Property Markets and Financial Stability

In August, the RBA and BIS co-organised a conference on this topic, which featured some interesting papers – downloads are here.

14 replies on “Property Markets and Financial Stability”

FYI Just off IMF Press

IMF Survey: Global House Prices Still Showing Down Trend U.S. house prices have started to pick up but globally prices are still on a down trend, according to IMF research. Price trends vary widely between countries, with Ireland, Greece, Portugal, and Spain seeing the biggest falls in the past year and Brazil and Germany, substantial increases.

@PL: Thanks for the link. Will take some time to study those papers.

@: DO’D: US residential property is up s**t creek and values and prices are being ‘goosed’ in front of the presidential election. QEx have failed. So the hope is that the latest QE will be a success (of the failing kind!)

As one of the contributors to this blog regularly reminds us – residential property values are what the lending institutions dictate, not what the properties are actually worth in terms of long-run yield.

Based on 2007 valuations my home had a yield of 0.007. That’s NOT a misprint! If I use 0.07 (and same putative rental income) the current valuation is 10 times less! That’s some drop! And dopey critters are still buying in this area (S Dublin) for yields of around 0.025.

What yield value am I to use to calculate my ‘household charge’? This will be interesting.

@Brian Woods Snr

“What yield value am I to use to calculate my ‘household charge’? This will be interesting.”

I’m certainly expecting to see some interesting arguments between householders and the Revenue about what the real value of their house is….. mine included. It’s one thing to say they have ‘statistics’ that show the % drop in prices since the so-called peak and another to find what a buyer will actually pay in the open market for your house (the true value/worth as far as I’m concerned). Nobody (afaik) has a clue about what the real value of a house is today until they come to try and sell it…. and then they usually receive a shock.

I reckon the reality is that we are already at the point where houses are worth less than 40% of what they were being put up for sale at in 2007/8 if you actually sell it on the open market today.

Anecdotal I know but houses in my street were apparently being sold for over 400k in 2007 and there’s one for sale up the road today that’s had two offers – both well below 150k. He’s changed jobs but can’t afford to sell at that price so now he’s being landed with mortgage payments and big commute costs. Oddly enough though, he reckons the council will pay him a grand a month to let it out to people on their waiting lists – not sure of the accuracy of that claim.

Spain is heading the same way – 60% or more drop in values. How big a bank bailout did they ask for?? 😉

@ PR Guy: Yeah, this turkey (Irish res property) is well-and-truely stuffed and cooked.

I was asked recently to value a 2xbed apartment (in a well sought-after S Dublin complex). I used the 0.07 yield metric and the known 10X monthly rental (since the annual services charges are almost 2 times monthly rental) and came up with 172,000. The owner nearly had a cardiac arrest – until this was confirmed by the local letting agent who said he had buyers at that price. One very pissed-off owner (paid 325,000 in 2005): was expecting 300,000!

Where’s Morgan Kelly when you need him?

In Ireland the interface between private property and the public sector is where much political corruption occurs. Two examples are the planning process and state commercial leases. The findings of the Mahon Tribunal were–”Corruption in Irish political life was both systemic and endemic”. In the Moriarty Tribunal the findings were ” What was attempted on the part of Mr Dunne and Mr Lowry was profoundly corrupt to a degree that was nothing short of breathtaking”

Former Taoiseach Mr Charles Haughey was acknowledged as being a corrupt politician. Many of Mr Haughey’s bagmen were state landlords–this was the pay back. Many Irish politicians families ,friends and donors are state landlords. This is institutionalised political corruption. No other government in the world would ever sign these ruinous commercial leases.The Irish commercial property market is an organised criminal cartel who have imposed the most anti-tenant commercial lease law in the world on all Irish commercial tenants i.e. ratchet upward-only rent reviews tied to long leases. The rent arbitration process is systemically corrupt with the use of secret agreements,side agreements and other chicanery widespread. We are alone in the eurozone with this feudal commercial lease law. Reckless Irish banks lent tens of billions against these ruinous leases,not against the properties, and created the greatest commercial property bubble and crash in the history of mankind,courtesy of an organised white collar criminal cartel.

