Allsop Auction Price Declines

Two comments

Northern Ireland (Bank of England managing monetary policy, different planning authorities, inflation through UK QE, no ghost estates, different politicians, different developers though some were all-Ireland) has seen a peak to current decline of 44% (Bank of Ireland, University of Ulster index).

Spain resi is down just 21% from peak (4.7% in Q1,20911 mind). Spain has ghost towns, not just estates. I see the impish Herman van Rompuy is meeting with the Spanish this week ahead of the bank stress test results on Friday. Coincidence like Herman meeting Nicolas Sarkozy two days before meeting Enda three weeks ago?

Without meaning to catastrophise, remember that the stress tests on our banks back in March anticipated 55-60% falls from peak on residential property. 60% was the adverse scenario.

Of course Dreaded_Estate’s analysis is between asking and settled, though the asking prices are “late 2007” which might be perhaps 6-9 months after the peak. And as Karl says, there are potential issues with sample size and the nature of the Allsop/Space auction.

What would a 68% or 80% decline in residential prices mean for the €24bn capital requirement. Another €10bn?

@Jadgip

“What would a 68% or 80% decline in residential prices mean for the €24bn capital requirement. Another €10bn?”

€10 billion would hardly cover it. The total book loan value of the covered banks was €312 billion as per S Coffey presentation:
http://economic-incentives.blogspot.com/2011/06/presentation-irelands-public-debt.html
If the asset values underlying most of those loans have now dropped by 20% more that the strees tests allowed for, then the implications would certainly not stop at €10 billion. Probably closer to €50 billion.

It should also be noted that German property prices may not be getting as boomy as German economy.

A Quinlan shopping centre in Cologne purchased for €170 billion in 2006 was sold last wek for €130 billion, a fall of 25%.

From Sun Independent (July 10th)
“Irish private equity group Signature Capital has paid about €130m for a German shopping centre that had been controlled by Quinlan Private before the centre collapsed into insolvency.

The Neumarkt shopping centre in Cologne was bought by Quinlan Private, since renamed Avestus, for €170m in 2006 but it went into administration last November after Avestus missed a €9.6m payment.”

The bust is getting bustier.

Time for a complete rethink.
The price that finished property changes hands for is an irrelevancy to the real economy that livelihoods depend on.

@ Joseph

“The total book loan value of the covered banks was €312 billion as per S Coffey presentation”

My IT overlords haven’t installed flash on my work comp, so Seamus’ presentation wont work here, but this sounds a bit high?

Ressie mortgages in Ireland amount to 120bio (incl foreign banks). Total NAMA CRE, here and abroad, amounts to 75bn, but some of this has already been discounted by 70%, and much of it is foreign as well. I assume 312bn was the total balance sheet, which would include lots of different assets, here and abroad, corporate bonds, government bonds, etc etc.

@senior propertyobserver – many people including the executive members of the ECB are calling for stricter credit conditions to prevent similar instances from happening again.
However in practice it doesn’t work very well. Shanghai and Beijing brought in the kind of measures restricting credit mentioned above last year and the market kept going up and up – simply didn’t work.
More effective was a law resticting purchases to maximum two residential properties per person. A law intorducing higher property taxes. Anti-collusion measures such as making sale price reporting mandatory and transparent on all transactions and measures to prevent devopers from ‘haording’ developments and zoned lands. Since these measures were introduced this year, the house prices have dropped in both Shanghai and Beijing. Much more effective than stopping first time buyers from accessing credit.
Italy has similar measures on restrictions of residental property ownership and this saved its real estate market from a boom/crash relationship.

@Jagdip

“What would a 68% or 80% decline in residential prices mean for the €24bn capital requirement. Another €10bn?”

I tried to make the point in advance of publication of the Irish scenarios, that in this day and age, and given the amount of fees paid by the taxpayer for their preparation, it would not be unreasonable to expect publication of a spreadsheet which allowed some variation of user defined inputs.

In this way, people like me would not be forced to largely partially the very expensive announced “results” because the assumptions looked unrealistic.

This gained zero traction. What should we do now, ask the central bank to re-publish with a different “adverse scenario” or just regard them more and more as a semi-PR exercise aimed at corralling expectations?

