Housing Bubble Bursting

Gurgle

smccarrick wrote:

rent yield was between 5 and 6% (historic norms)

Norms when the interest rates were 7-8% ?

johnnyskeleton

People are often arguing that if economic immigrants stopped coming to Ireland (and a lot of the ones that are here also left), the property market would collapse. It is often said that rich people are good for the economy because "the big ship raises the water level" or some such expression.

My question is, is the opposite of the big ships expression true, and if there is less demand for the lower end of the housing market, will the big fancy properties also drop in price?

I'd hate to think that ordinary people will loose their shirts on the property market, but the big wigs in the embassy belt will stay nice and comfy.

ronbyrne2005

Originally Posted by smccarrick
rent yield was between 5 and 6% (historic norms)

Actually rental yields were 10+% in Dublin for most 1990s and higher in 1980s.

Maybe an argument could be made for the new norms to be 6/7% due to lower interest rate environment in eurozone.

Victor

Note, there are several markets, it isn't a single commodity.

http://www.rte.ie/business/2007/0427/houses.html

First house prices drop for five years
Friday, 27 April 2007 14:10

...

The fall is reflected in all sectors of the housing market apart from Dublin and houses bought by first-time buyers.

...

The_Conductor

ronbyrne2005 wrote:

Originally Posted by smccarrick
rent yield was between 5 and 6% (historic norms)

Actually rental yields were 10+% in Dublin for most 1990s and higher in 1980s.

Maybe an argument could be made for the new norms to be 6/7% due to lower interest rate environment in eurozone.

You're quite right. What I should have said was Net Rental Yields (as opposed to Gross Rental Yields (net having all expenses, inclusive of mortgage interest and allowance for empty periods deducted from the calculation).

S.

ronbyrne2005

Victor wrote:

Note, there are several markets, it isn't a single commodity.

http://www.rte.ie/business/2007/0427/houses.html

There are several anomolies in the index such as price of new properties don't seem to be falling but in reality builders are throwing in loads of extras like kitchens, TVs etc. Also all the evidence I have seen indicates Dublin property is falling but as there is a lower volume of sales only the best quality/value properties are selling and the "average" property in each category(eg 3 bed semi Dublin) will be of higher quality than the "average " property last year. Also the time lag means this data is several months out of date. Dafts soon to be released report shows asking prices dropping significantly across Dublin.

babytooth

ronbyrne2005 wrote:

There are several anomolies in the index such as price of new properties don't seem to be falling but in reality builders are throwing in loads of extras like kitchens, TVs etc. Also all the evidence I have seen indicates Dublin property is falling but as there is a lower volume of sales only the best quality/value properties are selling and the "average" property in each category(eg 3 bed semi Dublin) will be of higher quality than the "average " property last year. Also the time lag means this data is several months out of date. Dafts soon to be released report shows asking prices dropping significantly across Dublin.

exactly, we need to compare like with like, apples with apples..

its down as well everyone knows..

nesf

ronbyrne2005 wrote:

There are several anomolies in the index such as price of new properties don't seem to be falling but in reality builders are throwing in loads of extras like kitchens, TVs etc. Also all the evidence I have seen indicates Dublin property is falling but as there is a lower volume of sales only the best quality/value properties are selling and the "average" property in each category(eg 3 bed semi Dublin) will be of higher quality than the "average " property last year. Also the time lag means this data is several months out of date. Dafts soon to be released report shows asking prices dropping significantly across Dublin.

You're quite correct. Sales volume is implicitly linked to sales prices when examining markets of any kind. Markets can behave very oddly when volume becomes suddenly very small.

http://www5.daft.ie/report/rossa-white.daft

Rossa White is our guest blogger, commenting on the lastest Daft research on the Irish property market.

[30 April 2007]

Ireland's housing market downturn in now almost nine months old. That makes its duration much longer than the blip in late-2001. At that time, more than five years ago, the market cooled for less than six months. In contrast, this slowdown may continue for the rest of the year at least.



The latest Daft.ie figures show that vendors have revised their expectations for prices, as a result of weaker demand from potential buyers. But the data also continue to suggest that the most likely outcome for prices is a period of stagnation rather than significant decline.

