Price expectations adjusting downwards, but further reality check is required to reduce stock levels

Dermot O'Leary, Chief Economist, Goodbody Stockbrokers

8th Apr 2008

Dermot O'Leary is our guest blogger, analysing the Quarter 1 2008 figures.

Property can be a pretty emotive subject at the best of times. Every seller has a personal view of the value of their own property. However, it is not the seller of a property that sets its value. Of course, sellers can set an expectation of the price they want to achieve, but in the end the selling price is decided by the interaction of supply and demand forces in the market. When the market is hot, as was the case in the Irish residential market in 2006 for example, sellers were quick to adjust their price expectations upward. According to the Daft.ie index, asking prices were rising at over 20% per annum in late 2006. As we know only too well, circumstances have changed dramatically since then, thus sellers are slowly realising that their price expectations will have to be taken down a notch or two in order to stimulate interest.


Difficult to escape the effects of the credit crunch
The most obvious cooling influence on the Irish housing market was the doubling of ECB interest rates from December 2005 to June 2007. More recently though, the international financial market turmoil has gotten all the attention, and it would be folly to suggest that Ireland, and the Irish housing market, will not be affected by these developments. In fact, credit standards have already started to be tightened with, for example, most lenders shying away from the 100% Loan-to-Value mortgage space, which had become very popular for first-time buyers who were finding it difficult to raise the initial funding for a deposit.


Asking prices have been slow to adjust downwards
Regardless of housing market trends, people need a place to live, so demand for housing has not just vanished. However, the price point at which this demand is triggered has been adjusted downwards. Indeed, this is reflected in the fact that house prices in the opening months of 2008 have been, on average, close to 10% below levels achieved twelve months earlier, according to ESRI figures. However, because of the emotions alluded to above, asking prices have been rather slow to adjust downwards, although there is evidence in the Daft.ie data for the first quarter of the year that vendors are starting to get the message that earlier expectations for house prices will not be achieved.

Asking prices are in fact being adjusted downwards at a faster pace more recently - while asking prices were largely static throughout much of 2007, in the first quarter of 2008, asking prices fell by 1.2% on average. We have already seen evidence that significant price cuts in some housing developments have been able to spur a rather impressive increase in demand. Vendors should take note. Taking a line from the 1969 Rolling Stones song, sellers are starting, and must continue, to realise that "you can't always get what you want" in terms of house prices.

Alan Greenspan, not so long ago, stated that there was no bubble in the US housing market. He believed at the time that there was simply a certain amount of froth in the market. The man certainly did have a way with words. Have a look at the dictionary definition for froth: "a mass of small bubbles". One of the key points that he was trying to make was that all property markets are local and are dependent on the unique conditions in place in those areas. This can certainly be the case in the US, given the vast diversity in the world's largest economy. But, can the same be said about the Irish housing market?

There are factors which will affect the whole market, the main one of which is movements in interest rates. For this reason, it is no surprise that price declines have been pretty widespread across the country; of the thirty-four regions identified by Daft.ie, twenty-four saw asking prices decline in the first quarter of 2008. However, the Daft.ie data also highlight some significant differences in the regional movements in asking prices; in Tipperary, asking prices increased by 8.5% over the past year, while asking prices in Wicklow were down by 8.0% over the same time period.


High stock levels indicate it is still a buyer's market
One would have to be brave to conclude that we have seen the end of house price declines. The headwinds in store for the Irish economy, including rising unemployment rates, tighter credit conditions and an international slowdown, have certainly got stronger since the turn of the year. Along with lower confidence levels, these factors do not suggest that there will be a near-term scramble to buy a home. On the supply side, the sharp reduction in the number of new houses commenced is undoubtedly a positive for house prices, but we must also take account of the stock of homes for sale on the market.

