House prices: bubbles versus booms

The end of one quarter and the start of another sees the usual slew of economic reports and the start of Q4 is no exception. Today sees the launch of the Q3 Report. In line with other reports in the last week or so, and indeed with the last few Reports, there is evidence of strong price rises in certain Dublin segments. What is new this quarter is the clarity of the divide between Dublin and elsewhere: all six Dublin regions analysed show year-on-year gains in asking prices (from 1.4% in North County Dublin to 12.7% in South County Dublin), while every other region analysed (29 in total) continues to show year-on-year falls (from 3.1% in Galway city to 19.5% in Laois).

The substantial increases in South Dublin over the last 12 months have led to talk of “yet another bubble” emerging, with internet forums awash with sentiment such as “Not again!” and “Will we never learn?”. To me, this is largely misplaced, mistaking a house price boom for a house price bubble. Let me explain.

Firstly, I should state that, unlike “recession” which is taken to mean two consecutive quarters of negative growth, there is no agreement among economists on what exactly constitutes a bubble, in house prices or in other assets, but the general rule is that prices have to detach from “fundamentals”. For example, the Congressional Budget Office defines an asset bubble as an economic development where the price of an asset class “rises to a level that appears to be unsustainable and well above the assets’ value as determined by economic fundamentals”. Charles Kindleberger wrote the book on bubbles and his take on it is that almost always credit is at the heart of bubbles: it’s hard for prices to detach from fundamentals if people only have their current income to squander. If you give them access to their future income also, through credit, that’s when prices can really detach.

In that vein, I think it would be useful for commentators to distinguish between price bubbles and price booms, even if that distinction may be less clear in real life than in theory. Stop any friendly economist and they will tell you that the price is just the outcome of the interaction between supply and demand. If supply falls, or if demand rises, this will push prices up. We are familiar with house price booms in Ireland: between 1995 and 2001, significant growth in house prices – even adjusting for inflation – was the result of a number of factors (fundamentals). These include demographics (how many people per household on average), household income and the supply of housing.

House price growth between 2001 and 2007 was, in contrast, a bubble, driven by banks over-extending themselves (lending relative to deposits) and over-extending borrowers (higher loan-to-value). Every increase in incomes that happened in that period was offset by an increase in the supply of housing. House prices rose because banks went from lending out 80% of their deposits to lending 180% (by borrowing themselves from abroad).

Somewhere in the middle of this split between boom and bubble is what’s known as “user cost”, basically how interest rates compare to people’s expectations about house prices. Expectations are clearly central to bubbles as no-one will pay €400,000 for a 1-bed apartment unless they expect it will be worth at least as much in the future – so we can say that expectations are a necessary precondition. However, while I may expect that this apartment will be worth at least €400,000 in ten years, unless I can turn my desires into effective demand, that’s not enough. And that’s where credit comes in. So, when we are talking about prices being a multiple of average incomes, expectations are necessary but not sufficient to bring about a bubble.

What do we see in the Irish market at the moment? We certainly do not see easy credit: fewer than 2,000 mortgages are given out to first-time buyers each quarter at the moment, one fifth of the number given out in 2005 and 2006. But whereas now is too few, then was almost certainly too many. What is the right level? Well, there are about 7,500 births to first-time mothers per quarter, which gives us an idea of how many households are being formed. Allowing for households that never buy (and for the moment excluding households that never have kids), this means a healthy market would see perhaps 6,000 mortgages being issued each quarter to first-time buyers. What we have is – still – a housing market starved of fresh credit, not stuffed with it.

This suggests that what we are witnessing is being driven more by fundamentals than by credit. For simplicity, if we think of house prices as demand divided by supply, it is clear that rising prices may be nothing to do with too much demand and may instead be driven by too little supply. This helps explain why it is Dublin, and not the rest of the country, that is seeing rising prices at the moment: Dublin has no oversupply from the bubble. This is being compounded by negative equity preventing trader-upper type moves, creating a crunch in a market where there is at best moderate demand.

The limitation to a neat split between house price booms driven by fundamentals and house price bubbles driven by credit is market momentum. Rising prices now may generate rising prices in the future because rising prices now affect people’s expectations. But the point made above still remains: unless those expectations can tap in to credit, they will not translate into a rise in demand.

Does this mean there is nothing to worry about? Absolutely not! The graph above shows the ratio of prices for a four-bed semi-d in South County Dublin to one in Mayo, and the same ratio for a one-bed apartment. The “Dublin differential”, which was steady from 2006 to 2009 and falling until early 2012 has increased dramatically since then. For a one-bedroom apartment, it has doubled (from 120% to 240%).

Rising prices may be good for those who already own their homes but for those looking to buy, affordability of property in the capital is paramount. When prices rise because of a bubble, you can prick the bubble by restricting the supply of credit, but this is invariably messy (UK: take note!). When prices rise because of a boom, what is needed to moderate prices to simply an increase in supply. What we need to understand now is why there is so little construction happening in Dublin, when the city clearly needs it.

Thoughts on the above welcome in the comments below.

81 replies on “House prices: bubbles versus booms”

Isn’t “supply” constrained not by lack of construction but by:

1) Gov’t hoarding
2) Negative equity
3) Tracker mortgages
4) An almost complete unwillingness to repossess
5) Discretionary unwillingness to sell among those waiting for their house to return to “its proper value” (i.e. 2007)?

Who is buying the stuff? Maybe they have windfalls from other bubbles where prices are detached from fundamentals (equities or bonds). Maybe it’s a wave of QE from elsewhere.

A few random thoughts.

Of the 2000 loans being drawn down, how many are being drawn down in the South Dublin area?
Is it proportionate to the population of South Dublin v rest of Ireland?
If it is the case that more people are in a position to buy in Dublin, especially south Dublin (where prices are higher to begin) than in the rest of the country where prices are falling, does that indicate that some younger people in this area are not being affected as much by the recession as other parts of the country?
Is it the case that people in their late 20’s – 30’s in south Dublin are more likely to have jobs that allow them to afford to buy, even at higher prices?
There are a lot of IFSC Job’s IT Jobs financial services jobs that are situated close to South Dublin.

Are banks more likely to give mortgages to people in these professions?
We also have the situation that Large investors are buying up property in Dublin. I don’t think this is happening outside Dublin?

Elizabeth Warren noticed a pattern in the US where there is starting to develop a larger upper middle class (about 20%) and a larger lower middle class and a shrinking middle class. I think we are likely to see that pattern develop in Ireland as well in time. We seem to be following the lead of the US and UK in needing to create more winners and losers in society so as to motivate commerce.

“What we need to understand now is why there is so little construction happening in Dublin, when the city clearly needs it.”

I can’t say I follow this very closely. The idea of levies for developers who hoard sites is floated from time to time. Is there any prospect of such things happening?

In the long run the value of an asset must be linked to the income that can be generated from it. It is quite possible for individual assets to shoot up in price since residential areas can become more fashionable and companies can have very successful products. But in aggregrate,share and property prices are constrianed by the growth rate of the economy. Rents cannot rise faster than income for long before no one can afford to rent,likewise if house prices outstrip GDP,more and more of a homebuyer’s income must go to service the mortgage. This cannot last.

In his ground breaking book ” Breakfast with Anglo” the distinguished Irish developer, author and columnist with the Sunday Tribune, Simon Kelly states “Banks believe valuers, which always amazes me because valuers don’t buy buildings. Some time ago, a system evolved whereby a valuer’s word was absolute, and a valuation was almost as good as money.”

Below is the link to the elementary property valuation error that bankrupted Ireland;
Professor Neil Crosby’s online response to this Irish Independent letter
“Bubble values” 29th February 2012

“The analysis may be simplistic but unfortunately it is not flawed.
Banks ask valuers to tell them what the market value/exchange price is
at a point in time and then lend vast amounts over time based on that
simple number. The surveyor gives them that simple number and do not
think it is their job to tell the banks that the question they have been
asked is stupid on its own and what they should have asked for is the
underlying value. It was obvious in 2005 and 2006 that prices in the
property market were higher than could be sustained by any rational cash
flow analysis. But in a culture that rewards individuals for short term
performance rather than longer term perspective, it was in neither the
bankers’ nor the valuers’ interests to stop it. I cannot see anything in
what the UK regulatory authorities have proposed that makes me think
they understand the role of property valuation in driving asset bubbles
and will prevent it all happening again sometime in the 2020s.”

Neil Crosby
Professor of Real Estate and Planning
University of Reading

John Corcoran – Neil Crosby is quite right to point out the critical and corrupting role of valuers and banks in the property bubble. RICS and other property related professionals should hang their heads in shame for not raising the alarm bells and not challenging landowners, banks and homeowners about the outrageous rise in property valuations which had no relationship with reality or ‘underlying value’. Their role is similar to that of ratings agencies which were paid to sign off triple A ratings by their clients for instruments most of which related to property assets..Sadly it does not require a university professor to point this out.

