Others will be able to say more about the inplications of falling house prices for the broader economy.

  6. Nice to read a bit it of real reality! Res property (where you sleep,eat and raise your kids) is not for speculation. You do, and you get ruined financially. Very unpleasant learning curve ahead.

    Judging by the emerging economic indicators, the decrease in res property values may be greater than Lucey, Kelly and I have been forecasting. Hope we’re wrong.

    Normally res property price declines are semi-glacial. This time it is different. The extent of the debts are dreadful and will lead to a significant number of defaults and foreclosures. Recourse loans will administer the Coup de Grace. Unless … …

    B Peter

  7. Morgan Kelly showed quite convincingly that during the ‘Bertie Bubble’ house prices were driven manly by bank lending and not by supply/demand or other factors.
    He seemed to conclude that it was all the bankers fault therefore.
    But I think it says more about the bubble mentality that so may people fell into, that they would borrow whatever the banks would lend.

  8. What is systemic about our banks? To me, the banks functions that should be systemic are, in order of importance:
    1 operating a clearing system for the productive and consuming sides of the economy.
    2 supplying sufficient credit, usually as overdrafts, so that the productive side can carry on operations while it is waiting to get paid.
    3 supplying long-term funding to enable production to commence.
    Various aspects of these functions have been modified till we end up with hedges and other instruments.
    The banks overextended the modifications and sent too much money chasing after assetts that the productive side could only supply in limited quantities.
    They are still running the clearing function but they are withdrawing money from the other two areas. They have to because they and the government are focusing on replacing that modification money.
    Their most immediate replacement process is to drain the maximum amount from the productive area , followed by using taxes to drain money from the consuming area with the balance coming from borrowing out of the future tax flows.
    To me the money that grew out of the excess financial modification looks more like a cancer than an integral component of our financial system.
    On the other hand if the productive area is integral to the system why are we draining it of the neccessary finance.
    The total EU structural funds for Ireland since we joined the EU is in the order of €17billion. This is the the order of the amounts mentioned for repairing Anglo. That is, the resources required to repair Anglo would be like burning all the structural funds that we have got.
    What we are proposing with Anglo and the banks is akin to telling those countries which funded the structural grants that we are content to waste their resources in any way we decide. And that after approximately 40 years of structural building we have not learned even the most elementary processes of how our economy functions.
    To me, bailing out Anglo and the banks is not a viable solution because it implies that the productive area -where structural funds were focused- has to be destroyed in order to save a cancerous growth.
    We have been told that the Nama process will not refinance the productive areas of our economy.
    Is it a naive proposal to use the Anglo money to bail out the non-viable mortages which were produced as a result of the cancerous growths. I exclude second homes but what is wrong with putting the Anglo money directly against a significant portion of family home mortages.
    The argument of moral hazard has already been trashed in our dealings with Anglo et al; there is no reason why it should be applied to bailing out family homes.
    I am not suggesting this in order to bail out families but rather in the expectation that once relieved of a significant block of debt, that they would begin to spend again and refinance our productive areas. Without that productive capacity we are finished.
    Maybe that particular proposal is simplistic. But how wrong is the analysis.

  9. I keep coming back to the basic connection between mortgage size and salary I heard over 20 years ago: a sensible mortgage is about 3x annual salary, maybe 4x at a stretch. Recently an online mortgage calculator quoted me about 3.5x, so I guess that banks have started to remember the fundamentals. Got a large deposit sitting in the bank? No? No mortgage for you, and no sale at the current price.

  10. What we need are official figures. The data is being collected by the Revenue Commissioners on a monthly basis and could be reported on.

    The problem with the Daft data is it is based on the prices as advertised on their site. During the boom these prices were understated to attract the buyer in (sometimes by very high margins). Today I suspect nobody pays the asking price. This distorts the drop. If 3 years ago a house was advertised for €500k and say sold for €550k. Let’s say it is now advertised for €330k (i.e 33% down) but sells for €300k. The real drop is 45% but Daft will report it as a 33% fall.

