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

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