There was a fair bit of media coverage yesterday (see here and here) about an apartment complex in Mullingar where prices start at €69,950 for one-bedroom apartments, €82,450 for two-bedroom units and €98,000 for three-bed units. These prices are 55pc and 63pc of their original prices (roughly in line with Morgan Kelly‘s prediction that property prices will drop by a half to two thirds from the peak). The Mullingar apartments are not unique and there have been a number of such ‘firesales’ around the country where the prices within certain developments, almost certainly built with loans from non-Irish banks and thus ineligible for NAMA, have been slashed once the receivers have been bought in (the Mullingar apartments were funded by National Irish Bank, owned by Danske Bank, who are seeking to recover €2m from the €7.8m owed by the developers). Prices are generally being cut in these kinds of developments by 50-75% as the banks seek to claw back some of the debt owed. One development in Rooskey, on the Roscommon side of the Shannon, has seen prices drop from 399K to offers above 100K.
'Firesale' in Rooskey
These kinds of sale are starting to establish a floor in the market. On the negative side, they start to reveal the level to which the whole market could sink to and thus the extent to which present home owners are in negative equity (and just how far the market will have to rise to climb out of that condition). On the positive side, once a floor is established, confidence will start to return to potential buyers who are presently too worried to purchase in fear that they will immediately enter negative equity.
Once the floor is established, how quickly prices will start to rise will be the next big question. It seems likely that prices rises will be relatively modest for quite some time due to: buyer caution because of the present price collapse; the general state of the economy, unemployment and underemployment; the difficulty of securing a mortgage, especially for first time buyers; and the present oversupply in the market enabling buyers to haggle. Morgan Kelly‘s view is that it’s difficult to dismiss the possibility Irish property prices could remain below half their peak value “for the next decade or longer.” It’s difficult not to agree with his analysis. At least we might be starting to find the floor.
March 26, 2010 at 11:53 am
On what basis do you claim that the market has found a floor? Where is the evidence aside from tying in a vague opinion from Morgan Kelly (didn’t he actually predict an 80% fall from peak?)?
I disagree with your opinion which although it refers to a drastic price reduction for a block of flats in Mullingar does not associate your claim with any hard evidence. The lowest priced 1-bedroom apartments in Mullingar are selling for €130/psf, because the 28 apartments are unsold a buyer will not have any certainty about neighbours and because the scheme hasn’t operated yet one doesn’t know if the annual management charge will be €200 or €2000.
There are five reasons why I disagree with your conclusion:
1. There is an overhang in supply and not all of it is reaching the market. There are various estimates of overhang. An overhang should in a price elasticity of demand economic model serve to depress prices when eventually marketed.
2. Population trends (even with the record 17/1000 birth rate announced yesterday) are beginning to point to the first population reduction in the State for 20 years. Lower Population = lower demand for housing = lower prices. This is a view and the missing factor is emigration which will be announced by CSO in April/May but I’m betting the negative trend started last year (-8000) continues in 2009/10.
3. Ultimately the next best alternative use for the complex in Mullingar might be the bulldozer and a sale as 2nd quality agricultural land. Against that scenario, a price of €1 might make sense to a developer.
4. In the short term, wages, employment, GNP will trend lower and taxes, levies and arguably commodity prices will trend higher. All of which will depress consumer markets (and housing is ultimately part of that market).
5. Interest rates will rise, either because the ECB introduces minimal increases perhaps as soon as the tailend of this year OR more likely lending institutions increase SVRs on 350,000 existing mortgages and with new lending because they are making losses at the moment (borrow at 3%, average deposit rates and wholesale markets and lend at 3.69% equals loss with our bank’s overweight overheads).
And if you want to take a look at a floor, take a look at the $1 foreclosure in Detroit, Michigan.
http://www.zillow.com/blog/1-will-buy-you-a-home-in-detroit/2008/08/
March 26, 2010 at 1:24 pm
The only reason you would bulldoze the apartments in Mullingar is if they do not sell. They’ve only been on the market at their new price for a day, but my guess is that they will sell in fairly short order. In all cases we know of where there has been a firesale the properties have sold. This suggests that the market will support these prices. It might fall slightly below these prices, or it might not, buoyed up by NAMA and people unwilling to sell at a huge loss. We are a long way from Detroit at this stage and we have a housing market that works very differently in terms of mortgage supports and foreclosure, etc. The overhang is very geographically uneven and there might be demolition in some places, but I imagine that will be under-construction property as opposed to completed property. I certainly can’t see €1 houses any time soon. Kelly’s analysis is certainly not a vague opinion, it is based on a rigorous comparison of housing crashes across many countries (and his work is full of hard evidence). He’s a well respected analyst and it’s trite to dismiss it so easily. Based on that analysis, and the fact that firesales are selling, 50-65% fall seems realistic. Your points do little to convince that we’re on the way to 80-90%+ fall, more that the recovery of any market will be slow and ponderous. Of course, time will tell!
March 26, 2010 at 2:21 pm
Apologies for the lack of clarity in my wording – the “vague opinion” was directed at the IrelandafterNAMA author’s interpretation of what Morgan Kelly said, not at Morgan Kelly himself. If you read the hyperlink that you include in your piece it actually says
“Kelly said all these boom and bust situations suggested, once the elevated bank lending which fuelled a property boom returned to its normal level, that real prices returned to pre-bubble levels, he said.
If this occurred in Ireland, prices of residential and commercial property would return to the levels of the mid to late 1990s – – half to two-thirds below peak values.”
