DAFT.ie report on property

chicken fingers

http://www.daft.ie/report/

Lorcan Roche Kelly, an independent economic researcher, commenting on the latest Daft research on the Irish property market.
The latest Daft.ie figures show little change in rents over the course of 2010, with the average rent nationwide falling 0.6% to €830. After falls of 15% in 2009 and 10% in 2008, these figures will come as no small relief to landlords. With house prices continuing to fall, albeit at a slower levels than in previous years, yields on property, in Dublin city at least, are starting to approach investable levels for the first time in a decade.

As with all statistics, we need to drill into the figures a bit to get a better idea of the story on the ground. The first thing that jumps out is that the market in Dublin seems to be a little ahead of the market elsewhere, with rents in the capital showing minimal moves during 2010. In the rest of the country, the rental pressure is all to the downside, but not to an extent that should prove worrying at the moment. The smaller prices moves in Dublin are probably due to the size of that market, and the rate at which it can clear, compared to the rest of the country.

So, it would seem that after six turbulent years (rapidly rising rents cause as many, if different, problems to rapidly falling rents) the Irish rental market may be returning to an even keel. Like everyone else, renters want to have clarity on what their future expenses will be and don't want to feel like they are over-paying for what they have. Reduced volatility in rents will provide reassurance in both cases.

It is important, therefore, to look at what pressures may add to uncertainty in the rental market for the coming year, and to judge whether those pressures will cause much movement in rent prices.

First, we have to look at the recent ESRI report which predicts that some 100,000 people will leave this country in the next two years. It is safe to assume that the majority of people leaving will be younger Irish people without firm ties to the country, or recent emigrants - people who normally rent accommodation. Landlords will not find easy replacements for these tenants, and competition for scarcer tenants will naturally lead to reduced rents. This reduction in the number of tenants will probably affect commuter belt areas hardest as people still looking to rent will migrate closer to city centres - a trend that can already be seen from the data where rents actually rose by 0.3% in Dublin city during 2010, but fell by 3.5% outside of major urban areas.

This 'reverse doughnut' effect in the rental market will be something to keep an eye on in the coming two years - all presuming, of course, that the ESRI forecast is reasonably accurate.

On the yield side, there may be pressures coming too. It is looking increasingly likely that the ECB will start to raise interest rates from their current lows sooner rather than later. With December's eurozone inflation figure coming in above target and Jean-Claude Trichet making all the right noises before an interest rate hike, it seems unlikely that we will make the summer without at least one rise in ECB rates. Interest rates matter to investors because they set the cost of money. If ECB interest rates rise then the rental yield demanded by investors from property will also rise. While this rental yield is more likely to be increased by further pressure on house prices rather than upward pressure on rents, it may lead to slower reductions in rents than would be caused if the ESRI emigration numbers happened in isolation.

The stock of units available for rent has fallen from the peak, by up to 50% in cities (more reverse doughnut, perhaps) and while this may be caused by normalisation of rents expected by landlords, there is also a chance that it might be an indicator of something more fundamental happening in the Irish rental market.

Economists have long tried to explain the exceptionally high level of property ownership in Ireland through an historical lens without, for the most part, offering a situation where this cycle might be broken. There is a chance - and this would need decades rather than years worth of data to prove - that the average Irish person may have fallen out of love with home ownership.

The last two decades have seen much greater labour mobility, both nationally and trans-nationally, as the 1950s ideal of a 'job for life' has disappeared. This fundamental change in how we live our lives has to be reflected in the decisions we make in our lives. Moving to a new job in a new area and buying a house was a natural decision to make in Ireland as house prices never fell - and (nominally, at least) they hadn't in three decades - so the perception of a capital loss didn't exist.

Many have learned the very hard way that capital losses can mount up very quickly and purchasing a house is a decision many have come to regret. There is a chance that people may stop seeing renting as 'dead money' and start to see it for what it is - payment for accommodation, to be treated like payment for any utility, free of worries about such things as ECB interest rates and market confidence.

There are still many factors, positive and negative, that will feed into the Irish rental market. But it is the profile of the renters themselves that will be most interesting to watch. Will we maintain the Irish obsession with home ownership, or will we start to see a more European attitude emerge?

The housing market is the business cycle. There can be no recovery in the property market without an improvement in the economic outlook for Ireland. Until the business cycle turns up again, any argument that favours ownership over renting can only be based on the traditional Irish arguments in favour of property ownership rather than the harsh economic realities we are now facing.

Whats your thoughts? I think the whole thing is built on a steaming pile of horse poo. IMO its a BS article written by "an independent economic researcher" (unemployed grad of UCD 2007 BES class, or similar).
Daft figures show asking prices, not final prices. Also, wishful thinking is keeping these prices high. And rent allowance is obviously the driving force keeping an artificial floor on rents, and that wasnt even mentioned.

Aka Ishur

I actually thought it was quite reasonable article. Half reported fact, half speculation. Yes we know that rent allowance is providing a floor. Yes we know that Daft shows asking prices and yes we know that wishful thinking is keeping those prices higher than they should be.