If forced to dismiss the published results from Ireland – or anywhere else – you don’t have to be George S to work out they become worse than useless.

Spreadsheet please.

Something might have leaked about Italian banks a couple of Fridays ago. The equity trading didn’t smell right then and the bond guys have been piling in on Italy recently. Meanwhile the ECB and France are discovering that banks have boards accountable to shareholders not sovereigns – again hardly surprising.

I’m not complaining. If things keep going like this, a few years work in the UK and I’d be able to buy a 3 bedroom detached house in Ireland for cash.

What are the Irish Banks to me, or me to the Irish Banks? They’re not going to give me a mortgage, and I’m not going to pay to keep them afloat.

So let the property prices decline, and the banks fail. I think the country will be better off in the long run.

@DE
I was just about to pose the question…was Morgan right after all? Time to revisit his analysis.

@JR
It’s getting bustier alright. 27 cents will buy you a share in all our quoted banks today and our 2 year bonds are yielding 18%+. What a mess.

@ Ronan Lyons
I think the prices achieved at the two Allsops auctions are going to cause reality checks in even the most optimistic property investors?
Do you think that we might see an increase in property supply as investors start to feel that we may not be at the bottom of the market and that it would be far better to try to sell now even at what they would consider to be a low price?

@Jagdip
Just looked and the 10 yr 4.5% is trading at 58 and change. The 19% haircut looks daft. But wait until Friday when the EU bank stress test release converge with whatever haircut scheme is drawn up for Greece and the proverbial hits the fan.

We also have no idea of the level of voluntary surrenders in workout deals by some of the defunct foreign banks, or the number of properties that have been repossessed by actions against commercial owners rather than individual owners.

@ Seamus/Joseph Ryan

cheers. Of that 312bn, 43bn is UK residential, and an unknown amount, but reasonably sizeable, is non-Irish corporate, SME and CRE. Total deleveraging required is around 75bn (i think closer to 85bn when non-rolled payments are included?), and most of this is UK, so this is the very starting point i would assume, ie 230bn. Don’t think you would stress the corporate loan book to the same extent as the property related stuff, so its not a blanket “20%” is it? And i’d assume its not a linear “property decrease of X = loss increase of X”?

Never ceases to amaze me how some people take pleasure in the pain of others. The same people who want to analyse everything in this country to death sic. The Allsop Auction prices are set based on the fact that Lenders are prepared to sell at rock bottom. We have around 74% home ownership in Ireland which is not as high as we always thought as in other jurisdictions. Most people are not sellers at present – in fact most are hangersoners because whatever about needing to sell there is in fact little or no mobility of employment/business within Ireland which generally is a big factor in moving house. We have not got a functioning Banking system which ultimately affects the prices paid for residential houses as in nearly every house transaction there can be up to 4 parties involved – the seller is buying another property from another party and the buyer is awaiting the completion of the sale of their property to another property. In England we were told that chains on each side were up to 3 parties per side in house transactions. The consequence is that “cash” is King and what we see at Allsops is a further abberation of the market based on a small sample not a reflection of what real prices would be in a reasonable market.

BTW I own my house and have had no loan on it for 7 years but I do feel the genuine pain of those who are under pressure enough without some people here and elsewhere dancing on their graves based on all sorts of spurious death wishes. Some on here should take the time to read some of the initial figures on housing in the 2011 Census from the CSO before making more comments. What would be more constructive from those here instead of wishing for argameddon is that the Minister for the Environment would get off his backside and set up a House Property Price Database Register next month which would provide real and factual data on housing price market trends.

@TRP

Some on here should take the time to read some of the initial figures on housing in the 2011 Census from the CSO before making more comments.

JTO again:

That is a very sensible suggestion. But, far too optimistic for Ireland, I am afraid, where the idea of letting facts intrude on the argument is frowned on.