    We have the data, let’s release it and if prices are still going down they’re going down. But there will be an inflection point and then people can truly buy with confidence rather than on the say so of a web site or indeed the Minister of Finance. It seems we’re afraid of giving the public facts and must shroud everything in mystery.

  11. It just struck me that it would be worth looking at how the stock of properties for sale on Daft compares with the total number of properties actually present in each area. A back-of-the-envelope look at this shows (using Census 2006 privately-owned household data excluding bedsits and caravans as a rough proxy for numbers of homes that exist now) that:

    The stock of homes for sale on Daft in Dublin is about 1.3% of the total number of privately owned homes.

    The equivalent numbers for other parts of the country are:
    Leinster (excluding Dublin) – 4.4%
    Munster – 4.5%
    Connacht and Ulster – 7.0%

    I think this reinforces the conclusion that others have come to that the housing market in Dublin is much closer to clearing than those of other parts of the country.

  12. As many people have pointed out, there are two key issues.

    One is that the asking price doesn’t tell you the selling price.

    The second is that the disconnect between incomes (and future incomes), taxes (and future taxes), requirements for pension investments, etc., and asking prices is still significant.

    When people who are portrayed in the press as Rich (e.g. earning even significantly more than €100k) can only prudently afford to buy entirely unimpressive housing then there’s still a long way to go.

    Similarly, at the bottom of the income scale, even small apartments are still above the top end of the prudent borrowing range for most normal incomes.

    Add emigration and the fact that there’s going to be huge net outflow of funds for years to pay back previous borrowing and the outlook for house prices seems unlikely to be positive.

    The economy may recover and stabilise at lower incomes and costs, but house prices will eventually have to come into line.

  13. That’s not to say that the Dublin residential property market is necessarily close to clearing. If the rate at which the stock of properties on Daft continues to fall at roughly the same rate as it has been doing, it could take almost another two years for it to return to the level seen early in 2007.

  14. @Con
    “I think this reinforces the conclusion that others have come to that the housing market in Dublin is much closer to clearing than those of other parts of the country.”

    Don’t forget all those big empty apartment blocks and half finished apartment blocks I drive past every day (Stillorgan Rd and Sandyford). They’re not for sale at the moment, they’ve gone into Nama and won’t be on the Daft site.

    Per an article in the Indo 658 second hand houses were sold in Dublin in Jan 2010 (versus only 200 or so in January 2009). An increase but that suggests less than 8,000 for the year. There are 5,675 houses in Dublin on Daft.ie for sale. Not all houses will be on Daft.ie so their 10 month figure for selling a house looks about right. The problem is there are more houses for sale in Cork and Galway than Dublin which supports your conclusion also that Dublin is clearing faster.

    Still, any uptick in activity has to be welcomed.

  15. @ Brian T

    i dont think its as simple as salary vs price, its much more of an affordability issue, or something like “% of net take home pay to service a 30 yr mortgage”. This would then take into account taxes, reliefs, actual outgoing mortgage costs. If we have interest rates at 4% and taxes at 45%, you can definitely afford a much bigger mortgage than a 8% mortgage on a 60% tax rate. The metrics that worked in the 80’s dont necessarily work now.

  16. One other point re the Dublin market, and possibly others.

    My impression – and it’s only that – is that the numbers on Daft are not as high as the numbers on myhome.ie, and no longer in the lead.

    Based purely on personal observation for the areas that I’m interested in, I’d say that myhome has gradually overtaken daft when looking at rental inventory in Dublin and I’m starting to get a similar impression for sales inventory.

    Looking at daftwatch there are 5600 properties for sale in Dublin on daft and a quick search of myhome shows nearly 6300 there.

    Has anyone been running a historical inventory track on myhome, or any other data which could confirm or contradict my impression?

  17. @Con
    “I think this reinforces the conclusion that others have come to that the housing market in Dublin is much closer to clearing than those of other parts of the country.”

    Or that there is a greater proportion of negative equity (affecting an estimated 170,000 properties today and projected to grow towards 200,000 at the end of 2010 – figs from BoI and ESRI) in Dublin and potential sellers can’t afford to crystallise their losses which would average €38k according to figures suggested by BoI. Why should Dublin be disproportionately affect by negative equity? The DAFT asking price data indicates prices have fallen more in Dublin than elsewhere and anecdotally the madness of the boom was bought into more so the City taxidriver with 2 rental apartments was not uncommon and stereotypically the Dub would have taken more of a risk in terms of LTV than his rural neighbour.

