A report by Standard and Poor on the European housing market has argued that Irish house prices are undervalued by about 12 percent “compared with long-term historical averages” (see Irish Times and RTE). They suggest that the “fundamentals driving the Irish market have … improved dramatically” (by fundamentals, I’m assuming they mean affordability, rather than demand (low) or supply (excess, even with falling completion rates)). They conclude that the market correction in Ireland “seems overdone”. However, whilst S&P feel that Irish properties are undervalued, they anticipate further falls in house prices of up to 10 percent due to the general weakness of the economy, high unemployment and oversupply, before stabilising in 2011. I’m sure the notion that house prices are undervalued must be music to the ears of government/NAMA and vested interests in the construction sector (although a further 10 percent fall takes the edge off), but this seems to take little account of the regional dimensions of the Irish housing market. Given the astronomical growth in Irish house prices between 1991 and 2007 (4-500% in many locations), the levels of oversupply in some parts of the country, the state of local economies, weakening levels of demand due to changing population dynamics, the gap between average industrial wages and house prices, the lack of access to credit and checks and balances being used to cap mortgage lending, the extent of negative equity, and general lack of consumer confidence in the housing market, it seems optimistic to suggest that Irish house prices are presently undervalued by 12 percent (and also possibly ignores the extent and length of the Irish housing boom that would skew long term historical averages). My feeling is that even if the market is undervalued by 12 percent, and it does stabilise in 2011, it may take some time before that undervaluation is realised, and that realisation is likely to vary regionally (with the greater Dublin region reacting first, the others lagging behind). In contrast, S&P feel that houses in other European countries, notably France, UK and Spain, are overvalued and possibly face a second dip after stabilising after their recent fall.
Rob Kitchin
Ireland after NAMA 
June 1, 2010 at 6:21 pm
Hi Rob,
The full S&P report costs a few $100 to non-subscribers – do you know how they arrived at the conclusion we are 12% over-valued? The Irish Times seems to have quoted from their press release (gratis) but doesn’t seem to understand what has prompted S&P to reach their conclusion.
The S&P report seems to echo an OECD report last week that claimed we were 57pc off peak (in real times) and that we were now at the long term average value by reference to household income. Again the OECD’s workings don’t appear to be widely available.
Moody’s predict an 18% fall to 2013 but yet again their methodology is occluded.
Any ideas on methodology?
June 1, 2010 at 9:45 pm
Unfortunately, I’ve no idea (other than a hunch) as to their methodology, which is partly why I am sceptical as their conclusions which are very broad brushstroke and lack any meaningful contextualisation as to the Irish housing market or economy. I really think it is imcumbent on agencies when they are making these kinds of statements to provide accompanying data and evidence that does not involve hundreds of dollars of outlay to purchase. These kind of proclamations are designed to influence opinion and markets and therefore they should stand-up to scrutiny.
June 6, 2010 at 4:12 am
It would also not take currency value movements into account. I see values falling for the next ten years albeit at a slower rate. Taking the euro into account, I expect values to fall by at least one third more in that time. That said, I know one person who bought recently and of another couple who are leaving Australia to return to Ireland for family reasons. They sold their house in four weeks, having made $50,000 in 18 months ownership. Anecdotally, there is support for prices being close to the bottom therefore. I have it in mind that there is usually an overshoot in correcting values, so an undervaluation would be a factor in S&P calculations?
On the grounds that the continuing stimulus to Ireland from the unsustainable deficit will mean more deflation, I think that S&P are plain wrong, but then they need to be optimistic for their model of the world, depending on debt, to work.
June 6, 2010 at 4:21 am
You seem to have a naif view of how profitable bodies work! They are entitled to charge what they like for their opinions, even if they are likely to be worthless.
You have the disconnect that suggests you have swallowed the blue pill, despite your “spot on” articles. Advertizing is designed not just for an individual product but an entire paradigm: “we will sell happiness to you!” using greed sex and every motivator they can come up with. No one has any legally enforceable obligation to provide content, even of dreadful propaganda, for free. Infomercials are free as they are not a useful product or service!
All this will unwind, but the most persistent is the idea that the government can help the economy! It is therefore in no way responsible for the economy. That is why regulation failed in Ireland. If there is no enforcement of rules then there are really no rules!
No surprise therefore that “no one knew”. Many did!
Please continue with your blogging, but self examination may help you?
Then you can consider taking the red pill!