However bank lending has not returned to its normal level. This is evidenced by the dramatic reduction in mortgages in 2009, the constriction of mortgage products available, anecdotally difficulties encountered in getting mortgages and mortgage companies setting minimum mortgages. Are you suggesting that “bank lending which fuelled a property boom” has “returned to its normal level”? No, of course not. Perhaps once NAMA and the recaps and the “third force” are actualized. Until then we are not in “normal lending” territory.
With respect to the 80% fall from peak values, I refer you to Morgan Kelly’s reported pronouncements in January 2009 – reported here http://www.irishtimes.com/newspaper/finance/2009/0113/1231738220759.html
And his report at the end of 2009 which predicted a further 50% fall from prices at the end of 2009 (which according to ESRI was 35% off peak) is here : http://www.ucd.ie/t4cms/wp09.32.pdf
And if you think that €130/psf represents a floor in the Irish market, I would recommend that you do a bit of research with DAFT where you will find examples of properties in reasonable conditions and locations going for €75/psf. And for new apartments less than €50k ASKING PRICES presently on the market, how about
http://www.daft.ie/searchsale.daft?search=1&s%5Bcc_id%5D=c24&s%5Bsearch_type%5D=sale&s%5Bfurn%5D=&s%5Brefreshmap%5D=1&s%5Bsort_by%5D=price&s%5Bsort_type%5D=a&offset=30&limit=10&search_type=sale&id=385039
Apply those type of prices to Mullingar and the 418sq ft apartment becomes €30-35k. And even that is not, I would suggest, “the floor”. Do an international search of DAFT and you will find apartments in good parts of Berlin (the capital of a country whose GNP didn’t fall by more than 10% last year with another fall on the cards this year) for less than €70,000
Lastly valuation is not a science and there is no objective way to call a floor (even if apartments were selling for €1 then someone could argue that the developer should pay the buyer to take them off his hands so that the developer didn’t incur demolition or ongoing costs!). What I had difficulty with in your article was the certainty implied in your language that this IS the floor and with respect, although you may be right (I don’t think you are), that certainty does not exist.
March 26, 2010 at 2:58 pm
I guess the key thing to realise is that the floor will vary geographically. It will not fall to a universal price everywhere. I’m not suggesting that these Mullingar prices will apply to all parts of the country, but rather that depending on the peak in a particular locale, we might expect it to fall 50-65%. That might mean a possible floor of 40K in Bundoran or X amount somewhere else. Perhaps prices might fall more if a place has very little going for it, depending on demographics, labour market, or extensive oversupply, etc. And prices in some places may stay relatively robust because of particular local factors. Perhaps the market will fall well below 69K for a one bed in Mullingar, but I suspect not. The key question re. Berlin is not what the price is now, but how much it has fallen since the peak? We can all find property with prices lower than in Ireland, but they are not part of the Irish housing market so in large part their price is irrelevant.
March 26, 2010 at 3:11 pm
Fair enough – I would like to say we’ll find out soon enough but unfortunately silence from DofEHLG is beginning to indicate the Register of actual prices we were promised has been kicked into the long grass much to the annoyance of CIF, IAVI and the public.
One thing I would appreciate you clarifying is your reporting of Morgan Kelly’s views on the Irish property bubble. I read his comments (and his report) to mean he predicts an 80% fall from peak to trough (and trough may be a dysfunctional credit market such as we have now) though when mortgage lending is restored to pre boom levels prices may recover to 50% of peak.
March 27, 2010 at 7:26 am
tHE BANKS ARE NOT LENDING. fOR EVERY SALE THERE WILL HAVE TO BE A CASH BUYER OR A BUYER WITH A VERY SECURE JOB AND A 50% DEPOSIT.
God I hate the Fing caps lock key.
There cannot be a bottom yet, as NAMA has yet to start selling. This means that there are as you rightly say, fire sales in the mean time. Once NAMA dumps stock we will get a view of the bottom, after a few years or a decade, of falling borrowing and falling GNP. I agree more with Winelake, I fear that the government is mishandling everything and to restore public support, an election is required. The likelihood that investment in property recovers, before NAMA is slight. Bureaucrats in charge of marketing …… hmmmm. Their delay will kill the property market. Imagine the constipation?
March 29, 2010 at 6:51 am
Well it would appear that there was no shortage of takers for the 28 flats in Mullingar – indeed according to the Indie article below the receiver sold 46 flats (I think that means that a new phase was released, not that we’re adopting Cyprus’s standards in estate agency). The Independent reports that there were 1000 bargain hunters – at 2.7 per family that would be almost 400 individual buyers though I’d guess there would be some spectators as well (the ghost estates in my home town are a tourist attraction so I’d guess these flats in Mullingar might compete a visit to Newgrange on a Sunday drive).
http://www.independent.ie/business/personal-finance/property-mortgages/price-is-right-as-1000-join-the-queue-to-buy-46-apartments-2115526.html
Remember the “technical” definition of a value is the sum arrived at by a willing buyer and willing seller both being in possession of perfect market knowledge. In this case in Mullingar, the seller was distressed (which would usually mean a cheaper than normal price) but I think more importantly there was certainly not perfect market knowledge. If 1000s of dwellings similar to those in Irishtown come on the market against the backdrop of a reducing population then normal economics would indicate a further drop even from a normal price. Population movements for the year will become apparent in a couple of months and I suspect we will begin to see by the end of this year a greater supply hitting the market.I suspect then and in 2011 we will see the true floor of the property bust.
April 4, 2010 at 10:16 am
[…] of properties marketed) has quite a range of properties at well below €100k and it has been suggested that we are near the floor. Morgan Kelly indicated in late 2009 that there was still another 50% to fall from prices then […]
April 5, 2010 at 8:59 am
[…] News stories | Tags: house prices, Nama | Leave a Comment A couple of weeks ago we speculated as to whether firesales, such as the one in Mullingar, might be setting the floor in the […]