The release of Residential Property Index figures for the month of December 2011 by the CSO allows the comparison of how house prices have performed between January 2005 and December 2011.  Such a comparison provides an overview of when and how the market has changed and what sectors have been affected the most by the downturn in property prices.  Rather than having to wade through 20 pages of tables, we have converted the data into a set of interactive graphs that detail overall change, annualised change and RPP index score (baseline 2005).  A brief analysis of figures reveals that overall house prices nationally are down 47.1%. Apartments in Dublin have declined more than any other market sector with a fall of 57.7%. Overall house prices in Dublin have fared worse than outside Dublin with a fall of 53.7% in comparison to 42.4% outside Dublin.  The period of greatest annual decline was recorded in August 2009 when prices were 20.8% lower than 12 months previously. The decline between Dec 2011 and 2010 was 16.7%.  To access the interactive graphs on AIRO click on the image.  Full CSO report is available here.

Eoghan McCarthy and Rob Kitchin

Yesterday the Irish Times reported that the Property Services Regulatory Authority (PRSA) hope to have a property register live by June 2012 that will give information on house price sales and commercial leases for 2010 and 2011.  The register will give a valuable insight into the housing and commercial market going forward and is to be welcomed.  What it won’t do is give us a detailed retrospective view of the property market at the tail of the boom and through the crash given the 2010 base date.

In collaboration with Ronan Lyons, Oxford University and economist at daft.ie, NIRSA through its AIRO project has been working on producing a set of maps charting various aspects of the housing market including asking price and rental yield using Daft.ie‘s database.  This database includes over 980,000 rental observations and over 600,000 sales observations from 2006 through to the present day.  Importantly, the maps are at sub-county scale, plotted into over 1,000 geographical units made of aggregates of EDs and EAs.  We hope to launch the interactive mapping tool in the coming weeks, but thought we’d give a brief taster on IAN of some of the preliminary output.  The maps below are examples of our initial work and look at 3 bed semi (or equivalent) deciles of asking price , rental asking price, and rental yield. The new mapping tool will contain sales and rental prices for 2-bed, 3-bed, 4-bed and a weighted average for all 1-5 beds. Prices wil be avilable for the peak (2007 q3), current prices (2011 q3) and % fall in the average price.

Once the interactive mapping tool is launched we’ll provide some more maps and analysis of the material.

Justin Gleeson and Rob Kitchin

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.

2. Oversupply

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.

Rob Kitchin

There have been a couple of reports this week on house and land prices for 2010.

MyHome.ie – Quarterly property barometer

Daft.ie – Quarterly report

Sherry Fitzgerald – house price index

Indo Farming Supplement

If there is good news from these reports it’s that house and land prices did not fall as much in 2010 as they did in 2009.  That said, they did decline quite substantially.

With respect to house prices nationally, Daft, MyHome and Sherry Fitz all calculate Q4 declines:

Daft = -4.8%; MyHome = -3.2%, SF Q4 = -4.2%

Similarly, all three report 2010 declines in prices nationally of:

Daft = -14%; MyHome = – 13.1%, SF Q4 = -12.0%

Declines since the peak are estimated nationally as:

Daft = -40%; MyHome = – 34.6%,

with Dublin falls being substantially more:

Daft = -40.4% to -49.6%; MyHome = -36% to -48.9% depending on area in the city.

In general, there seems to be quite good alignment between the reports, although when compared at a county level there are some quite sizable differences between counties.  Leitrim is the one that stands out.  Daft report that house prices in the county declined by -13.4% in 2010, MyHome report that prices didn’t decline at all (0%) over the year, even rising in the final quarter.  Given the levels of oversupply and weak market in Leitrim it’s difficult to believe that house prices are stable in the county when they are falling everywhere else.

Sherry Fitz reported that 49.7% of all purchases were by first time buyers, and 27% of vendors were selling investment property.

Farm land prices nationally averaged €8,420 per acre, down €8,800 (-4.3%), slowing significantly from declines in 2008 and 2009.

