Daft House Price Report: 2010:Q2

@Ronan L

Their are a lot of apartments between the canals. There would be few enough new houses in the same area.

Given that apartments are bottom of the pile now it is not surprising Dublin City Centre is falling faster than other areas.

Also, a lot of the apartments in the centre were occupied by workers from abroad. I expect a lot were employed in hotels, bars and restaurants. One expects there are less of foreign workers and a lot less hospitality industry workers now leading to a further fall in prices.

@Ronan L,

my guess would be that many young first time buyers used to think of the property ladder and buying an apartment in central Dublin would be a good place to live when young and carefree and also a good investment (as property never falls in value…). Those who now might have been in that group might be wiser, the lending criteria might be stricter and salaries/incomes for that group might be lower. Hence I believe they are not a big group of buyers anymore.

The other group of potential buyers would be the BTL. They should be wiser, banks apply stricter lending criteria and higher interest charges would make them to stay out of the market as well.

The potential renting market is probably the young professional employed in a FDI company. Some statistics seem to indicate that this kind of employment peaked and increased supply to a saturated market leads to lower prices.

Great as always.

Question: Has there been any attempt to calibrate the Daft index against the ESRI TSB one, to get a sort of sales price estimate more current than the TSB one? Rather the way the CSO works with the live register and the QHS data?

@Jesper
Good points, I think looking at the rental market will be central to understanding the sales market anyway.

@George
Thanks for the suggestion. We’ve two metrics. One is to analyse properties coming off the site. This is the standard “time to sell”. The problem is that with properties up for two years in some cases, the median gets dragged very far out. The other is to analyse properties that went on a site in a particular period (e.g. during January 2010) and see how many are sold. This latter one is probably more helpful to new sellers because it shows their probability of success, so to speak. Either way, it’s definitely worth a blog post, so I’ll schedule one in the property market section of the site.

@Ribbit
Interesting idea. I’m working with the guys in the ESRI over the summer on a few housing-related things, so I’ll see whether this can be explored in more detail.

@ Garo,

Thanks for that. Your is a logical view shared by many at the time. Resi & commercial Property looked overvalued to many at the time. It is interesting that as an “analyst” who came to the right conclusion, you are still cutting numbers for logical reasons. It just goes to prove the paucity of the “nobody saw this coming” line.

@Karl Whelan

Are we near bottom? Nothing ever stops real estate vested interests from assuring everyone that things are stabilising and it’s a great time to buy. However, I reckon we still have further to go. The recent Honohan report informed us on page 83 that the (quite sensible) McQuinn-O’Reilly model indicated that house prices were 33% over-valued in 2007:Q2 relative to what could be justified by disposable income and mortgage rates. This would justify a decline of one-third in house prices even if incomes hadn’t changed. However, nominal GNP has dropped by about 17% since house prices peaked while income tax rates have been increased.

If house prices were 33 per cent over-valued in 2007:Q2, then that would require a fall of 24.8120 per cent (derived from 100/133) to bring them into line, not one-third as you say. A common mathematical error.

Taking into account the 17 per cent fall in GNP since 2007 would bring the required fall to 37.5940 per cent (derived from 83/133). Which is more or less where we are at the present time, according to the Daft report, meaning we are now entering overshoot territory.

However, the fall in GNP is coming to an end, both value and volume. The economy is growing again. Most forecasters now predict GNP volume growth of 3 to 4 per cent for the next few years. I predict more, but leave that aside. In addition, if the euro stays where it is now (which obviously no one can predict), GDP/GNP deflation will come to an end in the next few months. As an indication of this, I would refer to yesterday’s industrial production figures for May 2010. Industrial turnover (value), as well as industrial production (volume), is now rising strongly. In May 2010, industrial turnover (value) was up 8.4 per cent y-o-y and industrial production (volume) was up 9.5 per cent. In the early months of 2010, industrial production (volume) was rising strongly, but industrial turnover (value) was still lower than a year ago. The explanation was the rise in the value of the euro against the dollar and sterling. However, this has reversed since the early months of 2010. If the euro remains at its present level, industrial turnover (value) will be recording much larger y-o-y increases in the second half of 2010 than does industrial production (volume). The same will be true for services exports. This will be reflected in GDP/GNP inflation from the second half of 2010 on, in contrast to the GDP/GNP deflation of the past few years. That is on top of any volume growth in GNP, which, as i say, most economists are now predicting will be 3 to 4 per cent in the next few years. The upshot is that the 17 per cent fall in GNP will be eaten away in the next few years, with implications for your calculation of the required fall in house prices since 2007 required to bring them into line with incomes.

