The housing bubble has burst

PDelux

....in Australia.

http://www.smh.com.au/news/national/slump-hits-home/2006/02/06/1139074171442.html

Maxwell

Is Australia's housing situation not similar to Ireland's over the past 10 years.

One major difference is Irish people appetite for house/property ownership - keeps the demand for any kind of property high......or does it.

Any economists on here want to make a prediction of Ireland's property market for the next 3-5 years?

Merrion

Two houses in my estate have been for sale for the last 3+ months. One was just taken off the market and it didn't seem that they had many people looking around...I'd say that either (a) they were wildly overpriced or (b) the market is shifting in favour of the buyer.

* Note : this is one small sample and doesn't necessarily indicate the trend for the whole of Ireland; just the vastly overpriced area I live in...

ronbyrne2005

prices will rise for at least next 3 years but after that with higher interest rates and a slowing of our economy with many jobs heading to india etc the outlook is less rosey.mainsteam economic commentators like damien kiebard in sunday times are calling an asset price bubble and our economys future is uncertain (read this http://www.finfacts.com/irelandbusinessnews/publish/article_10004162.shtml)

Nuttzz

Mortgage Interest rates down there are a lot higher, about 7.5% compared to our 3.5-4%, has to be a big factor down there

D'Peoples Voice

Nuttzz wrote:

Mortgage Interest rates down there are a lot higher, about 7.5% compared to our 3.5-4%, has to be a big factor down there

I assume thats a typo, you meant to say 5.5% not 7.5% in Australia.
and in the euro area, interest rates are only 2.25%.
http://www.bba.org.uk/bba/jsp/polopoly.jsp?d=141&a=627
Does anyone have an up to date measure of the number of dwellings in Ireland per thousand for late 2005? I'm guessing we were getting closer to 400 dwellings per thousand before the recent influx in immigrants. The last I heard was 378 per thousand, still a long way off the rest of Europe(420), although we were closing in rapidly before our immigrants came along.
Of course dwellings per thousand completely ignores the demographic profile of the population, but it's a very very loose measure of excess supply.
Some economists use this measure, but it ignores the fact that Irish catholic households tend to be bigger, so on average we'd need less houses than our european counterparts. It also ignores the fact that if you have loads and loads of kids/pensioners in your population, then the number of houses is not a great measurement for obvious reasons.

Nuttzz

http://www.interestrate.com.au/index.asp
http://www.national.com.au/downld/int_rates_pers_lending_13022006.pdf

all in the 7% range

BrianD

Maxwell wrote:

Is Australia's housing situation not similar to Ireland's over the past 10 years.

One major difference is Irish people appetite for house/property ownership - keeps the demand for any kind of property high......or does it.

Any economists on here want to make a prediction of Ireland's property market for the next 3-5 years?

It's hard to compare countries but I think the situation in Australia is quite similar. Big boom in development and typical houseprices many multiples of the avergage industrial wage. Like the Irish, the Aussies have a healthy desire to own their own place and invest in properties.

MG

D'Peoples Voice wrote:

Does anyone have an up to date measure of the number of dwellings in Ireland per thousand for late 2005? I'm guessing we were getting closer to 400 dwellings per thousand before the recent influx in immigrants. The last I heard was 378 per thousand, still a long way off the rest of Europe(420), although we were closing in rapidly before our immigrants came along.
Of course dwellings per thousand completely ignores the demographic profile of the population, but it's a very very loose measure of excess supply.
Some economists use this measure, but it ignores the fact that Irish catholic households tend to be bigger, so on average we'd need less houses than our european counterparts. It also ignores the fact that if you have loads and loads of kids/pensioners in your population, then the number of houses is not a great measurement for obvious reasons.

I posted this on another thread about two weeks ago but it answers yours question:

"Interesting stat from the CIF website today:

“Ireland has a stock of 391 houses per 1000 of population. The EU average number of houses per 1000 population is 428.”

Interestingly, if Ireland’s population were to increase by 100,000 every year for the next ten years, we would need to build an average of about 54,000 houses p.a. to be at the EU average above (based on a current population of 4.2m). In 2005, we built 80,957 houses so that’s a decrease of about a third on our current output.

Given that about 12% of the population are involved in construction and about 2/3s of these are in housing that could equate to an additional 2.5% of the workforce looking for work (which in turn lead to a lower population growth vicious circle.) Except it would probably be worse as output would probably go 70,70,60,60,50,50, 45, 45, 45, 45.

