Housing Market on hold while waiting for an economic turn-around

Daft Reports

Dr. Charles J. Larkin, Research Associate, Department of Economics, Trinity College Dublin

17th November 2009

Dr Charles J. Larkin, Department of Economics, Trinity College Dublin, commenting on the latest Daft research on the Irish property market.

The world economy - and in particular the OECD grouping of 30 economically advanced nations - has undergone the most severe recession since World War 2. Among that club, Ireland has suffered the most acute economic contraction of all: GNP has fallen 13.6% from peak - or by more than 20% if foreign-owned export-orientated sectors are excluded. This has taken its toll on jobs, with unemployment rising to 12.6% in October and expected to reach 14% within months.

There are many origins of Ireland's crisis but the primary cause is macroeconomic imbalances, in particular in housing. The spectacular boom and bust of the housing market has seen investment in housing fall by more than half and house prices are falling rapidly. At the same time, household face falling disposable incomes, with unemployment, increased tax burdens and negative wealth effects arising from falling house prices. The government has had to adjust also, with reduced public services and public sector pay. Its priority now is servicing national debt, which is rising rapidly due to deficits of almost 13% this year and next. Ireland faces economic déjà vu, with a fiscal vista reminiscent of 1978/1979.

The OECD's recent review of the Irish economy indicated that the decline has begun to bottom out. This heartening conclusion does not imply a return to higher incomes, reduced unemployment or increased property prices. Ireland's membership of the Eurozone means Irish borrower enjoy historically low interest rates, but also that unilateral currency devaluation is not an option. International competitiveness can only be regained through general reduction of price levels. Vital elements of this process will be wage reductions in the non-traded sector and reductions in rents.

The third quarter Daft.ie Rental Report reveals significant reduction in rents across the country, with an average national reduction of 18.4% over the 12 months to October 2009. Average monthly rent is now €775. Reductions in urban areas have been quite marked. In Dublin, rents have fallen consistently with an average reduction across all sections of the city of 24.5% from peak and 20.7% from the fourth quarter 2008. Rents in the capital are now lower than in the first quarter of 2000. The most acute reductions were in Dublin's City Centre, where rents have fallen 26.1% from peak and 21.3% from the fourth quarter 2008, returning an average of €924 per month. It is now common practice to tell the story of the Celtic Tiger in two stages: the first of export-led growth, the seond of an easy-credit fuelled property/consumption bubble. Rents are now back to the levels of the export-led growth phase.

While Dublin's rents have fallen most, rents in other cities have also been significantly reduced in the last 18 months. On average, rents in the cities outside Dublin have fallen 19.5% from peak. The only exception to the ongoing falls is Galway City, where rents appear to be levelling off with a small quarterly increase of 0.4%. In total, rents there have fallen from peak values by just 15.6%, compared to larger figures in Cork (21.5%), Limerick (21.8%) and Waterford (19%). Elsewhere around the country, rents continue to fall but generally at a slower pace. Rents in Connacht (16.6% from peak) and Ulster (18.4%) have fallen by significantly less than those in Dublin Commuter Counties (24.3%), or Munster (21.4%).

These statistics reflect dramatic shifts in Irelandis demographic patterns. Net outward migration has begun, with 65,100 people leaving the country from April 2008 to April 2009. Of these, 30,100 were nationals of recent accession countries (69.4% male) and 18,400 Irish nationals (62.5% male). This represents a significant change. Net migration has not been negative since 1996. Peak inward migration was in 2006 at 71,800 persons, coinciding with the peak of the Irish property market. The peak of the rental market was in February 2008. This change in migration may pose challenges to the rental market over the medium term. The rapid increase in birth rate (at 74,500, births for April 2008 to 2009 were the highest in the State's history) may result in new sources of demand as households become first-time buyers, trade up or withdraw rental rooms from the market.

Historically, property crises coupled with financial crises produce sharp and lasting falls from peak value. In Ireland's case, economic recovery will depend upon export competitiveness. Addressing macroeconomic imbalances in the property market will be an important part of this process. This quarter's data indicate that a correction is afoot that will bring about such a real devaluation. The key issue is that of time. Households, already saving heavily, are in the process of adjusting to what Nobel Prize winning economist Edward Phelps refers to the "new normal" of lower growth and higher unemployment over the medium term. Adjustments will take time and typically overshoot before a new equilibrium is established. This may lead to fluctuations in the short-term, but long-term recovery in the housing sector cannot occur without the easing of credit markets and increases in real income.

