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Economy Has Turned One Corner, But Outlook Remains Challenging.

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Jim Power, Chief Economist, Friends First.

13th July 2010

Jim Power, Economist at Friends First, Lecturer in the Smurfit Graduate School of Business, commenting on the latest Daft research on the Irish property market.

Following a barrage of absolutely dire economic and financial news over the past three years, it came as quite a relief to learn that the Irish economy technically emerged from recession in the first quarter of 2010. However, not everybody is convinced about the significance of this technical development and a vigorous debate is now developing about the real status of the economy.

Gross domestic product (GDP) in the first quarter was a hefty 2.7 per cent higher than the previous quarter, the first quarter-on-quarter increase since the final quarter of 2007 and so must be welcomed by even the most sceptical amongst us. This does confirm that the recession is technically over. However, the more realistic measure of domestic economic activity, gross national product (GNP) contracted by 0.5 per cent. This metric has contracted in every quarter since the first quarter of 2008 and in fact has fallen by a dramatic 16.5 per cent over that period. However on a positive note, the decline of 0.5 per cent in the first quarter is the lowest rate of contraction over that period.

It is clear that having fallen off a cliff over the past three years, the Irish economy has now hit the ground and the question is how quickly it can pick itself up and start to recover in a meaningful way. Consumer spending and business investment are still very weak, while the construction sector is still in steady decline. Exports on the other hand are doing well, but it is a selective performance, dominated by the mainly foreign-owned chemical & Pharmaceutical, and IT companies. The picture that is emerging is of an economy being pulled out of recession by the multinational sector, while domestic demand still remains weak, but there is increasing evidence that it is starting to level out.

Much has been made of the fact that the labour market situation is still poor, as evidenced by the live register reaching 452,882 in June. There is generally a time lag of up to a year between the bottoming out of the economy and an upturn in the labour market, so there is hope unemployment will have bottomed out by the end of the year. However, strong growth in employment thereafter is a different matter entirely. It is very hard to identify too many sectors that might be net job creators over the next two or three years, and in fact it is not difficult to identify those sectors that could well shed further jobs. Job shedding is not yet likely to have ended in manufacturing, construction, the retail sector and financial services and it is inconceivable that the public sector can be a net job creator over the coming years given the requirement to correct the public finances.

The outlook over the next couple of years remains very challenging, not least because the external economic outlook remains very fragile. A recovery in domestic demand is required, but this is likely to be slow to materialise, so it is essential that policy makers remain focused on what I would regard as three key priorities - getting credit flowing in the economy, improving competitiveness a lot further, and addressing the structural imbalances in the public finances.

The sovereign debt crisis in Europe is far from over and is imposing significant funding costs on errant governments around the EU, including Ireland. It is imperative for Ireland that the fiscal consolidation continues in order to control funding costs, which are already significantly higher than they should be. If Ireland were to show any signs of swaying from the path of fiscal austerity, the cost of funding would soar to Greek-style levels and that would be disastrous for a country that is currently borrowing close to € 400 million per week. There is also a requirement to fundamentally re-structure the public finances to achieve stability and sustainability in the longer-term.

A total reform of all elements of public spending is essential, but the tax base will also have to be broadened and made more stable and predictable. More workers will have to be taken back into the tax net, water charges based on usage will have to be introduced, all tax allowances will have to be critically evaluated, and a property tax that is not based on transactions will have to be implemented. A property tax will have to be carefully engineered to prevent distortions, but it appears to me that it has to be first and foremost based on site valuation, rather than house valuation. Politically this will be difficult, but we must have a more predictable tax base if we hope to fund the increasing demands on public spending from demographic change over the coming decades. In my view the most economically efficient tax system is one based on a broad base, with relatively low marginal rates. Ireland has been going in the opposite direction in recent years.

The need for a sustainable source of tax revenue from property is clear when one considers the ongoing uncertainty in the property market. The latest data from Daft.ie continue to suggest that activity in the housing market remains weak. Based on the demand and supply dynamics of the market, it is not too surprising that asking prices fell by over 4 per cent in the second quarter and that prices have fallen by over 7 per cent between January and June. On the demand side, the lack of adequate credit availability and low levels of buyer confidence due to a variety of factors are hampering demand. On the supply side, there is still serious excess supply all over the marketplace and this will be exacerbated by NAMA and financial institution engaging in fire sales over the coming years.