Anyone with a modicum of experience in property and development knew we were headed for trouble and I am sure I was not the only person to flag it up.

If these so called professionals had been held to account by their so called professional bodies ( as the General Medical Council regulates doctors) half of them would have been struck off. Their primary responsibilty should have been to the reputation of the valuation profession and not their commission. In many countries property is taxed and valuers are independent or are part of the state.

Radical reform is required or we will surely revisit this crisis again in the near future.

@ Ronan Lyons,

I have a few comments.

1. You write “House prices rose because banks went from lending out 80% of their deposits to lending 180% (by borrowing themselves from abroad).”

This is a perfect example of what I’m trying to correct.

Bank cannot and do not lend existing money. Banks create the money they lend by crediting the borrower’s account and recording a matching debt. Do you understand this? If not, please have a read of our guide to the system, How money is created and destroyed.

Banks do not first borrow either domestically or from abroad before they can advance a loan. After they create bank-account-money for a customer they may seek additional central-bank-money, perhaps from an overseas bank, but this is fundamentally different to borrowing existing money and the banks not having it once they lend it out as you suggest. The amount of central-bank-money is largely inconsequential to the real economy too because it cannot leave the central bank’s balance sheet and so it an only be used by banks.

2. You suggest that “If you give them access to their future income also, through credit…” describing credit as access to future income. However, money comes from bank loans. If no-one seeks credit there is no (electronic) money in the economy. Credit is better described as present income because it is the process by which money is created. If everyone lived within their means and no one borrowed from a bank with what would we trade?

3. In our paper, An electronic paper for your thoughts, we graph house prices versus supply and population growth and it’s clear that house prices disobey the laws of supply and demand. So what determines house prices?

Well, when banks are deciding what project to create money for they are incentivised to create money for a contract involving a real asset, often houses. Pumping money towards property over something that might increase GDP, for example, raises prices in that area.

If you were keen to get to the root of asset price bubbles then start advocating that we have the central bank create the money supply and have banks just do banking. Restricted to lending only that which they have, banks would naturally stop making the housing market so unfit for purpose.

The Irish farm market provides a good example of dysfunction and in 2007 Irish land was the most expensive in Europe.

Total annual turnover in Ireland was less than 0.2% of the total acreage while over the decade, subsidies/ welfare for the typical farm family ranged from 70% of income to over 90%.

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! Countries with sales restrictions, such as giving priority to purchases by young farmers in France, were cheapest.

In Ireland, there are more farmers over 80 years of age than under 35.

There were 17,786 mortgage approvals in 2012 compared with 19,188 in 1972.

@ Ronan

Do you give any weight to the idea that some of the rise can be attributed to a ‘search for yield’ among ‘investors’. Property being a poor mans equity fund and all that. The poor man in this case being the property obsessed professional class.

Fingers could get burnt if interest rates were to rise fast.

hmm….benched off the sellers asking prices…
“all six Dublin regions analysed show year-on-year gains in asking prices (from 1.4% in North County Dublin to 12.7% in South County Dublin), ”
“The statistics are based on properties advertised on for a given period.
The regressions used are hedonic price regressions, accounting for all available and
measurable attributes of properties and only coefficients with a very high degree of
statistical significance (p < 0.001) are used.”

Ronan until 1975 house prices in Dublin and the rest of the country were about the same. That is when the 1963 Planning Act began to bite. There is no shortage of land around Dublin, just a shortage of planning permission.

Couple of points related to what Eoin says above.

There is a hell of a lot cash in the market.

There may not be much credit in the market at the moment, but there was a lot of credit in the past and a lot of this credit has found its way into the bank accounts of current buyers – either directly through past sales or indirectly through inheritance.

So I think it is a bit too simplistic to say there is no bubble because there is no credit.

There could in fact be a mini bubble caused by the huge amount of credit that was available in the past. When the cash buyers dwindle down to normal levels, any type of moderate shock to the economy could cause the bubble to burst.

Finally, to answer Ronan’s last question concerning construction in Dublin. Is the answer not obvious in that developers have never neither the cash nor the credit nor the risk appetite to build?


I’m not sure that’s the full story – I know of at least a couple of plots of zoned land in Dublin that have been lying idle.

See my previous post…

When a pyramid scheme – e.g. the Irish housing boom – collapses, those that got out early enough – sale of principal residences at inflated values, ditto other property and land etc. – ended up with a lot of cash. This is now back in the market but one that is totally distorted by the impact of the collapse of said pyramid scheme (borrowers in negative equity, with tracker mortgages, in half-built housing estates etc. etc.).

Where is the mystery? The only consolation is that the new bubble will be much smaller than the last one.

@DOCM-who sets asking prices,the seller i think:)
What does a gain in asking price tell anyone,sellers expectations……..
How soon is soon,we have been waiting an awful long time for this paper,its like Goldbach’s conjecture at this point,why not just have sherry fitz or hooke and crooke sponsor it….

“A working paper on the methodologies employed in both rental and sales markets will be published on the website soon.’

With building activity virtually non-existent for 5 years you are going to end up running out of supply eventually. Interestingly just in the past few months I have noticed activity starting up on again on a couple of sites in south county Dublin, with half-completed projects here and there getting finished off.

The estimate of about 24000 new households per year based on births to first time mothers is interesting. I suppose you would also have to think about deaths, demolitions, and net migration. I have heard others cite 30000 new houses needed per year, down from estimates of 40000 per year during the bubble.

The challenging thing about analysing the housing market is that we heard so many analyses during the bubble, nearly all directed to justifying why there is no bubble, and all proved wrong.

Everyone in Ireland thinks cheap mortgage funding will continue. Seeing the “must get on the ladder” now effect. Caveat emptor……but the Irish govt, regulator, bankers, etc are hopelessly conflicted on this. In this world, anything can happen right now…….keep your heads down stupid!

It is common to refer to “wealth/value destruction” with regard to the banking crisis in Ireland but this is highly misleading, at best. The 100bn in losses incurred by Irish banks has not been “destroyed”, it has been transferred. In fact in Ireland the money supply may even have increased, since creditors suffered no losses. All the Euros created by the bank loan process are still there in the system (somewhere), along with all the deposits that were untouched.

The point Paul Ferguson makes yet again is a fundamentally key one, since the misconception that “banks lend deposits” is simply wrong, yet this misconception seems to permeate much discussion.

The report is strangely silent on the proportion of cash buyers, which was put at 57% in a recent Independent article, and this figure meshes with my points above.

Also the report seems to indicate that supply in Dublin is at an historic low, and is half (at 3000) what it was 2 years ago. The argument that this is due to a lack of new construction is very unconvincing – new construction has probably increased rather than decreased in the last 2 years, and there wasn’t much new construction in the 2008-2011 period. I think the five items in Comment No. 1 provide a much more plausible explanation.

Viewing the Irish property market along traditional lines of new credit supply/ lending standards/ overall housing stock numbers etc. is to assume that this market is somehow “normal”. It isn’t – the Irish property market has characteristics that make it very unusual, if not one-of-a-kind (e.g. housing supply not affected by whether people pay their mortgage or not – i.e. almost no repossessions/distressed sales that would commonly recycle the properties at more affordable prices and increase rental stock). The tracker mortgage situation is also highly unusual. Some estimates put the capital losses on trackers at about 15bn (i.e. the losses that would be incurred if marked to market/sold) so these wont-be-repeated loans are surely having a significant impact on housing turnover. In effect those on trackers in the aggregate have an asset worth 15bn. These Irish-specific characteristics need to be explicitly considered in any analysis.

Also one last point – although actual sale transaction prices are publicly available in Ireland, the reports are based on asking prices. As the report claims to be the “definitive barometer of the Irish residential property market” – why not use the definitive data?

Morgan Kelly warns of new middle-class debt default
The other side of the property bubble, Professor Morgan Kelly calls it like it is as always at Kilkenny Arts Festival:

‘His numbers refer to high-end properties in salubrious parts of Dublin and elsewhere which were snapped up at the peak by the well-heeled; they do not refer to the 165,000 buy-to-let mortgages, many of which are in danger of default. Kelly claimed that 10,000 loans of an average of €1.1m each were handed out during the boom to the “high-rolling” middle-class professionals, many of whom “could barely afford to buy you a cup of coffee now”.

Colm McCarthy is right to bring up planning and the racket to make land for development scarce.

The result is that not only is a stealth tax involved but the size of housing units is among the lowest in Western Europe.

There is a legacy of Ballymun Syndrome coupled with the power of Nimbies who were involved in what could be termed shakedowns in many developments.

Against the backdrop of the escaping gas from the bubble, Dublin City Council revised its minimum size guidelines. Occupants of the Gas Works apartments near the Google hq had to park bicycles on balconies.

Apart from improved energy insulation, the general quality of the output was poor. Docile is hardly the word to use.

