Categories Banking Crisis Economic Performance CSO House Price Index Post author By Karl Whelan Post date May 13, 2011 9 Comments on CSO House Price Index The CSO have released a new house price index (press release here and data here). Analysis by Namawinelake here. Related Tags House Prices ← Iceland’s Big Thaw → Central Bank Balance Sheet April 2011 9 replies on “CSO House Price Index” The index probably does not tell the full extent of the decline. There are two reasons why this might be case. 1. Stamp duty changes from 9% to 1% for most second hand homes in Dec 2010, would have resulted in a further 8% cost reduction to the prospective buyer. Would it be valid to factor this into the stats? Largely speaking the stamp duty isuue did not affect new houses. (Maybe a 1% stamp duty increase?) 2. There was VAT change introduced in July 1st 2008, which has had and will continue to have a large cost to the exchequer. It relates to deferment (over 20 years) of vat at 13.5%, in the case where a builder/developer rents a house as opposed to selling it. It was probably introduced to assist the cash flow of soon to be bust builders. Under the old vat system they would have to divvy up 13.5% of the sale point when the apartment came into first use. From July 1st 2008, at €350,000 per apartment that is about €41,000 vat foregone per apartment ‘rented’ rather than sold. The Gasworks apartments, by coincidence I’m sure, started to rent at around the same time as the vat legislation change. The new scheme, which not affecting a sale price, would in normal circumstance result in a a large advantage to a builder to rent as distinct from selling an apartment. Would this vat change affect price? Dublin house prices are missing from the press release. In March 2011 (75.2 rel. to 01/05 base) they were down 45% from the peak (137.8 in 03/07). If the bottom is 65% from peak, then sale prices (which are themselves significantly lower than asking prices) have 36% further to fall (to 48.2) from the March 2011 average. If the bottom is 80% from peak, they have about 63% further to fall (to 27.6). Nationally, the drops would be larger. As the press release outlines, the peak varied by market. Nationally, house prices flattened in 2007 with a peak in September. They only started to drop appreciably from December onwards. However, Dublin apartments peaked in February and then started to drop (interrupted by a brief rally in June/July). Nationally, the rate of house price growth, in the period measured, peaked in July 2006. So there were significant warning signs in the data well over a year before national prices started to drop appreciably and over two years before the Irish bank guarantee. The banks were in as good a position as anyone to detect these trends early and, although they didn’t have this index, they had their own data and the Permanent TSB/ESRI reports. The extent of house price inflation in Ireland was well-known and uncontested. The banks could have easily measured the hugely inflated ratio of house prices/mortgages to income of their customers in 2006. As has been pointed out elsewhere, there was no shortage of overseas commentary about our house price bubble. The supposed consensus that all was well (and subsequently that we would have a soft landing) seemed to be dominated by economists and commentators with a vested interest, to which the broadcast and print media gave a disproportionate platform. So what were the banks doing between mid-2006 and 2008 to reduce their exposure to a house price collapse (let alone before)? I hope the answer is not ‘nothing’. @Joseph Ryan Stamp duty changes may have an affect on how low the trough, though so will higher taxes, unemployment, lower incomes, lowered expectations of future income, tighter credit, lower rents, etc. From a policy perspective, prices should have been allowed to fall much further before any government policies to encourage housebuying were introduced. Instead, the government has sacrificed revenue without achieving any effect, so far. Interesting point about the VAT. I don’t know what the net effect would be. It should constrain the supply of apartments for sale but increase the supply of apartments for rent, thereby lowering rents and making both buying-to-rent and buying-to-occupy less attractive. Just to confuse things further, if an apartment has been rented out, it may be easier to sell. I should have read namawinelake before posting. It contains a much more detailed analysis than my first paragraph above… The Irish res property market – is in fact, and always has been, segmented. Hence, aggregate metrics are quite misleading. Publishing data for each of the different sectors (rural, ex-urban, sub-urban, urban, etc.) would be of considerable help in attempting to get a faintly accurate handle on actual selling prices (as opposed to valuations). My 2009 back of envelope estimate for res property price decline was -1% per month (plus or minus an error value), for about 72 months (fom 01/2008). With more up-to-date data for our financial calamity I would revise my estimate for final ‘bottom’ (excluding very top-end of market) for res property within range of -90% -> -75% of the prices at 2007 peak. The various tax ‘schemes’ and interest rate ‘reliefs’ and First-time buyers ‘incentives’ are dictated by vested interests and clearly cause significant distortions, so you have to fall-back on guesstimates. Its plain unsatisfactory. If both purchaser and vendor both had to pay some element of transaction costs, this might equalize the situation somewhat. And get rid of all other ‘incentives’ – which are simply Producer Surplus and tax forgone scams. Some progress. More required. Brian Snr. Great – Maybe some can graph this chart and label the points where the powers that be called the bottom to the Market. The IT alone did it 3 times in the last 18 months: In December 2009/January 2010, in May 2010 and latterley a few weeks ago – with those distressed properties being (yet again) the first swallows of summer. Remember this old rubbish? http://www.eapn.ie/eapn/wp-content/uploads/2010/04/Bank-of-Ireland-Wealth-of-Nation-Report-2007.pdf @ remnant: I read a piece in 2005 (got lost on the internet and stumbled on it by complete accident). Basically the author said that we in Ireland were the 2nd wealtiest in europe, but within a generation we would be the worst off ( I wish I could recall the ref). Thought the writer had completely lost it. Curiosity got the better of me and I did a bit of digging. Sure enough, the bloke had it sussed. Saved me a lot of heartache. Did not manage to save some friends who splurged on property. I have the gravest misgivings about any Spinola issuing from any sector with any link or interest to res property. Pointing out their errors is likely to get you a prompt ad hom! Still, it does gives one a warm feeling to be able to insert a briar where it deserves to be located. 🙂 Brian Snr. I think this index does reflect the average prices drops to date, it covers such a large proportion of all transactions that is hard to argue with the results. Will be interesting to see how this and the publication of all individual sales transactions effects the market over the next months/years. FYI, Charles Ferguson talks here about mortgage lending quadrupled in a few years. BOH. http://mitworld.mit.edu/video/861 […] Dublin, and national excluding Dublin regions. The release has been noted and covered by the great Irish Economy and Namawinelake blogs. I want to briefly look at some of the statistical properties of this series […] Comments are closed.