And given that we are our economy is supposedly driven largely by consumer spending, imagine the knock on effects.

Current Pop 2006 Say 4,200,000 at 391 houses per th. 1,642,200
Proj pop 2015 Say 5,100,000 at 428 houses per th. 2,182,800

Houses needed 540,600
Annual average 54,060


P.S. The CSO only predict a population of 4.8m by 2021 so the above is actually quite optimistic."

If the population were to increase by 100,000 per year and we were to maintain the rate of 80,000 new units pa then we would be at the EU average in 4 years.

If the pop were to increase by a more realistic 60,000 pa and housebuilding was to continue at a more realistic rate of 70,000 pa then we would be at the EU average in 3 years.

My prediction - house prices to stabilise (ie fall in real terms) within 18 months.

MG

I was reading a report from the ECB recently which listed the factors which probably explain house prices most. It was interesting that from an Irish viewpoint many, indeed all, of thee factors are at the top of their cycle – they can’t get any better fromm the point of view of inflating house prices. Usually above average returns are based on expectations of future growth. If these factors are at the top of their cycle it is hard to see where this growth could come from. I don’t see any upward pressure for house prices.

The factors are:
1. Household income – obviously this has exploded in Ireland in the last ten years with both wage growth and employment growth. But is their any more room for improvement? Unemployment is already extremely low and any more wage growth threatens competitiveness. At the top of the cycle IMO.

2. Interest rates (real & possibly nominal too) – Real interest rates have been very low, close enough to zero as the interest rate is being set for the slower economies, not for our tiger economy. Nominal interest rates are at historic lows. Outlook is for interest rate rises. Cycle topped out last year.

3. Household formation/demographic factors – Household formation and housing averages are fast approaching the EU average. Baby Boom peaked in 1981 so native population growth in the key 25ish age category is peaking. Immigration has surged but is it sustainable? If cost of living keeps increasing, low cost eastern European economies boom, etc then net immigration may slow. Dependent on many factors and the most open of these questions.

4. Supply side variables – housing supply has probably peaked but is at unsustainable level, accounting for probably 8-9% of employment. The effect of lower supply on housing prices may be more than offset by the economic impact of lower employment levels.

5. Financial market institutions & credit availability – never easier to get money. Maybe too easy.

6. Taxes, subsidies & public policies – tax policies have been very generous to property development but the climate seems to be changing here.


So in my opinion, all these factors have peaked (possibly possibly possiblywith net immigration continuing at a reasonably high level for a while yet), so where is a continuance of the housing boom going to come from? And given its disproportionate effect on the economy, can there be anything but a crash (real or nominal) around the corner?

D'Peoples Voice

MG wrote:

can there be anything but a crash (real or nominal) around the corner?

You must remember there are thousands of 'couples' waiting for the crash to move in and buy, therefore in my opinion, there will be no crash.

I see prices weakening, perhaps a fall of 15% - 20%.
However after that, my guess is they won't rise for many years ahead,
because rents will continue to remain weak,
which will mean more investors selling and young couples buying.

Having said that, I find the most interesting statistic in the Irish property market, is in the last census. Look up the amount of appartments that are owner occupied as a percentage of the total appartment population. Then think, that was in 2002, by 2007, the figure will be even more worrying!

lomb

I dont think that report has alot of relevence to ireland. interest rates are only 3.5% here up to 3.75% , rental yields are about 4.75%. banks are happy to advance money interest only...
also the germans never payed alot to borrow money and there is a political will there that they never will and they basically control europe.
i can gaurantee if interest rates rise here to 8% the market will bomb. the fact is that in times of low interest rates property becomes very very attractive.

MG

D'Peoples Voice wrote:

....... therefore in my opinion, there will be no crash.

I see prices weakening, perhaps a fall of 15% - 20%.
However after that, my guess is they won't rise for many years ahead,

You don't think this constitutes a crash?

MG

lomb wrote:

I dont think that report has alot of relevence to ireland. interest rates are only 3.5% here up to 3.75% , rental yields are about 4.75%. banks are happy to advance money interest only...
also the germans never payed alot to borrow money and there is a political will there that they never will and they basically control europe.
i can gaurantee if interest rates rise here to 8% the market will bomb. the fact is that in times of low interest rates property becomes very very attractive.