John Corcoran*

Irish Commercial Tenants Association

*John is a distinguished postgraduate of the London School of Economics and Political Science and was awarded the degree Master of Science in Economics in 1978. While at the LSE he studied under Professor of Economics Basil Yamey and Professor of Accounting and Finance Will Baxter. Professor Yamey was a member of the UK’s Mergers and Monopolies Commisssion and an authority on monopolies and cartels. Professor Baxter was a world authority on inflation accounting and valuations and developed the concept of “deprival value”.

@Brian Woods Snr

Based on available transaction details the average house in D4 & D6 were selling at net rental yields i.e. 11 months rent (a month deducted to account for upkeep, voids etc) divided by the price of the house, in the first half of 2006 at less than 1%. (Holy Mother of Divine!!). I’ve stated here before that this was a truly unbelievable position for any asset investment particularly a risky asset class financed in 95% of transactions by 3rd party lenders. For those not capable of computing this represents a p/e of about 100 times net rental earnings. That is also not a mis print.

Now the average over the entire country at the peak of the market in net yield terms was c2.9% or if you like a p/e of c33x times. Unfortunately the story gets worse. The effect of crazy over supply on the market since the peak (and a whole pile of other factors) has seen average rents fall by about 25% from peak levels – so equating today’s rents with peak prices would have house prices selling at an average of 46x times today’s rents. All known evidence suggests those banks and their financiers lending in the volume that they did and at such multiples deserve to go bust. Just to note the average long term p/e in the RoI since records began was about 14x times rental income i.e. about 7% net yield, this is ex the bubble years (from 2001 to 2007).

What we do know from years of market evidence is that asset prices tend to mean revert around their long run p/e/ average. The normal tendency in asset markets however is for prices to dip below their long run average and my estimate is that when the dust settles here we will see average yields eventually push out to about 9% and then begin the process to revert back to 7%.

If (or more correctly – When) prices fall to generate average yields of 9% this will see peak to through falls on the average house at about 75%. In D4 and D6 it will be about 85% peak to trough falls. Not pleasant.

Pricing, in a leverage driven market, is not driven by the market participants i.e. the consumers, its driven by the providers of the leverage i.e. the banks. So comments as I’ve seen above, in normal housing markets that a house is worth what someone is willing to pay for it is in fact complete bull. It’s noting of the sort. In a normal housing market (where 95% of transactions are mortgage financed) a house is in fact only worth the extent to which a bank is willing to lend against it. Plain and simple.

This basic point is not to my mind correctly appreciated and the enclosed papers again don’t actually get under this basic fact in housing markets i.e. the ‘market’ price is not a real price in the normal sense of the word because under normal house market conditions the amount of leverage in the system drives the price, not the fundamental value. Most commentary (including the enclosed) is presented on the basis that the price in the market is set independent of the available leverage. It is not. The available leverage drives prices :- as explained above the ‘price’ and the fundamental ‘value’ can diverge drastically with dire consequences as we all now only too well. This is a crucial point.

In a two bank market. House for sale at a price of 300k (price estimated by owner/estate agent using their best guess). Bank 1 looks at the houses in the area and estimates that based on long run yields and current cash rents being paid the true value of the house is in fact 200k. Bank 2 forms a similar view. Where does the price go?

I’d suggest that given the fact that most market participants don’t have 300k cash to hand and require to borrow to buy the banks will (or more correctly should) set a LTV not on the 300k ‘V’ but on the 200k ‘V’ i.e. the fundamental value given the cash flows being generated by similar houses. The max lend will by based on a value of 200k and in time with no other lenders in the market the price will be adjusted to reflect the available leverage i.e. the providers of the leverage will in fact determine the price in the marketplace.

This is basic stuff, but sadly this is not what happened in the years in question where the available credit increased beyond reason and house prices in unison.