According to the Daft.ie data, the stock of homes for sale on the website has begun to stabilise over the past few months. However, closer analysis reveals that stock levels in Q1 were still 51% ahead of last year's levels. The stabilisation has been mainly due to the fact that the number of homes being put on the market has fallen quite significantly, by 48% year-on-year in Q1 in fact. This may be due to a number of reasons, including a realisation by the sellers that the market has reached a saturation point or that sellers are unlikely to achieve their desired selling price in the current market. To clear this stock, asking prices may have to be adjusted further downwards, and vendors should not let their emotions get in the way, as recent evidence suggests buyers are willing to move at the right price.


HIGHLIGHTS:

Asking Prices, Residential Sales
Asking Prices, Residential Sales

Stock and Flow of Properties
Stock and Flow of Properties


SNAPSHOT:

Snapshot
Average Asking Prices across Ireland in Q1 2008

Discuss This Article

  • Re: The Daft Report Q1 2008

    Posted By: idiottje Date: Wednesday April 9, 2008 @04:47PM

    It has been up since the beginning of the week, and I am stunned to see a lack of response. Are people no longer reading the report, or just not willing to accept the report?

    Surprised to see some areas actually going up in price. Other sites that use tools to monitor the Daft site report 912 price drops between March 30th to April 6th, and 70 price increases. (http://www.irishpropertywatch.com/ being one)

    Is it that supply has stopped in some areas, or are buyers feeling that there is now value to be had, and the bottom has been reached in those areas? Is it because the EA's have decided to try and stimulate some activity in the markets in these areas by raising asking prices?

    I have often heard it said that we are currently measuring the market on what is being asked rather than what the final closing price is. There is no policy to publish this data, like there is in England. Should we start looking for this information on closing prices as opposed to asking prices to see what the real state of the market is?

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  • Re: The Daft Report Q1 2008

    Posted By: Chris Date: Tuesday April 15, 2008 @01:21AM

    I am intrigued by the comment "I have often heard it said that we are currently measuring the market on what is being asked rather than what the final closing price is. There is no policy to publish this data, like there is in England"

    I will be moving to Ireland soon and am looking to buy a home. I don't believe sellers' asking price trends are all that useful for someone in my position. The closing price is the only information that will allow me to determine what price I should offer.

    I know in Canada and Hong Kong it is very easy to get this info regarding closing prices. When considering a particular home, one can easily find out the closing price of similar homes in the area. This makes it pretty easy to determine what constitutes a reasonable offer and negotiations are usually quite quick and painless -both sides have a pretty fair idea of the market value of the home.

    Is informtion on closing prices available anywhere in Ireland?

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  • Re: The Daft Report Q1 2008

    Posted By: Cassie the cash buyer Date: Thursday April 10, 2008 @07:58PM

    Maybe the sellers aren't reading your report from my experience in the Wexford area. A cash offer of 3% less than the asking price has been scorned for a 4 bed house which failed to sell for over a year now. Sellers aren't getting the message, I'm not in a chain, I'm ready to close as soon as the legal end of things is in place. That is of course quite another story in this part of the country. Sellers are driving us cash buyers into the rental market.

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  • Re: The Daft Report Q1 2008

    Posted By: The Aztec Date: Saturday April 12, 2008 @12:10AM

    And the more sellers hold out the worse the situation will get. Eventually a glut of sellers will come into the market causing a crash. Sell now while you still can I say.

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  • Re: The Daft Report Q1 2008

    Posted By: dylan Date: Tuesday May 27, 2008 @12:01AM

    my cottage has been on the market since last august, it was sold twice but on both occasions the sale fell through because the banks would not give mortgage approval,even though i accepted 15k below the asking price,making it very good value at 150k,personally i think the banks are over cautious,my agent tells me its not the lack of buyers, but the lack of mortgage approvals granted these days...

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  • The Daft Report Q1 2008 - Recession - Market Data Wish List

    Posted By: Stephen F Date: Thursday April 10, 2008 @10:27PM

    How can the stock of property graph be flat from mid 2007 until Q1 2008 - when you look at the Daft Watch Graph http://daftwatch.atspace.com/ you can see that the total stock of property for sale in mid 2007 was closer to 45,000. I have referenced the Daft Watch site on numerous occasions and it always seems to be right on the money.

