Affordability and confidence pressures mean summer rally will not last

Constantin Gurdgiev, Economist

5th Jul 2007

Dr. Constantin Gurdgiev is the Head of Research and Strategy for St. Columbanus IA, and Adjunct Lecturer in Finance with Trinity College.

After months of steady, yet to date shallow, house price deflation, the latest figures from the Daft Asking Price Index provide a ray of sunshine. However, the overall market forecast remains gloomy due to structural income growth and credit markets imbalances.

Rental yields on property have been rising since late 2006: the Daft National Rent Index was up by approximately 12% in the year to May 2007, with even stronger gains recorded in the core markets for Dublin city. Rising rents have led to rosy readings of the effect of demographics on the housing market. Such analysis, favoured by some commentators, is a bit too optimistic. Ireland undoubtedly continues to gain from its young population. However, these gains are accounted for by a rising number of Eastern European workers.

While immigration may be providing support for rental prices, foreign workers are employed disproportionately at the lower end of the wage distribution. They are unlikely to settle in the country, meaning their demand for housing is temporary in nature and Spartan in quality. So, rising rental yields signal continued slowdown in the owner-occupier segment of the market.

Secondly, house price growth, despite a slight rebound in the asking prices over the three months, remains sluggish. As the ESRI/PTSB closing price figures from late June show, the average price of a second-hand property in Ireland declined by 1.6% during the second quarter of 2007. This suggests an annual fall of 2.7% since January 2007 - in line with forecasts for the entire year. In Dublin, second hand properties prices fell by 3.0% in Q2 2007 - down 5.2% for the year to date.

Some anxiety prior to the elections (fuelled by speculations concerning the stamp duty reform) undoubtedly held back a handful of potential buyers. Yet there is little evidence that this had much of an impact on prices. It is more likely that a rush to sell investment properties, driven primarily by rising interest rates and fears of price depreciation, have created a glut of excess supply at the time of falling demand. A swift, albeit disappointingly shallow, reform of stamp duty does reduce the uncertainty, but it will make little difference to the medium-term price dynamics.

Instead, it is becoming painfully clear that the mixture of adverse affordability shocks and lack of consumer confidence in income fundamentals are driving house prices down in the medium term.

Most of the economic growth over the last 6-9 months has been driven by two factors - robust consumer demand for non-durable, non-capital goods and public expenditure. The former, along with cost hikes in state-controlled services, has triggered runaway inflation. As a result of the latter, the Exchequer figures are now recording rising deficits. For example, the May 2007 exchequer deficit was €266 million, a sharp contrast to the surplus of €1,841 million in May 2006 and suggesting a year-on-year deficit of €2,107 million. The ESRI forecasts a swing this year in the government accounts of €2,822 million, accounted for by slower pace of growth in revenues and out of control expenditure, and bringing the Exchequer into deficit.

This growth in public spending has preciously little to do with disposable income. Earnings growth, having grown 0.4% faster than real GNP, by 5.7%, in 2005 slowed down to 5% in 2006, 2.4% slower than GNP growth. Growth forecasts for 2007 place earnings growth at 3-3.5% - well below real GNP growth.

Factoring out the effects of SSIAs, real personal disposable income is set to rise by 5.2% in 2007 relative to 6.1% in 2006, while household debt is expected to grow from 150% of personal disposable income in 2006 to 160.6% in 2007. At the same time, personal savings will remain robust, growing by 11% in 2005, 9.7% in 2006 and 9.2% in 2007.

Households switching their consumption from durables and investment goods to day-to-day consumption and maintaining strong savings at a time of shallower earnings growth signals that they are now in the precautionary savings mode. This underpins consumers' unwillingness to undertake long-term large-ticket purchases. Altogether, households are not likely to return to the housing markets as buyers any time soon.

The core issue here is affordability. Basic estimates suggest that the median per capita disposable income in the country today stands at around €31,300 per annum. Factoring in the savings rates and using a 4.5:1 ratio of disposable income to loan value, a median household entering the market today can afford a mortgage of between €380,000 and €400,000. The stamp duty, legal fees and costs of moving the household and upgrading properties cut roughly 15 percent from the affordability threshold.

This is a far cry from the latest asking prices - according to Daft's statistics, the average family dwelling in Dublin city ranges from €485,000 to €518,000 for a three bed and from €671,000 to €734,000 for a four bed property.

All of this suggests that we are not likely to see a return of buoyant housing markets any time soon and that the rally in asking prices we're currently seeing will not last.


