Constructing a National House Price Index for Ireland

David “In many cases negative equity will not be an issue” Duffy:
http://www.thepropertypin.com/viewtopic.php?p=307474#p307474

Marian “the rate of decline moderated” Finnegan:
http://www.thepropertypin.com/viewtopic.php?f=4&t=25935

Good luck with that!

I’ve indicated here before that whilst an index of the sort envisaged is obviously an important step. It will once again fail in determining the true cost of housing which is the rent paid on a street by street townland by townland basis.

Throughout the last decade had our beloved banks concentrated solely on rental yields the craziness of their lending decisions would have become all the more apparent by about 2000/01.

Instead we had to endure a further decade of daft lending practices because of the obsession of lending money to consumers on a times salary basis which gave people ‘buying power’ in the market but ultimatley the true value of the house based on equivalent rental yields was considered a mere after thought. How wrong can you be.

An index which complies house prices whereby banks (who ultimately price (incorrectly) 98% of property transactions) and still lend money on a times salary basis will be of little relevance because we all know – garbage in garbage out.

@ Ian

You have, of course, pointed out the fact that the emperor, in this instance, has no clothes. But that is not the fault of the CSO.

I would guess that the real reason for the failure of successive governments to do the obvious and collect data on the basis of transactions – which is done as a matter of course in other countries – is a fear that Article 43 of the good old Irish constitution would be called upon once again to protect private interests on the totally spurious ground that private data was being revealed. This would, of course, not be the case as only aggregated anonymous data would be collected and released.

But the argument would have enormous political resonance.

We Irish are special!

@ YoB: You have commented several times on the way in which ‘up-to-date’ res property prices may be evaluated. You suggest rental as a basis.

I have no idea whether or not your proposal has merit (ie. will achieve objective of market transparency) so I will not offer any critique – I have one suggestion; see below.

But if you can think of any of the known unknowns, and even the unknown unknowns of your scheme – then this would be most useful. It is difficult enough get legislation enacted, but attempting to tweak out unintended consequences from existing legislation is a parliamentary nightmare.

Same applies to anyone else proposing an accessible res property scheme. The damn thing must be simple. The principal users are financial duffers.

I have one deep reservation about any ‘mechanical’ scheme to let res property prices (not values!) see the light of day. You are poking into an area of great sentimentality! What did the man say about ‘treading on someone’s dreams?’

A new Freedom of Information Act: Nothing is witheld or restricted unless Ombudsman agrees to the witholding or restriction. Ombudsman is answerable to parliment only. That’s about as simple as one could get. Fox amongst the chickens stuff!

BpW

Property has unique aspects as a small number of transactons can have an impact on the assumed wealth of many individuals across the economy.

Two big drawbacks of the ESRI/PermanentTSB index is that volume change is not disclosed and it has not captured big value drops as the avg mortgage size of one lender may be lower than the market avg.

As to the CSO, it has been publishing data on agricultural land sales but apparently stripping out land above a particular threshold which would imply development land.

It has suited both FF because of its nexus with construction and the IFA who would not have wished to have data on development land sales to spoil the ‘an béal bocht’ mantra.

During the bubble, agricultural land became the most expensive in Europe as turnover was very low.

In addition to CAP welfare, a job at the local factory and a few bob from the 23% of the €18bn roadbuilding budget that was allocated for land purchases, put little pressure on farmers to sell land other than at extortionate development rates.

According to Savills in 2007, in France, each field changed hands at least once every 70 years, but in Ireland on average a field changed hands every 555 years! Total annual turnover in Ireland is less than 0.2% of the total acreage.

Savills said Ireland has a little over 10 million acres in agricultural use, which put the sales ratio in 2008 at 0.0005743%

So volume is important.

@ Yob and Michael

Straw in the wind stuff. I spent the last couple of days in Galway and was talking to a single woman who has 30k in the bank, reasonable needs and expectations, a respectable permanent position – and no Irish lender would offer her a mortgage.

I wonder, YoB, if we went your way, would the system be open to gaming as we saw Dublin landbanks and property prices being gamed for the sake of a small number of investor players?

@Brian Woods

Just so it’s clear my ‘scheme’, if that’s what it’s to be referred to as, is as about as unique as the air we breathe. In fact I believe Adam Smith first muted the motion back c300 years ago. Believe me it’s not unique.

That’s why it’s frustrating the ongoing property debate or more correctly property debacle continually misses the most obvious and probably the most fundamental point regarding this market and that is that banks price property not consumers. This is a fundamental fact, but largely washed over as, ‘so what’.

I’m afraid this misunderstood fact has enormous consequences for all the country’s citizens. It means that as pricing is ultimately the preserve of our beloved banks and given that we now know that that responsibility was wholly neglected for a decade it must, and does, raise serious legal questions for the banks and their actions in the market which they ultimately control.

I’ve said it here before but the residential mortgage disaster in the ROI will in time be recognized as the biggest mis-selling financial scandal ever visited upon a developed economy in time.

The lending metrics versus long run rental yields were ‘wrong’ in the ROI for a decade.

In that time more money per capita was lent to the citizens in the ROI than any other country on earth on a relative basis since bank lending statistics records were kept. Some feat.

Given these facts I’m continually annoyed at commentators raising issue with the legality or fairness of debt forgiveness schemes. In simple terms if the banks screwed up the pricing of property as Royally as they did, why in God’s earth should the consumer be asked to bear 100% of this mis-pricing burden. There is no logic (fairness aside) to the stance currently assumed by Regulators and others who fail to make this basic connection.

The residential property market is unlike virtually no other market as it lives and dies by the availability of credit/leverage. Most, if not all, other risk asset markets are cash markets and this differentiation matters hugely.

Those in control of the leverage control the price.

For far too long bankers, commentators etc have mixed up the financing decision and the valuation decision when it comes to property.

It seems to me that these two very separate questions have somehow merged, be it through ignorance or otherwise into a ‘model’ which seeks to do both – this particular merger has failed spectacularly. We need to demerge the two. Valuation (in general) is a long run mean reversion question whereas financing is idiosyncratic and individually dependant – the two simply do not mix.

Therefore deriving any index from metrics which are fundamentally artificial will never give one a true picture of the real market values – the property ‘market’ is, as a result, actually an unreal asset market (which seems at variance with its name). Its pricing is determined by the banks which employ pricing models which are fundamentally flawed in almost all respects.

Where markets in general move from unreality to reality is where the market becomes a cash transactional market and in most instances cash markets are much better at true price discovery than leverage markets.

We know that rents are real cash items (does anyone really borrow (aside from direct Govt transfers via rental allowance) to pay a monthly rental)? Perhaps they do – but the incidence is very small relative to the market so all things considered using a cash metric to determine price is always a more comprehensive method to employ than other available alternatives. Whether there are unknown unknowns here is always open to debate however in most instances history tells us that we’re probably on firmer ground using a rental/cash method than any other as all others as far as I can see suffer as a result of mixing up the financing and valuation decisions which is always likely to lead to an inferior result.