    I believe though that the market will continue to sell of - we are facing a major recession and it may be a long and drawn out affair. People have yet to start losing their jobs in major numbers - when they do you will find that sellers will be forced to drop their process to realistic levels. Recent talk of an increase in activity can be explained by the fact that individuals who have been waiting in the wings for the past three years or so to enter the market have been prompted to act as prices have fallen by 20% or more and they perceive this as great value. They fail to see the fundamentals - we have a serious confluence of negative economic factors (Currency, Inflation, Interest Rate, Credit De-Leveraging, Key Market Slowdowns, reduced immigrant populations etc etc), that will drive the property market far far lower.

    The key to market recovery is the provision of good clean data that is unambiguous and unbiased. I think Daft have a great opportunity to provide such data. (Certain other competitors to Daft have decided to stymie attempts to analyze their listings by displaying their price data in a picture format this prevents computers from harvesting that price data.) Daft should start off by providing buyers and sellers with more qualitative information on what property listings are doing - how long they have been on the market, what price reductions they have had, the nature and level of interest such as Bids etc. This would then equip the market with key tools that will allow it to find its equilibrium, only then will the market begin to free itself up. Can you imagine viewing a listing of houses in your target area and sorting them by; time listed, number of bids sent, chronological list of the reductions in asking price, local sales and listings, comments by people who have viewed the house, neighborhood information etc. Very soon the seller would know where the market is actually at for his or her property and a buyer would get to see how the current asking price might be good value. There is so much value to be added beyond the dull listings that we are forced to wade through.

    One last piece of advice Buy Gold!

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  • Re: The Daft Report Q1 2008

    Posted By: Cee Date: Friday April 11, 2008 @07:23PM

    Buyers won't have to wait too long for lower prices. New house prices will see to that. Builders have already dropped prices and will reduce them even more over the next couple of years. Secondhand sellers will do likewise if they genuinely want to sell instead of testing the market.

    House prices will eventually recover when the basic problems in the economy have been solved. Brian Cowen seems determined to do this - in his first interview he said that he would reduce current spending while increasing capital spending. Bertie was obsessed with "social partnership" which has brought the country to its knees. We have by far the highest cost of living in Europe. Real wages would have to fall by 20% in the next 5 years just to get us back to the level of competitiveness we had when Bertie came to power.

    At least Mary Harney knows what to do. I see that she is refusing to renew some contracts of ridiculously overpaid Irish nurses in favour of the recruitment of Asian nurses at almost half the cost. Of course, the Irish nurses can also apply for these positions but they must accept the lower wages that go with them. We need this all across the public sector and Cowen is committed to reform.

    Of course, in the short term this will depress house prices even further as buyers will have less purchasing power. However, the alternative is mass unemployment and a huge Government deficit which would be far worse for property prices.

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  • Re: The Daft Report Q1 2008

    Posted By: Bob Date: Saturday April 12, 2008 @05:30PM

    A fair, balanced report especially as it briefly alludes to the 'supply' of accommodation, in contrast with most messages and reports, which focus primarily on economic doom and on buyers' intransigence to meet sellers' price expectations.

    While the flow of properties to the market has declined by 48 per cent, as noted, CSO data records a trend towards continuing population increases. The number of immigrants in the year ending April 2007 was 109,500 which is substantially higher than for any other year since counting began in 1987. Furthermore, our natural growth (the excess of births over deaths) more than doubled from 16,600 in the year to April 1994 to 38,800 in the year to April 2007. Moreover, looking at the longer range, the population of Dublin, Kildare, Meath and Wicklow is projected to increase by over 500,000 persons up to 2021 and thus, the demand for accommodation in the Mid-East will rise rather than fall in the short and medium term.

    Where will this additional population live? Not in second-hand dwellings, based on the Daft data discussed in this report and not in new houses, given that registrations for 2007 were 62.3 per cent less than in 2006 and with industry expectations of further falls in 2008 and 2009.

    If the supply of accommodation is reducing at a somewhat alarming rate and if the demand for housing is rising as a result of continued population growth, market expectations of price stability or increases in the second half of this year are likely to be fulfilled. The answer is clearly, buy a home NOW (forget Gold, you can't live in an ingot!)