That doesn’t mean that your prediction of a 60 per cent fall will be wrong. House prices can overshoot on the way down, as well as on the way up. But, it is important to note that that is what it would be, a massive overshoot. If, hypothetically, we assume that GNP values recovers the 17 per cent fall by 2014 (which is in line with most forecasts) and your prediction of a 60 per cent fall in house prices from their 2007 level comes to pass by 2014, then that would mean that by that year house prices would be undervalued 46.8 per cent. Obviously, that is a possibility, but it would be some overshoot.

@ Karl

I think your 60% figure is a good baseline scenario. Your colleague Morgan Kelly, almost 2-years ago on a TV3 programme called “Crunch Time” predicted that home values in the ‘better parts of Dublin’ would fall by 70% to 80%. That figure is the other end of the price fall spectrum, but could easily materialise.

As Jim Power writes in his commentary, there are serious challenges or headwinds facing the Irish residential property market, but his figure for New Home Completions estimate of < 12,000 for 2010 looks to me to be very aggressive as we’re still finishing approx. 1200 homes/month – the official DoEHLG stats for 1st 5 months of 2010 was 6,112. Notwithstanding this amount, the real question is: “Are we selling more new homes yet than we’re still building?”. Central Bank lending figures (& IBF quarterly mortgage stats) would suggest not.

Before we even countenance any stabilisation in prices, we have to stop adding to the oversupply & get activity moving again (not allow NAMA to hoard properties for years & years).

Lastly, a little game I played two months ago in the TV3 studio was to ask people if peak property prices were say 100k & if they fell by 10% for 10-years where would they be? Answer: 35k, but most people said ZERO! I know that virtually all of the contributors to this blog understand that property price falls are ‘Division’ and not ‘Subtraction’ whereas gains during the boom was ‘Multiplication’ and not ‘Addition’. It is surprising still that a large number of Irish people have yet to get this e.g. if actual prices have fallen 40% to date from the ‘Peak’ then a further 25% drop would ONLY be a 15% fall from the top (worked example house 100k in late-2006, now asking 60k, but another 25% reduction would take it down a further 15k to 45k OR -55% from the peak).

The best analogy that I can use, is that of a car journey from A to B, or say driving from Dublin to Cork. If you drive @ 200 KMH you get there in an hour-and-a-half, but if you drive at 50 KMH it takes 6 hours to get to the same place.

The Irish property market using this metaphor, is crawling down the M7 in Kildare/Laois border, and is only half way there.

ps. for those that are interested, say Irish home values are down 40% from the top, so what was 100k is now only 60k, if prices fell another 25% this year they would be 45k (per 100k) or down 55% from the peak. However, if home prices followed the path below they would ALSO arrive at the same end price:

2010 -10%
2011 -7%
2012 -5%
2013 -3%
2014 -2%
2015 +0%

The above hypothetical sequence of another 4-years of price falls would only leave home values 25% below today’s levels. Not that unrealistic.

@ Ray

People will always need homes and new household formation will take place. The latest ESRI housing demand model (published last year by Prof. John Fitzgerald) estaimated that annual demand is for 45,000 new home per annum.

We are not seeing this reflected in Sales/Activity (using mortgage data). Most people need to borrow a loan to purchase a property and lending has been severely curtailed – total Private Sector Credit peaked at EUR 404 billion in Nov’08 and was down to below EUR 352 billion in May 2010 (according to Central Bank Monthly Statistics Bulletin). Credit is being rationed today in Ireland.

