Expectations, credit and house prices

Happy new year to the irisheconomy.ie community. Of course new year means new quarter and new quarter means house price reports…

The latest Daft.ie House Price report is out this morning. The PDF is available here. For me, the key takeaway is as follows: house prices fell in the final quarter of 2014 and it seems very unlikely to have been statistical noise or a seasonal effect. 35 areas are analysed in each report. For each of the first three quarters of the year, an average of 32 showed quarterly gains in asking prices. For the final quarter, this flipped, with 30 of 35 regions showing a fall. For Dublin, this was the first quarterly fall since mid-2012. (Given the size of increases earlier in the year, a one-quarter fall still leaves the year-on-year change large and positive: 20% in Dublin and 8% elsewhere.) Broadly speaking, a mix-adjusted analysis of Price Register transactions shows the same. While it is only one quarter, it seems more than just a statistical blip.

For me, the check-list of what matters for house prices contains five items: [1] household incomes, [2] demographics and [3] housing supply (“the fundamentals”); and [4] credit and [5] expectations, these last two being the “asset factors” that can create and destroy housing bubbles. None of the fundamentals changed dramatically in the final three months of the year (the only thing you could argue was a slightly higher volume of listings in Dublin), so the change after September must be due to asset factors.

The Central Bank proposed in October to cap residential mortgages as early as January 2015, although this could not affect prices directly in 2014. So the last remaining candidate is expectations.* The quarterly Daft.ie report includes findings from a survey of housing market sentiment. This survey indicates that, yes, those active in the housing market did revise downward their expectations about future house price growth, particularly in Dublin. Whereas those surveyed in September expected a 12% increase in Dublin house prices over the next 12 months, this had fallen to less than 5% by December. I expect that the Central Bank would be happy if it were the case that their proposals strengthened the link in people’s heads between fundamentals (in particular people’s incomes) and house prices.

As for my opinions on the Central Bank guidelines themselves, I submitted a response to the Central Bank’s Consultation Paper, which is available online here. The TL;DR version is “max LTV good, max LTI bad”. I made similar points at an Oireachtas hearing on this and related topics in late November.

* Some have argued that the end of Capital Gains Tax relief was what drove trends in the final months of 2014. The theoretical reasoning behind this is unclear – it is not obvious that this would affect supply more than demand – while practically speaking, it is also not clear how this would have managed to infiltrate the vast bulk of the market which is not of interest to investors. When asked what they thought was driving house prices, those active in the housing market rarely mentioned tax factors, instead picking credit and supply as the main factors.

21 replies on “Expectations, credit and house prices”

Property services can be consumed in two ways,by owning a property or by renting a property. In all euro zone countries lease lengths for residential properties and commercial properties are “say” three to ten years,with renewal rights and rents are reviewed each year with reference to increases in the CPI/inflation. At the end of the lease term,the rent reverts to market rent.
France and the Benelux countries have 3/6/9 leases where the tenant signs a nine year lease,rents are reviewed annually by the CPI for the nine years and the tenant can break the lease at the end of year3,6 and 9. At year nine the rent reverts to market rent. The tenant has renewal rights.

If residential property prices in these countries become too high you have an option to rent,with renewal rights and some certainty about your future rent. Residential property lease law in all these countries is the same as commercial property lease law.

Ireland has the most anti-tenant property lease law in the world. We have very different commercial and residential property lease law–commercial property leases are very long say 25/35 years with ratchet rent reviews every five years and no break clauses and residential property leases are very short say one year with no rent controls and no renewal rights.
In Ireland the residential tenants and the commercial tenants are serfs to be exploited. The state actively colludes with these landlords.
The option to rent residential property under Irish residential property lease law,impacts on Irish house prices. No sensible person wants to be treated like Irish property tenants are treated.

I think it would make sense to split the credit component of the checklist into its component parts. One is the availability of credit. A second is its cost – nominal and real. A third is expected returns on competing asset classes, which significantly determine what returns investors will find attractive in property and therefore drive the flow of investment funds.

