Economists Constantin Gurdgiev, Brian Lucey, Stephen Kinsella, Ronan Lyons, Karl Deeter, Shane Whelan, David Madden, Brendan McElroy, Valerio Poti and John D Masson suggest a way to provide relief to stressed mortgage holders.
Tag: House Prices
From the Department of the Environment “Mr Michael Finneran, T.D., Minister for Housing and Local Services, and Mr. Ciarán Cuffe, T.D., Minister of State, with Special Responsibility for Planning, Sustainable Transport & Horticulture’, today (21 October, 2010) published a National Housing Development Survey.”
In other words, the Ghost Estate report has been published. For reasons best known to themselves, the DoE has only released a summary (link to a Word document here) so far. Is it so difficult to generate a PDF and stick it on the website?
There are lots of aspects of the performance of the Irish economy that people disagree about. However, I had been under the impression until this week that everyone agreed that Ireland experienced an exceptional increase in real housing prices in the during the period before the recession.
It turns out, however, that I was wrong. Not everyone agrees with this. Earlier this week, there was a discussion on this website of a paper by Carmen and Vince Reinhart, which reported some figures for real house price appreciation between 1997 and 2007.
Among the figures reported by the Reinharts on Table 4 of their paper were the following:
U. Kingdom +150.1pc
Spain +118.5pc
Sweden +114.9pc
Ireland +114.8pc
France +111.6
These figures have been debated elsewhere on this site but not in a way that would clarify the key fact. That Ireland really did have a larger increase in real house prices than these other countries is not that hard to check.
Here are the facts. The Department of the Environment reports that the average second hand house in the Republic of Ireland cost €102,711 in 1997 and cost €377,850 in 2007, an increase of 268%. The average value of the CPI increased by 42.4 percent between 1997 and 2007. So, from the DoE figures, we can calculate the real house price increase from 368 / 1.424 = 258. In other words, real Irish house prices rose by 158% from 1997 to 2007. And, for what it’s worth, the real increase from 1995 to 2007 was 246%.
So, yes we really did have a huge house price boom. Certainly a boom that was bigger than occurred in Spain, Sweden or France. Morgan Kelly didn’t just make it up.
Cue comments from house price boom deniers, flat earthers and folks who believe Elvis is alive and living with Michael Jackson …
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%.
The latest Daft report is out, including a commentary from Brian Lucey. The analysis of asking prices is, as always, interesting and useful. However, given the evidence on how long it is taking units to sell, it seems clear that asking prices are still above what would be required to produce a normally functioning market.
The recent receiver-driven apartment sales in Mullingar that attracted considerable buying interest (Independent story here) perhaps provide an insight into the gap between asking prices elsewhere and what would be needed to attract demand. The two-bed units in Mullingar were priced to start at €82,000 and I seem to recall that the median two-bed in this scheme was selling for €90,000. For what it’s worth, a non-scientific comparison shows that the average asking price for two bed units in Westmeath in the Daft report is €162,000.