Why are Irish house prices still falling?

Really sad that the money supply must be tied to banks favourite extraction mechanism.
If the state was divorced from these assets (became a national economy again) it would not care what price these “assets” reached.
In the case of Japan I beleive they introduced new base money into the system for public work projects and the like.
While many of these were corrupt Turkeys or roads to nowhere they were far better investments (see Richard Koo) then the consumption sinks known as houses who in many cases have a higher input cost then their rental yield i.e. they have a negative value.

If you want to save a Town such as Youghal you spend new base money on something rational in a +100 $ world.
Otherwise the place rots into the ground.
http://www.youtube.com/watch?v=qjBWEOrWRMw

You also add base tokens to peoples checking accounts and tax waste (think rising home fuel oil tax to road diesel prices)

We need to get back to a Fiat currency….. this will create a far more rational national economy where you issue and tax as opposed becoming bagmen for serial credit hyperinflationists of the Lawson variety.
The problem now is we don’t have a rational economy – its merely a conduit for fluid international capital flows.
This unfortunetly means that rationality is not factored into the economic equations.
Although you could argue this is very rational from a criminal perspective.

@PR Guy: You are being most charitable.

Its mathematical poofery. Irish residential properties increased (in aggregate) 325% – if you believe the data. And it would be hard to refute it.

That’s a bubble in anyone’s understanding, so a correction will occur. But for how long, and for how far (down). The answers are in the realm of astrology. But a few pointers are available.

Housing bubble corrections retrace for about x 1.5 times the time it took for the bubble to form. Lets be generous and say that was from 2002 until 2007 (actually it was from 1995 until 2007 with a two year pause). So, that’s a 7.5 year downturn-time, minimum. We have done (I am being generous again) 5.5 years. So, a bit to go yet. My money is on 2015 – absent a significant energy shock.

The timing of this? Do I need to consult my millner about some metallic foil headgear.? If it were fashioned from tin, it would be a tad expensive. Tin is a truely beautiful, wonderful metal. Aluminium by contrast, is brash and nasty. But I’m poor! 😎

However. Terms and Conditions apply, as they say. We had the Mother and Father of a credit boom. This produces a lot of debt. And we have a nasty predicament with this debt. Unless it clears, no property recovery – except in the fevered imaginations of student statisticians, who steadfastly belive in the construct of The Meaningless Mean. [With sincerest apologies to the late Mr Gosset.]

I hope this report gets the shredding it deserves.

It is hard to gauge how much prices have really fallen because most properties cannot be sold given the limited supply of buyers with cash piles.

However, I have recently come across properties selling for more than their asking price and have heard anecdotes of others being hard to buy.

Accordingly, I don’t think prices are falling. We appear to be bouncing along the bottom in a lumpy market. (Note – “lumpy” is a current favourite with lingo lovers.)

With that said, further falls cannot be ruled out as the property tax situation evolves.

The authors should put the estimation results for the four pricing models on an accessible file somewhere. It is impossible to get the full picture from this CBI paper/note without the model specifications and model estimation details. Describing the current-period model residuals without showing the model specifications and sample-period estimation results is too limiting.

I can’t believe we will see either supply (of mortgages) or demand (from purchasers) until we see evidence of sustained and real economic growth and unemployment steadily declining in Ireland. If we ever get that (seriously – I’m still thinking the West might be finished), it’s going to be a long time coming.

It’s already clear that what was once 400k (at peak) is still not attracting buyers at 150k (I’m thinking of some specific 2-bed houses/cases I know). When people on 30-40k p.a. can afford modest 2 or 3-bed houses at 3 x salary, maybe that will be bottom? It doesn’t seem a ridiculous aspiration in a society that hasn’t gone out of control.

Lots written about detroitification, sad plight of Detroit as in this video, Detroit used to be very prosperous.

http://www.youtube.com/watch?v=T6WKMNmFsxM&feature=fvst

Agree ‘overshot’ is a misnomer, if only jobs are part time jobs or no jobs, and no property buyers because employment has gone elsewhere, property prices do not have a floor, think of abandoned mansions?

It’s difficult to understand how the authors of this report can reach the conclusion that house prices in Ireland are below fundamental value. Based on almost any reasonable measure, house prices in Ireland are not particularly low.