This may not be glaringly obvious in Ireland, but when one looks at other markets internationally it is fairly obvious that low interest rates and low expected returns in other asset classes are among the major factors driving property prices up relative to their historical relationship with incomes. It would be surprising if these mechanisms were not at play in Ireland too.

Hi Ronan.
Just wondering if changing demographics may be starting a bigger part than we might want to believe.
I think that the house price rises in Dublin were down to a pent up demand between 2007-2010 down to various factors mainly down to people needing to move into larger homes than the y had originally purchased in the bubble.

What we hope to happen after period of the pent up demand is a return to normal demand.
However what if there were huge demographic changes that means that there is a new normal that is much lower.
The number of people in their 20’s working in the economy has halved since 2007. This means that the normal level of the cohort we would expect to become first time buyers has been dramatically reduced.
I was reading a report today that stated graduates were now earning the same money they were making in 2004 and that working as a free intern for a time has become a norm.
Retail Sales over the Christmas showed that although sales were down the average value of items was up. This points to a widening of inequality and i think we are seeing not just class division but generational division on a huge scale. I think that the chickens are starting to come home to roost on the Irish policy of burdening so much of the recession on that 20-30 age group by excluding them from work in order to maintain salaries of those that were already in employment as much as possible.

“The Central Bank proposed in October to cap residential mortgages as early as January 2015, although this could not affect prices directly in 2014. So the last remaining candidate is expectations”

While it is true the expectations would be significantly impacted by CB cap proposal I fear (based on nothing more than anecdotal evidence) that it may not be accurate to say credit played no roll in the trend – although perhaps its just a case of semantics dear boy, semantics.

The pent up demand of the preceding years in my view was satisfied to a large extent by fronting of savings by the many not burned by the crash at a level that in turn satisfied banks to provide the requisite credit at a pace that helped keep prices in the ascendancy. As a collective the stash of the “unburned” has diminished to a point that no longer attracts a level of credit required to maintain price increases at constant supply/demand and incomine fundamentals.

I don’t know if you are considering savings within the income parameter of income (?) but whether or not that is the case (I presume not) one could envisage a scenario of rising incomes for the population, coupled with falling prices as a consequence of the rigidity of the credit system – which has by and large been self-regulated for the last several years to levels somewhere around the CB proposals anyway. If the credit stops flowing because the cash buyers that made it flow has been diminished to extent price increases are no longer sustainable and possibly reversible, then is this an income or credit problem? even if greater credit creation would pass an objective prudency test?

My own view is that were there to be no change in the 5 items you’ve outlined over the next 6 months then we are still likely to see a fall of as much as 5% in the first half of this year in house prices. I fear the cash pot of “pent uppers” is nearly dry and with credit and expectations being the only levers that can move things in a seismic way in a relatively short period to offset the drying well, and with these moving in either the wrong direction or standing still, declining prices will be the order of the day for at least the next 12 months….and worse still i think we will see this against a backdrop of rising rents in Dublin.

Having had experience of both types of Continental lease – commercial and residential – as identified by John Corcoran, I can confirm the accuracy of what he says.

As he has identified the wood, the insistence on pursuing the trees is rather puzzling. The answer must lie in the continuing Irish perception that all forms of fixed property are assets that can be traded rather than as an element of the capital required to run a successful business, in the first instance, and a home in the second, the lower the cost in both instances the better it is for the wider economy and standards of living in general.

This perception is undoubtedly a colonial inheritance which we could well do without. A decision by the ICB to stick to its guns on the 20% deposit requirement for a mortgage (a standard in Germany), combined with fixed term loans, would be a good start with regard to residential property. The abolition of upward only rent reviews (UORR) for future leases has, at least, prized open the door to reform in relation to commercial property.

No reform is incompatible, in the broader financial context, with membership of the euro, a fact which should have been recognised from the outset. It is not possible to dance the fandango with both the City of London and Frankfurt at the same time.