I fully understand why Ballymun became a byword for poor social planning and official ignorance. However, to decide that all high rise building is bad is simply stupid.

This is from the Indo in May 2000:

The strategic planning guidelines constitute a mandate for continuing urban sprawl which will create an ever expanding metropolis around Dublin at lower density than any comparable urban area in Europe, DKM Economic Consultants warns in its report.

According to Colm McCarthy, of Davy Kelleher McCarthy, the predicted number of new dwellings will require that development occurs over an area more than twice the size contained within the M25 around London, which has a population of eight million.

He maintains that suburban development at six units to the acre would accommodate the required 165,000 dwellings in an area of 118 sq kilometers, or seven miles square.

“The process of urban sprawl around Dublin has already spread throughout north and mid Leinster, beyond even the large area envisaged by the Strategic Planning Guidelines”, he warns. Due to speak at the Irish Homes Builders’ Association convention in Edinburgh this morning, Mr. McCarthy suggests an alternative policy by aggressively zoning and servicing all undeveloped land within ten miles of the city centre for housing and mixed-use development.

The UK’s Policy Exchange think tank, argued during the bubble that the Irish planning system creates too many ‘starter homes,’ of often mediocre quality on monotonous estates, and allowed insufficient quantities of larger, better quality properties. The lack of better properties fuelled house price inflation, it argued, so that the high headline housebuilding figures gave a misleading picture of the true supply situation.

Never mind, there will be a new planning regulator…..soon.

@ Bryan G

“new construction has probably increased rather than decreased in the last 2 years”

New home completion figures, per Dept of Environment.

2011 fy: 11582
2012 fy: 8488

2011 Jan-Aug: 7002
2012 Jan-Aug: 5367
2013 Jan-Aug: 5009

Note, fy house completion figures for pre-crash as follows:
2005: 80,557
2006: 93,019
2007: 71,198
2008: 57,753
2009: 26,420
2010: 13,500

So we’ve seen a 93% fall in new home completion levels from the 2005-2007 average.

@ Bryan G

Data on house completions can be found here :

Turns out there is no sign of a pick up in activity over the past 2 years, in Dublin or anywhere else. National completions so far this year are running at under 2000 per quarter, which is as low as it has ever been. If you go back to the 80s or early 90s, before this nonsense ever started, completions ran at around 20-25K per year.

It’s not implausible that we have reached the end of the bust. Morgan Kelly observed that the housing bubble/bust process tends to about symmetric, with the bust lasting as long as the boom. Where that puts us depends on how long you reckon the boom was. If the boom period was 2001-2007 then the bust should be ending round about .. now. I think MK put the start of the boom a bit earlier, around 1999 – which gives you 2015/2016 as the date for the end of the bust. However he also estimated that house prices would drop by 50% or more before bottoming out, which would imply that we have probably seen the bottom.

But does the recent price increase deserve to be labeled a “boom” or merely a “bounce”? The real estate industry is hopelessly afflicted with boosterism. Perhaps the best way to describe the increase is “deceptively spacious”.

If we were to do the right thing, fix the planning laws, implement the Kelly report, introduce non recourse mortgage loans, only allow banks loan out 3 times salary etc, then house prices would fall dramatically and since most of the countries ‘wealth’ is in property wouldn’t it lead to the banks needing even more money the state cant afford to give them?
The Point is we cant afford to do the right thing and Namas core function is to avoid as many losses in property assets as possible by restricting supply for as long as possible.

@Bryan G excellent points on trackers and repos.The Dublin market also fell the furthest,according to this…yes mtg. only.
“House prices in Dublin are 51% lower than at their highest level in early 2007. Apartments in Dublin are 59% lower than they were in February 2007. Residential property prices in Dublin are 53% lower than at their highest level in February 2007. The fall in the price of residential properties in the Rest of Ireland is somewhat lower at 48%”

@eamonn moran,NAMA “bought” about 70 Bil of assets just under 10% was land.Its fair to assume most that in Ireland,naturally NAMA’s vast land bank is a ehm state secret,hence the need to constantly assume.
Almost 80% of its asset/loan base is in around Dublin,so it’s probably the largest land owner,suitable and ready for development in and around Dublin.But it’s gotten very emotionally attached to its possessions,child like almost hates to part with them…..
But just as importantly housing development is highly capital intensive,long lead times,given the NAMA shadow inventory smart/savvy developers will be hesitant to start new projects until this clears.

Michael Hennigan is right that the D4 Gas Works was badly planned by not including sufficient secure cycle parking.

However I have my doubts when Michael says:

…the size of housing units is among the lowest in Western Europe.

I think this is based on a BBC news story:
which reports that average new build dwelling size in Ireland is 88sqm. I keep seeing this figure quoted and I don’t know its source.

This doesn’t match the CSO planning permissions data. For example have a look at Table 4 of this:

One-off houses average roughly 250sqm, housing estate houses are about 130sqm and apartments are 90sqm.

The weighted average size of all new dwellings granted permission in 2003 was 122sqm. In 2008 it was 140sqm

close the door on the way out gov thanks….indeed !
“The substantial increase in the value of mortgage loans in arrears of more than 720 days suggests that there is a significant cohort of distressed loans that continue to deteriorate.
The various resolution strategies implemented thus far have either failed to effectively tackle such problem cases, or they have not been targeted at these particular cases.”

@ Ossian Smyth

I reported this in 2009:

From RICS’ European Housing Review 2009 which said: “It still has worse housing conditions than other countries with similar living standards, despite the recent building boom, with floor areas per person of around a fifth less than the western European average.” (Housing Statistics in the EU 2005/6).

Page 52 here:

@BEB, Skeptic01

Thanks for the links/data, and it is clear that there has been minimal to no pickup in new construction over the last couple of years.

However I do not see that the graph of housing inventory in Dublin can be explained mainly as a function of housing completions. At a time when new construction was declining, over the two year period 2010 – 2011, inventory actually increased from about 5,500 to over 6,000. Since 2010 then there’s been a drop of about 1,000 in new construction completions in Dublin from about 2,250 pa. to 1,250 pa. so if this were the driving factor you would expect an inventory reduction of about 1,000. Instead it’s dropped by over 3,000. So there’s clearly other significant factors at play.

The rise (and rise!) of Irish residential property values started, I believe, about 1996. They continued to rise until 2000, when they stalled, and resumed in 2002. They finally stopped at end of 2006. So, in aggregate the ‘boom’ was of eight years duration. There are two other salient issues. The extent of the rise – variously put between 250% and 350% over 1995 values. And the steady decline in interest rates after 2004. These latter are still with us and have a distorting effect on residential mortgage lending. When interest rates start to rise again – and they will, the mortgage arrears and negative equity situations will become even more vexed than they are to-day.

The belief that an 8 year uptrend will unwind in a similar time-frame is, |I assert, misplaced. I would pencil in a 12 year, undulating unwind (ie: reversion to mean – if this has any valid meaning anymore). That puts us in 2019 – well beyond the next parliamentary election!

Buy the popcorn on this one!

@ John G

“Almost 80% of its asset/loan base is in around Dublin,so it’s probably the largest land owner,suitable and ready for development in and around Dublin.But it’s gotten very emotionally attached to its possessions,child like almost hates to part with them…..”

Nama’s loans were were paid for at 43% average cost of nominal loan
33% or so of Nama’s loans were not in Ireland
80% of Nama’s Irish loans were in Dublin

Knowing these three conditions, and assuming that the foreign Nama loans are worth a good bit more than the domestic Irish loans, Nama’s Dublin loans are probably equal to 53% of Nama’s nominal loan book and more like < 40% of Nama’s marked-to-market loan book.

I bring you news of great joy.
The above bill was carried tonight in Seanad Eireann. The government was defeated
The work goes on–the cause endures–the hope still lives–and the dream of fair rents will never die.

The two points about strong demographics and near-zero recent construction are compelling regarding the possibility of stable or even increasing property prices. However I have trouble dealing with the fact that the Irish banking sector is effectively paying the mortgages on 120,000 properties in default — the owners of these properties are almost uniformly paying little or nothing. Meanwhile the banking sector is straining against its minimum capital requirements and cannot continue to fund this big cash drain. How does that situation unwind? That is a question not an answer.

Link below,I stand over my assumption that NAMA is the largest hoarder off ready to go sites in the Dublin region,further disturbing and distorting the normal functioning off a busted land market by withholding sites.
They also can offer below market seller financing to juice the pricing oh and let’s not forget,I’m sure NAMA wants us too,that simply awful cartoonish 80:20 weird homebuyers scheme..

NAMA is a disaster waiting to happen that no one in situ will be held accountable for in the future.

Example: Re the Techrete site in HOWTH, there are a few self interested cute hoors interacting with NAMA looking for their “kill”…..welfare dependent hoors if one looks through…..same story everywhere……hopelessly conflicted and artificially driven. Ditto with the Santa Sabina (near the secondary school) site…..all about who has the connections. I hope history names these people properly….maybe the only benefit of CMcC’s banking enquiry (otherwise a waste of time and money).

