Daft House Price Report: 2010:Q2

The latest Daft house price report is now available here. Ronan Lyons discusses the report here and also discusses the need for a property tax.

The report shows asking prices down 36% from peak. Since asking prices during the boom tended to be less than purchase prices while the opposite seems to be the case now, I reckon it’s fair to view this figure as consistent with an actual decline in prices of over 40% since peak.

Are we near bottom? Nothing ever stops real estate vested interests from assuring everyone that things are stabilising and it’s a great time to buy. However, I reckon we still have further to go. The recent Honohan report informed us on page 83 that the (quite sensible) McQuinn-O’Reilly model indicated that house prices were 33% over-valued in 2007:Q2 relative to what could be justified by disposable income and mortgage rates.

This would justify a decline of one-third in house prices even if incomes hadn’t changed. However, nominal GNP has dropped by about 17% since house prices peaked while income tax rates have been increased. Headline mortgage rates are lower now for those on tracker mortgages but the more relevant measure is probably the cost of financing for the marginal new buyer and these are a good bit higher. One also has to factor in that people will need to make allowance for rate hikes to come.

Taken together, I think a peak-to-trough decline of about 60% wouldn’t be too surprising.

Update: John the Optimist reminds me that an overvaluation of 33% corresponds to 25% decline (100/133) which is fair enough. However, to be honest, I was being deliberately understated in the original post. Add in 17% for the decline in GDP, 10% for the effect of increased tax rates, and who knows what for tight mortgage credit and rate hikes to come and one can easily justify greater than 60%.

Innovation Fund Announced

There have been a number of media stories about the government’s latest Smart Economy initative: a new innovation fund featuring public money matched by money from venture capitalists. The Taoiseach was quite bullish about this program on RTE’s The Week in Politics on Sunday night and he has announced it in a speech in New York (press release here.)  The details say that it is a €500 million fund. As I understand it, this is €250 million from the Irish government spread over five years (€50 million per year) matched by private venture capital funds.

The press release tells us that this is a “major boost for enterprise development and job creation.” Well, with GDP for this year projected at €161 billion, venture capital investments of €100 million per year corresponds to six tenths of one percent of GDP. Government initiatives to develop a venture capital industry in Ireland are probably a good idea (I say probably because these initatives are often poorly implemented, in which case they’re a waste of money.)  However, in the grand scheme of things, this cannot be considered a major boost to enterprise. It’s certainly not a major boost to job creation.

Taxes postponed

It now looks as if neither property taxes nor water charges will feature in the next budget. Shifting the tax burden from income to property and resource use would provide a welcome stimulus to the economy. That said, water charges need water meters and property taxes need a valuation database — and the government does not appear to have put much thought into these matters since the Commission on Taxation released its recommendations.

The upshot, of course, is that spending will need to be cut further and that income taxes will stay high for longer.

It Depends on What the Meaning of “Cashflow Generating” Is

Here‘s an interesting article from the Irish Times by Simon Carswell in which NAMA’s senior officials squirm about their changed assessment of the quality of their loan portfolio, blaming most of it on the fragile psychological state of our bankers last Autumn (poor dears). The highlight:

Mr McDonagh said some loans – on top of the 25 per cent that were generating income – were yielding some, if not all interest due, but Nama was still assessing this.

“Twenty-five per cent is cashflow generating – the rest has some cashflow generating,” he said.

It brings to mind our friend Maurice O’Leary’s favourite quote:

“When I use a word,” Humpty Dumpty said in rather a scornful tone, “it means just what I choose it to mean — neither more nor less.”

Update on Current-Year Macroeconomic Projections

The Department of Finance has released an interim update of its macroeconomic projections: you can find it here.   While the upgrade to the real GDP forecast has been well publicised, this release also notes that the decline in the GDP deflator is sharper than expected –  but it does not provide a number for nominal GDP growth.

A more elaborate revision of its forecasts will be published in the Autumn.