However, assumptions in economics are made 'ceteris paribus' (all things being equal), that is to say the three points you make have been the norm in the property market for 20 years and dont look like changing, so why would you expect someone to make any kind of reasonable forecast based on anything else.

And the condescension you show only reflects badly on yourself.

BrownianMotion

Rent allowance at this level has not been the norm for the last 20 years.
I'd argue the levels are currently unsustainable and will change significantly in the next 3/4 years.

Rent allowance is a huge driver of rents and it's hardly condescension to point out that an article that completely omits this factor is somewhat flawed.

Aka Ishur

As I said the writer cannot forecast based on assuming that RA will fall. He has to take it at the current levels. It is not condescension to note RA is omitted. Its condescension to label the person -

(unemployed grad of UCD 2007 BES class, or similar).

dolallyoh

I get irked by use of the lazy term "irish obsession with home ownership"

Its like saying "irish obsession with car ownership" or going to spain and complaininng about the spanish obsession with renting

fricatus

dolallyoh wrote: »

I get irked by use of the lazy term "irish obsession with home ownership"

Yeah, you said it - it's the laziest piece of received wisdom ever.

or will we start to see a more European attitude emerge?

There's a subtext here: European=good, Irish=bad

In any event, didn't I read some time ago that Irish levels of home ownership, while higher than German, Belgian or Dutch levels, are comparable to British levels and below Italian and Spanish levels? (I would post a source if I could)

So, far from having an "obsession" with home ownership, we're in the middle of the European table?

Maybe someone has some figures that can prove me right or wrong?

Zamboni

I think he has done quite well. He has managed to say nothing, whilst using lots of words.

BrownianMotion

Aka Ishur wrote: »

As I said the writer cannot forecast based on assuming that RA will fall. He has to take it at the current level

I don't think you quite understand the concept of modelling. The assumption that rent allowance will be maintained at current levels is just as big as the assumption that levels will fall. Once an assumption is reasonable it is acceptable.

The question is what is reasonable. I'd suggest it is unreasonable to assume current levels will continue. We are running a huge deficit and social crutches like this have only one direction to go In the future.

Regardless of this, rent allowance is not even mentioned in the article.

Zamboni

BrownianMotion wrote: »

I don't think you quite understand the concept of modelling. The assumption that rent allowance will be maintained at current levels is just as big as the assumption that levels will fall. Once an assumption is reasonable it is acceptable.

The question is what is reasonable. I'd suggest it is unreasonable to assume current levels will continue. We are running a huge deficit and social crutches like this have only one direction to go In the future.

Regardless of this, rent allowance is not even mentioned in the article.

Whilst I agree with you that it should go down there is no indication that there is going to be any change to RA in the near future.
A decrease in the RA is certainly not part of the programme for government.
RA is an integral part of the 'let's keep property prices up' campaign regardless of who is in government.
Éire cannot afford it but this junkie will keep going to her dealer to get the next fix 'on tick' until the dealer says no.

robd

This report is the usual load of crap we've come to expect from Daft's so called Independent Economists.

How can an Economist being paid to write a report by a property website about property be considered independent? The conflict of interest in impressing their paymasters is blindingly obvious.

How can he say that "yields on property, in Dublin city at least, are starting to approach investable levels for the first time in a decade"?

The table on page 10 of the report clearly shows average yields of about 4.5%. The Dublin City Centre figure is clearly skewed by a spurious data figure of 6.5% for 3 bed. Bare in mind these would likely be houses no-one wants due to social deprivation in area.

4.5%. Come on. There's economic assumptions and then there's complete and utter rubbish. Yield of 4.5% is Celtic Tiger Stuff. Try 7% in normal times and 10% in this Irish Economic Depression and we can say they're approaching investable levels.

My forecast. Rental yields In Ireland (and Dublin) are 50% off levels where investors will return to the market and 33% off sustainable levels.

Aka Ishur

BrownianMotion wrote: »

......

Having a little experience in models, I realise a model can be based on both assumptions, and the writer chose to discount any change in RA because as mentioned above, it has not been hinted at in any way by the government.

Personnally I disagree with the forecast, and see a continued drop of 15% to 20% in the market, with rural areas faring worse.

Dymo

Can someone please explain what the 'reverse doughnut' effect or has this guy just made it up and assumes everyone will know what it is?

Godge

Zamboni wrote: »

Whilst I agree with you that it should go down there is no indication that there is going to be any change to RA in the near future.
A decrease in the RA is certainly not part of the programme for government.
RA is an integral part of the 'let's keep property prices up' campaign regardless of who is in government.
Éire cannot afford it but this junkie will keep going to her dealer to get the next fix 'on tick' until the dealer says no.

Aka Ishur wrote: »

As I said the writer cannot forecast based on assuming that RA will fall. He has to take it at the current levels. It is not condescension to note RA is omitted. Its condescension to label the person -

Those who refuse to learn from history are condemned to repeat the same mistakes (or something like that anyway).