Sad country really, these days. isn’t it interesting that Morgan Kely is seen as a renegade outsider…….Says much.

House price inflation did not start in 1995 or anytime near then. In 1960 (53 years ago) a 4 bedroomed semi detached house cost IR£2,500. In 1965 the same house cost IR£5,000. In 2013, some 50 years later the same house, same location, costs €450,000. There have been price collapses in the mid 70s, most of the 80s and since 2007 – but the inflationary long term trend is still up and will resume eventually.

Why is nobody building? Because there is no development finance available (building takes a lot of capital) and the risk – reward ratio is still out of kilter. It’s less risky buying an existing yielding asset or buying outside of Ireland using leverage.

Have to say that I experienced the first Irish house inflation in 1994 in Howth /Sutton. People were amazed when I paid IEP 149k for my house at that time (3 bed, old-time semi), sold in 1996 for more than double, built a nice new one on the water……sold in 2005 for multiple of that. More luck than expertise….although have to say that a Primetime programme at the time re widespread cocaine use in Ireland gave a real picture of the BS going on in the country at the time. We transferred voluntarily and willingly with work to the US……has been a v good decision overall. People said we were nuts to leave, considering how we had it, etc. Have to say that we got “lucky”…..the welfare dependent negativity that is Ireland (for many) is not something to aspire to /positive.

Why is nobody building in Ireland? ‘Cos the builder /mercantiler /entrepreneur has been wiped out in Ireland……will take a long time to replace… the meantime, the system favors the “civil servant”…..lifer.

Some positives…..IT. But in historical timeframe context, Eire is in for “difficult times”‘, for many many years. “Old Fart” Ireland knows this well and is accumulating ASAP to pad their way comfortably to “the grave”.

It’s not rocket science. Just look around (and be thankful that there are some positives eg aircraft finance /leasing being one of the star areas).

Longer term, It’s looking less bright…..but sure who cares is the reality of those enjoying the higher echelons of Ireland’s “welfare system”……most Senior Irish economists included.

Thanks for the great discussion one and all – lots of comments so here are some thoughts:
(1) On arrears
I do plan on writing a post on negative equity and supply in the next couple of weeks and perhaps more importantly will be undertaking some research on this over the next few months. Short version is: the arrears issue may just be a who owns what one and by not affecting the number of households compared to the number of houses it’s possible that this will have little effect on price.

(2) On who is buying now
In relation to who is buying, if you are interested in 1-2 beds, from what I understand they are typically investors from abroad (when talking in bulk, with some cash-rich types from home thrown in at the smaller end). Gross yields on 1-2 beds are double-digits hence it’s no surprise investors will be at least curious.
If you are talking about 3-5 bed family homes, however, yields are significantly lower so it must be owner-occupiers who are buying. Remember that there are 5-6 years of backed up demand from those who didn’t buy from 2008 on. This will be smaller than the 25-34 population suggests, due to “early first-time buying” before 2008 and to emigration. But there are still many out there who are increasing itching to own their pad. I wouldn’t talk this up too much though – going through a backlog of demand is a one-off process, not the start of a new normal.

(3) On the Dublin/elsewhere balance
Currently, statistics on mortgages are not available by region – hopefully that will change and we will have a better handle on this.

(4) On taxing empty sites
Dublin City Council is I believe proposing this and asking for permission from central government to do so. Again, this will have more of a one-off clearing effect than changing on-going supply but at least will help somewhat with the latter.

(5) On the creation of money
Paul, I understand your argument but that really does change a thing because banks have balance sheets. Whether they create zeroes on a screen before or after backing it up, it’s a joint decision. There is very little relationship between the exact timing of the money creation process and Irish house prices over the last 20 years because what you need to explain house prices are factors that vary over time. The simplistic comparison of stock, population and house prices in your document misses most of the key elements of supply and demand (the latter in particular) that determine house prices in Ireland.

In fact, adequately accounting for supply and demand, house prices follow both remarkably closely. In its own odd way, Ireland’s housing market is incredibly efficient.

(6) On interest rates
I don’t want to belittle the point as I believe long-run interest rates in a market like Irish housing are probably 5-6%, well above what we see now, but as all buyers are being stress-tested at those rates, an increase in interest rates will squeeze non-housing consumption, rather than housing consumption.

(7) On the use of asking prices
A few commenters seem to think that the use of asking prices is problematic. This would be the case if the CSO mortgage-based index was showing one thing and the listing-based index was showing another. In fact, they have been showing the exact same thing for the entire period from 2006 on, with the asking price index typically leading the CSO index, which is understandable given listings happen at the start of the process while the mortgage happens at the very end. For those not won over by that conceptual description, an academic paper exploring this very issue is available here:
Those (@john gallaher) keen to see the detailed methodology underpinning the Daft Report can do so reading this paper:

One commenter (Bryan G) asks: “although actual sale transaction prices are publicly available in Ireland, the reports are based on asking prices. As the report claims to be the “definitive barometer of the Irish residential property market” – why not use the definitive data?”
Perhaps it’s worth actually taking a look at the report. The Daft Report is based on analysis of both listings and transactions (through the Price Register). Which sums up this point nicely as all – Daft asking price index, Daft transaction price index and CSO mortgage-backed index – show exactly the same thing.

(8) On supply of land
I will be turning my attention to this key factor before the end of the year. We need good measures of land prices, planning conditions and (when looking regionally) availability of land.

(9) On wealth destruction
When people talk about wealth destruction, they typically refer to housing, rather than banking, assets. The value of Ireland’s housing stock has fallen from over €500bn to about €300bn in the last 7 years or so. This is not €200bn that has gone anywhere as it is not money. It is wealth. The aphorism “equity is imaginary, debt is real” is perhaps little over the top, but it makes the point well.

And (10), lastly, the timing of the bubble and crash
Morgan’s guidance on how long bubbles and crashes last is supposed to inform, not predict, so it’s something of a waste of time to argue about a crash being 1 or 1.5 times the bubble: these are averages not rules.
On when house price inflation started, when we talk about house prices going up, we mean faster than inflation. Thus while the £ amount in a deed may have changed phenomenally between 1975 and 1995, once you account for general inflation, there was no change at all – in line with the finding from other countries that houses are good for hedging inflation but bad for capital gain. Real house prices only started to increase noticeably in 1995 and the first 5-6 years are well explained by fundamentals (in particular rising incomes but static supply). Seen that way, the bubble started in 2001.

@Ronan Lyons

Is there any definative residential rental yield index available in the RoI which goes back further than the rental index ? I know the Central Bank used to publish one based off DoE data in their quarterly reviews but if there was a source for a longer term graph of events it would be useful to show readers how out of kilter the bubble years (2001/2 to 2008) really were in the context of the long run, and importantly how so many ‘experts’ missed/ignored the most fundamental indicator of prices available in the market.

“increase in interest rates will squeeze non-housing consumption, rather than housing consumption.”
not if you of the opinion of many that the market is full of strategic defaulters (or squatters as some call them)… Im not of that persuasion so id suggest taking these stress tests with some salt.

@RL thanks for the link,will take a look,fair point on the correlation btw. asking/actual price…
Given that Ireland is oh so so “special”,by all means keep coming up with more “academic” solutions to strategic default,notwithstanding that the only real solution is foreclosure or debt forgiveness.
The other solutions and whole approach by the central bank is a failure,I’d suggest taking a rather large brandy and sitting down after the stress tests and further recapitalization off the banks,the current approach is not working nor will it,time for a new approach perhaps..ah no it’s Ireland no one is accountable and he is a nice chap…

@ RL: Thanks for the interesting update.

Re: Time to Correct: Agreed there are no ‘rules’, but historic trends? Mind you, can I have any confidence in these? I’ll accept your start date of 2001 (with some misgivings). If so, then the smooth and rapid increase lasted six seasons. Now the bumpy and glacial downturn (folk are loss averse!) should take 9 seasons? So that put us at Autumn 2015? Cert Par – as they say, except the situation is anything but CP!

Is the South Dublin res property being ‘goosed’. Probably, but more likely its a very large Black Swan with a nice Fat Tail! We’ll find out – in time.

You mentioned that current buyers are being ‘stressed’ for the 5% – 6% range. I’d move this up to 8% – to be ‘sure’! And what are the deposit v loan levels? 20% – 80%? And if any lender is allowing x3 salary – what exactly is this? x3 two, or x3 one? It makes one hell of a difference.

Short, interesting, 16 line paragraph: IMF GFSR Analytical Chapters [Philip Lane post].

Annex 2.1. Previous Findings in the Literature on Credit Constraints; #1: p28. [terms such as: information asymmetry, moral hazard, adverse selection, cost of verification]. Now none of these apply to the Irish residential property 2001 – 2006 mortgage borrowing/lending mess? Yeah, I thought so!

