18 replies on “IMF Global Housing Watch / BIS Property Price Data”
From a blog post on that IMF page …
“Theory asserts that house prices, rents, and incomes should move in tandem over the long run.”
This seems like a major oversimplification to me. There’s a fourth factor missing from this list – the cost of money. Low mortgage interest rates drive up property prices, and an environment of low investment returns drives down the rental yield that landlords will accept. If, as many claim, we are adjusting to a new normal of low investment returns, ignoring this will skew any analysis seriously.
@BCT
Eh – low mortgage rates drive nothing. What drives credit to be allocated to the property market is the key, the cost of money is only one factor. We’ve had exceptionally low rates in both real and nominal terms in the RoI since early 2009 and yet property prices at a country level have fallen out of bed over that period. If my memory is correct I believe Morgan Kelly wrote a paper a few years back where he suggested that the cost of borrowing was in fact the least important factor, amongst known factors, in determining house prices.
The single most important factor that towers above all others is the yield issue.
I suggested here many moons ago that property prices would eventually revert somewhere relatively close but north of 7% i.e. in the 7% to 9% bracket when that occurs purchasers could dip their toe back into the market – but importantly, in fact way more importantly, banks could start lending in areas where yields had stablised at around these levels happy in the knowledege that the asset class was being priced at somewhere approaching fair value. This has happened in Dublin but in many other parts of the country yields are still below where they should be and the gap will be breached by numerator growth rather than further price falls as supply tightens. But rest assured yields will revert to in and around 7%.
The bubble will only reoccur when yields dip below 5%/4% again – thats the banks issue. Allocating additional credit to a market where yields dip below those levels is negligent. At the peak in Dublin in late 2006 early 2007 hundreds of millions were allocated to deals with net yields less than 1%. The banks mis priced the market on a grand scale and should be forced to reprice and allow novice purchasers the equivalent write down on associated debts.
@YoB, the IMF is writing globally, not specifically about Ireland. That said, for greater precision, it might be better if I said risk-adjusted mortgage interest rates, which are notably high in Ireland now (effectively infinite for many of those interested in purchasing a home), and were notably low leading up to the peak of the bubble.
I agree that it would be good policy to choke off mortgage credit from Irish financial institutions once yields go below 4-5%. That said, *if* widespread predictions of secular stagnation leading to low investment returns turn out to be correct, I would expect rental yields down to 2-3% (after management costs) to turn out to be sustainable over the long term. We can watch how things develop elsewhere for a decade or so before taking the plunge on the supply of mortgage credit in Ireland.
There are three factors of production, and a fourth, neglected and poorly understood: energy. The relationship between aggregate economic activity and output and energy inputs is: direct and positive. More energy in, more economic output. Less energy in, reduced economic output. And this is where we are (almost). In effect we are within the margin of decreasing returns – on whatever investment we have made.
This issue will not improve – except perhaps briefly. Then it will slowly, steadily deteriorate. Our 1995 – 2000 and 2002 – 2007 residential property ‘bubble’ was a madcap experience, and some folk will pay dearly for it. We may be having a ‘dead cat bounce’ reprise. Yields in Sth. Dublin sector are hovering between 2% – 3%! The rest of the country appears to be abnormally normal: decrease in residential prices.
Without a significant increase in fossil fuel production – at NO extra cost that at present, the level of economic activity and output necessary to sustain low yields will simply not happen. In fact, in order to overcome the current stagnating level of fossil energy production (and switch to re-usables) we will need to invest approx $2.5 Trillion, per year in the global energy sector. Re-usables are NOT an inexpensive alternative!
So, where will that level of investment have to originate from? Who will be willing to lend? And at what yield? What does increased risk do to interest rates?
And now we have some interesting folk creating significant mischief in the Mid East. Its time to pause and watch.
I suspect many observers are failing to grasp the potential for investment vehicles either on the carry or investing as an alternative to other very low yielding assets to usurp the traditional mortgage financed owner occupier (or indeed BTLer)
Interesting stuff wrt mop-up of what might be termed ‘dark supply’ on thepropertypin (bottom of page et seq):
I dunno about high prices being justified by low yields/interest rates. They are out of line with earnings which makes it look like a ponzi scheme. Taking future growth now because there is nothing else happening. And when interest rates go up what happens? I think property prices show the current weakness of monetary policy. I wonder how much of Johnny’s UK Wirtschaftswunder is driven by property.