Actually, I would have thought that the continuing high property prices in Ireland are a testament to the extraordinary amount of taxpayers’ money the government is willing to spend propping up prices through NAMA and the banks’ policy of refusing to repossess property almost regardless of how bad the loan.

I don’t agree that the property market has no floor until the economy improves or the backlog of empty properties is sold. The government is willing to spend an almost unlimited sum on keeping property off the market and by making sure that those with big property losses are under no pressure to sell.

Given the low supply of property available at a market clearing price we can expect that the market will reach an equilibrium price that is far higher than might happen in a free market. In fact, we’re seeing this already in Dublin where the shortage of family homes has already caused prices to stabilise at a level that is high for the average citizen.

Property of all sorts is being sold for less than the cost of rebuilding.

Building materials are not dropping in price, if anything they are rising due to increased energy costs and demand elsewhere for raw materials.

Petroleum products are steadily marching upwards. Tractor oil that cost 68 euro two weeks ago cost 71 euro today. Trivial but it has had at least four price rises over the past year to my recall.

I think they should call a halt to this scrapping of NIR class 450s DMUs, at least until we see where we are going with this oil thingy. (they are not that old really -1985ish)
We have continual declines of our CIE Bus fleet and now this…. put them in storage for a year please.
We might feel the need to use them down south next year when we are using Punts again.

One of the key questions from the point of view of employment, is have the cost of houses fallen below the current cost of building the house, even with a zero value assigned to the site. I suspect prices have fallen below the current cost of building and therefore the prospects of any upturn from an employment point of view are non-existant.

IMHO, apart from a feel good or a fell bad wealth indicator, the concentration on how far house prices have fallen is somewhat misplaced in terms of a future effect on employment.
There is still a hankering back to the misconceived notion that the price at which we sell houses to each other is a significant indicator of our economic wealth or of our economic prospects.

We only have housing bubble data going back to the 70s because before that a high proportion of the money supply existed as cash. It’s the digitization of money which has allowed such bubbles.

It’s important to note that mortgages repayments have hit the natural limit of taking two concurrent careers to repay. So all bets are off regarding what might happen to house prices.

We could reduce the effects of asset bubbles by allowing Central Banks to carefully create a debt free source of digital money for their Governments.

Like Gregory Connor id like to see the econometric models behind these figures but just a few points.

I think the models are dependent on income levels and interest rates as the main determinants of house prices. This may explain the results as interest rates have stayed very low. One thing that struck me as odd is that according to the diagram 2 of the models claimed that house prices were undervalued in 2003 which i find it difficult to accept.

On the rent to house prices model it seems that if you look at the figures one way then house prices are still overvalued.

But id like to see the econometric models which arrived at the results. Might be interesting to compare the models with the ESRI and Bacon econometric models to see what they would arrive at.

How about a Paper on how to stop Irelands property obsession.

We’d need a section on ending bubbles, increasing tenants rights and ending subsidies.

I suggest we also inform people that avoiding ownership does not mean they’ll:

1. End up in a famine pit.
2. End up homeless. (rent/social housing are alternatives)
3. Go to hell.
4. Be hated by their children.
5. Be poor.

http://www.independent.ie/opinion/letters/bubble-values-3034584.html

Celebrating the Work of an Accounting Great: Professor W.T. Baxter A Symposium was held at LSE on Saturday 15 July 2006 to celebrate the work of Professor W.T. Baxter, CA, Emeritus Professor of Accounting at LSE. Professor Baxter, the first full-time Professor of Accounting in Great Britain, sadly died on 8 June 2006, just short of his 100th birthday. He was a highly respected and greatly loved teacher, colleague and friend, and the Symposium was a fitting tribute to his achievements as an academic and as an individual. Around 100 former students, colleagues, and members of Professor Baxter’s family spent the day listening to presentations by academics and practitioners, who celebrated his significant contributions to accounting theory in areas such as deprival value and the measurement standards applied to accounting, which have led to current developments in accounting standards.