Asking prices increased only 2.1% year-on-year in April. That marks quite a change from a growth rate 13.8% when the market was hot in the same month one year ago. But year-on-year changes hide the turning point. In quarterly terms, prices slipped 0.5% in Q1 2007 compared with Q4 2006, an annualised rate of decline of 2%.

The Daft.ie Asking Price Index highlights that the housing market overheated in the year to mid-2006. Since then, Dublin has seen the sharpest drop in asking prices. Yet the data on final selling prices from PTSB/ESRI records that Dublin prices have held up better than in the rest of the country over the last four or five months. This implies that sellers in the Dublin area became greedier than elsewhere during the buoyant first half of 2006. Asking prices were quickly pared from an unrealistic level. The reversal in expectations is conspicuous in high-end areas of the market: Between Q3 2006 and Q1 2007, asking prices plunged 17% in Howth, 13% in Rathmines, Rathgar and Ranelagh and 10% in Clontarf, Killiney and Dalkey.

The recent slide in house-building has important implications both for the future direction of house prices and the economy as a whole. Builders and developers have reacted swiftly to falling demand thus far: it is the salient reason why overall asking prices were down only 2% in Q1 compared with the last three months of 2006. Housing starts decreased 22% year-on-year in October 2006-March 2007. The twelve-month running total has slipped to around 80,000 from a peak of 90,500 last September.

The Irish experience contrasts somewhat with US house-builders' response to the inflection point in that market in late-summer 2005. Our American counterparts kept building liberally and did not pull in their horns until the start of 2006. Housing starts were finally slashed throughout last year but developers' delayed reaction meant that the over-supply problem was relatively contained rather than calamitous.

What has happened in the US over the last 18 months may also provide a useful guide to future price trends here. Despite the biggest overhang of unsold stock in 16 years, their prices dropped only 5% year-on-year at worst.

Selling prices are unlikely to decline sharply here for a number of reasons. First, Irish builders have cut supply immediately and radically. That may help prevent a debilitating overhang of unsold stock. Second, the majority of new home developers are cash-rich after years of high retained earnings. They can afford to sit and wait for sales to materialise without having to drop prices significantly. Third, existing home-owners wishing to trade-up invariably take their homes off the market rather than sell at a discount. In some cases, they may prefer to extend or renovate their homes rather than settle for a lower price. Our guess is that prices will be unchanged to slightly down over the next six months.

But it is not easy to know when housing starts will bottom. Ireland has not witnessed a construction boom like this before. At least in the US, analysts can refer to the cyclical downturn in house-building in 1990/1991 as a guide. We no longer control interest rates, which is an added complication.

Many issues are of particular relevance to the prospects for house-building. Near term, sentiment may improve if the stamp duty matter is resolved straight after the election.

But stamp duty was not the salient reason why demand dried up. First time buyers (FTBs) neither pay stamp duty on new houses nor on second-hand homes valued at the national average. First-time buyer (FTB) demand weakened due to deteriorating affordability from rapidly rising house prices in the year to mid-2006 and from the increase in interest rates. This is reflected in rapid rent inflation, as potential buyers who could get approved for a mortgage were squeezed into the rental market (the Daft.ie index showed rents up 10.5% year-on-year in February). The challenge faced by FTBs was confirmed by the statistic that they took out 20% fewer mortgages in Q4 2006 compared with the same period a year ago. Affordability will improve with stagnant prices, but two more interest rate hikes may counter the potential boost to sentiment from stamp duty reform.

Looking ahead to 2008, other variables will determine housing demand. Increased net inward migration between 2004 and 2007 raised demand by as much as 20,000 units. Will the rate of immigration slow, as employment prospects deteriorate? To what extent was demand brought forward from the future when the market was hot in the year to mid-2006? Will the expiration of tax incentives curtail appetite for second or holiday homes, which have accounted for at least 20,000 units per annum in the last few years?