No thread on here this quarter discussing the Q1 mortgage arrears figures. There is currently an ECB AQR going on. For those interested the 11.04 June 9th analysis by bugler looks decent here:
One would have imagined that, in such circumstances, something more radical than what is now proposed with regard to reform of the public service would be on the agenda.
The proposal appears to be essentially to add another Secretary-General as head of the civil service and still another oversight board.
As Professor Rafter comments;
“The centre in the Civil Service has never been defined formally though it is generally seen as encompassing the Department of the Taoiseach, the Department of Finance and the Department of Public Expenditure and Reform.”
This can only be the case for a short period, the creation of the DEPR having been simply part of a coalition arrangement, no administrative justification for which has ever been advanced, to my knowledge.
He adds;
“Ireland does not feature a great deal in international studies of civil service reform. Even a recent UK report that reviewed civil service reforms in similar Westminster-type governmental systems did not include Ireland. The absence of an ongoing civil service reform agenda is one explanation for this omission.”
One hardly need wonder why! It is not the absence of an agenda but one with real content that is the problem, the most obvious content being to regain control of public expenditure through one central authority, the equally obvious one being the Department of Finance.
Only analysis on arrears seems that post on the property pin and Brian Lusy in the examiner.Guess were all numb
@Sam
Arrears analysis used to be a regular feature on here, but we know nobody reads the comments threads anyway… Nice to see Brian piling on the dark side elsewhere:
“As of the end of the quarter we have an arrears rate of 27%. This represents just under €11bn of mortgages, and a total of €1.6b in arrears. Some 37,000 mortgages are in this pot; 13,000 are in arrears for over two years. And yet, of these assets, less than 600 are in repossession. This is crackers.
If 14,000 people had car loans they had not repaid for more than two years, 13,999 would be on the bus. The question has to be asked: Why are we not seeing vast repossessions of these investment assets which have not performed and which the borrowers are not able to repay?
It cannot be down to the hit the banks will take if they enforce. A Central Bank paper presented earlier this year gives some granularity on the losses. In general we can see buy-to-let mortgages as of end 2013, as having a loan-to-value ratio of 120%-130%. Let’s say it is 125% for illustrative purposes.
Thus on the face of it, the €11bn in mortgages are worth only some €8.8bn. Across the sector therefore a first cut of the losses from enforcement might be some €2.2bn. This is a pittance.
There is no reason why we cannot create some form of a Nama to take these and drip them out, manage them and so forth. The great thing is that the banks have already been paid for these losses through rounds of state-led recapitalisation. We need not repeat the issues around the monies Nama paid for the large developers.
There is another benefit to this. A very large percentage, 70%-75% plus by balance, of buy-to-lets in arrears are on tracker mortgages. These are enormous loss makers at present and even with an upswing in the interest rate cycle, we will still see the banks losing money on an ongoing basis. Removing them from the banks, even in part, can only assist them to do that which we need them to do, act as credit intermediaries in a mild recovery.”
“There were 13,282 (9.2 per cent) residential mortgage accounts for BTL properties in arrears of over 720 days at end-March 2014, up from 12,218 (8.4 per cent) at end-December 2013. The outstanding balance on these accounts at end-March was €4.2 billion….
…There were 502 BTL properties in the banks’ possession at the beginning of Q1 2014. A total of 73 properties were taken into possession by lenders during the quarter, of which 21 were repossessed on foot of a Court Order, while the remaining 52 were voluntarily surrendered or abandoned. During the quarter 42 properties were disposed of.”
Yes, that’s a whole 42 ex-BTL properties sold into a rising market in which potential owner occupiers are being priced out, due to lack of supply, by investors.
@ UFC
As we do not have the detailed data on individual BTL situations, it is impossible to come to any definitive conclusion. But one can make an educated guess.
Most stem from the the incentive offered by Section 23 and other similar tax arrangements which allowed an offset of rental income on individual properties against ALL rental income. This created an entire class of BTL borrowers doubling up on properties and using imaginative schemes to maximise the tax concessions, including their own business premises.
These borrowers are to be found in every town in Ireland. They are influential supporters of the three establishment parties, many in the retail sector. These are now the borrowers in most difficulty but are sitting out the crisis in the expectation that the political forces that created the sca.. – sorry, schemes – will rescue them.
They are not mistaken.
P.S. For details of the various schemes, refer to page 24 of Form 11, the self-assessment income tax return.
We know why these people went into property. We don’t know who they are or how important they are
re BTLs
There is, of late, one reason to reconsider the quite obvious course of action that should have been taken for the past few years regarding BTL properties in arrears. This applies to Dublin only.