Trying to now proceed along the lines as proposed in the PIB in bankrupting the consumers for a basic banking asset mis pricing error is both morally and intellectual corrupt. It also shows how utterly bereft in problem solving ideas the powers that be are and importantly how completely captured they continue to be by the banksters spin. What a joke.


Don’t forget, that leverage, while being at the discretion of the banks is based on salary. We know the salaries of the next generation of civil servants ( the handfull being employed) will be 20% less (eg teachers). We also know being unemployed for long periods is a ‘drag’ on earning power. Then of course immigration isn’t exactly great for the housing market. Finally how about those who can afford credit, won’t a lot think twice after having a chat to their older sibling/neighbor/friend/colleague about the impact of negative equity on lifestyle, ie isn’t it natural for a fear of credit to develop considering the devastation the credit binge has caused so far?

From the ‘Taming the Real Estate Beast’ paper…

‘Our results show that decreases in the allowable loan-to-value ratios are associated with slowing house price growth. Similarly, limiting debt-service-to-income ratios and increasing loan loss provisioning requirements attenuate housing credit growth. Higher short-term interest rates also moderate house price and hous- ing credit growth to some extent. Taken together, our results suggest that macroprudential policies can be effective tools for stabilizing house price and credit cycles’

Correct me if I’m wrong but did we not have complete control over 2 of the 3 tools above during the ‘boom’. Yet neither were exercised as the boom got ‘boomier’.

@ YoB: That response was great. I’ll print and re-read so I get the full import. Thanks, again!

@ YoB: That response was great. I’ll print and re-read so I get the full import.

A family friend is very anxious for her son to purchase an apartment (320,000). I am having a difficult job attempting to explain the madness of this. The est. yield is 0.025*. If the est. yield were 0.07, price should be 215,000. Its still too much. Your comments may help – I hope!

Thanks, again!

* I am using 10 as the rental multiplier. I am thinking of the likely (depressive) effect of the proposed property charge. Is this correct?


An asking price of 320k and yielding 2.5% suggests an annual rent roll of 8k gross and c7.3k net. Using a 10x multiplier would suggest a fundamental price of c€73,000.

As indicated above depending on the location I still see yields getting to c9% gross which would suggest a price in the region of €90k on a gross yield and c€82.5k on a net.

Either way a price of 320k for an asset delievering c8k before taxes etc is completely bananas.

Given the market outlook I wouldn’t be paying a cent over €80k particularly for an apartment.

I see that German debt aversion is being attributed to Goethe’s work Faust in FT.

I have never heard the word debt being associated with Goethe in Germany. I have heard hundreds of the times about the hyperinflation of the Weimar era associated with the Papiermark and the widespread poverty that was unleashed when the Rentenmark was introduced. There is a lesson there for us as things are likely to get worse when we transition from borrowing to paying back the loans. The Weimar hyperinflation left deep scars in the German psyche similar to the famines of the nineteenth century in Ireland.

I find the German proverb “Borgen macht sorgen” roughly, literally “Borrowing makes worries”. Translations of this simple phrase abound because it has deep meaning to Germans. Some are “Neither a borrower nor a lender be (Shkspr)”, “To lend is to lose a friend”, “Better buy than borrow” .

Property markets bubble as the cost of money becomes negligible (close to or below inflation), this is happening in Germany and Austria now and it will be interesting to see how their Gov’ts react. The Canadian Gov’t has stepped in three times in the past two years to cool the property market. They have succeeded by putting a low ceiling on mortgage insurance to ensure that the banks absorb the losses and not the taxpayers. In the hottest market (Vancouver) prices have dropped by 16% quarter to quarter with prices nationally down 8%. Ireland’s property prices will show no buoyancy for a number of years since the cost of money is at historic lows and will increase worldwide while Ireland has the albatross of debt around its neck.

Our only hope is robust inflation.

@ YoB: Much obliged. I am learning something new each day!

I was perusing the IT Property Supplement this am. The asking prices are phantastic! The Pump-a-Tron has been put on supercharge! Its delicious!

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