The implications of the downturn in new housing construction for the whole economy are broad. Growth in tax receipts from housing - VAT, stamp duty and capital gains - will moderate. As a result, tax revenue may miss the government forecast this year. Luckily, robust non-residential building will largely compensate for lower activity and job losses in housing. And the release of SSIA funds acts as a buffer. So the economy will be resilient in 2007. The real issue is 2008; from that perspective we hope that our forecast of 75,000 house completions next year does not prove overly optimistic.

Zambia

Two things I cant see daftwatch anymore ?

and we where discussing how Dublin prices where not dropping

http://www.rte.ie/business/2007/0430/houses.html

soma

It's astonishing the level of economic double-think that you can see in periods of blatant asset speculation.

Rossa White wrote:

Selling prices are unlikely to decline sharply here for a number of reasons. First, Irish builders have cut supply immediately and radically.

So prices (which at the end of they day are held up by wages and related borrowing capacity) are going to pretty much hold-up, because the single significant driver of the economy (both directly and indirectly) is going to suffer a 'radical' slowdown. :rolleyes:

Zambia

soma wrote:

So prices (which at the end of they day are held up by wages and related borrowing capacity) are going to pretty much hold-up, because the single significant driver of the economy (both directly and indirectly) is going to suffer a 'radical' slowdown. :rolleyes:

In fairness she goes on to say there is ample Commercial building to maintain building. However I cant say I believe that.

soma

Zambia232 wrote:

In fairness she goes on to say there is ample Commercial building to maintain building. However I cant say I believe that.

The (circular) predicted sequence of events appears to be:

- Prices hold up because of radical slowdown in the main driver of the economy
- Slack will then be picked up by commercial building...... and those commercial buildings will support businesses trading in... what exactly? Commercial Building supplies perhaps? ;-)

Honestly the whole economy has the most awful pyramid scheme feel to it.

chump

Zambia232 wrote:

In fairness she goes on to say there is ample Commercial building to maintain building. However I cant say I believe that.

She's very pretty

http://www.daft.ie/report/photo/rossa-white.gif

pwd

what effect will the new national development plan have on the construction industry?

chump

Michael Hennigan, Editor and Founder of Finfacts has written an excellent piece over on his website, well worth a read. Of course it doesn't directly speak of the property boom, but it underlines serious weaknesses in our economy I think is relevant to the discussion here

Read it on
Irish General Election 2007: Tax cuts are the easy part as public sector reform is outsourced to the OECD and the Irish public

I found the below quoted bit quite revealing

Irish Economy 1997 and 2007

The big rise in inward investment up to 2000, coupled with billions in EU structural funds and a global economic boom, triggered a construction boom. To add fuel to the fire, the Government extended and broadened property tax incentives.

In the period 2001-2006, Irish investors put €41 billion in commercial property, mainly overseas. Less than €1 billion has been invested in venture capital for Irish business producing exportable goods and services in the same period.

Today, apart from the temporary prosperity created by the construction boom, we are as dependent on foreign direct investment, principally from the US, as we were in 1997.

In 2006, foreign firms were responsible for 92% of Irish exports and Irish-owned firms mainly export to the UK market.

As we remain so dependent on foreign direct investment, rampant property market has pushed up costs and our export performance is deteriorating.

Irish industrialist Eoin O'Driscoll, who is chairman of the Irish Government science and policy advisory agency Forfás, told a conference in 2005, that most of the products we manufacture, are designed elsewhere and the bulk of our exports, are marketed/sold by organisations outside Ireland.

In the Irish Times on Friday, April 6th, economist Paul Tansey wrote that Ireland's Celtic Tiger economy, where growth was led by exports, expired in 2001. The demise of the tiger went unmourned and for a simple reason. After hitting a flat patch in 2001-2002, the economy rebounded. Nobody much cared that domestic demand had elbowed out export demand as the engine of economic expansion. What was important was that growth was back. Never mind the quality, feel the width.

The European Central Bank had re-fuelled the property boom by reducing its key interest rate to 2% in June 2003 and keeping it there until December 2005.