Good luck with the research. Look forward to the results.

@ jg: LtV or LtI? Hmmmm. On balance LtV seems better, in that the lender has some leeway for reduced value, and borrower has committed some cash from savings (and not a ‘loan’). But the value must be based on x10 monthly rental, with a spread between 6% and 8%.

The income idea is based on the 20%,28% and 32% of income Rule of Lending – which became a tad tedious and was dropped. And when you do that – defaults are guaranteed!

I have heard all sorts of rumours, speculations, etc., etc. about how the incomes of many prospective Irish borrowers were ‘assessed’. Very imaginatively, to say the least. Some were simply lies. So, on balance I’d stick with the percentages quoted above and demand strong verification of basic income. And I would never accept two incomes – never! Borrowing x 2 of basic income is sensible. At x2.5 you’re closer to the margin. At x3 – I’d opine that you have exceeded your margin.

Defaulting arises when your nett income cannot support the full cost of repayments – you have insufficient available after you pay for food and utilities (and some other modern necessaries). Bit like that proverbial piece of string!

The lenders shredded all the basic rules of lending – deliberately! And now we wonder what we are going to do with all those defaulters and neg equity folk? Someone needs to be given a right royal kick in the proverbials – as a wake-up call, you understand!

In respect of Agents’ representations: lies, damn lies etc., comes to mind. I recall an agent extolling the virtues of a property in the depths of Westmeath to a young lady – “Its only 50 mins from Dublin!” Now having traveled that route many times, I could confidently assert that it was never less than 1 hour 20 mins! And that was early of a sunny Sunday morning! I laughed, but it was quite unfunny. Week-day commuting was actually a nightmare from Blanchardstown in. I took the starry-eyed young lady aside later and explained the ‘facts-of-life’ about Mon-Fri commuting to Dublin.

@Brian Woods Snr,hi Brian hope the garden is good,it was a kinda trick question:)
Its an ongoing debate,NZ is wrestling with it now,lots research stateside on it.

“We are keen to see house price inflation moderate significantly and, in doing so, reduce the risks to the financial sector and the broader economy. Speed limits on low deposit lending are designed to help achieve this. Loan-to-value restrictions are expected to give the Reserve Bank more flexibility as to when and how quickly we have to raise interest rates, but the more fundamental solution to reducing pressure in the housing market lies in addressing the issues around housing supply.”

On the Dublin vs Mayo comparison, Mayo has been hard hit by net emigration and presumably Dublin less so. Prices in Mayo are still falling because the target market has contracted.

@Seafoid,oh there won’t be too many repos/evictions in mayo..expect quite a few in cork and other FF strongholds…any chance ramping it up a bit in D4,I’m still looking for a cheap dojo,like a lot people no qualms buying after a messy eviction !

“How many times do you think Enda Kenny has put his hand in his pocket and felt his leg? He’ll always have cash and it’s like Enda and people like those just don’t care about struggling families.”

@ jg: Thanks for the link to NZ. That seems a bit of a mess down there!

A residential property which will function as a home is not an ‘investment’ – no matter what guff you encounter. Times were that there was a 3% – 4% annual, compounding increase in private res property. That gave you a doubling of the asset value (Cert Par!!!) in 23 – 17 years. This probably paralleled increases in incomes (or perhaps even GDP). Anyhow, it worked. And after 25-30 years one could sell-up and trade down. LtV was set at a max of 20/80. And 32% of your income HAD to cover ALL your debt repayments (home, car, loans, etc.). The nett outcome was that residential mortgage defaults were less than 1% -which was what the Actuaries had actually estimated!

Unfortunately, this simple vanilla envelope model was shredded in the mid-late 1970s with predictable results. Increases in defaults and worse, widespread neg equity problems. Absolutely no lessons – bar one, were learned. The deregulated financial houses learned that Gov (aka: the taxpayer) would act as a backstop. Bye bye Moral Hazard! The rest as they say, is history. And the beggars are at it again! Mind boggling!

Its one pissy day here in Dublin! But we had a wonderful summer and early autumn. See you around!


One commenter (Bryan G) asks: “although actual sale transaction prices are publicly available in Ireland, the reports are based on asking prices. As the report claims to be the “definitive barometer of the Irish residential property market” – why not use the definitive data?”
Perhaps it’s worth actually taking a look at the report. The Daft Report is based on analysis of both listings and transactions (through the Price Register). Which sums up this point nicely as all – Daft asking price index, Daft transaction price index and CSO mortgage-backed index – show exactly the same thing.

There’s one graph using transaction prices, but all the others use asking prices (as far as I can tell – the graphs are labeled “house price”, but the associated bullets points refer to asking price). Much of the discussion in the OP and comments has related to specific regions and comparing regions, for which the underlying data is asking price.

But more importantly the asking price and transaction price data don’ show the same thing, or even close.

Using Asking Price:
2012: 9% drop from Jan to Dec
2013: Flat (< 1% difference) Jan to Sep

Using Transaction Price:
2012: Flat from Jan to Dec
2013: 14% increase from Jan to Sep

They are quite different and could indicate that asking price is a lagging indicator. And the differences are not just in trend but in level – the average asking price is 12% higher than the average transaction price.

If there’s nothing else to go on then using asking prices is fine. However if there’s comprehensive up-to-date transaction prices available then I would suggest that’s what should primarily be used (e.g. for the regional analysis).

Asking prices encompass a number of things other than market value. Sellers’ unrealistic expectations are one example, but asking prices may be off in the other direction too. In the US (don’t know how common it is in Ireland) it is not uncommon to deliberately low-ball the asking price to induce a larger number of offers, either to generate a bidding war or to find an offer with a quick close (e.g. all cash). If transaction prices are used then all these extraneous factors are removed.

House prices may be on the rise, but so are rents. A simple gauge of house price fundamentals is the price to rent ratio. When the ratio rises, it is often a sign of house price overvaluation. Given that both house prices and rents seem to be on the rise, this would mean that the ratio must be staying fairly steady, which implies no evidence of overvaluation (i.e. a bubble).

link to the paper above after a request for some skinny!
“East, West, Boom & Bust: The Spread of House Prices & Rents in Ireland, 2007-2012”
i tried,no really i did but when something starts with..”In modern developed economies’.. i just felt drained,worn out,the paper is not what i was looking for.
this is what i was hoping to get-below.
if the daft thing simply mirrors other index’s why bother,whats the point unless its a indicator other than that i’d give it up,
Irish people were bombarded with property porn,this is like the amateur section,the report is all mixed up.
utilizing asking prices and PPR info,in the same report renders it a bit off a dogs breakfast.

“The Trulia Price Monitor and the Trulia Rent Monitor show how home prices and rents are trending right now. The Trulia Price Monitor tracks asking prices on for-sale homes, and it leads the commonly watched sales price indexes by several months. The Trulia Rent Monitor tracks asking rents. Together, they are the earliest leading indicators available of trends in home prices and rents, both nationally and locally. Based on the for-sale homes and rentals listed on, the Trulia Price Monitor and the Trulia Rent Monitor take into account changes in the mix of listed homes, so they reflect trends in prices and rents for similar homes in similar neighborhoods”

@ john gallaher
It’s tough to have a useful conversation about academic research with someone who gets worn out by the first four (not very complicated) words of an academic paper!

@ Others include Graeme & Brian Woods
It looks like this version of WordPress won’t allow me to include an image in a comment but I’ve put up an estimate of the gross yield on Irish housing from 1950 on, using what patchy information there is in DOE and CSO sources. You can view it here:

The change over time is remarkable (as a number the yield fell by perhaps nine-tenths) but in and of itself that says little about sustainability. By mid-next year I hope to have some research out (at least in working paper format) on what might be termed its equilibrium properties (including the cost of credit and the extent of credit rationing).

@ Bryan G
It’s most important to make sure you’re using like-for-like comparisons. As the Report is Census-weighted while – from memory – the CSO index is transaction-weighted, comparing national changes will be relatively meaningless. Looking at specific figures (e.g. Dublin yr/yr) will probably serve you better. However, what you will find is that what I have stated above: over the last 8 or so years, mix-adjusted asking prices track and probably lead transaction prices. This is not really that surprising (it’s true in other countries), given the time between an initial listing and the ultimate draw-down of the mortgage, although for some reason it is debate still going on to a few on this thread at least.

@RL-who’s says i want a conservation…….a link would suffice!
the paper you linked is a what,explanation on your asking price index ?