Irish banks are not lending that much money to FTBs. In fact, they’re receiving more money in Capital Redemptions (repayment of older loans) each & every month than they’re lending out. Which is why loans to businesses & individuals has shrunk more than 52,000 million over the last 18 months.

Sorry, these are official figures not mine. Prices will fall this year and could fall for several more years. Nobody knows. But we do know that the fundamentals are awful :- unemployment, emigration, oversupply, lack of credit etc.

In the USA, President Obama introduced a FTB tax credit of $8,000 per person (towards deposit for a home), and it improved the situation there for the period that it was in place. What measuures have the Irish government taken to help younger people on lower incomes to achieve home ownership?

At least in the UK they’ve operated very successful Right-to-Buy schemes as well as Shared-Funding & Shared-Equity through Housing Associations. What have we done, but criticise academics who actually got it right.

@Karl & JtO
I think attempting to link GNP/GDP changes to the likely future movements in house prices is deeply flawed at the moment. While the link may be valid over the long-term the ratio will almost definitely be broken over the short-term in Ireland. So just as the link was non-existent during the bubble years it will be non-existent during the bursting phase of the bubble.

IMO the two most significant factors that will drive Irish property prices over the next 5 years will be the return to normal rental yields and the unwind of the excessive stock and oversupply of properties.

The latest report from Daft have the average rent nationally at €760.
A rental yield of just 6% (which is low and hardly compensates for property risk when the Irish 10 year is yielding 5.3%) would indicate a fair value of €152,000.

The latest sales report puts the average price nationally at €224,000.

Which would indicate that property prices have 33% further to fall assuming there is no over shoot.
Of course increasing rents could do some of this work but the 2nd factor, excessive supply, will probably prevent any meaningful increase in rents. IMO rents will continue to fall over the next 12 to 18 months which will mean prices could have even further to fall.

Excessive supply is probably even bigger factor but much harder to quantify.
There are various estimates around of the number of vacant non-holidays homes in Ireland ranging from 150k to 250k. If the natural demand is optimistically 40k per year and we only build 10k it will still take us 5 to 8 years to clear the over supply.

A further 33% fall after the 40% fall thus far would mean prices could be 60% below peak.

Finally, I would add that I see most of the risks to this prediction to be on
the downside and the following could push prices down further.

– Rental yield of just 6% hardly compensates for the risk
– Excessive supply could force prices and rents down far further
– Introduction of property tax
– Emigration

I think MK’s prediction of a 75% fall could be close to the mark than people think.

@Dreaded_Estate

Do you still do the rental reports on irishpropertywatch? Unless I’m doing something wrong, it doesn’t seem to have been updated since 2 May. The CSO figures show rents stabilising in the past 6 months. The CSO index was 91.1 in December 2009 and 91.2 in June 2010. Do your figures agree with this? Even if different, I’m not saying that your figures are wrong and that the CSO figures are correct, just curious to know if your figures are in agreement with their’s, and why you seem to have stopped publishing your’s?

http://www.irishpropertywatch.com/viewLatestReports.php

Regarding house prices, I’d just make the same point as before. Namely, the peak-to-trough fall is an irrelevance. Its the long-term trend that matters. The peaks and troughs are merely moments in time. The price of oil fell from $150 per barrel in August 2008 to $30 per barrel in April 2009, a fall of 80 per cent. But, it only stayed at that level for a few weeks. It bounced back up to $80 per barrel. The reason it bounced back from its trough was because the $30 per barrel was an overshoot, leaving prices way below their long-term average. Likewise with house prices.

Rather than people continually making predictions about the peak-to-trough fall, I suggest a better activity would be publish a quarterly estimate of how much house prices are overvalued or undervalued. Hardly rocket science. This would, of course, take GNP into account, as Karl Whelan correctly suggests. Based on the extent to which prices were overvalued or undervalued, people could then make their own judgements as to whether or not they were likely to rise or fall in the long-term.