The World Trade Organization reported this month, that exports from Ireland grew in US dollar terms by 3% in 2006, compared with 27% for China and 15% for Germany. Ireland had the lowest growth rate of the top 30 world exporters in a year when the global economy grew at a real (constant prices) rate of 5.5%.

Over the past decade, only four Irish companies have made an impact on the world stage - CRH, now the largest building materials supplier in the United States, Ryanair, Independent News & Media and Denis O'Brien's Digicel.

While plans to ramp up R&D spending are laudable if properly managed and focused, the notion of becoming a world class knowledge economy in six years, is a pipe dream.

Apart from Digicel, no other Irish tech company has revenues of over $100 million. Quite a number of them including Iona Technologies are in fact struggling.

Zambia

chump wrote:

She's very pretty

http://www.daft.ie/report/photo/rossa-white.gif

Oh dear lord .... :eek:

indiewindy

One issue not mentioned by Rossa White is what will happen to all the building workers who will be laid off if construction is being cut back. Implications for tax revenues less vat on sales, paye/prsi etc.

Zambia

indiewindy wrote:

One issue not mentioned by Rossa White is what will happen to all the building workers who will be laid off if construction is being cut back. Implications for tax revenues less vat on sales, paye/prsi etc.

[He] reckons commercial building will sustain them.

whizzbang

Zambia232 wrote:

[He] reckons commercial building will sustain them.

ahh so we are going to build 93,000 offices and factories a year now

for all that manufacturing and exporting we do...

miju

i have to say i find it increasingly hilarious how the vested interests constantly squimr a bit more and then move the goalposts / reasoning for eveything still beeing fine

come on in everyone the waters just perfect

Zambia

whizzbang wrote:

ahh so we are going to build 93,000 offices and factories a year now

for all that manufacturing and exporting we do...

Yes the new goverment will state that all office cubicles must be 5 metres squared??

pjbrady1

She also fails to mention the large drop in Stamp duty that will result from the decline in asking prices in the fancier districts. 17% in 6 months in some areas. Is that not a serious indicator of a crash already taking momentum downhill.
The houses with the largest stamp duty bill are falling by the most, seriously declining tax revenues.

She also fails to highlight accurately the actual fall in asking prices from the time the market peaked. Surely the most important factor rather than incomparable stats which hide property asking price falls.

Reading the article quickly you would come away with opinion that it was still possible to raise your asking price in Dublin. She quotes a seperate index Permanent TSB, which is biased anyways as the most liquid housing asset at the moment are the larger places in good areas thereby increasing "the average price paid for a house" in Dublin.
Reads like lovely steady 2% house growth, whereas 13.8% - 2% = 11.8% asking price falls. Even higher falls when you go from September peak down to todays prices.
She does not highlight inability of government to complete projects when stamp duty receipts fall, plus ridiculous not to mention the resultant unemployed from construction slowdown.
Nor the fact that we have a serious multiple of per head of population directly employed in construction. 1 in 4 men, and we are not even taking into account carpet salesmen, woodies diy and cement lorry drivers.

An economist who looks at a report showing 17% price drops in some areas and paints a reasonably rosy picture is just not doing their job in a balanced manner. Especially in a country with what must be the highest construction employment in the world.

Victor

ronbyrne2005 wrote:

There are several anomolies in the index such as price of new properties don't seem to be falling but in reality builders are throwing in loads of extras like kitchens, TVs etc.

Specification inflation. They are still making you pay full price.

Chipboard

Rev Hellfire wrote:

My main point is that right now in the fact of uncertainty over housing policies people will be more likely to wait until after an election before making such a large investment.

Why wait. Houses are cheaper now; soon stamp duty will be reduced but houses will be dearer as ronbyrne explains;

ronbyrne2005 wrote:

As we have said ad nauseum if stamp duty was removed prices would simply rise to reflect the extra buying power of buyers across the market. A house costing 450k now with 24k stamp duty costs a buyer 474k, if stamp duty was removed then price of house would rise to around 474k anyway!

If I were buying I'd sign the contract now and agree a long closing with the vendor. The stamp duty is only payable when the transfer of title happens so you get the cheaper end of both deals.

