House prices still falling - DAFT Q2 2011

Scofflaw

http://www.daft.ie/report/Daft-House-Price-Report-Q2-2011.pdf

Gurdgiev on the stuff he knows well, and pretty grim reading...Daft seem to have given him plenty of scope for what amounts to political commentary in the preamble.

First the news:

Year-on-year falls up to 16%
The year-on-year fall in asking prices was 16.5% in June, up from 14% last November.

Dublin prices now 50%
below peak levels
Prices in June in the capital were 51% below mid-2007 levels, whereas Limerick prices are down by just one third in the same period.

The typical time on the market down by one month
In most parts of the country, the typical time on the market fell by about four weeks, ranging from 4 months in Dublin to 14 in Connacht/Ulster.

The total stock for sale remains very high
The number of properties for sale has fallen slightly but still remains high, at close to 60,000.

And then the forecast:

One more slightly technical factor is important to the consideration of the future of the property markets here. Looking at historical monthly data from 2005 through present, continued declines in asking prices are now putting renewed pressure on rents, which remain out of sync with long-term relationship to asking prices.

Using a simple rule of thumb that at the long-term real interest rates of 3% (the scenario toward which we are heading with ECB policies), the ratio of household income to purchase price should be around 2.8:1, the 3-year horizon average property prices projections based on per capita income in Ireland is in the region of €156,000. That is about 13.4% below today’s average asking prices, allowing for a 5% sales discount currently – or 57% below the peak.

In other words, the vicious cycle of low yields and collapsing capital gains still has some room to run before Irish property markets can see a sustained stabilisation.

Depending on whether the fall flattens out close to the bottom of the cycle, that suggests 'stabilisation' may be coming next year. No guarantee, though, that there will be an upturn.

cordially,
Scofflaw

Nijmegen

I haven't seen any definitive research (though given the opacity of many figures, it would be difficult to do) on NAMA's distortion effect on the property market. Similarly, what the lack of bank lending is doing.

One wonders what the world would be like if only we had created a new bank that could actually lend...! The trouble with buying a house is getting a loan - we know there continues to be a net contraction in mortgage lending MOM and YOY, and Irish households are deleveraging (which, in one sense, is a good thing; in aggregate it means more mortgage debt is being paid off than lent out.)

Prices would have fallen... But at the €200k or even €150k mark there's great value in the market for young couples to get in. One gets a sense however that by the time banks start lending again, folks may have missed the opportunity.

EL_Loco

Nijmegen wrote: »

by the time banks start lending again, folks may have missed the opportunity.

but who'll buy them in the mean time to take away this opportunity?

what are the banks looking for as regards giving a mortgage? have we returned to 92% or is it stricter than that?

also, on the point of going back to the "old" way of doing things, how close to the ratio that our parents paid for their houses are we going to get? something like 5 times your wages or something similar?

I'm curious if people consider that this market will take off again, or will it just settle, and not bubble again, or are people lying in wait to plough money back into the housing market with a "I've seen it happen before, I'll get out in time next time"?

ei.sdraob

EL_Loco wrote: »

I'm curious if people consider that this market will take off again, or will it just settle, and not bubble again

If cheap credit becomes available again from "somewhere", "somehow" then I believe we will endup with the same madness as before. Why?

Because I do not think any lessons have been learned, and worse no legislation (and not even slap on wrist of the regulator for not doing his job!) is in place, so things could return to "business as usual" and we could endup right back where we started.

Anyways interesting how Gurdiev is trying hard to pimp his new venture, while fairplay to him for making money in current climate, hanging around the likes of Declan Ganley would do him more harm in end.

Nijmegen

ei.sdraob wrote: »

If cheap credit becomes available again from "somewhere", "somehow" then I believe we will endup with the same madness as before. Why?

Because I do not think any lessons have been learned, and worse no legislation (and not even slap on wrist of the regulator for not doing his job!) is in place, so things could return to "business as usual" and we could endup right back where we started.

Anyways interesting how Gurdiev is trying hard to pimp his new venture, while fairplay to him for making money in current climate, hanging around the likes of Declan Ganley would do him more harm in end.

I agree that the pain of the lessons need to be translated into control for future.

What's needed is not cheap credit... It's any credit! Economies don't function without it, as we're seeing.

ei.sdraob

Nijmegen wrote: »

I agree that the pain of the lessons need to be translated into control for future.