Based on the figures Karl Whelan gave, I calculate that house prices are no longer overvalued. As I said in my earlier post, a 33 per cent overvaluation in 2007 Q2, combined with the 17 per cent fall in GNP since then, would require a 37.6 per cent fall since 2007 Q2 to eliminate the overvaluation. But, that is almost exactly what has occurred. Hence, house prices are no longer overvalued.

I agree that this doesn’t mean they won’t fall further in the short term (as well as the factors you mention, the mere fact that so many in the media are predicting that they will makes it more likely that they will). But, it does mean that there is every possibility that they will then recover post-trough over several years to their current values (plus an adjustment for further GNP increases in those years).

How about ye all do a “What if” ….

Aggregate economic activity (using whatever metric you wish) – Flatlines (at the current value) for a decade. Probability of >20%!

So, your ideas for such a scenario are … …?

This is neither a trite nor trivial question. I respectfully suggest ye apply yourselves to this.

Res prop prices should decline by about -50% (of their current). The bubble run-up was approx 5 years. Run-down (Reversion) should approx 7.5 years (we’ve done 3). You do not need a goofy calculus model to estimate res prop prices. Prices should approx x 2.5 times wages/salaries, with a 20% cash down deposit. Simple.

B Peter

@Karl and Ronan,

I appreciate more funds are required to stabilize our fiscal situation. But, as you noted, some planning needs to be done. I don’t see any evidence of that yet. F O’Toole in today’s Irish Times seems to bear that out.

Even when the planning is done, I am unsure about the middle class’s ability to absorb another tax hike. In my opinion, the government has not only run out of money, but the taxpayer has too!

@Derek

Why do Irish people pay property tax in foreign jurisdictions but are so against it at home? As someone, who lived in the Boston area as a home owner for many years, I can tell you I was not wild about property taxes there, either. However, my money was kept local. I could see where it was spent. I could go to the town hall or school district and get an exact account of where all the tax money went. I don’t foresee that kind of transparency happening in Ireland unfortunately.

As for our tax fugitives, my opinion is that they should pay taxes on any money they make in Ireland.

@Karl Deeter,

Helpful to know. Oddly enough you can get the rateable occupier of any property in the State

http://www.valoff.ie/Research.htm

but they absolutely won’t provide you with the owner.

It was a couple of months ago when Emer O’Siochru appeared on the Vincent Browne show and told Vincent that we were the only country in the developed world that didn’t have a cadaster – a public record of who owns what. She also said that about 8 people owned most of the development land in Dublin.

The issue of the House Price Database is raised in the Oireachtas every month by the Opp. The govt have promised it in their Renewed Prog for Govt and as recently as last week Michael Finneran said it was a “priority” for the present administration’s term.

Do you have any link or source to what you say about the “data protection commissioner” getting involved in this? Michael Finneran has raised the DP Act as an obstacle though everything I have seen indicates that it just needs an amendment to a Land Registry act and their rules from the 1970.

@JohnTheOptimist
No we aren’t doing the reports on IPW anymore. But the database still gets updated so it is possible to search for a daft, myhome or propertynews property and get the price history.
Our figures would be broadly tie in with the CSO figures showing a slight increase in rents. Although we are probably showing a little more over the period.

Firstly, I don’t subscribe to the GNP model you are using and I think there are much better models of house price out there. As I said I think the link between GNP and house price has completely broken down in Ireland during and post the bubble.
Secondly, I think the starting point of an overvaluation of 33% in 2007 is simply wrong. And extrapolating from there gets you nowhere IMO.

My prediction of a fall of a further 33% is just to get to equilibrium prices and that assumes constant rents. I am not assuming any over shot within that prediction but I think it will happen and prices will fall more than 60% peak to trough.

After we get to the equilibrium prices, I think prices will bounce a long the bottom for much of the next decade. IMO house prices will not even beat inflation over the next decade and won’t come close to matching GNP growth.

If you want a finger in the air long term prediction, I think it will be well past 2030 before we return to the nominal prices of 2009.