“Property prices in the Republic of Ireland fell by half between 2007 and 2012 on average, but little is known yet about how price falls differed across property type and location. This paper examines this issue, using a dataset of over one million property listings to calculate 2007 and 2012 prices for a set of standardised properties for over 1,100 sales regions and 312 lettings regions. It finds four stylised facts about the distribution of house prices and rents in Ireland during this period. Firstly, the spread of prices across different property sizes increased significantly in the crash. This is consistent with a “property ladder” effect during the bubble temporarily pushing up the relative price of smaller properties. Secondly and conversely, the spread of rents from largest to smallest property sizes fell between bubble and crash. Thirdly, there was at most a small fall in the spread of both prices and rents across space. Lastly, in both bubble and crash periods, the spread of rents was constrained relative to the spread of prices, particularly in the upper tail, a finding suggestive of renter search thresholds.”

i simply don’t understand why DAFT does not provide info on its web site similar to trulia,a simple explanation will suffice,i’m not in the slightest interested in a trip down memory lane but thanks for the link to eh ..east west stating the ble..
simply copy it…….
“The Trulia Price Monitor reflects trends in asking prices, while the sales-price indexes reflect trends in sales prices. The Trulia Price Monitor leads the sales price indexes by several months, for two reasons. First, asking prices are set in the market three months, on average, before homes are sold, but because we use the last observed asking price, the gap is closer to two months. Second, we produce the Trulia Price Monitor days after asking prices are reported, while the main sales-price indexes come out between five and eight weeks after the latest month they are reporting. For instance: on April 5, 2012, we will release the Trulia Price Monitor and the Trulia Rent Monitor through March 2012. Asking prices observed in March 2012 should be associated with sales closing around May 2012 or later (this can vary a lot of course), and May sales prices will be reported in sales price indexes released throughout July. Therefore, the Trulia Price Monitor will detect national trends in home prices at least three months before the leading sales-price indexes. However, we stress that the Trulia Price Monitor is not “better” than the sales-price indexes: the Price Monitor and the sales-price indexes both have important strengths. While the sales-price indexes remain the definitive guides to home price trends historically, the Trulia Price Monitor is the clearest read on what is happening to market prices now.”

I mistakenly assumed that you wanted more detail, as you appeared to be lamenting the lack of a detailed methodology in one of your first comments above but events have clearly shown that you most certainly do not want to read a detailed methodology.

Every Report has text in it similar to what you quote from Trulia. Every point that Trulia make is also relevant for the Report. I’m not sure what more I can do for you.

@Ronan Lyons,thanks Ronan,its not that i don’t want to read it,is simply a guide or a indicator,actual prices are available.
i just find the reporting on it oh never mind…ok i read your report but …..
‘HOUSE PRICES IN parts of Dublin have risen by more than 12 per cent this year – the biggest single increase in prices since early 2007.
The unexpectedly high uptick shows sellers have begun raising their prices following several years of caution after prices cratered following the over-inflated property boom.
However the rising prices are confined to Dublin – asking prices in the rest of the country are down almost 10 per cent compared to this time last year, according to the latest house price report which was released this morning.”

@ RL: Thanks for that graphic. Pretty odd. More Qs than answers there. What happened to residential housing from 1960 -> 1980? 1980 -> 1995 looks ‘flat’. Then it was dippy-do again for a decade. Demographics? More semi and detached units? When did apartments become more ‘fashionable’? Inflation? Financial deregulation? Very interesting.

The recent ‘surge’ in res property values in parts of S Dublin is, I believe, a blip. The yields are probably 5% or somewhat less? Now if they were 7% I start to pay attention. And we really do need to observe a statistically significant increase in the actual number of completed transactions before prognosticating on a ‘recovery’. Swallow and summer comes to mind.

Thanks again. We’ll be back at this one!


As the Report is Census-weighted while – from memory – the CSO index is transaction-weighted…,

I’m not comparing the report with the CSO report – I’m comparing the data on page 5 of the Daft report (asking prices) with the data on page 6 of the Daft report (transaction prices). You have asserted that the two indices “show exactly the same thing”, but the data I presented in my previous post shows that there’s quite a different pattern between the two. How do you account for that?

House Price’s…..the only comp. or asking price index stateside is Trulia,there really is no research or papers on asking price index’s..wonder why ?
As agents work on a no foal no fee basis,pointing out a correlation btw. ask/close is kinda pointless,what else would it be ?
FSBO-for sale by owner may be different but its such a small sample size.

@RL i was reading the wrong paper,i assume you meant me to look at Price Signals,thanks for the link have read it.
im surprised you are surprised…
“The issue is one practical importance but has been the subject of a small literature. In the very first issue of the Journal of Real Estate Research, Miller & Sklarz (1986) highlight the gap between list prices and transaction prices as one of five leading indicators in the housing market. However, their analysis – and their call for future research – has largely gone unheeded. The contribution here is an attempt to belatedly answer their call.”

no one can be bothered to research it over here,there is ample controversy over existing house price indexes w/o looking at the one asking price index.

“It is not always a fact that home price indexes move in tandem. It is not difficult to record instances where changes in home prices differ in both direction and magnitude. This is true, for example, of the FHFA and Case-Shiller indexes for the second quarter of 2010. The differences in methodology and composition determine the behavior of each index at different points in time. Knowledge of individual index calculation aids in understanding the observed disparities among the indexes.”

@ Brian Woods Snr
Indeed, more questions than answers. Recent theoretical research from the US suggests that the % renting is another determinant of the yield. Looking forward to applying that to Ireland. As I read it there appear to be clearly different regimes with an equilibrium level around 30-35% in the 1950s and then 20-25% as we entered the 1970s falling to about 10% in the 1980s. Whether 10% remains normal or whether 5% post-EMU is the new normal… I guess that’s the €64bn question.

@ john gallaher
The debates in the US about house price indices are about issues which are reasonably well established, albeit somewhat boring. Even leaving aside the issue of improvements, repeat sales are a biased sub-sample of transactions while transactions themselves are a biased subset of all houses, hence it depends on what you want your house price index to measure (the market or the stock of homes). In the battle between all transactions (mix-adjusted/hedonic transactions data) and all properties (hedonic assessor/owner valuation), the humble list price is actually not so badly positioned.

@ Bryan G
As you seem so certain that list and sale prices show such different trends, I’ve a simple test for you. Take a look at this link:
Top half is Dublin, year-on-year, while bottom half is Ireland, also year-on-year. All you have to do is identify which of A, B and C is (i) the asking price index, (ii) the CSO mortgage-backed transaction price index, and (iii) the Price Register-based index. The rules of the game are (obviously) that you can’t reverse engineer it by going to the indices and calculating the figures yourself – instead, given your belief that they show such obviously different trends, go with your gut and say after your first look which is which. (For what it’s worth, I work with Irish housing data an unhealthy amount of my time and I would have difficulty telling you which is which! But then, that was my point all along…)


I’d like you to address the data sets I’ve actually referenced i.e. the tables on pages 5 & 6 in the Daft report. On page 5 it is showing a slight *decline* in 2013 to date, while on page 6 it shows the market is booming, with a *14% increase* in same 9 months. Which is it?

Also on the leading/lagging issue – by definition an asking price will precede a transaction price for a property – i.e. in time (the x-axis). However what is significant is the trend in price (the y-axis). The transaction data shows, for the last 3 years – drop; flat; boom. The asking data shows drop; drop; flat. So what is the next entry in the asking data series? It could well be boom. It appears that it is lagging the transaction price data, with people adjusting their asking prices to last year’s market.

@ Bryan G
Those graphs ARE using the datasets you referenced. What you are doing is falling victim to small sample size – using one data-point, you’ve reached a conclusion. Looking at a much bigger sample size (the last 3 years or so) using the very datasets you’re talking about gives you a completely different picture.

As regards whether asking prices are always and everywhere a lead indicator, that’s a good research question. So far, trends in asking prices have led those in sale prices in turning negative in 2007, in moderation of falls in 2009 and subsequent re-acceleration of falls in 2010-11. If it is different for prices turning positive, that might tell us something about seller expectations (which is ultimately what they measure).

But I would caution against being as dogmatic as you are, particularly if you are using one data point to reach your conclusions.

@Ronan Lyons,regarding boring on a rather sunny fall afternoon, I waded thru two of your papers,the second one was a breeze in comparison….
The “clincher” for me is the endorsement by Jonathon Miller of the Trulia asking price index.Hes highly respected appraiser and widely read/quoted on the NY mkt.
But I did note the comments regarding the lag in a falling market,but yes there is a role in a rising market as a baramoter !
“Table 16 compares the various indices in respect of their price obervation type, when they achieved their highest level and the magnitude of decline from that level. Three of the five indices reached their highest levels in late 2006 but the and CSO indices lag several months behind in mid 2007. However it should be noted that with the exception of the Sherry-Fitzgerald index, all were quite flat in mid 2007.”'hanlon%20pdf.pdf

@Bryan G,not sure if that link works for you but the paper is,ref. pg 186-enjoy!
“Journal of the Statistical and Social Inquiry Society of Ireland Vol. XL
Constructing a National House Price Index for Ireland
Niall O’Hanlon1
Central Statistics Office and Centre for Policy Studies UCC”


I hardly think that using data for the last 2 years, as I did, can be regarded as one data point. Most readers of the report will be looking at recent trends rather than historical ones. At best asking price is a rough approximation to transaction price, at worst there can be some significant divergence as has happened since the start of 2012.