What's needed is not cheap credit... It's any credit! Economies don't function without it, as we're seeing.

Thats why i put down "somewhere" "somehow" in my post, the local banks are bust, they will spend years licking their self inflicted wounds at the expense of the very people and companies who need these "banks" (yes in commas) to function.
So that leaves foreign banks entering the domestic market, but so far they are leaving, and thats no surprise why get involved in a market where the state is the worlds largest landlord and is distorting the market?

Money will continue to flow out of the country until the issues that got us here are resolved and so far they just have been ignored or kicked down the road.

On the bright side housing is approaching "normal" levels when compared to US for example who had a large boom and bust too (note: despite property taxes!) but still has some ways to go. The rising population as per recent census might be able to absorb the empties, but having a large population with little money...

Idbatterim

I read an article in the indo a few days ago on numerous steps that the government were going to implement to stop this happening again...

ei.sdraob

Idbatterim wrote: »

I read an article in the indo a few days ago on numerous steps that the government were going to implement to stop this happening again...

The long promised "real" selling prices databases would be nice a nice start.

3 years in and we are still relying on asking prices as a proxy measurement, so much for openness and transparency. If the DoF or Revenue want Ill setup a database for them for free, how bloody hard can it be?
Yes I realise there are privacy issues (my own transaction is in there) but hell how long does it take to get the required legislation in place for something as simple as house price database?

Scofflaw

ei.sdraob wrote: »

The long promised "real" selling prices databases would be nice a nice start.

3 years in and we are still relying on asking prices as a proxy measurement, so much for openness and transparency. If the DoF or Revenue want Ill setup a database for them for free, how bloody hard can it be?
Yes I realise there are privacy issues (my own transaction is in there) but hell how long does it take to get the required legislation in place for something as simple as house price database?

Is that this one: http://www.cso.ie/px/pxeirestat/Statire/SelectVarVal/Define.asp?maintable=HPM01

Or this one: http://www.cso.ie/releasespublications/documents/prices/current/rppi.pdf

cordially,
Scofflaw

ei.sdraob

Scofflaw wrote: »

Is that this one

The RPPI is compiled using data on mortgage drawdowns provided on a monthly basis by 8 of the
main Mortgage Lending Institutions under Section 13 of the Housing Act (2002). This data
provides details on the characteristics of properties bought (such as building type and size) as well
as the price paid. It is transactions based; meaning that prices are recorded only where a sale
occurs. Not all residential property transactions are funded by a mortgage (i.e. they are cash
based) and these transactions are excluded from the scope of the index.

Heard of that, its not very useful , yet another proxy measure not to different from the PSTB index it seems.

my purchase was cash for example, now that the banks are not lending properties either dont sell or cash buyers get a pick of what they want.

Considering that Revenue are sitting on the data for each and every transaction one has to wonder how hard is it to anonymize it (if privacy is a concern) and produce a proper index, in other countries one can look up the sale price history of homes on any street, all in the open.

Debtocracy

There's no point buying those housing estate properties that were built during the boom. Once you've paid off the mortgage in 30 years time, the property will start to crumble.

Scofflaw

ei.sdraob wrote: »

Heard of that, its not very useful , yet another proxy measure not to different from the PSTB index it seems.

my purchase was cash for example, now that the banks are not lending properties either dont sell or cash buyers get a pick of what they want.

Considering that Revenue are sitting on the data for each and every transaction one has to wonder how hard is it to anonymize it (if privacy is a concern) and produce a proper index, in other countries one can look up the sale price history of homes on any street, all in the open.

True, it's very limited compared to other countries. Yet another victim of the Irish mania for hoarding information. No wonder Monaghan Mushrooms is one of our most successful companies.

cordially,
Scofflaw

Scofflaw

Ronan Lyons' take on it:

http://www.ronanlyons.com/2011/07/05/are-we-nearly-there-yet-finding-the-new-floor-for-property-prices/

Some nice graphs, all of which suggest we have a ways to go yet. This is the summary graph:


House prices in Ireland adjusted for inflation, incomes and rents, 1975-2011

The blue line there shows house prices in constant units - the 'real price' of the house, taking out inflation. That gives you a way of comparing the recent prices to the historical price.

