The Economist has calculated a fair-value measure for property by calculating the ratio of house prices to rent.  As they explain:  “The gauge is much like the price/earnings ratio used by stockmarket analysts. Just as the worth of a share is determined by the present value of future earnings, house prices should reflect the expected value of benefits that come from home ownership. These benefits are captured by the rents earned by property investors, which are equivalent to the tenancy costs saved by owner-occupiers. Shares are deemed pricey when the p/e ratio is above its long-run average. Similarly, homebuyers are likely to be overpaying for property when the price-to-rents ratio is higher than normal.”  As the figure below show, by this measure Ireland’s housing market still has a fair way to fall to hit fair-value, as is the case for most of Europe with the exception of Germany and Switzerland.

The Economist's house price fair value data

According to Permanent TSB/ESRI house price index house prices have now fallen to October 2003 levels.  Nationally, Irish house prices have fallen by an average of 26.6 per cent since February 2007.  The figure below shows biannual percentage changes in house prices for the past decade.

Bi-annual percentage change in Irish house prices 1999-2009

Given The Economist’s forecast and the trend of the Irish data it seems like it might be some time before the Irish market reaches the bottom of the market (and a very long time until house prices rise to meet 2006 levels).

Rob Kitchin

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