As most purchasers will insist on vacant possession, the sale of such properties will put immediate pressure on rental prices and could force some tenants onto the homeless list.
This should not normally be a consideration in a properly controlled and well managed BTL sector.
Another policy measure, the bedsit ban, has already contributed in no small measure to the housing crisis in Dublin.
Either way the BTL landlords, most on trackers that have benefitted from sizeable reduction in mortgage payments, and have seen rental increases in Dublin of ~10% at least in the past year are laughing, not all the way to the bank, but at the banks and at the people who are keeping the banks afloat.
@All
I should add that the ousting of tenants is not an incidental consideration.
The link below is for a house for sale (tenanted).
Take a look at the house photos, with particular reference to the children’s bedroom with two beds and two children’s duvets.
I wonder where those children will sleep the evening they are evicted?
[Incidentally, those houses are selling for at least €25,000 above the marked price.]
Agree, any landlord with more than one BTL property should be considered professional and should have far fewer opportunities to evict a tenant than an “accidental” landlord with just one property.
i.e. no right to evict in order to sell a property or to move into it themselves.
Of course the side effect would be even fewer landlords willing to rent to rental allowance tenants or low earners as it would directly affect the value of the property.
Unless the government steps in at the bottom of the ladder to provide more social housing almost every measure you can think of to improve conditions for tenants overall will have a negative effect on the most vulnerable amongst them.
18 replies on “IMF Global Housing Watch / BIS Property Price Data”
From a blog post on that IMF page …
“Theory asserts that house prices, rents, and incomes should move in tandem over the long run.”
This seems like a major oversimplification to me. There’s a fourth factor missing from this list – the cost of money. Low mortgage interest rates drive up property prices, and an environment of low investment returns drives down the rental yield that landlords will accept. If, as many claim, we are adjusting to a new normal of low investment returns, ignoring this will skew any analysis seriously.
@BCT
Eh – low mortgage rates drive nothing. What drives credit to be allocated to the property market is the key, the cost of money is only one factor. We’ve had exceptionally low rates in both real and nominal terms in the RoI since early 2009 and yet property prices at a country level have fallen out of bed over that period. If my memory is correct I believe Morgan Kelly wrote a paper a few years back where he suggested that the cost of borrowing was in fact the least important factor, amongst known factors, in determining house prices.
The single most important factor that towers above all others is the yield issue.
I suggested here many moons ago that property prices would eventually revert somewhere relatively close but north of 7% i.e. in the 7% to 9% bracket when that occurs purchasers could dip their toe back into the market – but importantly, in fact way more importantly, banks could start lending in areas where yields had stablised at around these levels happy in the knowledege that the asset class was being priced at somewhere approaching fair value. This has happened in Dublin but in many other parts of the country yields are still below where they should be and the gap will be breached by numerator growth rather than further price falls as supply tightens. But rest assured yields will revert to in and around 7%.
The bubble will only reoccur when yields dip below 5%/4% again – thats the banks issue. Allocating additional credit to a market where yields dip below those levels is negligent. At the peak in Dublin in late 2006 early 2007 hundreds of millions were allocated to deals with net yields less than 1%. The banks mis priced the market on a grand scale and should be forced to reprice and allow novice purchasers the equivalent write down on associated debts.
@YoB, the IMF is writing globally, not specifically about Ireland. That said, for greater precision, it might be better if I said risk-adjusted mortgage interest rates, which are notably high in Ireland now (effectively infinite for many of those interested in purchasing a home), and were notably low leading up to the peak of the bubble.
I agree that it would be good policy to choke off mortgage credit from Irish financial institutions once yields go below 4-5%. That said, *if* widespread predictions of secular stagnation leading to low investment returns turn out to be correct, I would expect rental yields down to 2-3% (after management costs) to turn out to be sustainable over the long term. We can watch how things develop elsewhere for a decade or so before taking the plunge on the supply of mortgage credit in Ireland.
There are three factors of production, and a fourth, neglected and poorly understood: energy. The relationship between aggregate economic activity and output and energy inputs is: direct and positive. More energy in, more economic output. Less energy in, reduced economic output. And this is where we are (almost). In effect we are within the margin of decreasing returns – on whatever investment we have made.
This issue will not improve – except perhaps briefly. Then it will slowly, steadily deteriorate. Our 1995 – 2000 and 2002 – 2007 residential property ‘bubble’ was a madcap experience, and some folk will pay dearly for it. We may be having a ‘dead cat bounce’ reprise. Yields in Sth. Dublin sector are hovering between 2% – 3%! The rest of the country appears to be abnormally normal: decrease in residential prices.