The latest Daft.ie supply data show that the total stock of properties for sale is rising again, and is now approaching 60,000. This probably reflects a view amongst aspiring sellers that the market may be starting to bottom out and they are now moving to sell. Having failed to anticipate the magnitude of the imminent house price collapse at the beginning of 2007, I am now far from convinced that the market is yet bottoming out. I anticipate that average prices could fall by around 12 per cent this year, and completions could be lower than 12,000. Any meaningful recovery in 2011 looks unlikely. The housing market is not yet out of the woods, nor is the overall economy. A little progress made, but considerably more to be made.


HIGHLIGHTS:

Stock of Properties
Asking Prices, Residential Sales

Stock and Flow of Properties
Stock and Flow of Properties


SNAPSHOT:

Average asking prices across Ireland in Q2 2010
Asking Prices in Q2, 2010

Discuss This Article

  • Re: The Daft House Price Report Q2 2010

    Posted By: NO1FAN Date: Tuesday July 13, 2010 @08:22AM

    i'm glad someone is prepared to give a realistic interpretation of the available information. despite one favorable economy figure, we can't (much as we'd like to) agnore the rest of our economic figures.

    most of us are makling big sacrifices, pay cuts etc, to bring the country back to where it once was, but thankfully this commentator does not insult our intellegence, and gives us a true evaluation.

    undoubtedly, estate agents will read the information in a different way. i think 12% is a bit off though, i would expect another 20% drop in prices, but this is dependent on exposure to the 'double dip' factor in house prices affecting UK and USA.

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  • Re: The Daft House Price Report Q2 2010

    Posted By: Pat the Builder Date: Tuesday July 13, 2010 @03:44PM

    Unlike other countries, notably the U.K, we in Ireland do not have a published register of Annual House Sales. This reluctance to compile and publish such data leaves the ordinary among us at a distinct disadvantge re; Having a Realistic Property Valuation. Add to this the unprofessional 'Cat & Mouse' game played by a large number of self-appointed Estate Agents (a large number of whom have NO professional training whatsoever!) and the guessing game goes on unabaited. What a mess!

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  • Re: The Daft House Price Report Q2 2010

    Posted By: Disgruntled and stuck in the rental market Date: Tuesday July 13, 2010 @08:21PM

    "Asking Prices" fall by 4%. So, peoples' generally overinflated, unrealistic expectation of what their property is worth, was tempered by 4%. What people *actually* paid may have fallen by more. Who knows. Is there any real debate, anywhere, on what people are really paying? I don't expect honest answers from the agencies as it's in their interest to talk everything up.

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  • Re: The Daft House Price Report Q2 2010

    Posted By: Jason Bourne Date: Tuesday July 20, 2010 @11:01PM

    I have to say i agree with the view that we need much more transparency on actual house sales figures.

    look at the UK website http://www.houseprices.co.uk/ as an example whereby you can enter a post code and see a full history of actual sales prices for a house (or houses) in you area.

    There is far to cosy a cartel with estate agents and developers that needs to be cut right through with independent facts.

    if there is an Ireland equivalent web site to the example above please let me know.

    Jason Bourne

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  • Re: The Daft House Price Report Q2 2010

    Posted By: theOrb Date: Wednesday July 14, 2010 @02:25PM

    This market just keeps finding new bottoms (i.e falling at 16% on a per year basis) -The Irish property market has turned ...............right into the oncoming lorry that is the IMF.

    It really is frightening to look back at how wrong and deluded certain people were re the property market i.e Paul / Paul Murphy / Paul Economics Student ./ Bob

    Looks like you were the naive one Paul, to believe the below - How far are we away from 2000 price level now ????? About 6 weeks !!!!!!!!!!!!



    Re: The Daft Report Q4 2006 Posted By: Paul Murphy Date: Saturday February 10, 2007 @05:47PM
    Rich,if you are naive enough to believe that house prices will return to their 2000 level(ie a circa 80% fall),then you will never be joining this "party" my friend.78.6% equity now exists in the residential property sector,so it will take a collapse of 80% to turn the market to negative equity and i,m sure not even devoted readers of "marketwatch" are gullible enough to believe that is even a possibility.You also conviently overlook the fact that during the first 5 years of the boom interest rates were over 5% in this country. Best of luck in "picking up some cheap pieces" as you so smugly put it,but it will have to be in Bulgaria or Romania, because the collapse which you crave and would welcome with a ridiculous I told you so expression,is not going to happen.Please keep us all posted on the goings on in "Marketwatch"

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  • Re: The Daft House Price Report Q2 2010

    Posted By: Breid Date: Wednesday July 14, 2010 @07:57PM

    Why is everyone grumbling now. Ireland had its boom with the property market. Perhaps if there was not such greed from developers we would not be in this situation today. I dont mind how much house prices drop as my house is a long term investment.