The paper JG referenced gives an insight into the production of the CSO transaction-based index – it was entirely EU driven. Without EU requirements there would likely be no transaction-based index or property price register. The first driver was Eurostat with a view to including house prices in HICP. The second was the ECB, who want volume and value data in addition to indices. I presume this is to accurately value covered bonds/mortgage backed repo. Eurostat/ECB require that the indices be transaction based – using asking price is prohibited; the paper notes

Appraisal and asking price observations are deemed C methods – i.e. they cannot be used as they cannot be considered a robust verifiable measure of price by any standard.

Separately the CSO are looking at Stamp Duty data to correct/modify the index due to the large proportion of cash-only transactions not currently included (an ECB request perhaps).

I guess I just don’t understand why, for the sake of more accurate data, transaction prices are not just plugged in to the existing model and the report expanded to or migrated to using transaction prices for its regional analyses.

“VAT cut to kickstart building industry.”

Not again! This is just more of the same ‘loot the taxpayer’ and bend dependent citizens over the fiscal table stuff. Its not incentives at the expense of citizens that are needed. These are simply stealth taxes. A transfer of wealth from one sector to another – a sort of inverted welfare transfer. Remember it was Oliver Twist (the rich brat) who asked for more – not the indigent urchins – they knew the real story!

“Its the rich what gets the pleasure and the poor what gets the blame”

Planning permissions should come with some very unpleasant ‘or else’ penalties. Like long, mandatory jail terms for non-compliances (think Priory Hall) – together with hefty fines and sequestration of assets.

The default position with permissions is that they will automatically expire within 28 days – unless the project is started (its ready-to-go). That is the developer has provided evidence that the project has full financial backing. No exceptions.

Actually, this Planning Permission scam should be replaced with a Building Permit – issued by a single national authority. The permit details exactly what will be done, where and how. Permits are only granted if the locale can actually ‘carry’ the development. You cannot appeal the non-issue of a permit, since a refusal means that the development will overburden the existing services. And there should be a provision that a permit will be refused if the Solar Path of any existing dwellings is occluded by any part of the proposed development.

Chances of these ‘reforms’. Zero! “Just carry on looting the citizens Mr. Parlon. Money good, as they say”

he mix of papers in this issue also indicates the internationalisation of the Journal. The first volume of the Journal of Valuation was virtually exclusively UK and dominated by the University of Reading, its first home. You can almost picture Andy Baum, the first editor, running up and down the corridor pleading with colleagues for papers to fill his new love child. The latest issue has no authors based in the UK and they come from as far away as Australasia, Asia and Europe. The papers are on a diverse range of issues which include leases, retail rents, airports and mixed use developments. It also includes one paper on one of the issues that seems to be exercising many minds in the real estate industry and that is sustainable buildings.

rity of both did know; they didn’t However, one issue that was strangely lacking from the accepted papers was whether valuation had a part to play in the financial crisis and its solution. I found this surprising given that Sir John Vickers, head of the Independent Commission on Banking in the UK suggested that;

“The shock from the fall in property prices, even from their inflated levels of a few years ago, should not have caused havoc on anything like the scale experienced. Rather than suffering a ‘perfect storm’, we had severe weather that exposed a damagingly rickety structure”. (Vickers, 2011, p2)

However, in his interim report, although there are mentions of real estate they are all refer to how we got into the mess in the first place, they were not part of the solution. But more recently, the head of NAMA, Daly, addressed the Chartered Surveyors in Ireland and suggested that valuation and valuers had avoided their responsibility by hiding behind the excuse that they had done as they were asked by providing market values, no more or no less.

“The crisis in which Ireland now finds itself has, as its source, a banking implosion which was driven ultimately by a property market bubble. It would be remiss of me to appear in front of a gathering of construction and property professionals such as this without raising the question of whether, at least collectively, you could have been more vigilant in drawing attention to the enormous systemic risk which was being created. Many of you must have wondered about the sustainability of the ever-escalating upward price spiral that was developing by the middle of the last decide, a spiral driven by cheap money and by a coterie of bankers and market participants who appeared to lack a basic understanding of the dynamics of a properly-functioning market. You must have questioned whether a fourfold increase in commercial and residential property prices in the decade after 1997 could possibly have been justified given its ever-increasing divergence from the trend of economic growth over the same period.
I expect that the valuation professionals amongst you will claim that your job is to provide the best estimate of the market price of a particular property at a particular point in time. However, there is a widespread external view that your responsibilities are more extensive than that. This applies also to other professions such as accounting and auditing which have been similarly criticised for adopting a narrow interpretation of their responsibilities during the evolution of the banking and property bubbles. At a time when many lay people with no great knowledge of the property business were becoming increasingly alarmed at the disconnection between the prices being paid for properties and the intrinsic long-term economic value of those properties, could the two professional bodies not have signalled some concern at what was taking place?”

(Extract from address by Frank Daly, Chairman of NAMA to The Society of Chartered Surveyors 12th April 2011)

NAMA is the Irish National Asset Management Agency and was established in December 2009. Its purpose is to acquire assets in the form of property-related loans from the Irish bank. The overall objective of this process is to bring stability to the banking system by removing impaired loans from the balance sheets of individual banks.

The message is clear. The valuation profession should be identifying ways in which it can extend its advice beyond confirmation of current price and signaling to not just clients but to a wider community about the dangers of asset price bubbles. Real estate professionals have a wider duty than to the client. The academic community, through these and similar pages, has a duty to aid real estate professionals to undertake these tasks and should be identifying and testing approaches by which these objectives might be achieved. However, when it does, does anybody listen?

This presupposes that the industry and its academic support network actually knew we were heading for a fall. My view is that the vast majority know when and they didn’t know what would prick the bubble, but they did know that it would be pricked. Any cash flow undertaken in 2005 and 2006 with any sort of objective inputs would get to a negative NPV, certainly in the UK or Ireland which, if you believe the global indices accurately reflect differences between countries, had the highest peak and the largest falls in asset values. If they got a positive they were cheating.

This also presupposes that anybody wants to stop a financial crisis ever happening again and that is highly debatable. The behavioural finance literature is depressing in that it shows that there are too many opportunities to make money and too few risks of losing it in a bubble and crash. So it is a shame that the UK ICB doesn’t realize that real estate could be a much bigger part of the regulatory solution as well as being the problem because, without a sound regulatory solution, it will all happen again.

So the Journals, including this one as it has its 28th birthday this summer, need to keep publishing work that not only advances our theoretical understanding, but also addresses the major practical problems of the day and ultimately aims to impact on the behaviour of real estate markets in the future.

Neil Crosby

University of Reading

July 2011

In the long run the value of an asset must be linked to the income that can be generated from it,rent in the case of property,dividends in the case of shares. It is quite possible for individual assets to shoot up in price since residential areas can become more fashionable and companies can have very successful products. But in aggregate,share and property prices are constrained by the real growth rate of the economy. Rents cannot rise faster than income for long before no one can afford to rent. On the same basis if house prices outstrip GDP,more and more of a home buyer’s income must go to service the mortgage. This cannot last.Of course in the short term,changes in interest rates,lending practices and the rest can cause house prices to overshoot.
” Housing prices should not outstrip inflation in the long term because,except for land restricted sites,house prices should tend towards building costs plus normal economic profit” Bob Schiller

Property bubbles are difficult to stop, because they have many supporters while they are inflating. Banks are making money from lending,estate agents and valuers are making money from commissions on property transactions, and the broadsheet media property advertising revenues soar. Home owners feel richer because their home is worth more.

The Irish Society of Chartered Surveyors are the Irish property professionals,and are self regulated. They engaged in three practices which inflated the property bubble;

One,the property valuation error, unwittingly valuing all five euro notes as twenty euro.
Two,they administered the Irish feudal commercial property lease law on behalf of a cartel.
Three,ninety five per cent of all property sold in the state,is sold by surveyors/estate agents and they controlled where the property advertising money was spent. Almost all of this money was spent with the broad sheet media and the Irish Times,the owner of the property portal, got the lion’s share. During the years the bubble inflated, the Irish Times revenue from property advertising was a substantial part of their gross income,and the surveyors/estate agents were allowed free rein with their puff pieces and property propaganda. Essentially this paper became the largest property market in the state with a newspaper bolted on.

There were other useful idiots,like the soft landing economists etc.