Without a significant increase in fossil fuel production – at NO extra cost that at present, the level of economic activity and output necessary to sustain low yields will simply not happen. In fact, in order to overcome the current stagnating level of fossil energy production (and switch to re-usables) we will need to invest approx $2.5 Trillion, per year in the global energy sector. Re-usables are NOT an inexpensive alternative!
So, where will that level of investment have to originate from? Who will be willing to lend? And at what yield? What does increased risk do to interest rates?
And now we have some interesting folk creating significant mischief in the Mid East. Its time to pause and watch.
I suspect many observers are failing to grasp the potential for investment vehicles either on the carry or investing as an alternative to other very low yielding assets to usurp the traditional mortgage financed owner occupier (or indeed BTLer)
Interesting stuff wrt mop-up of what might be termed ‘dark supply’ on thepropertypin (bottom of page et seq):
http://www.thepropertypin.com/viewtopic.php?f=10&t=61818&start=270
I dunno about high prices being justified by low yields/interest rates. They are out of line with earnings which makes it look like a ponzi scheme. Taking future growth now because there is nothing else happening. And when interest rates go up what happens? I think property prices show the current weakness of monetary policy. I wonder how much of Johnny’s UK Wirtschaftswunder is driven by property.
It is merely a question of valuation:
http://www.irishexaminer.com/viewpoints/yourview/a-question-of-valuation-220487.html
@ seafóid
A lot!
http://www.theguardian.com/commentisfree/2014/jun/11/living-airing-cupboard-housing-crisis-rent
@ All
http://www.theguardian.com/business/2014/jun/12/osborne-regulators-power-cap-mortgage-loans
@docm
Note the interest ratre comments from Carney.
@All
No thread on here this quarter discussing the Q1 mortgage arrears figures. There is currently an ECB AQR going on. For those interested the 11.04 June 9th analysis by bugler looks decent here:
http://www.thepropertypin.com/viewtopic.php?f=10&t=44532&start=2280
I imagine ECB and CBI guys are aware of the property pin anyway.
@ UFC
What is certain is that we live in a very uncertain world.
http://www.independent.ie/business/irish/debt-burden-means-irelands-three-years-off-aaa-rating-sp-30351083.html
One would have imagined that, in such circumstances, something more radical than what is now proposed with regard to reform of the public service would be on the agenda.
https://www.irishtimes.com/news/politics/new-accountability-board-and-head-of-civil-service-could-boost-policy-delivery-1.1830358
The proposal appears to be essentially to add another Secretary-General as head of the civil service and still another oversight board.
As Professor Rafter comments;
“The centre in the Civil Service has never been defined formally though it is generally seen as encompassing the Department of the Taoiseach, the Department of Finance and the Department of Public Expenditure and Reform.”
This can only be the case for a short period, the creation of the DEPR having been simply part of a coalition arrangement, no administrative justification for which has ever been advanced, to my knowledge.
He adds;
“Ireland does not feature a great deal in international studies of civil service reform. Even a recent UK report that reviewed civil service reforms in similar Westminster-type governmental systems did not include Ireland. The absence of an ongoing civil service reform agenda is one explanation for this omission.”
One hardly need wonder why! It is not the absence of an agenda but one with real content that is the problem, the most obvious content being to regain control of public expenditure through one central authority, the equally obvious one being the Department of Finance.
Only analysis on arrears seems that post on the property pin and Brian Lusy in the examiner.Guess were all numb
@Sam
Arrears analysis used to be a regular feature on here, but we know nobody reads the comments threads anyway… Nice to see Brian piling on the dark side elsewhere:
http://www.irishexaminer.com/business/buy-to-let-arrears-have-been-allowed-to-fester-272061.html
“As of the end of the quarter we have an arrears rate of 27%. This represents just under €11bn of mortgages, and a total of €1.6b in arrears. Some 37,000 mortgages are in this pot; 13,000 are in arrears for over two years. And yet, of these assets, less than 600 are in repossession. This is crackers.
If 14,000 people had car loans they had not repaid for more than two years, 13,999 would be on the bus. The question has to be asked: Why are we not seeing vast repossessions of these investment assets which have not performed and which the borrowers are not able to repay?
It cannot be down to the hit the banks will take if they enforce. A Central Bank paper presented earlier this year gives some granularity on the losses. In general we can see buy-to-let mortgages as of end 2013, as having a loan-to-value ratio of 120%-130%. Let’s say it is 125% for illustrative purposes.