Don't misunderstand my hypothesis. This report names the dynamics of house prices. My point is that all these factors have aligned extraordinarily in the past few years causing the price increase. All the factors influencing prices have - household income increases, low interest rates, favourable demographics, relaxed lending criteria etc have been in the optimal position/cycle for rapid house price increases. But most of the factors have peaked, they cannot continue to improve and drive expectations of above average returns. Once the market acknowledges this, we could be on a vicious downward circle due to our overdependence on the construction (especially housing) sector.

Zynks

MG's argumentation is very logical and I tend to agree with most points. However, there is one point not being considered: the age distribution piramid is changing fast. Until a few years back 50% of the population was under 25. This youth block is getting slimmer fast. This means that there still is a supply of new buyers that will probably peak by 2010-5. So, until then, it is not just the imigration figures that will influence the demand, and even if the population in Ireland did not change, there would still be demand for new houses, albeit at a lower level than now.

On another note, the market is only driven by one true factor: people's willingness/ability to buy. I doubt a drop in willingness to buy will happen soon in Ireland, but the ability to buy may be very close to the limit...

ronbyrne2005

MG wrote:

I was reading a report from the ECB recently which listed the factors which probably explain house prices most. It was interesting that from an Irish viewpoint many, indeed all, of thee factors are at the top of their cycle – they can’t get any better fromm the point of view of inflating house prices. Usually above average returns are based on expectations of future growth. If these factors are at the top of their cycle it is hard to see where this growth could come from. I don’t see any upward pressure for house prices.

The factors are:
1. Household income – obviously this has exploded in Ireland in the last ten years with both wage growth and employment growth. But is their any more room for improvement? Unemployment is already extremely low and any more wage growth threatens competitiveness. At the top of the cycle IMO.

2. Interest rates (real & possibly nominal too) – Real interest rates have been very low, close enough to zero as the interest rate is being set for the slower economies, not for our tiger economy. Nominal interest rates are at historic lows. Outlook is for interest rate rises. Cycle topped out last year.

3. Household formation/demographic factors – Household formation and housing averages are fast approaching the EU average. Baby Boom peaked in 1981 so native population growth in the key 25ish age category is peaking. Immigration has surged but is it sustainable? If cost of living keeps increasing, low cost eastern European economies boom, etc then net immigration may slow. Dependent on many factors and the most open of these questions.

4. Supply side variables – housing supply has probably peaked but is at unsustainable level, accounting for probably 8-9% of employment. The effect of lower supply on housing prices may be more than offset by the economic impact of lower employment levels.

5. Financial market institutions & credit availability – never easier to get money. Maybe too easy.

6. Taxes, subsidies & public policies – tax policies have been very generous to property development but the climate seems to be changing here.


So in my opinion, all these factors have peaked (possibly possibly possiblywith net immigration continuing at a reasonably high level for a while yet), so where is a continuance of the housing boom going to come from? And given its disproportionate effect on the economy, can there be anything but a crash (real or nominal) around the corner?

i agree with all above but then there is the speculative element with people buying as "prices can only go up". rental yields are so low- below 3%in many places-and this is an indication of the belief that prices will rise further,people are prepared to accept low rental yield as they beleive they will make their money on capital appreciation.

ronbyrne2005

lomb wrote:

I dont think that report has alot of relevence to ireland. interest rates are only 3.5% here up to 3.75% , rental yields are about 4.75%. banks are happy to advance money interest only...
also the germans never payed alot to borrow money and there is a political will there that they never will and they basically control europe.
i can gaurantee if interest rates rise here to 8% the market will bomb. the fact is that in times of low interest rates property becomes very very attractive.

rental yields are below 3% nearly everywhere! even lower when you take expense into account.my friends rent a house in ranelagh for 1600 a month and its worth 800k! as for the germans not paying much for borrowing,the bubdesbank used to beleive in higherr interest rates and would raise rates now if it wasnt for italy and france,the new guy joining ecb board from the bundesbank is in favour of higher rates policy.forget about rates having to hit 8% or even 5% if prices are excessive and any shock from supplyside or demand side occurs prices could drop significantly as the psychology changes.people who plan to buy will see prices falling and will consider buying but will then think but prices are falling why should i buy now? prices will fall further then i will buy,then we get caught in a negative spiral where house prices fall further and the rest of the economy gets affected and then jobs are lost and then economy suffers further.

chump

are rental yields based on the price of the house when purchased or current estimated market value?