The Symposium opened with a keynote address by Professor Christopher Napier (University of Southampton) who provided an engaging insight into the ‘History of Accounting at LSE’ over the last hundred years. Professor Baxter’s contribution to the School and the development of accounting as a discipline was situated in the context of the School’s emerging focus on economic approaches to analysing business issues. Professor Baxter was central to developing undergraduate and postgraduate teaching in this newly-emerging academic discipline that recognised the business needs of the profession, but provided students with a rigorous and theoretically sound basis for understanding how businesses work. This is a tradition that continues at LSE today, with the Department of Accounting focusing on providing the intellectual training and theoretical understanding of accounting as a discipline, leaving the professional accounting firms to train graduates on the practical, number-crunching exercises that form part of a young accountant’s daily life.

Following Professor Napier’s keynote address, the first session of the Symposium focused on Professor Baxter’s theory of deprival value. The practitioner perspective on this concept was provided by Sir Ian Byatt (Past Director General of the Office of Water Services) and Peter Holgate (Senior Technical Partner, PricewaterhouseCoopers). Sir Ian illustrated its use in nationalised and privatised utilities in the UK, and showed how it was critical to setting an initial regulatory capital value. Peter Holgate examined deprival value and its use in current cost accounting and the setting of accounting standards. Professor Michael Bromwich (LSE) then gave an academic view of deprival value, its relationship to other prominent academic accounting theories of current value, and the importance of this concept to the Sandilands Committee and the Accounting Standards Committee.

The afternoon session examined the research importance of Professor Baxter’s work, looking at how it had been used in the past, and its relevance today. Professor Shyam Sunder (Yale University and President of the American Accounting Association) looked at Professor Baxter’s contribution to the accounting standards debate, and discussed how Professor Baxter was one of the first academics to recognise and articulate the negative consequences of authoritative measurement standards on the accounting profession. Dr Joanne Horton (LSE) described how the concepts of deprival value are still central to the teaching of financial reporting by pointing to the relevance of this work to standard setters obsessed with ‘fair value’. The session concluded with a presentation by Professor Ken Peasnell (Lancaster University) who examined where deprival value is today and its role in contemporary financial reporting and potentially again in inflation accounting. Professor Richard Macve (LSE) gave the concluding overview.

Leading figures from both sides of the Atlantic gave oral reminiscences of working with Will. One of the highlights of the day was a presentation made to Mrs Leena Baxter by Emeritus Professor of Economics, Basil Yamey, one of Will’s oldest colleagues and friends, who he met in South Africa, and who subsequently became an LSE colleague. Mrs Baxter was presented with a bound book of reminiscences, contributed by people who were Will’s students, colleagues and friends. The reminiscences showed the warmth with which former students remembered their teacher and the respect in which he was held by his students and former colleagues. The second highlight was the informal reminiscences provided by a number of alumni during the lunchtime reception. The memories shared by these former students reminded all of the participants of Will Baxter’s unique nature, his sense of humour and his keen intellectual engagement with accounting history, theory and practice.

The Symposium was jointly and generously sponsored by LSE, the British Accounting Association, the Institute of Chartered Accountants in England and Wales, and the Institute of Chartered Accountants of Scotland (where Professor Baxter trained as a Chartered Accountant).

The intellectual contributions of the day have now been collected and edited by Professor Pauline Weetman (Strathclyde University) and will appear in the September 2007 edition of Accounting and Business Research (Vol. 37, No. 2) under the title ‘Comments on deprival value and standard setting in measurement: from a symposium to celebrate the work of Professor William T. Baxter’.

I was fortunate in the 1970’s to study under Professor Will Baxter and Professor Basil Yamey at the LSE and was honoured to attend the above symposium.
Professor Baxter spent all his long life trying to develop theories of asset valuations and developed the concept of deprival value.

Professor Basil Yamey was an expert on the economics of industry and was a member of the UK Monoplies and Mergers Commission. He lectured on cartels, monopolies, etc etc.

The Irish commercial property merket is an organised cartel. This will be proved in the Irish courts very soon.

It’s very sad with all the Irish Professors of Economics none were capable of noticing the greatest property bubble in the history of mankind or the commercial property cartel

Your six year old could have spotted both.

@All

Folks, I’ve read the paper from the CBI and those of you who have been reading posts of this nature over the past number of years will recognise that the CBI have a dismal record in forecasting anything, let alone an asset class which they had to employ 3rd party external consultants to assess for them last year. And the small matter of paying €30m for that advice. Lets not go there.