HIGHLIGHTS:

Rental Index

Stock and Flow of Rental Properties

SNAPSHOT:

Snapshot of Rents Nationwide

Discuss This Article

Re: The Daft Rental Report Q3 2009 Posted By: Timbo Date: Tuesday November 17, 2009 @08:09AM
I would be very interested to hear the author's views on yields (roughly annual rent divided property value). Mr Lenihan is claimed to have stated in the context of the NAMA legislation that we are close to the bottom of the market because yields are close to record highs.

Notwithstanding that the NAMA assets will be far more than residential property, can the author confirm that Mr Lenihan is using faulty logic. To illustrate, if annual rent is €5k and the property is worth €100k then the yield is 5%. If property drops by say 40% and is now worth €60k and rents by 24% to €3.8k then the yield will rise to 6.33%. Given that the bank is only offering 1% on deposits we should all invest in property because it returns 6.33%, right? Not if rents are going to fall further because of government cuts in rent allowance, rising unemployment, excess supply of property, reduced wages. And if rents drop then the yield will drop, and contrary to Mr Lenihan's assertion a further cycle of property value falls could be on the cards.

Any comments?
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Re: The Daft Rental Report Q3 2009 Posted By: Timbo Date: Tuesday November 17, 2009 @08:23AM
Very interesting report but are there statistics available on the following:

Voids - ie how many months on average in a year is a rented property empty and not generating income.
Supply - what % of properties available for rent remain empty and non-income producing.

Would also be interested if there were any comments on the small fall in rents (24%) compared with 62% (?) drop in mortgage costs (this is my recollection of a report on CPI published last week).
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Re: The Daft Rental Report Q3 2009 Posted By: Anonymous Poster Date: Tuesday November 17, 2009 @08:31AM
If the average rent has fallen from €1000 to €775 isn't that an average fall of 22.5%, not 18%?
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Re: The Daft Rental Report Q3 2009 Posted By: Anonymous Poster Date: Tuesday November 17, 2009 @08:35AM
If statistics are based on asking prices, what account should be given for negotiations between parties which might lead to the actual price signficantly different?

If you produced statistics on the asking prices of property for sale then people would build a fair degree of scepticism into the results because we all know actual prices can be significantly different.
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Re: The Daft Rental Report Q3 2009 Posted By: Anonymous Poster Date: Tuesday November 17, 2009 @10:11AM
Spot on. My own experience as a landlord is that the asking price is pretty much irrelevant. All the asking price determines is the number of inquiries from prospective tenants - none are even thinking of offering the advertised rent. Negotiation begins anywhere from 15% off the asking price, right up to almost one-third. The rent registered with the PRTB is where analysis should begin.
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Re: The Daft Rental Report Q3 2009 Posted By: Timbo Date: Friday November 20, 2009 @11:48AM
Your point about using the PRTB is spot on.

The report's authors might assert that if you're comparing asking rents now with asking rents a year ago, then you are comparing apples with apples and the trend is an accurate reflection of what is happening to rental values.

My own experience is that, because of the recession (phoney Depression as far as I am concerned), the overhang of supply and collapse in property values, there is far more effective haggling going on and also the asking prices (though reduced) are a remnant of the good times. To me, and of course this will be anecdotal and not to be taken as gospel, the actual prices now have a greater % reduction from asking prices than a year ago and therefore this report is not comparing apples with apples.

In future DAFT might consider liaising with the PRTB about obtaining actual price data (which if not tied to a specific address or individual would not offend the Data Protection Act).
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Re: The Daft Rental Report Q3 2009 Posted By: Anonymous Poster Date: Tuesday November 17, 2009 @08:39AM
The rent-a-room income trends on page 7 look unrealistic with double digit falls in a quarter? And what does "vacancy" mean (eg Dublin City Centre "vacancy" is 5.0 again page 7).
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Re: The Daft Rental Report Q3 2009 Posted By: Ste - StatusIreland.com Date: Tuesday November 17, 2009 @10:12AM
More importantly than the exact costs of houses and rents right now is the trend. There are not many statistics about house prices available but knowledge of asking prices / rent prices offer up just as valuable information. People seem to be holding out for the bottom, but for what reason? Are people seriously considering investing in property again after all that has just happened? There will be no 2nd property boom, for many reasons. The biggest being NAMA which will trickle property onto the market place for the next decade and more ensure that we are always at least never oversupplied.
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Re: The Daft Rental Report Q3 2009 Posted By: Kev Date: Tuesday November 17, 2009 @11:55AM
Whats interesting as per the Rental Stock Graph is that since Jan 09 there is circa 7,500 properties not being rented at all with a high turnover of properties from people moving for cheaper rent or better properties?