HIGHLIGHTS:

Asking Price Index
Daft Asking Price Index (API)

Stock and flow of properties
The stock and flow of properties for sale nationwide


SNAPSHOT:

Snapshot
Prices across Ireland in Q2 2007

Discuss This Article

  • Re: The Daft Report Q2 2007

    Posted By: Ronan Date: Thursday July 5, 2007 @01:49PM

    Interesting that this came out the same day that interest rates again are up in the UK. If Ireland were to take more similar increases things would get very though for some investors.

    As well as foreign workers spiking up the rental market don't you think it could have something to do with many potential buyers (like myself) staying in the rental market untill things cool off? I think the current prices are very unsustainable!

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  • Re: The Daft Report Q2 2007

    Posted By: Anonymous Poster Date: Thursday July 5, 2007 @10:39PM

    Absolutely right on many first time buyers staying away from the market. It is the issue of affordability and it is false to assume that first time buyers can always opt for cheaper housing outside the Dublin City. Thos who have real careers to build simply cannot afford 2 hours a day for a commute. Hence, robust demand in the professionals-dominated Docklands.

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  • Re: The Daft Report Q2 2007

    Posted By: Tim Date: Friday July 6, 2007 @10:56AM

    Real careers? That's a bit snobbish!
    Only about 40,000 people work in the Docklands area. The biggest employing sectors in the country are occupations such as gardaí, teachers, nurses and some professional services such as accountants and lawyers. They can work and live anywhere and often will, because the Dublin-rest of country wage differential is much much smaller than the Dublin-rest of country house price differential!

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  • Re: The Daft Report Q2 2007 - answer to Tim Friday July 6 @10:56AM

    Posted By: R Date: Saturday July 28, 2007 @12:23PM

    It does not matter what is your job. If you are working 8 hours a day and on the top of this you have to commute for 2 hours plus taking care of the children, you have very little choice left. If you want to survive, you CANNOT live and work anywhere (unless you enjoy slavering).

    And yes 2 hours commute this is a lot on the quality of life for any individuals, whatever is his/her job and it is a big factor when choosing a place.

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  • Re: The Daft Report Q2 2007

    Posted By: ricky Date: Saturday July 7, 2007 @11:53AM

    Rental demand will reduce in latter half of 2007 construction workers return to Poland ,etc cf housing starts june 07 -60% reduction on june 06 or 40% reduction on trailing 3 month average,FTB defer moving out of family homes as happened in UK housing downturn 1989 to 1993,ECB interest rate increases to 4.25/4.5 fuelled by rising oil prices and affecting affordability.As UK 1989 to 1993,major price falls will occur 2008/2009

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  • Re: The Daft Report Q2 2007

    Posted By: Anonymous Poster Date: Sunday July 8, 2007 @04:20PM

    Not true, The Irish market has never followed the up and downs of the UK and is more dependent on the growing young economie,and the relative low and stable EU intrest rates.

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  • Re: The Daft Report Q2 2007

    Posted By: ricky Date: Monday July 9, 2007 @12:38PM

    I did not realise that a doubling of interest rates in less than 2 years represents a "stable" interest rate environment-spare a thought for the many people who were seduced by the "get on the housing ladder before it is too late mentality" lining the pockets of fat cat developers and estate agents and who bought in the last few years and are currently moving from 1/2 year fixed mortgages to variable rate.

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  • Re: The Daft Report Q2 2007

    Posted By: fadalease Date: Sunday July 8, 2007 @09:39PM

    Interesting that you did,nt mention that uk interest rates were 15% at the time of the 1989 crash,a scenario that will not occur here,ya muppet!

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  • Re: The Daft Report Q2 2007

    Posted By: ricky Date: Monday July 9, 2007 @12:48PM

    Similar concept UK interest rates hit a low of 7.5% in summmer 1988 and together with double tax relief fuelled housing boom.Then interest rates briefly doubled as you noted.In Ireland interest rates have doubled in less than 2 years and FTB have been essentially exempt from stamp duty.Spare a thought for the buy to let get rich quick "businessmen"

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  • Re: The Daft Report Q2 2007

    Posted By: Anonymous Poster Date: Monday July 9, 2007 @03:17PM

    Interest rates may have been that high but you need to remember they have doubled in this little country and will continue to rise as the german econemy soars.

    1. 10,000 jobs to go in Construction within the next year. (AIB).. You must also rememeber they tend to talk such things down e.g 3-5% house price growth this year. Now the optomists are predicting 8% falls.