As for what 2011 brings.  All predictions are for a further slippage in prices given the state of the economy overall and the surplus of overall stock (both new and secondhand).   The falls might though slow a little as stamp duty changes encourage people to re-enter the market to move up or down.  As Ronan Lyons notes in his analysis for Daft there are, however, significant regional variations now in housing market dynamics, with Dublin in particular operating in a different way to the rest of the country, and it may well be the case that house price falls will vary quite considerably across the state in 2011, especially if the sticky decline in rural areas speeds up.  MyHome‘s hope that there is an overhang of pent-up buyers waiting in the wings to come into the market once the house price trough is reached seems a little fanciful – this is the generation who are emigrating in droves, with substantial numbers on the Live Register, the need to build a large deposit, and difficulties in accessing mortgage credit.  I would think demand is pretty soft all round, and even if people moved out of rental accommodation into their own homes this creates an addition problem of further oversupply in the rental/investment sector and the potential to push that property onto the market.  The effects of the future property tax may also slow sales as people wait to find out what their commitment might be.  Overall, 2011 seems set to be another year of decline, but perhaps not as drastic as 2010 and certainly not as bad as 2009.

Rob Kitchin

Three stories in today’s Irish Times property supplement that reveal something of the death of the Irish property dream.  Alison O’Riordan bought the dream.  She paid €525,000 for an apartment, where those  in a neighbouring block are now selling for €190,000.  This is what she had to say:

It’s such a bitter taste of defeat as I stare out my window each morning that I leave the blind down continually … As a homeowner, my load was already heavy enough to carry as, stuck with a property I cannot sell, I struggle to meet my monthly repayments …I chastise myself for incarcerating myself in my own financial prison. A prison, I soon learned, that had no more than about 10 inmates.  … I am so worried, I can hardly think of anything else … At least I can put the newspaper down or flick over the page, however there is no getting away from the apartments across the street. … Yesterday the bill for the management fee came in. It is for €1,600 – another figure I carefully choose to ignore back then.”

And she’s far from the only one locked in a financial prison.  Over 250,000 mortgage holders are in negative equity.  For those that have lost their jobs or taken pay cuts, they are struggling to pay the bills and over 36,000 are over 90 days in mortgage arrears. The dream has turned very sour for many and the stress is chewing up their lives.

And the property supplement lets another set of people know the extent of financial hole they are in.  A 62-unit apartment complex in Booterstown has prices half what apartments in a similar adjacent development went for during the boom years.  One bed apartments for €215,000; two-bed from €289,000; two-bedroom duplex from €355,000.  The one beds are still six and half times the average industrial wage.  A complex in Leopardstown start at €210,000, selling at 40-50% the price of when they were first released in 2008.  A bitter pill for those who had already bought in the complex and similar apartment blocks nearby.

And finally, Meath County Councillor are selling five houses that were bought compulsorarily for the M3 motorway but were not demolished.  The units are up to 80% the price they would have fetched at the top of the boom and before the motorway was built on their doorstep.  Interestingly they warn that the properties may need ‘entire rebuilding – “as they haven’t been lived in for about six years”.’   So, houses that were family homes that have not been lived in for six years may need to be knocked and rebuilt.  Well, that confirms the clock on doing something re. the unfinished and ghost estates around the country.  Many of these estates have already been empty since 2006/07, so they’re very much on short time before the bulldozer may need to be bought in as they may not be fit for purpose.

Reading the property supplement can indeed be bad for your health.

Rob Kitchin

At the end of last week EBS announced that it would no longer provide a mortgage for the purchase of an apartment outside of the four major cities of Dublin, Cork, Limerick and Galway, or the large commuter towns (such as Navan and Newbridge) (see here and here for story).  It’s not fully clear whether the move also excludes large regional towns such as Waterford, Athlone and Sligo, but it appears that way from the media coverage.  In the case of the cities it will only lend 85% of the value of the property, in commuter towns 80%.  It is also changing its rules with respect to second incomes, reducing the amount it will take into account, and only allowing borrowers to lend 30% of disposable income.  This change in policy concerning the purchasing of apartments is worrying for a number of reasons as it appears to execute a form of redlining.

First, it suggests that apartments are a particularly risky part of the housing the market, especially outside of the major cities.  I can find no data to suggest this is the case and, in the absence of a detailed explanation from EBS, my guess is that they feel that there is a serious oversupply of apartments in many areas, which they anticipate will lead to large price falls from present levels.  That said, there is a demand for apartment living in any town of any reasonable size, in terms of lifestyle choice and cost, and all local markets need a diverse stock to cater for different consumer groups.  Moreover, it seems unlikely to me that someone who can afford to front up 20% of the cost of an apartment represents a serious financial risk for EBS going forward and over the long term the value of the asset will increase (and EBS are protected from a future fall of 20% if the borrowers did get into trouble).