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  • Re: The Daft Report Q1 2008

    Posted By: Badgeman Date: Tuesday April 15, 2008 @05:26PM

    Bob,

    Why would I go and buy a house "NOW" instead of hanging on and getting one significantly cheaper in 6 months time?

    Those obsolete population growth "estimates" you refer to for the Dublin region were released at the height of the boom, and will have no relevance once the downturn really kicks in, and all our construction workers (both Irish and foreign) head off to London to work on Olympic projects. Once again you fail to take account of the existing 40,000 plus vacant units that are not even available for rental in Dublin. Supply is not going to be an issue in the short or medium term.

    This reminds me a bit of that guy "Paul", who used to post those delusional rants here imploring everyone to keep buying any kind of property, so we could all be rich and fabulous just like him, while at the same time traducing anyone who dared to opine otherwise.

    I notice he's been rather quiet of late,though ....

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  • Re: The Daft Report Q1 2008

    Posted By: Bob Date: Thursday April 17, 2008 @08:16PM

    In my message, I noted that our population was increasing and drew on empirical and anecdotal evidence adduced by serious unbiased professionals. I also noted the decline in the supply of properties to the market and again drew on up-to-date data from reliable websites, including Daft.

    Badgeman, while entitled to an opinion, trivialises this data because it is inconvenient for and incompatible with the claim that prices will plummet and anticipates mass emigration merely on the basis of possible building opportunities abroad, but again fails to produce evidence showing that the boats are full of migrants.

    Being practical the available data, together with the fact that househunters, especially first timers, have been absent from the market until recently, suggests that there will be an inadequate supply of accommodation, even taking account of vacant dwellings. Believe me, supply will be an issue from 2009 onwards (especially as many vacant units are perhaps in less accessible locations).

    The reason that you should buy now is that prices wont keep falling, much as though some would like to believe that they will. Average prices fell by a rather small 0.8%in February, which is nearly one-half of the rate of decline over the final quarter of last year and this supports the likelihood of stagnation or increase by late summer.

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  • Re: The Daft Report Q1 2008

    Posted By: Paul Date: Friday April 18, 2008 @03:20PM

    You are wasting your time BOB, there will never be a right time to buy property for the likes of badgeman, who will still be bleating on in 20 years time about the property market,and how it is about to 'crash'!

    These guys do not want to deal in the facts as outlined by you, they would rather speculate,deal in hearsay,and manipulate valid facts and arguments to propel their doom and gloom 'property crash' BS.

    Dealing in reality would be a novelty for the likes of badgeman, who will hang around scrounging for years while trying to get a house for nothing.You know the type BOB, everything for free brigade, entitled to this that and the other, while the rest of us work hard to get where we are and what we have. And then they have the nerve to begrudge others who took a punt that paid off, and will continue to do so, just because they did,nt have the foresight, wherewithall or b**ls to do it themselves! It would be ironic if it was'nt so sad!

    Tll me badgeman, if you could have bought a property in 1995 for 50k, nd it was worth say 400k today, would you turn down the opportunity? If you were selling the same house today would you accept 100k for it instead of 400k, as a gesture of goodwill and helping others and all that! I think we all know the answer to that one folks

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  • Re: The Daft Report Q1 2008