If tis on current values no way could it be 5odd percent. Not in Dublin CC anyway!

nlgbbbblth

edit

ronbyrne2005

chump wrote:

are rental yields based on the price of the house when purchased or current estimated market value?

If tis on current values no way could it be 5odd percent. Not in Dublin CC anyway!

retal yields are based om current house prices and current rents.if you take the expenses of being a landlord (insurance maintenace etc)from the rent you get an even lower rental yield

lomb

Rental yields in office and retail are accepted to be just under 5%. as regards residental, i viewed a house in ranelagh the other day(not that i have the money but anyway) with a guide of 1.4 mill, and it went under the hammer at 2.2 million. and to be honest i wasnt very impressed. it was an end of terraced 4 or 5 bed with a small side garden, no front garden but had parking out the back. it was divided into 2 shoddy pre 63 apartments and needed a total refit, and i mean total. if that was rented u wouldnt see 1% return on it. absolutely mentally overpriced but it was sought after and sold..
anyway when i say yields are just under 5 i mean for rentable type stock, like apartments in D1 or maybe houses in certain cheap suburbs.
there is no way ul ever see anything like 5% on family type homes and i would accept that the prices are very very high for them. but there is value out there.

ronbyrne2005

lomb wrote:

Rental yields in office and retail are accepted to be just under 5%. as regards residental, i viewed a house in ranelagh the other day(not that i have the money but anyway) with a guide of 1.4 mill, and it went under the hammer at 2.2 million. and to be honest i wasnt very impressed. it was an end of terraced 4 or 5 bed with a small side garden, no front garden but had parking out the back. it was divided into 2 shoddy pre 63 apartments and needed a total refit, and i mean total. if that was rented u wouldnt see 1% return on it. absolutely mentally overpriced but it was sought after and sold..
anyway when i say yields are just under 5 i mean for rentable type stock, like apartments in D1 or maybe houses in certain cheap suburbs.
there is no way ul ever see anything like 5% on family type homes and i would accept that the prices are very very high for them. but there is value out there.

any professional long term property investors will not invest in residential unless they get rental yields of around 8-10%.i dispute your contention that there is value in the rental market,give me an example and links maybe to homes on myhome.ie and daft.ie.
a lot of landlords bought their properties at far lower prices than now so their yields are higher but current yields would be an indicator to "take profits" to me.

lomb

value is buying a 3 bed semi in say clonsilla for 330-380 and it getting 3%-3.5% and it increasing 15-20% in one year.
value is buying a commercial prime retail property that yields 4-4.5% and has a virtual 100% rental gaurantee. prime retail went up a surprising amount last year.
value is not buying office space that yields 5% because there is an excess of it and ul find if its old tat it wont let once the lease runs out. people want glass palaces with parking these days.
value is this http://194.46.8.213/search/property.asp?id=257990
should yield what 4-5%?
the problem is capital appreciation isnt as strong there in that location as in say rathgar, donnybrook, blackrock etc, u wont see 1-1.5% in these places.
the thing is professionals look not only at rental yield, but capital increase, and better locations appreciate at a higher rate, but conversely have a lower yield.
many people buy family homes to live in not to let. so low yields in family locations can be explained by this but i have seen clever investors buying on ailesbury road, and period redbricks in d6, when they never intended living there themselves. they never bought for rental return, with them having to cover interest themselves for years out of their pocket, but they bought for capital increases which they have done very very well out of..

ionapaul

Those people are clever speculators, not clever property investors! Property investors follow the fundamentals with regard to yields - there are a lot of people who are happy to accept poor, below average, or even negative yields (I know people relatively happy to have an unoccupied property that is achieving strong capital growth) and who have made huge paper gains, but lets be fair: they are speculators

JimmySmith

Oh ...... This again.
I wish the Irish Property market wasnt going to collapse every single f*cking year. I hate it when everyone on here predicts a crash is wrong every few months.

Can we make a rule that anyone who predicted a property crash in the last, say 5 years not be allowed to predict it again. And anyone who predicted it more than once just be shot.