But like the sales stock, the rental stock has being falling since June, if this continues then now is the best time to buy or move to rent cheaper properties??

After say 2 years for stocks to get back to normal (15,000 units only being built for next 2 years with a 35,000 requirement giving a total of 40,000 units requirement off whats existing), It's looking good for a pick up in early 2012!! All good for the future....
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Re: The Daft Rental Report Q3 2009 Posted By: Ted Date: Tuesday November 17, 2009 @04:16PM
@Timbo: You're right, I think the press release mentioned NAMA. There's a link to it above. Also, the Daft economist has some more thoughts on his blog:
http://www.ronanlyons.com/2009/11/17/rents-hit-their-lowest-level-in-a-decade/

Re supply, there is a chart in the report which gives the total stock available to rent. That's not exactly what you were looking for, I think, but close enough. Seems to be at very high levels compared to 2007. Chart doesn't go back beyond that. Doubt there's anything on voids, unless daft have a database of every single property in the country and monitor them over time.
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Re: The Daft Rental Report Q3 2009 Posted By: Timbo Date: Friday November 20, 2009 @09:16AM
Thanks for that - you're right there is a discussion about the logic being used by Mr Lenihan and presumably his employees in NAMA as they start to shell out an estimated €60bn including administration and interest costs in the State's name. Record yields (and is a 2.0 - 5.0% yield record?) would normally mean people take their money from their 1% deposit scheme and place it in property thereby driving up demand and consequently prices but if rents continue to come under pressure from falling wages, higher unemployment, pressure on social wellfare benefits including rent allowance, a net fall in population largely due to an estimated 100,000 emigrants this year, an "overhang" of property, competing housing in better economies (eg UK and most of Europe) then yields will drop unless house prices do to.

Re Voids, in the UK where I used value, I would assume 6 weeks per year void on average to account for the time between departing tenants and getting new tenants in place. Just wondered what the average was in Ireland as it will be an important aspect of any yield calculation.
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Re: The Daft Rental Report Q3 2009 Posted By: Anon Date: Tuesday November 17, 2009 @04:17PM
Anonymous: where'd you see €1,000? Commentator up above seems to have some certain figures in his mind, as the percentages are not round ones. €1,000 sounds very round to me.
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Re: The Daft Rental Report Q3 2009 Posted By: Anonymous Poster Date: Friday November 20, 2009 @08:57AM
It's on page 5 of the full report (you can click the link at the top of this page) and it says as a headline "Rents fell just over 18% in the twelve months to October 2009.
The average rent nationwide has fallen from over €1,000 in 2008 to
under €775 in October 2009."

Maybe the two sentences are separate (even though they're the only two sentences in the headline) and the €1000 doesn't refer to October 2008? Maybe it's a peak from last year. I must say that the report is helpful but I think it would have benefitted from some clearer language and better descriptions.
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Re: The Daft Rental Report Q3 2009 Posted By: Joseph Date: Tuesday November 17, 2009 @11:29PM
Having studied the rental market in my own areas of Dublin 3 and 5,rents have fallen well below the rates suggested in the snapshot.

One beds are rarely making more than 750 euro a month and 2 beds are making 800-850 depending on location and quality of furnishings.

Renters are becoming fussier (with more choice) and are not afraid to pick out faults and ask for a reduction in the asking price.

Properties that were 1200 euro a month 18 months ago are now being advertised at 1000euro but landlords are taking 900euro to fill properties that are lying idle for 6-8 months.

Rent.ie will give you a clearer picture of how long properties are on the market,and their prices are the main reason.

You might feel an Apt.or house is worth 1000 euro a month but it is only worth what someone is willing to pay.
Better to have 900 a month for 12 months than nothing but your pride and the smug knowledge that your property is worth 1000 a month.
Properties that rent quickly are those that are well furnished and realistically priced

I have also noticed most landlords are ignoring the new legislation on B.E.R certs.We do this at our peril ,because court cases are in the offing.
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Re: The Daft Rental Report Q3 2009 Posted By: The Realist Date: Wednesday November 18, 2009 @09:31AM
well its about time ! the control of the market has shifted from seller to buyer and landlord to tenant. 2010 will be another tough year for property owners with the pending commencement of the interest rate cycle rise along with an acceleration of the Net outward migration and forced sales due to unemployment and cash flow problems of the overleveraged. advice to potential buyers and tenants...pull or lower your bids !
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