@Dreaded Estate
One quick comment on your yield calculation. The daft.ie average rent is based off Census lettings weights, while the average asking price is based off Census household weights, so that the two aren’t directly comparable.
The yield figures given at the end of each Daft Rental Report use the same weights and so correct for this.

@D_E
If the average yield is still only 3.6% then prices are 100% overvalued (i.e. need to fall by 50%_ on average. Using a yield calculation.

I notice nobody is talking about income figures. What’s the median wage in Ireland again? What’s a sustainable income multiple for the average couple to buy at?

Given that the banks are being pushed to prioritise SMEs for lending and they have a finite and diminishing pot of cash to lend, where is the credit for an stabilisation, never mind an increase in prices going to come from? Time to go back to being a long-standing regular saver and cultivating the local bank manager perhaps?

Finally, new house prices drive second-hand to a certain extent. In some areas (where new house supply is high), they’ll exceed old house prices (as why would you buy an old house when you can buy a new higher spec one for only slightly more). In other areas, they’ll be lower (as they just don’t have the character of the redbricks). In any case, there will be a relationship between the new and old prices. The banks no longer have an interest in new houses as they’ve offloaded them to NAMA. It is not their problem anymore, so they won’t feel any need to provide loans for newbuilds on a risky basis. They will, I believe, become ultra conservative with newbuild valuations, particularly given some of the quality issues that have emerged. This will restrict newbuild prices which in turn will have an effect on used stock.

@Derek Brawn & @John Muldoon: I think you are right about the breakdown and the ability to show value, the failure of property related taxes in general often has to do with ‘visibility’

Any tax that is built into a system is far less likely to face backlash than a stand alone tax, we don’t cry about VAT (although I do because financial services is a zero vat biz and we get charged it but can’t in turn charge vat), we don’t tend to find a way to evade income taxes – for those on PAYE, and many other built in taxes become ‘hidden’, we know they are there but they don’t cause a stir, property taxes – stamp, stand alone bills for rates etc. on the other hand don’t have this, so perhaps an incorporation into payroll would be a system for doing this or having some other mechanism that makes the process less painful than a once a year bill landing on the door. thoughts?

@Dreaded_Estate

That is interesting. So, you are saying that rents have stabilised or even slightly increased in the past six months. Both your survey and the CSO are now saying that. I don’t think that anyone was predicting that six months ago. And, naturally, it has got zero publicity in the media and on sites like this. How wonderfully convenient that Property Pin should drop your excellent survey the moment it shows rents stabilising or even rising. And, I’d say that the chances of Morgan Kelly mentioning in an IT article the fact that rents are now rising are about the same as those of Meath agreeing to a replay with Louth.

Of course, six months is not a long time. It could be a blip. We will know better in another six months time. But, it is at least possible that it is related to the clear slowdown in the fall in the number of arrivals of foreign nationals. During the recession there has been virtually zero net emigration of Irish nationals, but a sharp drop in the number of arrivals of foreign nationals, resulting in a net outflow of foreign nationals (which is ludicrously presented in the media as if it were old-style emigration of Irish people to Camden Town and Kilburn, when it is no such thing). Regardless, the fall in the number of foreign nationals is clearly now slowing down, in line with the renewed growth in the Irish economy. These are the monthly PPSN numbers for 2009 and 2010:

Jan 09: 17,532 – Jan 10: 13,470 – y-o-y fall: -23.2 per cent
Feb 09: 14,377 – Feb 10: 11,837 – y-o-y fall: -17.7 per cent
Mar 09: 15,204 – Mar 10: 13,083 – y-o-y fall: -14.0 per cent
Apr 09: 13,585 – Apr 10: 12,125 – y-o-y fall: -10.7 per cent
May 09: 13,493 – May 10: 12,497 – y-o-y fall: -7.4 per cent
Jun 09: 14,230 – Jun 10: 13,375 – y-o-y fall: -6.0 per cent

So, the number of PPSN numbers is clearly bottoming out, indicating that the number of arrivals of foreign nationals is also bottoming out. Based on these figures, there is every chance that the number of arrivals of foreign nationals will be rising again later in 2010. If so, this would have implications for rents and on the likelihood of the rise, that both you and the CSO have reported so far in 2010, continuing.