Have you noticed how all discussion of the census results disappeared from the Irish media about 24 hours after they were published? The Irish Times did not have a single reference to them all last week. Messrs Browne and O’Toole failed to mention them in their columns last week, despite having spent the previous couple of years claiming there was a huge exodus. And David McWilliams’ normal columns failed to appear in the Sunday Business Post of Sundays July 3rd and July 10th, or in the Irish Independent of Wednesday July 7th, and his last entry on his website is for June 29th, the day before the census results were published. Looks like he’s done a runner to save himself the embarassment of having to comment on the census results, which contradict everything he has written in recent years. And likewise with Gurgdiev, who similarily has failed to mention them, while posting about virtually everything else in the 10 days or so since the census results came out.

Even worse, the Irish Times is still printing rubbish that was clearly planned before the census results came out. So, on Saturday morning, as a preview to the London v Waterford GAA football match in Ruislip, West London, the IT had an article (link below) about how the mass exodus of GAA players to London (the IT article called them Generation London) was turning London GAA into world-beaters.

http://www.irishtimes.com/newspaper/weekend/2011/0709/1224300373770.html

Naturally, not a scrap of statistical evidence was given to support it, and it is completely contradicted both by the Irish census results and by the UK ONS quarterly population figures (which show the number of Irish-born in England continuing to plummet). And what happens? London promptly lose by 1-17 to 0-13. I didn’t even know they played Gaelic football in Waterford. I thought it was a hurling county. Can’t be much of a GAA footballer exodus to London, if London go and lose by 7 points at home to Waterford. I can only imagine the slaughter that would have occurred in Ruislip, if London had been playing a real GAA footballing county, like Tyrone.

TRP is correct about the need to take the census results into consideration before pontificating on the housing market. The government should appoint a committee of experts to report on the implications for the housing market and future housing demand of the much greater growth in population and number of households that has occurred and is occurring, as compared with what was claimed (although not by me) to be occurring prior to 11am Thursday June 30th.

OMF you are quite right to presume that you could buy a 3 bed house by saving up for it.This will be the next phenomenan to hit Ireland.A couple earning say €32,000 each per annum could save €32,000 per annum for 2.5 years and purchase a house outright without a loan(Taking prices from the Allsop Auction).If this happens and there is no reason to doubt that it won’t then it spells the end for lending institutions who make their money largely from loaning money for mortgages.House property must be nearly the only item which traditionally increased in price over time. Practically everything else other than precious metals,stones and antiques decreased in value over time.This is largely as a result of a mindset which brainwashed the Irish over many years, encouraging them to “get on the property ladder before prices increase even further”.As David Mc Williams has often said high prices in Ireland has been predicated on the high cost of servicing ridiculously high mortgages(ie demands for higher wages was as a result mainly of having to pay high mortgages). If house property prices were to reduce to affordable prices as should be a citizens entitlement then all other costs would reduce and Ireland would become a competitive economy attracting both industry and tourism.

@seniorpropertyobserver

House property must be nearly the only item which traditionally increased in price over time.

JTO again:

Exactly which planet do you live on? Just recollecting from my own childhood and teenager experience:

In 1960, the admission price for the Down v Kerry All-Ireland final at Croke Park was 5 shillings (25p in decimal)

In 1963, the Irish Times cost threepence (1.25p in decimal)

In 1966, a bar of Cadbury’s Dairy Milk cost sixpence (2.5p in decimal)

In 1967, the boat/train fare from Belfast to London was under a pound

In 1968, entry to the National Ballroom in Parnell Square was 7s-6d (37.5p in decimal)

If you know anywhere that matches those prices today, do let me know.

It seems a little strange to take prices from an auction of property so poor it has ended up in this kind of auction and compare it to asking prices that may never have been paid (for the kind of properties in question) and extrapolate a figure for general decline.

I am no cheerleader for high property prices, they were insanely inflated by loose credit, particularly on the cost side through land price inflation, but also on the demand side through lack of control on mortgage credit.

Yet this market is almost as irrational as the boom. Banks can not lend, therefor no one can buy – no one can buy so the property based collateral and mortgage books of the banks become ever more distressed. And so banks can not lend.

You have an inverse ponsi scheme.

@SPO I live in a 120 year old building. If I had a 120 year old car in similar condition I expect it would have increased in value.

Zhu
If you had a 120 year old car in good condition, it of course would be a vintage car otherwise known as an antique and would naturally be valuable as I mentioned in my original blog.