Interesting findings Ronan.

If price expectations are adaptive one would not expect the correction outlined given the trend in national prices as reported by the CSO. If Rational, are buyers reflecting the prospect of increased supply and dampened demand, the latter due to prudential controls. If so, the likely delay/ phasing in by the Central bank should have an impact.


Here’s one I prepared earlier fwiw:


I would just add that the CGT deadline would seem more likely to motivate purchasers than sellers. We became aware of some apparent belated awareness of the deadline by banks looking to shift a few more properties in possession late in the year, but the steadily increasing numbers of BTLs over 720 days in arrears (now 15,000 +) and the fact that repossessions and voluntary surrenders have consistently and significantly lagged the numbers drifting into this category quarterly square with anecdotal reports of lack of urgency generally here.

Also noted were some estate agents frequently advising potential purchasers, blanket style, that their purchase would be of a CGT-free asset when it was quite obvious said purchasers would struggle to satisfy all the requirements of S64 (a few paragraphs not often actually read).

Some of the individual investor behaviour was frenzied (not necessarily late in the year) and the effect of the expectations of a return to boom-time prices and boom-time lending I referenced in the link was magnified by the further expectation that the large capital returns would be tax-free, so long as the deadline was met.

The prospective PPR buyer would have been caught up in similar sentiments, but more in terms of panicking at missing an opportunity.

The Dublin market went from being ‘no bid’ to being ‘no offers’ in the space of 12 months, I suppose the nearest a property market can get to gapping higher, with q3 2013 – q1 2014 being the most dynamic.

On the supply side I think SI.9 requirements are probably a 20 – 30k OTT cost and ludicrously high site costs builders seem institutionalised into paying are another pointless expense. (Perhaps re-zoning should always result in sufficient options to force landowners to compete with each other to sell land to builders (and have it actually built on) rather than being able to sit on their near monopoly positions until someone pays up…)

You are right imho about the Planning restrictions in Dublin – millionaires only please, because Dublin’s worth it.

On the ICB LTV & LTI limits, there is a fair amount of cocky chat about PH being put back in his box.

Don’t forget commuting costs. I’m not suggesting it’s responsible for the Q4 fall but ‘going forward’ driving 100km daily is getting cheaper by the day. Which should relieve Dublin of some demand, especially on the rental side. Remember we built the houses, just in the wrong places.

Is it just me or has moderation ramped up a lot of late. I’m experiencing hour longs delays getting posts up.

The survey brings a very welcome piece of news to start the year. The Dublin house price rises over the past 15? months were just unsustainable economically and particularly socially.

On the question of the interpretation of changing expectations, one of the factors, at least, could be a view that the rate of increase was simply unsustainable and people had started to look elsewhere for houses; both owner occupiers and investors looking outside Dublin.

On the question of the fundamentals changing, one would not want to ignore that Dublin fundamentals, in term of demand, changed significantly since 2011. As far as I can recall there are about 50,000 additional people working in Dublin since the nadir of the crisis. This would certainly have ratcheted up housing demand in Dublin, where supply has been almost non existent for the past few years.

I note from the Daft report the following:
“The other main aim of housing policy – abundant housing – is beyond the Central Bank’s remit and must be a priority for the Departments of Environment and Finance.”

Is that not the crux of the problem? There is no single department charged with providing a properly planned, controlled and resourced national housing policy.
At the end of the day, nobody was responsible for our boom-bust approach to housing, and even as of today after all the mayhem created, nobody is still responsible for overall housing policy. Policy is made up as we go along, in response to the latest crisis.
We have learned nothing, or very little.

@ Joseph
“As far as I can recall there are about 50,000 additional people working in Dublin since the nadir of the crisis”

But how many of these people already had bought homes and then lost their jobs? Its true that employment has increased but it was not in the younger cohort of likely first time buyers the very limited increase in employment for this age cohort has been in precarious work.
How many of these jobs were for a salary higher than 40k, the minimum you would need to get any kind of mortgage in Dublin?
As Kerchav and I believe, most of the pent up non investor demand was not new first time buyers. It was young growing family’s in their 30’s that kept their jobs and needed to move from shoe box apartments to houses. A lot of that demand is now waning and there is a lot less demand to replace it.