One of the better critiques of where the Irish property markets is headed was provided by Cormac Lucy back in January –

http://cormaclucey.blogspot.com/2012/01/prospects-for-irish-residential.htm

on a previous post I copied in the link – quite obviously the CBI didn’t review same because on almost all topics their view is at variance with Cormac Lucys except for one. And that one has been something of an obsession of mine for a long long time and thats mainly the importance of rental yield analysis in property valuation. In its lastest paper the CBI specifically notes:

.”..If, on the other hand, one regards the
relationship between 1982 and 1995 as being more
reflective of what the long run relationship between
rents and house prices should be, then house prices
still have some way to fall.

Notwithstanding the implications of the rent
price analysis, the empirical evidence, in general,
would appear to suggest that Irish house prices
have fallen by more than what they should have
over the past couple of years…”

Now allow me to tell you a story. I wrote to the CBI following the publication of their PCAR document and suggested their house price falls estimate made absolutely no sense at any level but importantly at the rental yield level. If one was to follow their logic their adverse house price fall assumption would have seen net rental yields bottom at about 5% (in fact marginally below but we’ll use 5% as a close yardstick). No response. In fact after about the 7th time of asking they finally wrote to me and suggested that using a yield analysis was not their preferred methodology and pretty much dismissed what I had set out in detail to them.

Move on c1 year to today. Its very clear to me that the CBI simply don’t get this. The quote from the paper above is indicative of a form of arrogance of those who believe they know better than the rest of us. They don’t. The simple truth is that the CBI have bought into the ‘location, location, location’ property industry spin and dismiss the fundamentals of any asset class valuation in order to give the air of the all seeing guru where they seek to pick the model that fits their view of the world. This is nonsense. The fact is they have been proven to have paid for advice and can’t now logically be seen to put the hands up and say it as it is – ‘we was wrong’.

Instead they have the nerve to produce this claptrap and dismiss the fundamentals on the ground.

The most important number that’s produced in the Irish property market comes from the Daft.ie survey of rentals every quarter. The latest quarterly average asking gross rental yield number for Dec 2011 was 5.1%. Netting this back using the long term standard metrics and those recently provided to us by Ronan Lyons in adjusting from asking to contracted numbes on Daft (7% discount) suggested that at the end of Dec 2011 the average net yield in the Daft survey was 4.35% (5.1%*11/12*93%) which equates roughly to an asset trading at about a p/e of 23 times its most recent earnings. This is far from cheap or indeed ‘undervalued’ as the CBI would have you believe.

Data produced by Credit Suisse and the LSE suggests that the historical review of Irish asset returns over the past 100 years or so would lead one to the conclusion that the average long run equity premium for assets defined as ‘risky’ has Ireland throwing off a premium of 4.5% over and above risk free equivalents.

At the end of Dec the net property returns in Ireland per Daft were less than the premium required forgetting at all about the additional risk free returns. One could argue as to what now constitutes a ‘risk free return’ but even assuming it somewhere between Germany, France, Finland, Luxembourg etc one would work on the basis of at least 2% (forgetting inflationary effects). So here we have it, Irish data analysed by Credit Suisse and the LSE suggesting that ‘risky’ assset classes have exhibited returns of at least 6.5% (notwithstanding the property over supply issues in the RoI or the lack of credit or the lack of confidence or the liquidity issues) for the best part of 100 years and the CBI are suggesting that yields at about 4.35% are now about 25% undervalued i.e. net yields should really be 3.26% i.e. fair value in their world is an asset valued at 31x current earnings. I’m sorry folks but this is lunacy.

@ gregory

is the answer to the problem of smoothing out for the bubble to include dummy variables to account for shock/irrational periods? i suppose if such periods are the norm you have a problem….there is no question that normalised bubble periods which arguably make up a large portion of the data is going to generate biased upward results….but is this not all a case of the CB doing the bidding of Nama in much the same way a broker pushes stock he has a vested interest in?

@V Barret — The same dummy-variable approach occurred to me so I went ahead and stuck a bubble period dummy into the estimation code and re-ran their RATS program – adding this dummy lowers the end of sample mispricing a bit giving 10-15% underpricing instead of 10-26% underpricing. So it does not change the sign just narrows the range of findings across the models. The model uses log prices and the bubble dummy explains about 20% overpricing during the bubble period 2002-2007.