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  • Re: The Daft House Price Report Q2 2010

    Posted By: Spaniard in Dublin Date: Friday July 16, 2010 @01:46PM

    I think house prices are now in fact undervalued in Dublin, in Central Madrid and Barcelona, a normal 2 bed apartment costs at least 300k even with our massive 20% unemployment, and a minimum wage of 700euro a month. In Paris a central 60sqm 2 bed costs 400k, unemployment 9% min wage 1200per month.
    So, Dublin 13% unemployment minimum wage 1400euro, 2 beds central for 250k? Thats good value in my opinion.

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  • Re: The Daft House Price Report Q2 2010

    Posted By: paul the realist Date: Saturday July 17, 2010 @02:42PM

    "I think house prices are now in fact undervalued in Dublin"

    Over 100K people are struggling to pay there mortgage and this is rising fast, the country is now broke, property tax, water charges and income tax rises still to come, 450K people of the dole, (would be more like 600K only for the usual Irish mass emigration which will in turn drive down the demand for paoperty), 300K properties empty, bank bailouts/nama sucking the wee bit of life out of the economy.
    Banks which have no more cheap credit to shovel into mortgages, so its back to 5 times basic salary max amount ( I can verify this as I went for a mortgage last week to see what I would get).

    The rental market is been kept artifictally high due to rental payments to single mothers, people who have lost there jobs etc, this will have to change as we can't keep borrowing 20 billion a year to pay for this madness.

    It is only a matter of time before this comes to a head, it might take a year or two but the flood of borrowed money that is keeping the lights on will have to stop....wake up and smell the coffee, people like yourself are in total denial about the dire situation we are in my friend..

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  • Re: The Daft House Price Report Q2 2010

    Posted By: Andy84 Date: Sunday July 25, 2010 @11:25AM

    Personally I think the press love to talk up the crisis - and feed off our national obsession for whinging. So its good to have an outside viewpoint too - from Spaniard in Dublin.

    I only found out recently that the 450,000 unemployed includes 200,000 who are working part time and getting unemployment benefit! But I dont see this plastered accross the papers..

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  • Re: The Daft House Price Report Q2 2010

    Posted By: tramor Date: Thursday July 29, 2010 @08:54PM

    450,000 would give an approximate unemployment percentage of 25%, not 13%. The 13% comes from the true 5 day a week unemployed figures. There is no hidden good news in these figures, its worse than it looks at first glance.

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  • Re: The Daft House Price Report Q2 2010

    Posted By: shaypain Date: Friday July 16, 2010 @05:53PM

    I was looking at the listed prices in the various provinces you have displayed and i noticed the co. galway section, on it..it has the average going rate for three (3) and four(4) bedroom houses @ 211k....262k respective. now I happened on your sales section and low and behold what do i see.. a four bedroomed average sized front and back gardened house @ 1.3m euros,?..and thats not all,on the same page the average price for similar properties 750k euros, my point being.where do you get your information from in this regard of data.???

    • Reply to this message

  • Re: The Daft House Price Report Q2 2010

    Posted By: Spaniard in Dublin Date: Monday July 19, 2010 @07:37PM

    Paul, you are astonished with 450k unemployed ppl, we have 4 million unemployed ppl, 20% of work force is unemployed, plus we have an ageing population, a lot of pensions to pay, Ireland has a younger population.

    In Madrid and Barcelona average salary is 2000 a month and ppl manage well, i dont know, maybe we dont spend as much on Alcool :), but here 2000 its considered a crap salary.

    We are giving out here but Ireland and Spain are still in the top wealthiest Contries in the World per capita.
    Spain is a great country to live, specially for holidays, but Ireland has more potential to grow and is better to work.

    Back to my point, Dublin central apartments are now cheaper here than Madrid, Barcelona, Lisbon, Paris, London, Fact! Getting even close to Warsaw prices, where there are ppl on 400 a month.