    2. Investors are desperately trying to rid themselves of ridiculously overpriced properties. Hence the saturation of sites such as this one. Most cannot sell and if any offers are made, they are well under the asking price.
    I think i better keep this whole thing simple... There are more than enough houses to meet damand now that investors can no longer benifit from capital appreciation and rents just don't cover mortgages.

    3. Interest Rates to hit 4.5% September, 4.75% just in time for Christmas and twice in the first half of 08. This will lead to further falls not to mention crippling dozy first timers who may have availed of the synical 100% mortgage. (These dopes won't really have an affect on the market just thought i'd give them a mention for a human touch.)

    3. 3 Bed semi in Balbrigggan asking price of €400,000 August 06 sold last week for 317,500.

    4. As predicted by those with no vested interests (Banks/Estate Agents/Government etc) stamp duty reform has had or will have any affect on the market that has just slammmed on the breaks but unfortunately was looking out the window at fields to build on and was too late.

    Ever felt had?

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  • Re: The Daft Report Q2 2007

    Posted By: Anonymous Poster Date: Monday July 9, 2007 @03:19PM

    kl

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  • Re: The Daft Report Q2 2007

    Posted By: Blackmore Date: Sunday July 8, 2007 @10:50PM

    Poland is a huge country with a highly educated (one of the few worthwhile legacies of communism) and cheap workforce. Does that ring any bells? There will be a "Polish Tiger" which will suck most of the cheap labour out of Ireland and The UK. We don't elect governments anymore; we elect a board of directors to manage the economy. Multi-national companies that are more powerful than governments will simply move to cut costs. This is the nature of capitalism. The hugely inflated house prices in Ireland will collapse. There is no escape from this reality.

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  • Re: The Daft Report Q2 2007

    Posted By: Anonymous Poster Date: Monday July 9, 2007 @01:24PM

    http://www.thepropertypin.com

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  • Re: The Daft Report Q2 2007

    Posted By: Cee Date: Tuesday July 10, 2007 @10:44PM

    Minister for State Batt O'Keefe was on the news yesterday urging young people to buy now as house prices were back to 2005 levels. He said to get on the property ladder before prices start to rise again. Who is he kidding?

    This "advice" follows Friday's news of a 12,000 rise in unemployment - mostly due to layoffs in construction. The Government knows that residential construction is in dire straits and it is now trying to dupe young people to part with their hard earned cash in order to stave off further calamity. What sort of leadership is that? My advice to young people - hold on for another two years - houses will be much cheaper then.

    Hanby Wallace - probably the biggest conveyancing solicitors for builders - laid off 25 staff last week. This is the reality of the market and it still has a long way to fall.

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  • Re: The Daft Report Q2 2007

    Posted By: Paul Date: Sunday July 15, 2007 @02:39AM

    Myself and my partner are going to try get a house in the next two years near my folks.

    Im delighted the market is on a down turn as all I want is a place to call our own at a reasonable price. We will wait 1 - 2 years if necessary for this to happen.

    I dont want to be a slave working 60 hours because some broker etc has made too much.

    To would be “developers” who have prospered on the backs of ordinary people – go earn a living and do some graft.

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  • Re: The Daft Report Q2 2007

    Posted By: aul' fool Date: Monday July 16, 2007 @10:33PM

    I enjoy your reports. Its many years since I was involved in the business. Bought my first semi in Dublin with 100% loan for less than 2 years wage. (current value €700k or 100x multiple in 36years). Land gives much better returns. Site I sold (sad!!)has a value 300x more than I paid 30years ago.
    I used to follow the old equation: Selling price = land cost + building cost + profit. Building cost is a calculated price and so is profit. The variable is LAND. Here there are so many variables - national, political, legislative, economic. The Govermental system in place dictates the Land Cost. In boom times (Ireland), the most sucessful developer bids up the price of land until it "squeeks". There is never any rationality about this. Its all to much for my old brain!!
    Prime farmland in the U.K. is say €7000 acre. Semi-bogland in Ireland say €25,000 acre. Of course English Farmers are farming corn not sites - there is the difference!! Its my bedtime.

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  • Re: The Daft Report Q2 2007

    Posted By: Anonymous Poster Date: Saturday July 21, 2007 @09:49PM

    The 'doom and gloom' scenarios in many of these replies echo the views displayed on a now defunct website 6-8 years ago. Those previous house hunters also hoped for market changes, emigration, lower prices and all sorts of evils on developers, but these have not occurred. If such individuals had not changed their minds and bought houses in the meantime, they would be homeless today - perhaps a lesson for those currently considering their options.