During the property years, it was assumed that we were in a virtuous circle, that property prices never go down, that we were in a new paradigm of a low-interest environment, that we could have the highest property prices in Europe in one of the lowest population densities etc. etc. So we never assumed anything else and we went over a cliff.

We have to face reality. Our social welfare bill is too high by European standards. Intensifying fraud detection will make some savings. Unless we address some of the other costs, the IMF will do it for us. They will look at the high property values relative to Europe (still!!) and reckon that cutting rent allowance is an easy way to achive two aims - stablise the property market at European norms and cut the costs of social welfare payments.

As a result, the reasonable assumption to make is to assume when making any analysis that the total cost of rent allowance to the State will drop by between 15-40% over the next three years. Factor that into your rent predictions and see where they go. Otherwise you are like a property economist in the boom years!

professore

Dymo wrote: »

Can someone please explain what the 'reverse doughnut' effect or has this guy just made it up and assumes everyone will know what it is?

The doughnut effect is people leaving the city centre for the suburbs and commuter towns, creating a dougnhut effect where the centre is empty and the periphery is full. A reverse doughnut implies people moving back into the city centres from the suburbs and commuter towns.

robd

Godge wrote: »

We have to face reality. Our social welfare bill is too high by European standards. Intensifying fraud detection will make some savings. Unless we address some of the other costs, the IMF will do it for us. They will look at the high property values relative to Europe (still!!) and reckon that cutting rent allowance is an easy way to achive two aims - stablise the property market at European norms and cut the costs of social welfare payments.

As a result, the reasonable assumption to make is to assume when making any analysis that the total cost of rent allowance to the State will drop by between 15-40% over the next three years. Factor that into your rent predictions and see where they go. Otherwise you are like a property economist in the boom years!

Agreed. To add to this the program for government has agreed to not cut headline social welfare rates any further. Given the savings that need to be made in the overall welfare package, it would seem likely that very serious cuts are going to be needed to rent allowance, in the 15-40% region you mention.

pooch90

Aka Ishur wrote: »

As I said the writer cannot forecast based on assuming that RA will fall. He has to take it at the current levels. It is not condescension to note RA is omitted. Its condescension to label the person -

Half of all residential rents in ireland are paid for by the state so any analysis which doesn't mention rent allowance is worthless.

chicken fingers

But you should remember that this is some young fella who Daft call an economist who writes economics articles for some (online only) blogs and news sites.
Its a laugh to call him an independent economic expert, if Daft are paying him any money.

Idbatterim

could viable ghost estates and developments not be completed, and used for rent allowance housing or simply rented out? obviously this could realize big savings, but at the same time the government want to keep property prices inflated, and a result make us less competitive. If the cost of living here was tackled, not only could they more easily justify lower welfare amongst other things, we would become more attractive for outside corporations...

jamesbrond

chicken fingers wrote: »

But you should remember that this is some young fella who Daft call an economist who writes economics articles for some (online only) blogs and news sites.
Its a laugh to call him an independent economic expert, if Daft are paying him any money.

Didnt you hear? Its the Irish disease.
We're all economists now. We have the answer to everything. Any of us new economists could write that article.
We used to all be property experts too. Double skills there.
We should export some of these skills.

okedoke

Idbatterim wrote: »

could viable ghost estates and developments not be completed, and used for rent allowance housing or simply rented out? obviously this could realize big savings, but at the same time the government want to keep property prices inflated, and a result make us less competitive. If the cost of living here was tackled, not only could they more easily justify lower welfare amongst other things, we would become more attractive for outside corporations...

Remember that using these ghost estates (presumably owned or to be owned by NAMA) for a social purpose like social housing rather than selling them means that the taxpayer is going to have to subsidise NAMA in the amount of the lost sales revenue.
There is a myth being propogated that these houses are all unsaleable and therefore worthless. But before we write them off as worthless and therefore cost-free to use for social purposes let's have some no-reserve auctions to see if there's demand at any price - I'm fairly sure there will be.
I'm not saying I disagree with using these houses for social purposes but people need to realise it's exactly the same as buying houses to use for social purposes - and we need to question whether we are in an economic position to buy up a lot of housing stock (without even getting the stimulatory benefits that would come from building new houses).

gcgirl

dolallyoh wrote: »

I get irked by use of the lazy term "irish obsession with home ownership"

Its like saying "irish obsession with car ownership" or going to spain and complaininng about the spanish obsession with renting

I don't think his far wrong there in compariousion to our European neighbours
How can you compare a house to a car
A car is going to depreciate
Where as people bought houses as an investment which some thought was going to make a quick buck

testicle

chicken fingers wrote: »

"an independent economic researcher" (unemployed grad of UCD 2007 BES class, or similar).

Dunno about that, but he seems to be a blogger and his wife was murdered. http://www.google.ie/search?hl=en&source=hp&biw=1920&bih=985&q=lorcan+roche+kelly&aq=0&aqi=g4g-m1g-v4&aql=&oq=Lorcan+Roche