@Ahura Mazda — They use four standard macro-type property price models estimated with monthly frequency log-linear regressions, using affordability, demographic, interest rate variables as explanatory variables. See the CBI note.

@ Gregory Connor,

I hope my previous comment didn’t appear rude. My abrupt series of questions reflects more my stream of consciousness than anything else.

I’m boxing in the dark a little as I don’t have the data, but I’d note the following:
1. Their models attempt to predict market prices not a fundamental price.
2. FIG4 suggests the models are too sensitive to short term variations to be considered as predicting a long term value.
3. Removal of outliers – in this case I’d argue removing 1998 + data. It’s a whole chunk, but it would be interesting to see the outcome. If you consider rental price from 2000 to 2008, it would appear to have little value in predicting house prices. You’d probably get an inverse relationship between rent and property prices between 2009 to 2012. Though intuitively, there should be a positive correlation.

I won’t address the variables being used as I don’t know their exact nature. Regarding a dummy variable, is this a constant value?

The surveyors red book may have to be revisited. My suspicion is, I havn’t yet proof, but the society of chartered surveyors, the property professionals, may be an organised cult,who are totally brainwashed and highly dangerous.

Perhaps some of their spokespeople might like to comment.

@grumpy

“..Where Property fits into the bond, pref, equity spectrum is never really certain and in 2006 or so Irish property was almost being rated as high-tech start-up companies. It was ridiculous…”

Fair point and you are correct there is no definitive box you can place property into in terms of valuation methodology – however there are a few known knowns such as its a risky asset (just ask the banks) , has a tendency to mean revert over time in terms of relative valuation to its long run trend but most importantly and nearly always considered an after thought for the most part its a credit dependant asset class. In that regards its almost unique.

Being a credit dependant assest class changes life a great deal. The riskometer moves up many notches which in fact places it further out the risk spectrum (for most owners) than its close cousin the humble equity which is normally bought for cash (options/cfds/spread betting/derivatives etc aside). The risk premium to which I refered above relates to equities not property. Given the added credit risk any risk premium, all other things being equal, should on a fundamental basis be higher – further negating what the CBI have suggested is an over sold asset class.

@ grumpy and ahura.

Iv a paper from 2003 outlining the various models and variables to determine fundamental house prices. Im having a bit of difficulty putting it up here but theres a copy of it on the Irish Mortgage Brokers website.

Its in the historical blog there dated 4th august 2010

@ Grumpy,

Re ‘Are you observing the fact that rents have stabilised / gone up a bit while prices still fell?’ Yes. If you were to chart avg. house price to avg. rent over the last 30yr, my guess is you would see three patterns 1. up to late1990s/2000 a positive correlation (i.e. prices tending to increase in tandem) 2. 1990s/2000 to peak little/no correlation 3. Post peak a negative correlation. I’m just observing that the regression model is run over this whole period where we’ve some odds trends.

Re your second point: I’m saying the CB models are predicting historical market prices using a series of variables. I don’t think this is the same as a fundamental price. Although a slight tangent, we should bear in mind that only 30ish% of properties have mortgages and only a small portion of housing stock is for sale at any point in time so it is worth questioning how national level variables relate to the population of buyers. Then we need to consider soft issues which are not captured by data – people on deckchairs queuing to buy off plan (maybe we need to use a poisson – bet you weren’t expecting stats humour :D). Though ‘soft’ factors might help explain historical prices, I’d argue they shouldn’t alter fundamental price.

Also, one unfortunate aspect of the CB models is that they seem to be backward looking. We know that there is a huge whole in the state coffers to be filled, emigration and a backlog of foreclosures to work through etc. From what I can tell these aren’t addressed in the CB model.

@ Gregory,

Is it fair to say that the dummy variable will be constant each year (2002-2007)? It’s explanatory power is limited by forcing it to have the same effect in each of these years. You could create a dummy for each year, but that’s going in to spurious territory.

@ Frank Quinn,

Do you have a link?

BTW there are default models that penalise mortgages originated via intermediaries 😉