Second, excluding buyers from buying apartments across large swathes of the country potentially creates serious problems for both existing owners and EBS itself (who presumably have lent mortgages during the boom years to the purchasers of such properties) as it will undermine the value of the assets by making them much more difficult to sell.  This will potentially lock a number of apartment owners onto the first rung of the property ladder, unable to sell and move on, and also place them in (further) negative equity.

Third, EBS is a nationalized institution, which one would have hoped means that it would serve the interests of all citizens regardless of where they want to live (assuming they meet financial as opposed to geographic criteria) and also the taxpayer (one assumes that many new apartments are heading into NAMA and if no-one can access a mortgage to be able to purchase them they effectively become worthless).

EBS, Bank of Ireland and AIB, are the only lenders in the market at the minute, and if BoI and AIB follow EBS’s lead, then a significant part of the housing market in many areas of the country will become excluded from buyers and lock-in existing apartment owners for the foreseeable future.  It’s hard to see the justification for such redlining.

Rob Kitchin

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

House prices seem to be on the road to recovery in the North.  The market stabilized somewhat in 2009 after falling 35% from the peak (Q3, 2007) and has risen by 4.9% in the first three months of the year.  The authors of the University of Ulster Quarterly House Price Index note, however, that price growth varies by area (with Belfast increasing and Mid-West and West declining) and house type (terraces and semi-detached continued to fall, detached and semi-detached bungalows increased), and the level of activity in the market is significantly below what it was in 2006 and 2007.  Belfast prices have risen by 18% over the past year.  Prices in the Republic for the same period continued to decline, falling another 4.8% to 34% of peak prices.  The average price of a house in the North rose to £169,497 (c.€200,000), bringing average prices for the North and South into approximate alignment (the average price for a house in the Republic in Q1 2010 was €204,830 according to the PTSB/ESRI index).

One of the major differences between the North and the South is that, due to a much tighter planning system, the North does not have a sizable overhang in the market, with supply and demand more aligned.  And there has been no need for a NAMA response by government, though a sizable proportion of NAMA assets (€4.8bn) are located in the North and agencies there are clearly worried about how these properties will be affect the market.  Whilst the market might be turning there, it seems likely that it’ll be some time before it turns in the Republic given supply/demand imbalance, the lack of access to credit, and the low levels of confidence in the housing market and the general state of the economy.  The way the southern market is heading, the performance of overseas assets is going to be important as to whether NAMA delivers.  The good news is that NAMA housing assets in the North are gaining value (or at least are not still falling).  The bad news is that the wider macroeconomic situation in the North is somewhat uncertain and widescale cut backs in public expenditure is expected in an economy highly dependent on the public sector could weaken any recovery.  One hopes that this recovery in the North is not a dead cat bounce.

Rob Kitchin

According to NCB Stockbrokers, as reported in the Examiner today, if house prices have continued to drop at the same rate as in 2009 then over 50 percent of all mortgage holders will be in negative equity by June of this year (this assumes that house prices are on average down 45% since the peak).  The same story reports that the ESRI predict that 53% of mortgage holders will be in negative equity if house prices fall by 50%, and that the Bank of Ireland report that 21.5% (40,000) of its residential mortgages are in negative equity, and that the average level of negative equity is presently greater than €50,000.   There’s clearly a significant difference between 21.5% (BoI) and 50% (NCB), and it’s likely that the true number in negative equity is somewhere between the two.

It is also the case that there are significant geographical variations in rates of negative equity for two reasons.  First, rates will vary in line with household growth, with some areas experiencing a large growth in new homes, and hence new mortgages, in the Celtic Tiger years.  For example, there was significant household growth in the commuting counties around Dublin – Meath (69%), Fingal (68%) and Kildare (57%) between 1996-2006, whereas growth in other counties was substantially less, such as Sligo and Monaghan (both 22%). In the high growth counties, a large number of new mortgages would have been in the 2003-2008 period (with house prices in Dec 2009 having fallen to April 2003 prices according to the PTSB/ESRI index).  Second, rates will vary in line with local housing markets.  Daft.ie, for example, report that asking prices have dropped between between 43% (Dublin city centre) and 21% (Limerick) between the peak of the market and Dec 2009, with more people in negative equity in those areas with the highest price drops.  It seems likely then that negative equity is likely to affect more people, with the size of the equity gap also larger, in the commuting belt around Dublin than in other places across the country.  What that means is that the consequences of negative equity, in terms of ability to move homes and consumer confidence, also varies geographically and may have additional effects on local trade.

Rob Kitchin

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.