The three issues which affect housing are supply, employment and sentiment. 1 and 2 are fine and all you have at the moment is adverse sentiment caused by our brilliant leaders. Stamp duty is a tool used by the govt to manipulate the housing market. Housing is such a huge part of the govts tax take (not only stamp duty but Vat and PAYE from the house building industry) that they will do whatever they have to to keep the train running. All will be fine in around 3 months time and people will still be waiting for the big crash like everyone has been for the last 7 years.

Rew wrote:

Ill be closing a 3 bed semi-d in maynooth for 381k shortly and my nerves are shot trying to decide should I pull out... Its a good house in a good location, big garden, very close to the train for comuting but I just dont know if its enough...

I have 2 main worries a) would I get it cheaper down the road b) will i pay 11,300 to the tax man as a FTB only to have stamp duty scraped a few weeks later...

My advice to you would be to snap it up. If you can afford to buy now go for it. In years to come Ireland will harmonise with the rest of Europe and house ownership will not be as prevalent as it is today, but people will need to make extra provisions for a good pension as they will be paying rent in their retirement.

Do-more

Two points that the bould Rossa fails to mention are:

1. It is estimated that 40% of new houses were bought by investors/speculators last year. With capital appreciation now non-existant most of these are not buying and many it seems are now selling. Even with rising rents we still have a long way to go before housing becomes a rational investment again. Builders/developers need to slash production to take this into account and the knock-on effects of that will be very severe for the economy.

2. The huge number of empties, especially in many tax incentive fuelled areas of the Midlands and West where non-existant demand and huge oversupply makes a complete crash in prices in those areas seem inevitable.

SkepticOne

Chipboard wrote:

The three issues which affect housing are supply, employment and sentiment. 1 and 2 are fine and all you have at the moment is adverse sentiment caused by our brilliant leaders.

I think this is true in the normal market (I would also add interest rates and lending criteria), however in the current bubble, sentiment plays a disproportionate role. In the past years, it has really only been positive sentiment propping up the whole edifice. Unfortunately this sentiment is based on continually rising prices. Now that the price rises have stopped, the positive sentiment is being eroded and we are seeing falling prices. These price falls are further eroding confidence and so on. It is the classic bursting bubble scenario.

Zambia

Chipboard wrote:

The three issues which affect housing are supply, employment and sentiment. 1 and 2 are fine and all you have at the moment is adverse sentiment caused by our brilliant leaders. Stamp duty is a tool used by the govt to manipulate the housing market. Housing is such a huge part of the govts tax take (not only stamp duty but Vat and PAYE from the house building industry) that they will do whatever they have to to keep the train running. All will be fine in around 3 months time and people will still be waiting for the big crash like everyone has been for the last 7 years.

With respect I disagree

1: Supply while being "fine" there is to much on the market. Over supply leads to a drop in prices

2: Employment is heavily dependant on construction, as supply is "fine" then we stop building. We stop building we lay off buiders and support services fail they lay off people.

3: Sentiment is not fixed by an election.

All will be fine in around 3 months time and people will still be waiting for the big crash like everyone has been for the last 7 years.


OK prices are falling now this has been reported for a while now in every paper in the country.

chump

Again, the one big issue that I regard as the main driver of price drops is simply -affordability-. Even if the irish economy doesn't take a hard knock and maintains ~ 3% growth for the next decade housing is not sufficiently affordable. Reasons for lower affordability

- primarily ECB rates, not in our control
- no scope for significant wage increases, due to competitiveness
- decreased quick-buck sentiment, people now know that they can't make 100k in 1 year by jumping into it

I comfortably believe that best case scenario is stagnant market/insignificant price increases for the foreseeable future, worst case scenario we have a few years of consistent drops, economy hits the rocks big time (lots of reasons for this), and many people lose their shirts.

Chipboard

Chipboard wrote:

All will be fine in around 3 months time and people will still be waiting for the big crash like everyone has been for the last 7 years.

Would 35 and 40 year mortgages be "fine" ?
If the past 4 years here in Ireland have not been revolving madly around an asset bubble then good luck to ya, I want no part in it!