    The problem here is the stupid banks are not lending because ppl would buy a 2 bed for 250k in Dublin

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  • Re: The Daft House Price Report Q2 2010

    Posted By: Paul the realist Date: Tuesday July 20, 2010 @08:30PM

    People do not want to live in apartments in Dublin, you have to pay god knows how much maintaince fees every year, not to mention they are small and poorly build, I know of people who bought and can hear people talking in the next apartment!, people want to live in houses.
    Dublin is a very small city compared to the cities you mention, find other cities with a population of around 1 million and prices would be way lower I would hazzard a guess. In any case its all about supply and demand, there is no demand at the moment for apartments, there are loads of them lying empty not only in Dublin but all over the country. Maybe if supply was tight they would be more expensive, but the way people are emigrating I just can't see any improvment in that department at all! (not to mention all the other points I have made).
    And another thing 2000 euro will no longer be seen as a crap salary to anyone who is employed in the private sector, saying that actually explains in a nutshell is exactly why the country is screwed now!, we are way to expensive!.
    The boom is over, we are broke, there is no missing the boat talk anymore, we don't need to borrow 10 times your early wage to buy a place, thank god!.

    • Reply to this message

  • Re: The Daft House Price Report Q2 2010

    Posted By: Denis Date: Tuesday July 20, 2010 @10:54AM

    Pat the Builder you are correct the estate agents are not helping the situtaion one bit. In my experience here in Clare they wont even put the offer to the clients saying "they wouldn't accept it anyways" absolutely no negotiation whatsoever, they have said upon re-enquires about some properties that they were "withdrawn from the market" which most certainly is not true. I urge all people who wish to sell to consider selling the pile of bricks youself at least in Clare and be realistic like Paul above. I think it's gonna be a long long time before the property market recovers far longer than it will take the economy to recover, basic supply and demand no more no less.

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  • Re: The Daft House Price Report Q2 2010

    Posted By: Anonymous Poster Date: Wednesday July 28, 2010 @11:48AM

    1 in 4 mortgages are underwater, thousands of idle housing units litter the country, the banks are hopelessly smashed, western age demographics are shifting in the wrong direction, food/energy and transport are on the cusp of demanding far larger proportions of peoples incomes. There is no good news, turning corners or anything else on the horizon. That doesn't mean the planet will stop spinning but when all the variables are negative there will not be a positive outcome for the majority. The amount of money printing it would take to reignite the smoke and mirrors debt based version of 'growth' that was embraced by western nations over the last forty years is not even remotely feasible. Our currencies are already disintegrating in value against the purchasing power of the developing world i.e whether or not we have bail outs and debt forgiveness; the increasing poverty of western nations relative to the developing world will find economic expression and unfortuantely you can take as a given that this is understood by now at the highest levels. All of the G7/8/20 etc meetings being held are not to bring about reforms. Reform is the antithesis of renewed 'growth' or 'recovery' for it would put an end to debt fuelled transfers of wealth via inflation/debasement capture a.k.a bubbles.

    First priority for all voters should be to prevent property taxes and water charges. Property tax in a capitalist context is an obscenity against freedom and means ownership is meaningless-so why buy anything? Yes renting is fine so long as it is a choice, otherwise it is equally serf-like in nature to mortgage debt. Water charges will bring this natural resource under EU competition law as the gov will effectively be competing against ballygowan etc and the price of our water will be determined not by the cost of provision or our supply relative to our domestic demand but what say the Spanish or the Greeks will pay for it during a drought.

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  • Re: The Daft House Price Report Q2 2010

    Posted By: READER Date: Wednesday July 28, 2010 @10:41PM

    JUST AS PRICES RISE .. PRICES FALL... BUT THEY DO AND WILL RISES AGAIN
    jUST AS IN THE BOOM ... ALL TALK WAS ABOUT PROPERTY AND IN THE BUST WHEN PRICES ARE CHEAP ... ALL TALK OF NO MONEY ..WAS THERE ANY REAL MONEY WHEN HOUSE PRICES WERE HIGH OR WAS IT ALL ON PAPER
    WHERE THERES A BOOM THERES A BUST AND SO IT HAS BEEN HAPPENING FOR MANY A GENERATION lIVE FOR TODAY AND BE PREPARED FOR TOMORROW

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