I would also question the predicted size of the future private housing requirements made by many commentators. I cant see where the demand will come from. Our population increase at the moment is exclusively down to people living longer rather than extra people being born.

The biggest change in the Irish housing market since 2007 is the doubling in private rented accommodation. And the subsequent doubling of the power of the land lord class. A class that, as John Corcorann has pointed out religiously already had the laws of the land sown up in their favour.
in his final sentence of his post he says. “No sensible person wants to be treated like Irish property tenants are treated”. To which I would add, that might be true but unfortunately twice as many people have been forced to since 2007.
The worrying thing about home ownership being in freefall is that when you look at the CSO figures from 2011 it shows that it is not people living in rented accommodation that are providing for their retirements. It is almost exclusively People who own their homes that are paying the biggest % of their earnings into their pensions. Justifying tax relief at the top rate gets even more unjustifiable.The 49% of people working without pensions and the growing number of people renting for life/longterm are the same people and when they get sick or retire it will cause huge societal difficulties that we have not even begun thinking about. The government by their landlord friendly policies are storing up massive problems for the future.

There are a number of issues with respect to our PPR sector which get little attention.

The PPR sector has both fixed (structures) and variable (principles + interests + rents) assets where each can be separately engineered into various types of financial derivatives, which in their turn can be traded OTC or hypothecated and re-hypothecated. This has profound implications for the nature and type of mortgage originations that can now occur and the financial wellbeing of the persons who contract to take on the repayments.

In effect, our domestic housing policy has been moved out of its traditional control centres and placed (quite improperly) into the control of international financial speculators. Their care is for their yield – not for the number or nature of domestic housing units – anywhere!

The ICBs proposal to use LTV + LTI as a rough-and-ready means of credit control are not really optional anymore. They need to be made into legislative controls over a financial system gone haywire. Both LTV + LTI (they actually act in parallel) have proven, in practice, to be highly effective as financial controls in PPR sectors. The historical record confirms this. OK, so the theory may be a bit dodgy. But, Just ignore this anomaly and move on. Economic theory is very dodgy anyways.

A key variable in the Irish context is the low number of existing PPRs that are coming onto the open market. Yes, this number does vary a lot with the selling season, but it should be predictable – if the PPR sector were ‘normal’ – which it is no longer. A serious political fix is needed – but the wet J-Cloth and Damp Knicker brigades will nix that. Not convenient.

Ronan mentioned ‘expectations’. Indeed. But its the expectations of the financial speculators which will trump all. They ‘expect’ low interest rates for a while yet and they also ‘expect’ that governments will keep a solid floor under their reckless lending risks. “Gamble on!”

And I hope this comment is completely untrue:

“On the ICB LTV & LTI limits, there is a fair amount of cocky chat about PH being put back in his box.”

If not, its quite disgraceful. But predictable.


Moderating comments may or may not have any practical use – especially on this blog, which seems to be quite robust. The ad homs and non-pc terminology are few and far between. The former will be promptly and firmly dealt with by active commentators. The latter are usually artfully edited by the authors.

Many of the comments are directly connected to a previous comment or series of comments. So, if you do excise a comment perhaps you could graft it back into its original place in the comment sequence – with a Moderator Comment on how long the comment was held in the moderation kraal. Delayed comments may become irrelevant to the discussion in hand.

And again: any chance we might get the real-time SpellChecker back on-line?

Brian Woods Snr.

Agreement with many of the points above. And perhaps it’s just me, but I didn’t hear or see news of the Daft report being shouted from the rooftops on the papers and radio this time. Whereas it was the last few times.

Maybe just my impression.

Meantime, here’s my tongue in cheek solution to Dublin’s housing crisis. High density housing (yes, flats, but good big ones) here.