The green line is the price houses "should be" if you factor in the rise in incomes in Ireland but assume that a house is worth no more as a multiple of income than it ever was.

The purple line does the same as the green line, but with respect to the rental value of the property.

So, what the blue line tells you is where house prices are, and the other two lines tell you where house prices "should be", according to rental values and incomes. When the blue line meets the other lines, the market has returned to reality. Will it simply stop there? Usually, no - house price falls usually overshoot a bit. And something you can also see from the graph is that the green and purple lines are themselves trending downwards, because rents and incomes are also falling. And there remain difficulties in getting credit, which will suppress the prices further.

Also, a quick roundup of trough-to-peak predictions from the major commentators, courtesy of NAMAWineLake:



cordially,
Scofflaw

thebman

I don't really see the problem with falling house prices. Surely affordable houses is a good thing?

The biggest problem with our boom houses is as someone else said, the quality but also the energy ratings of these houses.

They aren't very environmentally friendly houses.

OMD

Scofflaw wrote: »

http://www.daft.ie/report/Daft-House-Price-Report-Q2-2011.pdf

Gurdgiev on the stuff he knows well, and pretty grim reading...Daft seem to have given him plenty of scope for what amounts to political commentary in the preamble.

On the original report by Gurdgiev. He says that

"Taking assumed 5% average premium over asking prices at the peak and a similar discount today, the swing in prices in the capital is probably between 50% and 60%."

Sure it would be more prudent to use a 10% swing both ways. Certainly a 10% discount now. That would put the actual drop at between 60% and 70% which is pretty much in line with the most extreme predictions. (70% in real terms)


Also:
"the 3-year horizon average property prices projections based on per capita income in Ireland is in the region of €156,000. That is about 13.4% below today’s average asking prices, allowing for a 5% sales discount currently – or 57% below the peak."

Again if you take current discount as being 10% not the 5% he is claiming then doesn't that imply again that we are near the bottom (if his figures are correct which as always is a massive IF with Gurdgiev)

1huge1

thebman wrote: »

I don't really see the problem with falling house prices. Surely affordable houses is a good thing?

The biggest problem with our boom houses is as someone else said, the quality but also the energy ratings of these houses.

They aren't very environmentally friendly houses.

Well personally I agree with you on the quality of house's built, but my worry is the amount of people in negative equity, while I don't have as much pity for the many people who just bought houses as investments with the indea of just sellings them on in just a few short years for a massive profit.

But for first time buyers who have a steady income, they are in a good position no doubt.

The_Honeybadger

1huge1 wrote: »

But for first time buyers who have a steady income, they are in a good position no doubt.

High interest rates have almost wiped out the benefit of the price drops for FTB's. Unless you have a whopper of a deposit you will still pay back almost as much as you would if you had bought in 06 with a tracker.

oflahero

mickeyk wrote: »

High interest rates have almost wiped out the benefit of the price drops for FTB's. Unless you have a whopper of a deposit you will still pay back almost as much as you would if you had bought in 06 with a tracker.

Is this just a feeling you have, or have you checked any numbers?

Principal is *everything*.

Some rough, back-of-envelope stuff. Let's say a gaff for 400k in 2006, dropping to 200k now. No deposit in either case, 2006 tracker of 3% average vs 2011 floating/fixed of 6%.

1) 2006 tracker. Let's say 400k over 30 years, 3% average (which is low-side generous given Trichet's constant 'strong vigilance' warnings). You're looking at 207k in interest before tax relief. Total payment: 607k before tax relief.
2) 2011 fixed/variable. 200k over 30 years as well, 6% average. 231k interest. Total payment: 431k before tax relief.

In scenario 2, you're saving over 175k over the 30 years, ignoring inflation. Take inflation into account (say 3%) and your 'real' interest difference is still just 150k vs 164 k. How does that sit with you?

And that is still a relatively pessimistic scenario 2, where it's more likely you'd have a deposit saved, and be in a position to choose a shorter mortgage. Given a 180k mortgage over 20 years at 6%, you're looking at interest of 130k - a total spend of 330k.

P.S. Assuming tax relief on mortgage interest, you'd be doing even slightly better in scenario 2 than I've guesstimated.

ei.sdraob

Is Ronan Lyons graph/article on earlier page based on asking prices too (his own daft index?)
I remember hearing before there is 10-20% difference between asking and selling prices, this alone could be a big variable that's not being considered.