@Derek Brawn

What exactly is the value of a scientific survey of house prices, based on the price of one house? I’m afraid that 25 million smackeroonies is a bit outside my range, so I haven’t been following price trends for such houses too closely.

But, a relatively small number of houses fetching prices that only the very rich can afford does have one important effect. Namely, it skews up the figure for mean house prices as distinct from median house prices. Most countries publish figures for both mean and median house prices, and generally median house prices are a lot lower (for the reason stated above). In Ireland, as far as I know, no survey publishes figures for median house prices, only mean house prices. The upshot is that, even at the height of the boom, the extent to which house prices in Ireland were out of line with other countries was greatly exaggerated. The only report I’ve ever seen that based its analysis on median house prices in Ireland was by that American company (Demographia, I think it was called – but, Michael Hennigan would know more about it than me). But, when it switched to using median house prices for Ireland, it found that house prices in Ireland, even back last September, were only about 60 per cent of those in the UK. Given the fall in the euro, the fall in house prices in Ireland since then, the rise in house prices in the UK since then, median house prices in Ireland relative to those in the UK are a lot lower now than then. The bottom line is: house prices for the ordinary family in Ireland are now a lot lot lower than in the UK, which anyone can check out if they have relatives in the UK.

@Dreaded_Estate

So, they suddenly found that they no longer had time to do the rental reports just at the very moment when rents stabilised and even rose slightly? How very convenient.

Alas, I have a day job to go too. I will try and deal with your other points this evening.

@Jagdip no, I mean a company that was recording sales prices and that had to stop doing so. ring me, I don’t have your contact info.

@JtO
We don’t do the sales reports anymore either and those prices are still definitely falling.

@R.Lyons. Excellent report as always. If introduction of property tax could be combined with database of actual sale values then we could get two vital issues sorted.

@D. Brawn I agree completely with the crazy notion of 2006 as a normal or base year for property prices.

The study you suggest of going back to 1995 and examining whether the prices after that are fundamentally sound has been done a few times in the early 2000s by Dr. Maurice Roche (Nui Maynooth).

My more modest attempt in 2002 showed that house prices then could not be justified by the fundamentals and were already overvalued.

(Karl deeter can give you a copy of my 2002 study and contact details if your interested in discussing it)

@Ribbit
Does that say rents have fallen 50% in Estonia? Blimey… and I thought we were having a property market correction.

Hi all,

Very well-informed thread.

As an aside, if any ESRI people are on here, I’d be interested in knowing when the ESRI/PTSB house price index for Q2 (the only true metric of actual house prices we have) is next to be published?

Q1 showed a dramatic fall of 10% in Dublin and 4.8% nationwide – but the report was published at a time that a cynic could say was guaranteed to minimise press cover (e.g. late Friday afternoon on a bank holiday weekend).

http://www.irishlifepermanent.ie/ipm/media/pressreleases/permtsb/ptsb2010/2010-04-30/

At that time, the Real Estate lobby were busy trying to call a bottom to the market 🙂

sorry that should have read “(buh-bum tiiiish!)”

@hoganmayew I’ll get karl to put the study on his site next week

@Derek Brawn This is the best ever time to push for a proper price index as all parties including EA’s agree for the need to bring confidence and better understanding to the market. All we need is a reforming minister to push for it !

I know Ray, twas just a joke. But as for not tolerating positive views, trust me I’m very tolerant. Everyone can come on here and make their case — I just don’t have to agree.

PS: No offence intended to Freemasons, who I’m sure are all salt of the Earth gentlemen.

@Joseph, we sure do.

But we also have this crowd http://en.wikipedia.org/wiki/Knights_of_Saint_Columbanus

@JTO

http://www.demographia.com/dhi.pdf
Refer page 40

Cant say I believe the numbers particularly for median household income…..given the employment situation…..