Won’t happen here, but other countries would do it. And it seems more sensible than exiling people to places that are 10s of kilometers away, where the price of petrol is a major feature of life.

@Eamon Moran

Point taken in respect of the fact that some or many of the 50,000 jobs in Dublin were already Dublin residents. It had not registered to me!
I agree fully with your other points in relation to those in rented accommodation.
Looked at from a distance, it looks as if the state has bent over backwards to protect property interests of all sorts (commercial and residential), while throwing tenants open to the full viciousness of those protected by the same state.

One further point re the stalling of house price increases. The fact that the stall occurred simultaneous with the finalization of the stress tests, could lead a sceptical person to conclude that the banks manipulated the amount of credit available in the early part of the year, and then got much more restrictive as Sept approached. Now, banks would never have considered such a devious strategy, would they!!!?

On the plus side the doubling of the rental market, doubles the voters subject to Europe’s least Tennant friendly tenancy laws. Things can only get better from here.

@ Eamon Ryan

Great point on the cross over between pension apartheid and those priced out of property ownership. We’re storing up plenty of problems for the future.


Well, of course the Supreme Court found in favour of the commercial landlord, even though hell may freeze over, the pound of flesh had to be extracted.
Dutifully the SC stuck to the narrow focus of interpreting the meaning of ‘preceding period’, etc ; choosing to ignore the broader issues of a landlord continuing to extract twice the market rent from a commercial organization, with all the consequences that such an extraction portended.

Bewleys, on the other hand, presumably could have have gone into examinership, thereby making an attempt to preserve jobs. [Under examinership the landlord could, by law, go whistle for his excess rent]. However, they appear to have chosen a ‘shutdown’, making all staff redundant, reopening and hiring at their own choice and discretion following the shutdown period. [The article makes no mention of Bewleys being in receivership/liquidation, so I assume they are not.]
One can only construe that the principle of first in last out, that might have applied to an examinership, was not to Bewleys liking.

Lets hope that the corporate structure of Bewleys does not allow a situation whereby the State ends up funding the redundancy, and if it does the State should seek reimbursement from Bewleys.

As for the SC, its judgement has served landlords well. Pity about the workforce but there are property interests at stake!

@ JR

It is not the job of the Supreme Court to do anything other than to adjudicate within the limits of the case before it. Were it to act otherwise, anarchy would beckon. The responsibility with regard to reform of Ireland’s extraordinary lease law – both commercial and residential – lies with the politicians elected by the people. That there is little pressure for them to do so says a lot – not very positive – about the nature of Irish society.

No sure who the bye-line is by. But the entire piece is rubbish.

“There is no reason why the “capitalist achievement” cannot be applied to providing people with decent housing, just as it has provided them with a limitless supply of stockings.”

Residential housing for home formation is a unique economic enterprise. Its not amenable to being shoe-horned into the useless gibberish that passes itself off as capitalist economic theory, despite the heroic efforts of some economists and their useful idiot supporters in the media and persons afflicted with a severe bout of partisan bias.

If instead, the above read like this: – you’d promptly classify the author as a social and intellectual misfit. An idiot.

There is no reason why the “capitalist achievement” cannot be applied to providing people with decent housing, just as it has provided them with a limitless supply of tents.”

There are some reasonable reasons and plenty of very unreasonable reasons why Capitalism cannot, ever, provide decent housing – in the aggregate. But trying to get your intellect around those reasons seems to be proving a tad challenging to the cognitively challenged brigade.


The Law Reform Commission March 2003–Consultation Paper on Business Tenancies ref (LRC CP 2003);
In Chapter 2– General Conclusions page 15 subset 2.05: The Commission finds the following important conclusion:

“The Commission’s preliminary conclusion is that the current state of commercial leasing law and practice in Ireland is so out-of-line with that in the rest of Europe and other jurisdictions with which Ireland has substantial trading links(such as the USA), that serious consideration must be given to a radical overhaul”

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