JTO Would you say a mobile home well maintained for 50 years would be as valuable as a modern mobile home purchased today?Hardly.
I am just stating that the public have been brainwashed into expecting to pay high prices for houses.
Even the Govt. were forced into compelling builders to include so called “affordable housing “as part of their schemes.

@SPO,

One of the usual reasons for justifying the long term above inflation rise in house prices is not so much to do with the replacement cost because obsolescence comes into it, but more to do with Mark Twain’s attributed advice

“Buy land because they’re not making it any more”

No doubt property prices in Ireland will increase again the future. However for today the concerns are more short term. Are we at the bottom? How will prices change in the next six months? Year? Five years?

We suffer from a dreadful lack of price discovery in this country. Which is why the Allsop auction is swarmed over to see what clues it offers. We don’t have settled prices for late 2007 when Irishpropertywatch was started. So what Dreaded has done is compare asking prices in late 2007 with the prices we do know, those achieved last Thursday in what appeared to be an open and transparent auction. Most areas of Ireland peaked in early 2007 it seems according to the CSO, so you MIGHT conclude that in late 2007 asking prices might have been more realistic. Who knows. It’s an indication, and I think a good enough reason to ask if the stress tests for our banks are adequate or should they be re-run.

@SPO I agree with the general point that people were in Ireland and are in many other places convinced by the media and marketing to embrace unnecessarily high prices for property. (the ratio of house prices to real earnings in many Chinese cities is far worse than 2007 here). Though I would say that if prices do stabilise at 80% down there will be as little relation to the cost of construction as there was during the boom.

By if you exclude the cost of living stuff listed by JTO and accept that all good objects become “naturally valuable” antiques are you really left with many examples of things that have not consistently inflated.

“haven’t”

@ SPO

houses, if looked after, are long term durable goods, unlike the other things you mentioned like cars and computers. Thats why they increase in price, because they get the benefits of inflation but don’t have the same disadvantages of wear-and-tear that most consumer goods do. Technological changes i also less of an issue in housing (ie a house built 30 years ago isn’t all that different to a house built now), but you can’t really compare cars, computers or CD players from the 80’s with those made today.

The genius of “Dreaded Estate”‘s analysis is in bringing 21st century information management to an 18th century marketplace.

In the absence of a proper price database, Dreaded Estate created IrishPropertyWatch and now, with the continuing absence of a proper price database, has provided information which the marketplace requires but is being denied.

No one wants to use asking prices as a starting point – but in the continuing absence of anything else it’ll do for me!

Kudos!

@ dreaded estate
Do those studies take account of the money spent on the property in terms of renovation?
A house built in Dublin in 1900 will have had to have at least two full refurbishments done between then and now. The two refurbishments will probably cost almost as much as the initial build (with inflation) due to added difficulties (access, working with an exhisting building).

@all

Neat piece of property on College Green – some time back I suggested it as a possible HQ for the IMF – but they didn’t bite. No need for a fire-sale here …

Now that the corner back from North Kerry has come on board I, in company with Joe and Joan Citizen_serf – Blind Biddy – Patricia the Irish Sovereign_in_exile – Seven_of_9 & the unemployed turf-cutters cooperative, urge all to fully support Minister Denihan in evicting the board of BoI [4 of whose directors have been in situ since vichy_banking crisis – corporate governance how are ya!] from these premises – after all us Serfs now own 70% of it …… and we want this little corner of our heritage back …. who knows, it might be restored to its former glory in this island’s heritage …. I’m sure John The Optimist will agree.

Property prices are still nuts especially in Dublin. Some boxes in Ranelagh are asking 675,000 even at this stage of the collapse. Looks like our futurologist, Morgan Kelly is right on the money yet again when he called an 80% drop.

@ Karl Whelan

Thanks for the link. The economist ‘fall so far 2006 – 2011’ is only given as -35%, while the tenor of this thread is that Ireland is way beyond that now.

Over the last year I’ve found ‘Yields or Bust’ and ‘Brian Woods Snr’ pursuasive on this, and reckon, all other things allowed, a fall of about 75%.