Lets just agree that it will possibly happen one day and admit that none of us has a clue when, how or if.

dmeehan

JimmySmith wrote:

Lets just agree that it will possibly happen one day and admit that none of us has a clue when, how or if.

totally agree!

not too sure about the shooting people part though

JimmySmith wrote:

And anyone who predicted it more than once just be shot.

lomb

ionapaul wrote:

Those people are clever speculators, not clever property investors! Property investors follow the fundamentals with regard to yields - there are a lot of people who are happy to accept poor, below average, or even negative yields (I know people relatively happy to have an unoccupied property that is achieving strong capital growth) and who have made huge paper gains, but lets be fair: they are speculators

well there is alot of science to it, i think its more than speculation when there is a thought process involved. speculating is betting or something like that, investing is putting money into something to reap a return, that return is profit.
there is a lot of clueless speculating going on out there and on this thread. there are reasons property rises, virtually everyone agrees that over 20 years it will always rise by the rate of inflation or more.

ionapaul

Loads of people predicted the dotcom bubble bursting numerous times...they were all right in the end. Why should they have been shot for saying it more than once (i.e. in 1998 dotcom stocks were overvalued, in 1999 dotcom stocks were overvalued, in 2000 dotcom stocks were overvalued)? Obviously no-one has any idea when, how or if there will be a housing market crash, but it is ok for people to say 'based on fundamentals the housing market was in a bubble in 2000, based on fundamentals the housing market was in a bubble in 2001, based on....' etc etc

How many people who have predicted a crash, correction or anything given specific dates for this? Point and those people and shoot them, if you like.

ronbyrne2005

lomb wrote:

well there is alot of science to it, i think its more than speculation when there is a thought process involved. speculating is betting or something like that, investing is putting money into something to reap a return, that return is profit.
there is a lot of clueless speculating going on out there and on this thread. there are reasons property rises, virtually everyone agrees that over 20 years it will always rise by the rate of inflation or more.

lomb when yields are ultra low by definition people are speculating that prices will rise further therefore they dont mind the low yields.As for science involved,maybe psychology is involved but psychology is a very inexact science when dealing with crowds/herds.

as for your assertion that over 20 years property will always rise by above inflation-yes on average it will(over last hundred years prices have risen by 0.9% per year after inflation) but there can be and has been periods where property is flat/declining after inflation over 20 years ,its all about timing,but property prices cant increase (on average) more than real increase in wages ceteris paribas.

Pa ElGrande

Once the money stops blowing into our debt bubble, the bubble bursts, and no financial intervention can restore it. Its interesting to note that nobody I've spoken to actually wants the price of houses to go down, they just want to get on the ladder and get their slice of the pie. They only complain because the cost of entry to this market is beyond them.
I have yet to see a discussion about buying a house or apartment that takes the following costs into account over the lifespan of the person or their family.

1. Cars - Road tax, insurance, fuel, maintainence, servicing car finance/loans
2. House - Mortgage payments, Home insurance, Maintainence, furnishings, Home heating, appartment maintainence fees.
3. Family & personal - Child care, Food & clothing, education, health insurance & other bills
4. Services - Electricity, telephone & internet access, rubbish collection, water services
5. Government - income tax, stamp duties, benefits, PRSI & other taxes
6. Employment - income growth, pension provision, unemployment, retirement.

As one of the most open economies in the world, our economic survival depends on being competive, this puts downward pressure on our wages (unless we continue to improve productivity), and, must at some point put a brake on our abilty to take on debt. The major ecomonies in €uroland (Germany, France, Poland) will not remain in the doldrums forever and when they get their act together money will not flow into this country unless we are willing to pay a higher price for the privelege by way of interest rates.

lomb

normally id agree with you guys except ireland is in a very very special position. its english speaking, has a large young population that can pay taxes, has net immigration of young people that pay taxes, is in euroland with low interest rates, and finally has a very very low corporation tax rate. did u know microsoft pumps its entire european revenue thru ireland and the government gets 10% of the profit in tax off that. and microsoft arent the only ones.

whats happening is foreigners are coming here like microsoft, hp, xerox, intel ,xilinx ,symantec, ebay. they provide the innovation and the irish pump the profits of the innovation into a dead asset property, which goes up.

these are very strange times, but there are reasons that explain what is going on here.

and u are right no one is complaining about property prices except if they cant get on the gravy train. every one wants them to keep going. if they didnt then all they have to do is tighten the capital requirements that banks need to hold before lending money, that would stamp out 100% and 92% mortgages overnight! why dont they do it? because the politicians have no reason to stop the train, they are the one with their feet on the acclerator!!