  18. @Eoin
    Your point re affordability has merit. However, there are a number of ways of looking at affordability. In the past, with high interest rates and high inflation, houses were initially unafforable, but only for a couple of years until inflation had its impact, and over the life of the mortgage they were eminently affordable. People bought houses for what they thought were huge sums, but ended the first decade of the mortgage with a salary equal to the total initial capital value of the house. Inflation can be good to debtors. As someone once said to me “Eventually the mortgage was less than the cost of renting a TV”. That’s unlikely to happen with Euro area inflation levels.

    Today houses may be more affordable in the first years, but the cost doesn’t decline in real terms and the overall affordability may actually be lower over the life of the mortgage. In a context where pension investments must be higher for the same reason, i.e. low interest rates, this double aspect to affordability shouldn’t be discounted…if you’ll excuse the bad pun.

    This is all without considering the rent vs buy option that a lot of people face. The low rental yields make renting very enticing – with consequent impact on likely sales price evolution.

  19. @Jagdip, on reflection, I think it’s probably a bit of both. The Daft data seems to show Dublin homeowners being less likely than others to put their homes on the market, which is consistent with your point. But on the current trend, the stock of Dublin homes on Daft will return to its Jan 2007 level within two years, which for me suggests that the market is on the way towards clearing. On current trends, the stock in other areas will take much longer to return to Jan 2007 levels.

    Or maybe, if Hugh is right, some of the trends in the Daft numbers are being driven by myhome.ie gaining market share in Dublin, rather than by actual property market trends.

  20. @Eoin

    We are also entering a period where inflation and tax hikes (reduced credits) are our future. Mortgage rates (where available) are currently at their lows and well off the likely median monthly payment over the loan’s lifetime; factor in a rate closer to 6-7% and match that to diminishing net income leaves very little room for maneuver, especially for high income earners who are presumably the market for the more desirable neighborhoods. Unless you have €500,000 sitting in cash under the floorboards any house trying to shift for over €400,000 is going to be a hard sell to a high-income earner mortgage borrower.

    Maybe the answer is to open Head shops and use the proceeds to buy property!

    DJF

  21. I view low property prices (both commercial and residential) as a positive thing for an economy. A cheap house should mean buyers don’t need as much income to maintain their quality of life. I couldn’t imagine commercial tenants would object to lower rents.

    Unfortunately Irish property prices became a function of credit. I would cap the size of mortgage. If people want to spend more, let it be done with earned/existing wealth.

    A problem with this is the destruction (or perceived destruction) of wealth for current property owners. Though further sustaining high prices could eventually lead to a greater destruction of wealth.

  22. p.s. In partial answer to my own earlier question, our friend on IrishProperty watch seems to have been tracking myhome.

    Although I can’t immediately see an overall aggregate county level graph, you can graph – for instance – three bedroom house inventory in Dublin over time, then two bedroom houses, etc..

    No inventory curve on myhome for Dublin goes up and to the right. All are downward sloping, like this one.

    http://www.irishpropertywatch.com/salesStatistics.php?Region=Co.+Dublin&Type=House&Beds=3

  23. @ ahura

    That’s fair comment. One point:

    ‘A cheap house should mean buyers don’t need as much income to maintain their quality of life’

    It should also mean that they have more of their income left over to invest in their employment generating SMEs. What has happened here is that the future SME investment/credit has been diverted into paying down huge mortgages.

    That’s house equity extraction in reverse and it’s totally inimical to an entrepreneurial culture. I imagine that it will take major social upheaval and constitutional change to bring the infernal machine to a halt. We need to eat more spinach.

    @Hugh Sheehy

    Excellent and very apt link.

  24. @Hugh

    Eventually Nama might pull a profit, but only after a long period of underutilising the countries assets….by keeping all those oranges in the freezer. I dread to think of the energy bills for running that giant freezer also.

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