On that link though, Spain is way over-valued by 39.2%. Does you think this may be the difference between crystalising bank losses up-front (Ire) and not (Spain), given relatively similar problems? Is there anything for economists to learn about handling the fall out from property bubbles here.

Another reason why the increase in house prices in Ireland (and, to a lesser extent, elsewhere) is far less of a bubble than some claim, is that both the quality and size of Irish houses have been increasing rapidly. These should both be factored in, when comparing the trend of house prices over time.

In the early 1970s, almost half of Irish houses had no indoor toilet – now they all have.

In the early 1970s, almost half of Irish houses had no fixed bath – now they all have.

In the early 70s, the average Irish house had 4.5 rooms – now it has 5.6 rooms.

These figures make the idea of using some sort of historic norm for the ratio of average house prices to average incomes deeply flawed. Of course, it is going to be higher now, because the average house now is so much better and bigger than in the 1970s. Obviously, this doesn’t acount for all the increase, and there is indeed a large inflationary component. But, the improved quality and increased size of houses in Ireland should be factored in as well.

@Michael Hennigan (in anticipation)

If you come on and post, as is your wont, that the above is wrong and that Irish houses have been getting smaller, I shall refer you for the umpteenth time to the CSO figures for average floor sizes of new Irish houses (link below)

http://www.cso.ie/releasespublications/documents/construction/2010/planperm_q42010.pdf

These are the figures the CSO give:

CSO figures for average floor size of new houses (square metres):

1993 125.8
1994 129.2
1995 129.2
1996 127.8
1997 138.7
1998 139.5
2001 149.2
2002 143.6
2003 147.1
2004 147.8
2005 149.1
2006 158.7
2007 163.9
2008 168.6
2009 171.3
2010 190.3

CSO figures for average floor size of new appartments (square metres):

1993 59.6
1994 61.4
1995 64.8
1996 68.7
1997 71.4
1998 69.5
2001 78.2
2002 77.9
2003 79.3
2004 76.7
2005 78.2
2006 81.1
2007 85.0
2008 85.4
2009 93.6
2010 91.5

I am certainly not suggesting that increasing size explains the whole, or even most, of the increase in house prices in Ireland between the early 1990s and the late middle 2000s, but it certainly should be factored into the calculations. If it was bars of chocolate that we were talking about, it would be elementary that this be done.

@ TRP
I dont think anyone is trying to dance on anyone’s grave.
The objective is to try to take a look at where we are and which direction property prices are likely to go.

You are right to say that immediately setting up a property price data base would help.

“The consequence is that “cash” is King and what we see at Allsops is a further abberation of the market based on a small sample not a reflection of what real prices would be in a reasonable market.”
But when do you expect to see a reasonable market?
And if by reasonable you mean a return to Banks offering more than 90% or 3 times yearly wage then reasonable is something we don’t need.
Also I am going to take a guess based on the tone of your comments which seemed quite emotive.
Do you have a close relative in negative equity?

You mention that the CSO figures should cause a rethink.
I have one point to make about the great news about our population growth and how that will affect house demand.

My instinct (could be totally wrong) is that one reason the extra demand you would think will materialise, may not actually is because I think we will see a reverse in the trend for decreasing persons per household. I think as we become a little less affluent the trends for low person per house holds will reverse. This could wipe out the benefit of the increase in population. Also demand will be affected by emigration.

D.O.C Do you actually believe that because credit is available(in abundance up to 2007)that developers,builders,vendors etc should be paid in accordance with the amount of money that can be borrowed?In other words if a lot of credit can be given by lending institutions it justifies paying exorbitant prices for property.Hardly.That’s why a fair price for something should be based on the amount of effort required to produce the funds to acquire it within reason.And thats why since 1959 a 3 bed semi (even without the indoor toilet!)could be purchased for around 2.5 times the national average industrial wage as was the case in 1973, up until 1996 and between 1996 and 2007 it became 8.5 times the national average industrial wage.So to reach the bottom they have to return to 2.5 times the national average industrial wage approx.
When both partners became employed a corresponding increase occurred in the price paid for property because with 2 people working a higher mortgage could be paid.And as we now see it really could’nt be afforded as such loans should only have been advanced on the basis of one income and if this had transpired house property would never have reached the ridiculous prices that they did at the height of the bubble.

