Residential Property Investor Report

Here‘s an interesting report on the Irish residential property market prepared by Karl Deeter’s Irish Mortgage Brokers in association with & Frank Quinn (Senior College Dun Laoghaire). Its conclusion: “residential investment property is overvalued currently by an average of 37% in Dublin, 43% in Cork, and 39% in Galway.”

17 replies on “Residential Property Investor Report”

Make sense. Just one quibble. Property in Dublin is not overvalued by 37%. It needs to come down by 37%.

on page 10 iain nash does a good job of debunking our findings, we asked for a critique in the spirit of balance.

i found the medium term comparison v.s. deposits to be interesting, i think that we might see savings rates continue while investment (in property) won’t because the retail risk free rate (due to taxation individuals don’t often opt for sov. bonds as the standards risk free) looks like a better option.

this means prices have to drop to a point that makes yields look good, with supply being high and demand somewhat stagnant (outside of the every willing purchaser that is NAMA) the only thing that can change to re-start the market is price.


“this means prices have to drop to a point that makes yields look good … the only thing that can change to re-start the market is price”

I’d disagree with the “only” qualification – rents could rise as indeed asking rents did rise at the start of this year according to DAFT (based on asking rents and the rise was only 1% – still). The link to their report is here.

There are many reasons why there will be resistance to rising rents but you can’t write off the possibility of any rise.

BTW, well done with your report. It re-affirms the disconnect between rents/asking prices but does so with good explanations and detail. For what it is worth, I’d tend to agree with you when you say that market prices need to drop (though that’s not the only scenario). The difficulty is that for those who don’t need to sell there are numerous reasons to be optimistic about future price recoveries which might encourage them to wait. For others, some will not be able to sell because of negative equity. It may be the forced sellers that make the market for some time to come. And given their actual sale prices (which may be heavily discounted from asking prices) will be mixed in with aspirational asking prices of those who don’t need to sell and inflated pricing by the negative equity group (average NE is €38-50k), good luck with finding out what is actually happening with market prices. Mind you if actual prices do come down to the level that makes the yield competitive you will never know.

It highlights yet again the government’s failure to put in place a House Price Database which they promised (again) in their Programme for Government in Octiber 2009 and despite Opp politicians asking Michael Finneran every month about progress, they get the same cant text as a reply – that’s it’s complex, there are Data Protection considerations (as far as I can see that’s rubbish, it just needs to amend rule 188 of the Land Registry’s procedure from 1972). On Vincent Browne’s Tonight programme recently Emer O’Siuchru said that eight people owned most of the development land in Dublin but you can’t find out who owns what and that Ireland was the only country in the developed world without a cadaster – a public record of who owns what.

A recurrent theme throughout the commentariat (including sections of this blog) is that we will neve fall for it again. Moreover, we will, in future, always call it the way it is, rather than spoof, spin and dissemble. In particular, we will get real about the housing market.
And then we fall striaight back into old habits and start looking for ‘value’ or the ‘bottom’ of the current housing cycle. While karl Deeter et al are to be congratulated, the rest of us should be in despair over the fact that this report is unusual to be almost unique. And if it is nearly right, housing is still egregiously over valued. And, of course, it is right.

If the housing price does move to there the authors identify,
Then what will this do to the banks balance sheets.

Further to the fact that people are already in negative equity,
If wages and standards of living etc fall to reflect the property price, then a significant sector of society will be left in worse trouble.
And locked in there too….

It is basic economics.

Prices do not “have to do” anything.

They will do nothing because they are an abstraction. Like a flag that millions of children swear allegiance to daily. It can lead and mislead.

Prices result as people buy. Who is going to buy what they cannot afford? There is going to be a massive overshoot. Sensible investors know this. They are the only ones who can afford to buy.

They will wait, with the foolish wasting capital all the while, but less and less. Sellers will wait and wait. Prices will fall all the time. With all the intelligent go ahead types emigrating, who is going to replace the owners who die? Who will form families that need housing? All lag the bottom of the market, people!

We are not there yet. With NAMA we may never be there as investors wait for the shoe to drop ……….. two decades anyone?

@Jagdip Singh i saw that report and spent a good deal of time thinking about it, a 1% change may be the start of something, but I certainly can’t say what! equally, the rents are asking price the same as the sales prices are asking price, we don’t know what the actual figure is on the lease when it is finalised, and it also doesn’t show the number of private re-negotiated leases. I think we’ll need to see some follow on before a trend can be called one way or another. i’m 100% with you on the housing database being a cornerstone to making any sense of our property market, how we have gotten this far and avoided it is a fascinating insight into shirking common sense policy and practice.

@Al bank balance sheets are based on the loans, it is only when they stop performing that they have to be marked to market, that is why they are not complaining about mandatory forbearance and they will be willing to do any kind of debt/equity swap or whatever solutions becomes the main suggestion- because as long as the asset value on the balance sheet doesn’t change they stand a chance (and they can put equity ownership in a house in if they reduce the debt so the end figure is the same). their income statement will suffer (in forgone interest) but that is being addressed by increasing prices across all product ranges (mortgages being the one that has gotten the most headlines).

@ Karl
Thanks for the clarification

This ‘issue’ could hang over the heads of people for decades.
A form of bondsship that will have an affect on their consumption for years to come…

As Iain Nash points out, there is a problem in using average price.

In Dublin, the jump in existing higher price houses was likely greater than was the case for mainstream houses and such borrowers are likely to have high motgages and falling incomes.

Prices of this segment will continue to tumble.

After the dot-com bust, rents either fell or remained static for a number of years in various parts of Dublin, despite rising house prices.

As for houses in general, a small volume of transactions has so far determined the price change; prices will fall further because of the large number of empty properties and high unemployment.

How much is unknown as the strength of the economic recovery is the biggest unknown.

The lending market is also going to remain risk-averse for at least a decade.

Just to clarify my position somewhat; I think time spent deriving a figure to be the ‘turning point’ of the property market is somewhat wasted. I’ve discussed some reasons in the report, but also because we don’t really know specifically what drives the property market at the moment.

Until we can determine the fundamentals in the market, we’ll have no real idea as to why the slope on the price trend is moving the way it does. Trying to then give a specific point forecast as to where the market will bottom out (or return to the ‘correct’ price) appears to me as an exercise in speculation rather then investment.

Personally, I think we’ll find out that the property market has turned some time after the event given that we don’t have the statistical infrastructure need to conduct solid, rigorous empirical analysis of the market.

If every investor had stuck to these ‘fundamentals’ we wouldn’t have had the property boom and bust that we had……everyone was factoring in the rise in prices….hindsight hey.

Very good doc btw.

There are a number of articles in the independent today re Cowen’s economic policies and the opposition’s economic policies in relation to property during the boom. I think it is a bit futile to be commenting on what the effect FTB stamp duty had on the property market as IMHO it was more to do with the investor incentives that inflated it.

It would be interesting to see more articles on what FG said on this front

Karl (D)
Interesting piece of anlaysis. I’ve just one question of substance – are you assuming that the population of houses for sale are directly comparable to the universe of houses for rent or have you adjusted? If you’ve assumed they’re comparable, the results are most likley well over-estimated as the average house for sale is (me thinks) worth a fair bit more than the average rental property so comparing average rent to average price wouldn’t make sense?
Would appreciate you reverting

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