    While prices may drop sharply in the future, a distinction must be drawn between what is likely and what is possible. Economic/demographic trends suggest that, although a small decline is possible, the fall sought by buyers is unlikely (and those who forecast decreasing prices in times past are still awaiting such an event). Thus, those who wait too long before buying could pay more in the end.

    The price of houses is linked with supply and the shortage of building land which is served by water / sewage is not appreciated by the public. Whilst figures are published periodically on anticipated house completions, these are highly fictional forecasts and house hunters, hoping for a price reduction, should consider the impact of a significantly reduced housing supply on future prices.

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  • Re: The Daft Report Q2 2007

    Posted By: DeeGee Date: Tuesday July 24, 2007 @06:20PM

    As to "Anonymous" July 21st ...... He must be in the business.... either floggin houses, floggin mortgates or the son of a builder. Come out to Bray County Wicklow for a look. Last year - June 2006 I was given a valuation by an estate agent of €500,000 on my house. In feb 2007 the EXACT same house went on the market for €449,000 !!! Nearly 6 months later, its not sold and the asking price is €439,000 !!!! A new estate on the Herbert Rd. went on sale in April (Easter weekend) detached bungalows at €1,300,000. Three months later the houses are now on sale with a different agent at €1.1 million ... A FALL IN ASKING PRICE OF €200,000!!! This is in a county which is the only one in the commuter belt where prices HAVE GONE UP !!!Who says this ???? The vested interests .... thats who the ones who said in 2006 BUY NOW WHEN THE SSIA MONEY COMES IN THE PRICES WILL GO THROUGH THE ROOF......Bertie and the f.f. types who will be swilling at the trough at the Galway Races next week have been telling us its good value....One of the richest men on these islands (Dermot Desmond) said in 2006 that if prices in Dublin were more per sq. foot than New York - something was wrong ...... Was he buying in Dublin.... Last Sunday`s Times had an interview with Mr. Gallagher - the financier who is married to one of the Doyle Family - said he would not be buying in Ireland at the moment - after he had done the biggest land sale in the history of the state on a piece of prime Dublin 4 land (ie Jurys, The Berkeley Court etc) for record breaking price....Why were they selling ??? Because they knew the party was over !!!!! So the builders can sit on land - the planning applications are down, the banks can offer 110% mortgages, the estate agents can waffle on about the "fundamentals" the economists can try to make the medicine as suggery as possible - its all over folks - Sensible people are not buying.....

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  • Re: The Daft Report Q2 2007

    Posted By: PAUL Date: Friday July 27, 2007 @04:40PM

    No dear,the sensible people have allready bought and have seen massive capital appreciation!Who cares if 10-20% is knocked off this "paper profit".And does it really matter if the property is their PPR and they have no intention of selling it???For years we have heard that the huge capital appreciation in house values was only "a paper profit",and while that is correct the same also applies to the fall in house values now.
    As for the largest land deal in the history of the state it was actually the Glass bottle factory in Ringsend,AKA SOUTHWHARF,sold to Bernard McNamara in October 2006.As for that sale and the Jury,s sale bought by sean Dunne,do you really believe that 2 of the wealthiest men in the country have have been "conned" into parting with vast amounts of money?
    Also,in 10 years time do you really believe that house prices will be below their current level when inflation is factored in???????I certainly don,t and anyone that does is extremely naive and will be heard mutterring the same sh1te in 10 years time about the housing market being overvalued as they only have themselves to blame for missing the boat again.

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  • Re: The Daft Report Q2 2007

    Posted By: Anonymous Poster Date: Thursday July 26, 2007 @07:45AM

    The difficulty with the last reply is that it focuses only on the last 6 months, during which prices stagnated / fell solely due to political uncertainty as regards stamp duty and interest rates. Property is a long term investment and should be viewed as such.

    This political uncertainty is short-lived and has clearly been resolved in relation to stamp duty (and long-term fixed interest rates strongly suggest that the banks do not believe that further rate rises are imminent (otherwise their 3, 5 and 7 year rates would be higher).

    Innovative repayment mechanisms offered by banks, housing shortages resulting from planning difficulties, continuing strong economic growth fuelled by immigration, further employment opportunities due to a skilled workforce and poor transport linkages will combine to ensure increasing medium - long term prices in the Greater Dublin Area.

    Be in no doubt and gamble at your peril!