@seniorpropertyobserver: I fear that time has dimmed your memories of the difficulties in getting on the property ladder.

The Department of Environment website contains a nice data base of new house prices (admittedly not mix adjusted) and average industrial earnings between 1970 and 2010. This demonstrates that house prices were 7.4 times average earnings in 1970, they fell to 4.0 times average earnings in 1983 but never fell below that during the 30 years of the data series. Prices rose to a high of 10.2 times average earnings in 2006/07 and have been on the slide ever since. If someone advises me how to do so, I’ll post a copy of a graph summarising the data.

Anyway my point is the view that (at least since the invention and widespread availability of mortgages) that average house prices 2.5 times average incomes is fiction. The proportion of households living in rented accommodation was almost twice as high in the early 1970s as it is now. Why? Because people couldn’t afford to buy.

@Eamonn Moran

No I am not concerned in particular about close relatives/friends in negative equity although I do know of many people in that situation particularly those that bought after 2005. I understand their pain. I am concerned that such a hysteria has now been created that lots of young people are not interested in owning a home. They have this belief that a home can soon be bought for a song if you wait long enough based on the meanderings of St Morgan and others ,but, that belief has an opposite person who needs to feel secure in the home they have bought be it 5,10 or 15 years ago as being something worthwhile and essentially very sensible so as not to feel when you reach nearer to old age to realise that you still owe a rent each week/month and may not have security of tenure if you cannot pay that rent. The present market is not a reasonable market when this hysteria is pervasive.

As regards multiples of income etc this is all balderdash at present because the Bankers have found multiple ways of saying No to borrowers not because they cannot afford the property but because the Banks do not want to lend – full stop. The people now inhabiting these institutions are the ones that doled out the money so freely but now want to see themselves as squeaky clean when it comes to new lending. I have come across cases turned down by the Banks on the most spurious excuses which would not be tolerated 20 years ago. This is not a reasonable market.

The recent CSO Census 2011 figures show not only the numbers in the country at it’s highest in decades but a new level of increase in the number of households presumably because of changed mores and culture with more cohabiting persons. I see no evidence of the young ones returning home to Mammy. The number of inhabited houses increased from 1.503 million in 2006 to 1.710 million in 2011 a 13.8% increase. The Census also shows that taking Dublin for example that the number of vacant housing units had dropped to 8.6% from 9.7% in a period when there was an extra 52,000 units in Dublin since 2006. There is without doubt a demand for housing but if hysteria continues to be manufactured about house prices and the Irish Banks are allowed by the Government that owns them to spurn those that want loans to buy them then that is not a reasonable market.

@JTO

St Morgan is giving a Public Lecture at the Kilkenny Arts Festival in St Canice’s Cathedral Kilkenny on saturday 6 august @ 6pm. The tickets are pricey but then genius never comes cheap !!!

St Morgan!!!

Please give the man his proper title/s. He has earned them.

He was a tad wrong (he has underestimated the decline) with his prediction (of should that probabilistic opinion) of res property decline. It will be in range of -70% -> -90%, depending on nature of property and of course, the location. I suggest interested parties should research property prices in daily newspapers published from mid-1980s up to mid-1990s for enlightenment.

If there are many ‘forced sales’, who will be doing the buying? Cash customers? The current res property market is a – non-market!

Brian Snr.

And the commercial property market looks to be in equally poor shape.

http://namawinelake.wordpress.com/2011/07/12/shock-5-7-decline-in-irish-commercial-property-prices-in-q2-2011-nama-now-carrying-a-e5bn-paper-loss/

MH You are quite right even in the early 60’s you could not speculate with the Banks money.Banks in those days only lent for “productive purposes”.Are we returning to that?Selling houses to one another at ever increasing prices is now seen as a folly.The solution lies in investments in such things as Renewable Energy,Road,rail and infrastructure projects which will give employment and provide long term benefits for the country.To have house property available at reasonable cost as heretofore can only but enhance available finance in a household where there is money left over for other purchases after paying the mortgage.