Is Real estate an effective hedge against inflation?
Recent research has seriously questioned the notion that real estate is an effective hedge against inflation. Joe Valente says such arguments are missing the point

The inflation hedging quality of real estate is one of its most attractive and enduring investment characteristics. Indeed, it is the reason often given to invest in real estate, particularly by those investors who need to match long-term assets to liabilities. A number of major institutional investors have increased their allocation to real estate recently as a result of their respective house views that assume a significantly higher rate of inflation in the future. It is not just institutions. The continuing attraction of the asset class to an increasing number of high net-worth Individuals with a strategy underpinned by wealth preservation also implies a belief that property can and does act as a suitable hedge against rising inflation.

Many practitioners have long asserted that property can be used as a hedge. Most investors tend to be of the view that property is, or can be, an inflation hedge, particularly over the long term. In the same way, most will recognise that, in the short term, local market fluctuations will tend to prevail and confuse the debate somewhat. It is clear, however, that the debate over the merits of real estate as a hedging tool has long been raging but that the evidence is remains inconclusive.

This debate will undoubtedly gather further momentum given the growing concerns over a higher inflationary environment in the years ahead across Europe. No doubt this will trigger a wave of new research papers on the subject which, if anything like recent ones, will shed next to no light on the issue, and succeed only in adding to the general level of confusion surrounding the subject, or at least glossing over some of the most important characteristics of the asset class and its ability to perform successfully as an inflation hedge.

The definition of what exactly constitutes a hedge is the first, and possibly the most important, source of confusion. An inflation hedge is often taken to mean an investment whose value is directly related to the level of inflation. In other words that there is a direct relationship between property values and some measure of inflation. So if over, say, a five or 10-year period, property values keep pace with inflation, or even outperform a particular benchmark, this is not in itself viewed as sufficient evidence that real estate is capable of performing a hedging function. For this to be the case, so the argument goes, property values have to move with, and react, to a changing inflationary environment.

Far from semantics, the use of such a definition will inevitably lead to the conclusion that commodities, or even equities, offers a much better hedging mechanism than that provided by real estate. After all, real estate is lumpy, there is a lack of frequent real-time pricing – quarterly data in a few markets, annual indexes in most – and that’s not to say anything of the constraints imposed upon it by the landlord/tenant relationship which will vary not just between markets but over the course of the real estate cycle as well.

Issues that make real estate different and which will inevitably mean that values won’t be able to ‘react’ sufficiently quickly to changes in inflation. But this ignores the fact that growth in property values may well exceed inflation over a set period. In essence, the conclusion that real estate is a poor hedge against inflation is often solely the result of applying a definition that is ill-suited to the sector or doing so with little understanding of how the property market actually works in the real world.

The key point is that real estate provides a long-term hedge against inflation but, in order for it to do so, certain other criteria have to be met.

First, while the real asset nature of property underpins its inflation hedging quality over the long term, buying tangible assets as a protection against inflation is sensible only if done at the right price. It’s an obvious point but one that is overlooked a little too often.

Second, properties with inflation-linked leases are increasingly attractive to a broad range of investors as they are often seen as defensive in nature. However, while such leases can offer many attractive qualities to the investor, rent indexation does not equal inflation protection – it is not a guarantee even if some investors tend to regard them as such.

The reality is somewhat different – rent indexation in the absence of pro-active management results only in over-rented assets. Such leases should not be viewed as a guarantee of an outcome but rather as a starting point in the quest for inflation protection.

Third, income growth is the key to solving the inflationary puzzle. The ability to retain a tenant in the building, maintain and grow cash flow lies at the very centre of an inflation-hedging strategy. And that applies across all markets and points in the cycle.

And finally, the importance of income growth brings us to the missing link in much of this debate, which is simply the ability and expertise of the asset management team. The situation is the same for all real estate markets: in the UK with its longer leases and upward-only rent reviews; in the euro-zone with its propensity for shorter leases and rent indexation; in the US with year-long leases and no indexation, or in markets such as Turkey where the length and value of a lease can be somewhat debatable. In all these instances it is the ability of pro-active asset management to deliver value that consistently shines through time and again.

The bottom line is very straightforward: a bad asset manager will underperform inflation no matter what the inflationary environment might be, the point in the economic cycle, the holding period or the relationship between landlord and tenant.

Author: Joe Valente

An important part of what happens during a property bubble is mediated by the marketplace,to which all people are attentive,and by prices that are observed there and subsequently amplified by the broadsheet media. The broadsheet media weave stories around price movements,and when these movements are upward,the broadsheet media tend to embellish and legitimize “new era” stories with extra attention and detail. Feedback loops appear, as price increases encourage belief in “new era” stories, promote the contagion of these stories, and so lead to further price increases.

Ninety five per cent of all property sold in Ireland,is sold by surveyors/estate agents and they controlled where the property advertising money was spent. Almost all of this money was spent with the broad sheet media and the Irish Times,the owner of the property portal, got the largest share. During the years the bubble inflated, the Irish Times revenue from property advertising was a substantial part of their gross income,and the surveyors/estate agents were allowed free rein with their puff pieces and property propaganda. Essentially this paper became the largest property market in the state with a newspaper bolted on.

On page 123 of Tom Lyons and Brian Carey’s book “The Fitzpatrick Tapes” it states; “Fitzpatrick declared ‘ Our exposure is not to the building,it’s to the money that comes from the leasing of it’he said’ If the value of the property goes down,it dosn’t matter. We still get our loan repaid’ Fitzpatrick was nothing if not consistent in this,one of his core philosophies”.

If you examine Sean Fitzpatrick’s core philosophy if the property was worth zero he didn’t mind ,because he wasn’t lending against the properties he was lending against the feudal leases i.e ratchet upward-only rent reviews tied to 35/25 year leases with no break clauses. These unique leases were only available in Ireland.The average length of a commercial property lease in the rest of the world is five years.The corrupt Irish politicians had organised these leases for their bagmen paymasters. All Mr Haughey’s bagmen are sovereign landlords.

Check out Carrisbrook House Ballsbridge Dublin 4 –an empty building which the state is the tenant on a sixty five year lease with ratchet rent reviews every seven years and no break clauses signed in 1969. The taxpayer has twenty years to go paying this rent. No other government on this planet would sign a lease like that. Guess who was Minister for Finance in 1969?.

The attached FT article dated 31st August 2009 explains that the upward-only rent review lease clause was a bomb waiting to explode. The UK escaped the explosion because soon after their property crash of the late eighties/early ninties,their economy boomed and the crisis was averted. In Ireland`s case the explosion destroyed our banks,which in turn bankrupted the sovereign. Upward only rent review tied to long leases, just didn`t destroy the tenants, it massively inflated the commercial property pricing model which created the monster commercial property bubble.

UK commercial rents

Published: August 31 2009
| UK commercial rents

Most industries are suffering from falling prices. Not UK commercial property. Property trusts such as British Land and Derwent London have reported relatively upbeat earnings figures; in spite of continued falls in property valuations, rents have generally remained strong. This is largely due to “upward-only” contracts, whereby rents rise through the life of a company lease, whatever the state of the broader market. However good this industry norm might sound for landlords, it also represents a potential timebomb.

As Nomura’s rent-free move to a new London headquarters shows, the problem comes when contracts, typically for five years, but sometimes 10 or more, expire or otherwise lapse. If market rents drop in the interim, leases are renegotiated at lower rates. That is what is happening now, after vacancy rates doubled over the past two years. By March, new rental contracts in the City had dropped by more than a third. This has re-focused minds on the remaining life of property companies’ leases. At Land Securities, about 22 per cent of lease contracts will expire or can be broken by 2013. At Derwent London, it is almost half.

Upward-only rents have come under pressure before. In 2004, the government considered banning them. That initiative fizzled out in the boom, but now tenants have become increasingly vocal; Ireland banned such contracts in July after retailers complained they gave an unfair advantage to new entrants. Meanwhile, high street heavyweight Philip Green, owner of the Arcadia Group, is seeking other concessions. Landlords have successfully argued in the past that upward-only reviews keep overall rents down by providing certainty of returns and ensuring a stable supply of new properties. The recession, and property surplus, are putting paid to that. Meanwhile, the timebomb ticks on.

Item 6.2 of the Honohan report on the Irish Banking Crisis
“Evidence from elsewhere suggests that the bursting of a commercial property bubble can have considerably more severe adverse financial impact than the case of the residential market”

A Preliminary Report on the Source of Ireland’s Banking Crisis ” by Klaus Regling and Max Watson-page 6:
“This was a plain vanilla property bubble,compounded by exceptional concentrations of lending to property-and notably commercial property”

When the commercial property bubble burst it bankrupted the entire Irish banking sector,which in turn bankrupted the sovereign.

Reckless Irish banks lent billions against the feudal leases i.e. upward-only rent reviews tied to long leases,not aganist the properties themselves ,and created the greatest commercial property bubble in the history of mankind.
The feudal leases were the collateral not the properties.

The reason Ireland had these ruinous leases was because the sovereign signed them.
All Mr Haughey’s bagmen are sovereign landlords.

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