The general consensus amongst economists and property specialists is that the housing market is yet to reach its price floor. Prices have fallen by 40-50% across the country and are expected to fall by c.60% by the time they are fully unwound. There has been some speculation that the market might recover quite quickly, especially in the cities, with population growth cited as the prime factor to drive such a turnaround. The hope is that Ireland might mirror the reasonably rapid recovery of the mid-1990s Finnish property crash, rather than the stagnation of the Japanese crash from the late 1980s wherein present property prices are still below those twenty years ago. My own view is that the Irish crash will be nearer to Japan’s experience than Finland, with property prices unlikely to rise to peak 2007 prices for at least another ten to fifteen years, and longer for some parts of the country. There are six reasons why.
1. Still unwinding
As noted, Ireland is experiencing a steady but relatively slow unwinding of the property market, with property prices still falling. They seem set to keep falling for at least another 12-24 months and possibly longer. Until the market has fully unwound there will be no correction or growth. And once it’s unwound there are a number of factors, set out below, that are likely to see the market flatline or only grow marginally for a number of years to come.
The property sector have tried to spin the data around oversupply every which way they can to make the issue appear better than it is. Principally they’ve tried to focus on unfinished estates, arguing that oversupply is brand new, complete but vacant property. They ignore the stock still being built on these estates and the vacant, brand new and under-construction one-off properties around the country. They also largely ignore the vacant stock in the rest of the housing stock, principally on the argument that any property that is owned does not represent a problem, despite the fact that it can still be a part of the housing market and affect that market. The Census 2011 preliminary results reported that there are 294,202 properties around the country that are vacant and habitable (14.7%). Some of these properties, c.80-100,000 are holiday/second homes. In any housing market one would expect some vacant stock, usually 3-4% (the Irish government uses a base vacancy rate of 6%). Even in Dublin, vacancy is running at 7.8%, with a large oversupply of apartments in particular. What that means is that there are c.200,000 vacant properties in the country excluding holiday/second homes, c.100,000 of which are in excess of expected base vacancy. That is a substantial oversupply. When supply exceeds demand prices fall or remain weak. Until supply and demand are aligned, it is unlikely that prices will rise to any great degree. For the last two years the property sector has told us that supply is running out in some areas and we need to start building again. The data – either in terms of oversupply or units available to the market – does not yet support this assertion. The property sector can try and spin oversupply estimates however they want but the evidence of vacant oversupply all round the country is plainly evident to purchasers.
3. Weak demand
Demand for housing in Ireland over the past twenty years has been driven by two principle factors – population growth (net natural increase, net migration increase) and household fragmentation. Basically, population grew rapidly (by a million people between 1991-2011) and the average household size fell. The effect of the latter process can be quite profound, for example if the population remained the same size but the average household size fell then the population would need to occupy much more stock. Whilst we do expect the population to grow over the next twenty years, it is tempered by two factors – emigration (there is presently net migration of -34,000 per annum) and age profile (the bulk of natural increase is accounted for by children under the age of five). Emigration is primarily being undertaken by young adults (aged 20-40) who are at household formation stage; children under the age of five will not be at household formation stage for another twenty years. Household fragmentation is affected by economic circumstance with children more likely to stay at home, parents less likely to separate, and young adults to share property to keep down costs. These are often choices, not a compulsion, and until the wider economy recovers household fragmentation is likely to weaken. One factor used to try and off-set these arguments is to focus on the social housing waiting list as evidence of pent-up demand. In March 2011 the DECLG revealed that there were 98,318 households on the social housing waiting list. However, 65,643 of these were in suitable housing, but they could not afford the rent and were receiving rent supplement. The need for additional social housing stock then is c. 33,000 (still a relatively substantial need), though it’s fair to say that that much social housing stock is in need of replacement, though the State cannot afford such programmes at the moment.
4. Negative equity and mortgage arrears
Properly functioning housing markets require a mobile population. It is estimated that at least one in three household mortgages in the state are in negative equity. Regardless of whether they want to trade-up or down, or to move to another part of the country they are locked into their present property unless they are prepared to realise a loss. The Central Bank estimate that over 50% of investor, buy-to-let properties are in negative equity. When prices do start to rise at least one in three housing units with mortgages are largely precluded from moving until prices rise sufficiently that they can trade. Moreover, 62,970 households (8.1% of mortgages) are more than 90 days in arrears on their mortgage payments and a further 36,376 have restructured their mortgages (and so far are not in arrears). This is a substantial growth on the 26,271 households in arrears in Q3 2009 and looks set to keep rising as households struggle to meet debt commitments, and might well be joined by many investors on interest only mortgages if they are asked to start paying down the capital. Further, 25% of properties have more than one loan secured against it. What this all means is that a sizable chunk of potential movers/sellers are impaired and will be absent from the market for some time.
5. Downward spiral of the economy and accessing credit
The Irish economy has been severely weakened over the past four years and household income and access to credit is much reduced. Austerity measures are biting through various tax increases and deductions. Many are living with a radical change in financial circumstance through unemployment (14.4%) or underemployment. An unstable Europe and general weak global economy is having a deadening effect. The banks are reluctant to lend for mortgage credit. What this all means is that even if a household wanted to purchase a property, their own reserves are depleted and their access to credit restricted. This is unlikely to change until the wider economy recovers and the banks have worked through their corrections. This is going to take a number of years, probably the best part of a decade or more.
6. Confidence and caution
Confidence in the property market and the property sector in general is at an all time low. Few at this stage believe what property professionals have to say regarding the property crash, housing need and construction. They are seen as self-interested groups who are more concerned in their own bottom-line than the state of the nation. People view the work of NAMA with deep scepticism and lack trust in the government and local authorities to address issues such as unfinished estates and taking in charge. Issues around poor construction typified by Priory Hall and disputes concerning pyrite in concrete have weakened confidence further. Investment purchases by individual households, a key feature of the boom (27% of mortgages in 2007), is likely to be much less prominent giving how badly burnt many investors have been by the crash. Combined with the issues above, it seems likely that confidence will remain weak and that buyers in future will proceed with caution. Growth when it does occur then will be marginal and hesitant, perhaps after a short dead cat bounce. Assuming the market falls 60%, at growth rates of 5% a year, which would be a good target to aim for, it will take 19 years to reach 2007 prices. Even in the cities, where growth is likely to be the strongest, it’s going to take some time for confidence to return.
I would like to provide a more upbeat, positive assessment, but the evidence just doesn’t support that sentiment at this time. Ireland’s property crash, aligned with the weak domestic and international economy, is severe. For the reasons above, it’s my view that the market is going to be very slow to recover. It will though recover as supply and demand align and the economy stabilises and starts to grow again.