    Posted By: Anonymous Poster Date: Tuesday April 15, 2008 @06:58PM

    We are living on the East coast of the USA.I have worked in real estate here and it is all about DISCLOSURE DISCLOSURE DISCLOSURE.When a house is listed with a company it states the number of days it is on the market, the original price if the house has been reduced and what the current owners paid for it and the year they purchased.In the current downturned market the average offer is usually 20% below the asking price. There is then some negotiation wherby the buyer and seller meet somewhere in between depending on how long the house is on the market, the condition of the house and what other homes in the area sold for in the weeks previous.When a house sale closes the sold price is then put up on the site for all to see.There is also a company Zillo who gives you an estimated value for any house in the country based on market conditions and sold prices in the area.We moved back to Ireland two years ago and bought a brand new very overpriced house in a nice area. We were fortunate to sell it six months later with nothing done to it before the market turned,although it did take 4 months to sell.The same house three doors up on the same road with upgrades galore just sold one year after ours for 130,000 less than we got for ours.This is a 15% reduction on our closing price, not taking into account inflation,money spent on the house and interest and it sold for less than the original builders price.If this is not an indication on how the marker is going then what is?It is very difficult to get the sold prices of agents and the dishonesty and deceit in Ireland is appalling.We need to get wise and realize that any report issued from a bank, agency or other bodies with a vested interest in making profits must be ignored. The market has a huge way to go. Wages in Ireland are so out of line with borrowings. The value you get in the USA is unbelievable in comparison, you can buy a detached 4 bed home on one acre with in ground pool with fabulous schools and parks for less than 550,000 dollars.Wages are much higher too!Ireland has big trouble ahead!I have written comments in the Irish Independent many times at the end of property articles regarding prices and they never publish my comment because it is living, honest proof of what is really happening in the market and is not being disclosed to the public.

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  • Re: The Daft Report Q1 2008

    Posted By: Anonymous Poster Date: Saturday April 19, 2008 @09:30PM

    Where are you living now - US or Ireland ?

    Your email suggests that whilst you moved back to Ireland 2 yrs ago, you now reside in US.

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  • Re: The Daft Report Q1 2008

    Posted By: Anonymous Poster Date: Monday April 28, 2008 @08:30PM

    New Jersey, yes we moved back after six months.

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  • Re: The Daft Report Q1 2008

    Posted By: Bernadette Date: Saturday April 26, 2008 @03:20PM

    It was a breath of fresh air to read your comments regarding the amount of disclosure, relating to the buying and selling of property in the US.
    I fully agree with you on the deceit and dishonesty involved in the property market here, it makes my blood boil each time I have to rely on the word of a sales person, and have no way of knowing the truth around an original offer made to a property. It was put to me once by an agent that an offer had been made on a property, and the first offer had been increased by 10 000e by the very same person who put in the offer, all this was supposed to have happened, even though no other offers had bee made, I was to believe the he increased his first offer with no one even bidding against him, totally unreal but how can a person prove its rubbish as we have to relay on the word of one person and no paper trail. We have been lead to believe the agent is working to the best interest of the seller by aquiring the best possible price, and as much as I would like to believe this is out of loyalty to the seller I fear it is mainly to do with the percentage they receive from the selling price(the higher the selling price the bigger percentage paid to the agent by the seller) a sham. Trying to get information on what a property sold for is impossible, better chance of the US economy recovering within a year, I think not.
    B

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  • Re: The Daft Report Q1 2008

    Posted By: Raymond Date: Saturday April 26, 2008 @05:31PM

    Very true. The wages in Ireland are a joke Plumbers make thousands of Euros per week its crazy lets hope everything comes back to reality very soon. People think they should get this because America gets good pay for what they do. Ireland needs to grow up fast

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  • Re: The Daft Report Q1 2008

    Posted By: worried agent Date: Tuesday May 20, 2008 @10:56PM

    my partner is a plumber, has been for the last 12 years he is excellant at his job, however he comes home with well under a grand a week,and now the company he works for dont have any work lined up after the end of june, i am a ipav student and i am starting to wonder if i choose the right career given the state of the market and the uncertainty of how property will perform by the time i quailify.

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  • Re: The Daft Report Q1 2008

    Posted By: Tracy Date: Monday April 28, 2008 @11:14PM

    Hi all,

    Just wanted to write and say that we are trying at the moment to sell our house. The truth is that it has been on the market for over 6 weeks with not even one viewer or even interest. It seems as though the buyers are waiting for the 'crash'. Perhaps our price is unrealistic (although 45,000 euro less than what it was valued at 12 months ago!) If however the market does dive I am sure that many sellers, us included, will simply take our properties off the market. I await with interest the future developments of the market! My advice would be to the estate agents to bring back the phrase 'open to offers'and if you are thinking of buying I would not be put off by the displayed price. If you are not a speculator but genuinely looking for a home then I do think there are 'bargains' to be had. Good luck!

    p.s. I would also love to know the final closing price for any house and would have no problem with having ours published for anyone to view!!