OMD

oflahero wrote: »

Is this just a feeling you have, or have you checked any numbers?

Principal is *everything*.

Some rough, back-of-envelope stuff. Let's say a gaff for 400k in 2006, dropping to 200k now. No deposit in either case, 2006 tracker of 3% average vs 2011 floating/fixed of 6%.

1) 2006 tracker. Let's say 400k over 30 years, 3% average (which is low-side generous given Trichet's constant 'strong vigilance' warnings). You're looking at 207k in interest before tax relief. Total payment: 607k before tax relief.
2) 2011 fixed/variable. 200k over 30 years as well, 6% average. 231k interest. Total payment: 431k before tax relief.

.

You need to alter your figures a little. You need to take into account that person in scenario 2 has been paying rent for last 5 years and/or person in scenario 1 will have mortgage paid off 5 years earlier than scenario 2.

Both mortgage rates will average higher than than you have quoted but it is pretty obvious that new mortgages will average more than your estimate of 3% difference.

Mortgage interest relief is an important issue and reduces monthly payment by just under 200 a month for 7 years. It would improve situation for scenario 1 only (you said scenario 2 would benefit more) as it is no longer available.

While minor you need to include stamp duty introduced for first time buyers.

Also as I have said so many times people need to stop comparing now with the top of the market. If you decided in 2006 to rent instead of buying then you are in a tiny minority. Also most people (despite what people think here) are not on 30-35 year mortgages. Most are paid off in less than 20 years

OMD

ei.sdraob wrote: »

Is Ronan Lyons graph/article on earlier page based on asking prices too (his own daft index?)
I remember hearing before there is 10-20% difference between asking and selling prices, this alone could be a big variable that's not being considered.

This is the point I was making previously. If you take your figure of 20% discount on asking prices at present, that means that according to Gurdgiev we are now at the bottom of the market. (I always have great difficulty trusting his figures however)

oflahero

OMD wrote: »

You need to alter your figures a little. You need to take into account that person in scenario 2 has been paying rent for last 5 years and/or person in scenario 1 will have mortgage paid off 5 years earlier than scenario 2.

True that. It is very rough and doesn't take that into account. If I'd been more thorough, and assuming that 2006 guy is not on IO, I'd be using the difference between renting and buying for those 5 years as 2011 guy saving for his deposit.

I take your points - a large number of variables, and cherrypicking long-term average interest rates for both was obviously going to be dodgy. Still, by their definition trackers are never going to be down in the 3% range over the mortgage lifetime.

I was one of that 'renting minority' you mention in 2006 (and still am), I've no doubt this has coloured my outlook more than a little...

OMD

oflahero wrote: »

I was one of that 'renting minority' you mention in 2006 (and still am), I've no doubt this has coloured my outlook more than a little...

Genuinely well done then. I get tired however of others constantly comparing prices to the peak. I mentioned this on a previous thread but a friend/colleague moved to Ireland from UK about 11 yrs ago. Constantly said how over priced houses were and so has rented since. Now he goes on about how much he has saved as prices are now 50% below peak. He totally misses the point that if he bought in 2000 he would nearly own his house outright with all the money he has spent on rent.

ei.sdraob

Well in all honesty the crash (erm correction) is working in favour of people who can save. I myself bought/build relatively recently and now have no mortgage while owning my home outright, it is possible to do it.

bryaner

ei.sdraob wrote: »

Well in all honesty the crash (erm correction) is working in favour of people who can save. I myself bought/build relatively recently and now have no mortgage while owning my home outright, it is possible to do it.

That brings a tear to my eye, you hardly have a time machine handy?

OMD

ei.sdraob wrote: »

Well in all honesty the crash (erm correction) is working in favour of people who can save. I myself bought/build relatively recently and now have no mortgage while owning my home outright, it is possible to do it.

It is possible but not likely for most people. Say you have a decent wage of €50,000 and want to buy a house for 4 times your income i.e. €200,000. To save that amount of money you would need to save 40% of your take home pay every month for 14 years. That assumes the interest you are earning on your savings and your pay rises over that time will compensate for the rise in house prices over the same period which may or may not happen.

40% is a lot to expect people to save especially as they have to pay rent over that time as well. As I said not impossible but not too easy either.