Thus on the face of it, the €11bn in mortgages are worth only some €8.8bn. Across the sector therefore a first cut of the losses from enforcement might be some €2.2bn. This is a pittance.
There is no reason why we cannot create some form of a Nama to take these and drip them out, manage them and so forth. The great thing is that the banks have already been paid for these losses through rounds of state-led recapitalisation. We need not repeat the issues around the monies Nama paid for the large developers.
There is another benefit to this. A very large percentage, 70%-75% plus by balance, of buy-to-lets in arrears are on tracker mortgages. These are enormous loss makers at present and even with an upswing in the interest rate cycle, we will still see the banks losing money on an ongoing basis. Removing them from the banks, even in part, can only assist them to do that which we need them to do, act as credit intermediaries in a mild recovery.”
I’d just reiterate:
Q1 Mortgage arrears figures published.
http://www.centralbank.ie/polstats/stats/mortgagearrears/Documents/2014q1_ie_mortgage_arrears_statistics.pdf
Standing out like a sore thumb:
(Page 8 onwards)
“There were 13,282 (9.2 per cent) residential mortgage accounts for BTL properties in arrears of over 720 days at end-March 2014, up from 12,218 (8.4 per cent) at end-December 2013. The outstanding balance on these accounts at end-March was €4.2 billion….
…There were 502 BTL properties in the banks’ possession at the beginning of Q1 2014. A total of 73 properties were taken into possession by lenders during the quarter, of which 21 were repossessed on foot of a Court Order, while the remaining 52 were voluntarily surrendered or abandoned. During the quarter 42 properties were disposed of.”
Yes, that’s a whole 42 ex-BTL properties sold into a rising market in which potential owner occupiers are being priced out, due to lack of supply, by investors.
@ UFC
As we do not have the detailed data on individual BTL situations, it is impossible to come to any definitive conclusion. But one can make an educated guess.
Most stem from the the incentive offered by Section 23 and other similar tax arrangements which allowed an offset of rental income on individual properties against ALL rental income. This created an entire class of BTL borrowers doubling up on properties and using imaginative schemes to maximise the tax concessions, including their own business premises.
These borrowers are to be found in every town in Ireland. They are influential supporters of the three establishment parties, many in the retail sector. These are now the borrowers in most difficulty but are sitting out the crisis in the expectation that the political forces that created the sca.. – sorry, schemes – will rescue them.
They are not mistaken.
P.S. For details of the various schemes, refer to page 24 of Form 11, the self-assessment income tax return.
https://www.google.ie/search?q=Form+11&oq=Form+11&aqs=chrome..69i57j0l5.9553j0j8&sourceid=chrome&es_sm=122&ie=UTF-8
We know why these people went into property. We don’t know who they are or how important they are
re BTLs
There is, of late, one reason to reconsider the quite obvious course of action that should have been taken for the past few years regarding BTL properties in arrears. This applies to Dublin only.
As most purchasers will insist on vacant possession, the sale of such properties will put immediate pressure on rental prices and could force some tenants onto the homeless list.
This should not normally be a consideration in a properly controlled and well managed BTL sector.
Another policy measure, the bedsit ban, has already contributed in no small measure to the housing crisis in Dublin.
Either way the BTL landlords, most on trackers that have benefitted from sizeable reduction in mortgage payments, and have seen rental increases in Dublin of ~10% at least in the past year are laughing, not all the way to the bank, but at the banks and at the people who are keeping the banks afloat.
@All
I should add that the ousting of tenants is not an incidental consideration.
The link below is for a house for sale (tenanted).
Take a look at the house photos, with particular reference to the children’s bedroom with two beds and two children’s duvets.
I wonder where those children will sleep the evening they are evicted?
[Incidentally, those houses are selling for at least €25,000 above the marked price.]
http://www.myhome.ie/residential/brochure/161-st-attracta-road-cabra-dublin-7/2826425
@ Joseph Ryan
Agree, any landlord with more than one BTL property should be considered professional and should have far fewer opportunities to evict a tenant than an “accidental” landlord with just one property.
i.e. no right to evict in order to sell a property or to move into it themselves.
Of course the side effect would be even fewer landlords willing to rent to rental allowance tenants or low earners as it would directly affect the value of the property.
Unless the government steps in at the bottom of the ladder to provide more social housing almost every measure you can think of to improve conditions for tenants overall will have a negative effect on the most vulnerable amongst them.