A couple of weeks ago we speculated as to whether firesales, such as the one in Mullingar, might be setting the floor in the market.   These firesales are typically selling property at 50-75% less their original value at the top of the market.  In Sunday’s Independent, Brian Lenihan, the Finance Minister, stated that the NAMA haircut of 47% on the first tranch of loans transferred in are establishing a price floor and stablising the market, predicting that that the residential property market is now in a position to start functioning normally again: “One of the good things about the steep discount, averaging 47 per cent, is that the residential property market will now be stabilised at a realistic level … You can now buy in confidence that the price is realistic.”  There are a number of reasons as to why such confidence might be more hope than reality.

First, the 47% haircut (€8.5b) was for the initial tranch of €16b of loans. Of these loans, €4.9 billion relate to assets located in Ireland; €5.5b related to investment properties and residential property for resale makes up just €0.4b.  A good chunk of the haircut relates to property in the UK and very little relates to residential property, so whether the 47% haircut will apply generally to residential property in Ireland is difficult to know at this stage.

Second, there are a number of residential developments which are not being taken into NAMA, such as the Mullingar one, where the receivers are setting a floor below the NAMA discount.  This inevitably drops the local market towards the firesale level.

Third, supply and demand are nowhere near alignment, which would be a normal pre-condition for market stabilisation.  As our comparison of NIRSA, UCD, DKM/DEHLG and Goodbody’s estimates of oversupply highlights, there is presently an estimated overhang of between 100-170K houses, depending on what one thinks is a realistic underlying base vacancy level and other assumptions.  The stock of housing for sale on daft.ie alone has risen from just above 20K properties at the start of 2007 to over 60K at the end of 2009.

Fourth, many people are not in a position to enter the market due to their personal employment circumstances or difficulties in accessing credit.   Given what has happened to the housing market, and the economy in general, a flat assertion by the Minister is unlikely to have restored the confidence of those who are in a position to buy.  Unable or cautious, buyers are likely to continue to remain spectators until they see some sustained evidence that the market has bottomed out, or the price is sufficiently low to tempt them to buy (which does seem to have happened with the Mullingar example, hence our speculation that those apartments could represent the bottom in that locale).

Given the points above, it is interesting to note that the property market has not yet fallen to the NAMA haircut rate in most areas, suggesting that sellers are trying to dig their heels in and hope for a sale.  The haircut, the firesales, and the oversupply all suggest though that the market might still have some way to drop in many places.  Daft.ie reports that asking prices have dropped somewhere between 21.5% (in Limerick) to 43% (in the centre of Dublin) from the peak.

There is little to suggest that the market is presently stabilised or that buyers can purchase ‘in confidence that the price is realistic’.  There is some activity in the housing market, but it mainly concerns cases where there is very good value for money, where sellers have reduced prices to meet buyer expectation.  And even if all sellers were to do this, the present difficulties in wider economy and accessing credit will inevitably limit market activity.  Ultimately, a normal, functioning market will return once the oversupply is worked through, not through a simple assertion that NAMA has set the floor.

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