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  • Re: The Daft Report Q1 2008

    Posted By: John Date: Friday May 16, 2008 @12:59PM

    I am not overly keen on pointing out the obvious for fear of looking foolish, but since our friend Paul is still in denial about a property crash I need to say this - open your eyes, you are slap bang in the middle of one of the world's biggest property crashes. And this is against a background of the biggest global property crash since man started building houses. Irish property prices fell by 10% last year in nominal terms, 15% in real terms. And the same is slated by pretty much every sane observer for this year(even the so called "vested interests". That, my friend, is a property crash - and you would know all about it if you borrowed 100% of the price anytime in 2006.

    Analysis of previous property downturns suggests it will take a number of years for prices to bottom out. I know lots of people think Ireland is different, and maybe it is, but Im not going to encourage people to gamble their hard earned money because there is a chance that the Irish property story is unique. Especially if the person advocating its uniqueness is not even aware that we are in the middle of a property crash.

    I have a very simple way of deciding whether property prices are overvalued or undervalued. If I seek an interest only mortgage (and put up e.g. 15% myself), I would hope that the income from renting the asset I purchased would cover the ongoing costs (i.e. mortgage interest, management fees and maintenance costs), leaving me with a profit on my 15% investment. I can put my cash on deposit and achieve 6% risk free, so risk adjusted, I should be earning more than that. The reality is, up and down Ireland, there is a c. 30% gap between my outgoings and my rental income. When property prices fall by 30% more we might be in a position where fair value is close to where it should be. It is nonsense to talk about where all these people are going to live - there is a glut of supply in the Irish market that noone wants to buy which will take years to shift.

    I would be delighted for people to pick holes in my calculations (ideally it will not include a suggestion that house prices always rise!).

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  • Re: The Daft Report Q1 2008

    Posted By: Eoin Date: Saturday May 17, 2008 @10:39AM

    Very methodical and cold analysis.

    Two more things to factor in - the amount that house prices will drop before the touted recovery is unknown but the current number of people in negative equity is likely to multiply.

    The house value:salary ratio is still way above the level of the 1980s English crash and that will be a significant pain factor accelerating the crash as it bottoms out.

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  • Re: The Daft Report Q1 2008

    Posted By: Bob Date: Saturday May 17, 2008 @12:14PM

    Sorry buddy, but please read the latest Permanent / TSB index which shows that the price of semi-detached houses rose in March by 0.2%.

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  • Re: The Daft Report Q1 2008

    Posted By: idiottje Date: Monday May 19, 2008 @04:52PM

    Dead cat bounce.
    Some people who have been holding out, think they see value, and so are buying now, but until a realistic price of 3 times average industrial wage (35-37K at the moment?) for a 3 bed semi in a normal average wage location is seen, it will keep dropping, because the banks are just not going to give the mortgages.

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  • Re: The Daft Report Q1 2008

    Posted By: Badgeman Date: Thursday May 22, 2008 @04:32PM

    Bob,

    For a guy who advocates opinions based on empirical evidence, that's a remarkably selective interpretation of the actual report - and one that's at variance with the author's opinion.

    3 bed semis are just one segment of the national housing market, and therefore should not be examined in isolation - especially by using a "cherry picking" method of comparing one narrow set of figures to the previous month's data.Year on year and quarterly analysis of the facts tell a different story of continuing price drops.
    Anyone interested in what the rteport actually says can view it on this link http://www.esri.ie/irish_economy/permanent_tsbesri_house_p/

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  • Re: The Daft Report Q1 2008

    Posted By: John Date: Tuesday May 20, 2008 @10:24AM

    Very good Bob - I'm kicking myself that I didn't buy a semi-detatched house at the start of March. My deposit account increased in value by 0.42% that month - double the extraordinary return your semi-d made - and my return was fixed and guaranteed by the government!

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