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  • Re: The Daft Report Q2 2007

    Posted By: Sean Date: Sunday July 29, 2007 @07:50PM

    Have a good look across the Atlantic thats wher you will find the true picture of what we face. 2 years ago 4 Bedroom home valued at 635,000 now sits on Market for 485,000 no offers for the last 6 months!!!!!. The US market has gone thru 2 years of month on month decreases the reasons rising interest rate currently 7% and people who borrowed money when it was cheap at 3 and 4 %. investors who bought new builds in the condo market 2 years ago that are only now finshed are walking away from 15-20% deposits as the figures dont add up any more, there is a glut of empty properties on the market, local news reports say there could be a national foreclosure rate of 4% this is a massive figure and the Banks are under srious pressure the mortgage broking community are disappearing fast. Why do we always think we are different to everybody else and it will never happen here do you think the economic conditions are going to improve or disimprove!!! The american economy is currently improving and their property market is in utter chaos, their prices are on average half ours and they still cant sell their properties. WAKE UP AND SMELL THE BACON (no pun intended) THE PARTY IS OVER.

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  • Re: The Daft Report Q2 2007

    Posted By: Anonymous Date: Sunday July 29, 2007 @06:18PM

    Dublin house prices have dipped a little - woopie do.

    This just means that the asking prices went ahead of the market for a short stint. Equity prices do this nearly every day because individual businesses are more transparent to analyse and liquidity is greater, making the market more efficient. The trading price goes up and down around the 'real' value on a daily basis, with a few outside factors thrown in.

    The property market is not as efficient, and we are very used to steadily growing in property prices in Dublin. We appear to be freaked out with this slight drop as it is not what we are used to.

    Fundamentals for sustained (albeit much slower than before) growth in the Irish economy are still in place.
    Banks are not predicting significant interest rate rises in the medium term, and well located/serviced housing stock is of limited supply.
    The trick is when to call the bottom. If you are first time buyer and you are planning hold/live in the property for a number of years, I'd suggest getting in now in a prime location with a low ball offer to someone who has to shift their property urgently. You may be able to take advantage of this transient period of poor sentiment and you can nearly guarantee that the asking price on the same house will be higher than it is now in a few years time.

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  • Re: The Daft Report Q2 2007

    Posted By: Anonymous Poster Date: Saturday August 11, 2007 @07:01AM

    Precisely, "the trick is when to call the bottom". This has the same depth of anaysis as "buy low, sell high"!

    Apart from that, my two cents:

    I don't think that the current market fluctuations will make a lot of difference to owner occupiers, unless they haven't been suckered by banks offering loans that they cannot service. Quoting short term "teaser" rates in literature, and other tricks to distort the impression of the affordability of a loan, should be definitely banned.

    However, I sincerely hope that the uniquely Irish sight of "investors" paying more in interest than they make in rent for their properties is truly over. It's really a pyramid scheme - many do make money from it, but it is essentially flawed and bound to fall like a house of cards.

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  • Re: The Daft Report Q2 2007

    Posted By: Anonymous Poster Date: Monday August 13, 2007 @01:08AM

    Look at the turbulence of the international markets over last week. Financials are looking very dodgy at present and there will be serious knock on effects on property.It would be sensible for anyone hoping to buy property at the moment to hold off until things stabilise and property prices have "bottomed out". Don't worry there will be plenty of property to buy over the next while if you are in a position to wait.

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  • Re: The Daft Report Q2 2007

    Posted By: Terry Date: Sunday August 12, 2007 @09:26AM

    I think your all kidding yourselves if you really think house prices are going to fall dramaticaly. I am English and have heard all the brits saying the same thing as the Irish are now saying for the past 7 years, and what has happened to all their predictions of mass collapse,they were all wrong and houses have keeped rising. Before moving to ireland I lived in Queensland Australia for 3 years and luckily purchased a house at the start of their boom that the Ozzys all said would stop and collapse, but guess what, it didnt and my house doubled in 3 years and the market although slower is still rising. First time buyers must realize that markets dont just drop nower days. With all the TV investment programmes etc, the only real investment the average man can rely on is the housing market. Dont Kid yourselves any longer get on the ladder before its to late, this slow down is your oppertunity ! Take it while it lasts !!!!!!!!!!

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  • Re: The Daft Report Q2 2007

    Posted By: Anonymous Poster Date: Tuesday July 13, 2010 @10:32PM

    Oh dear O dear

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  • Re: The Daft Report Q2 2007

    Posted By: Christopher McLaughlin Date: Friday August 17, 2007 @03:13AM

    I am not the best at math and economies however, today I chose to entertain the idea of living in the land of my ancestors, Ireland. I am a highly skilled computer geek who manages a network here in the USA. More to the point, can Americans buy real estate in Ireland? What are my dollars worth? From looking at these posts, seems like I should wait for prices to go down, eh?

    For your kind considerations,

    Chris

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