Waking from a property-induced slumber

Dr. Liam Delaney, Geary Institute, UCD

6th Apr 2009

Dr. Liam Delaney of the Geary Institute, UCD, commenting on the latest Daft research on the Irish property market.

Psychology matters - particularly in times of uncertainty. Economists always talk about fundamentals and they are important - but prices are determined as much by people's emotions about the future as they are by so-called fundamentals. This is particularly pronounced in an environment of such uncertainty. Also, we are not computers. No matter how rational we think we are, humans are emotional - the cost of assets such as property and our job situation mean something to us, and these feelings relate to reference points that are set by culture, our peers and our past.

House prices are still falling and this downward trajectory is adversely affecting well-being, just as sentiment is boosted when prices were rising. This report shows that asking prices in March 2009 were over 16% lower than they were in March 2008. The average asking price nationally in March 2009 was €281,000, which is below September 2005 levels. In Dublin City Centre, prices are down 10% this quarter alone. Asking prices must be seen as an overestimate of actual prices for many reasons, not least of which the disgust people feel at disposing of an asset for less than they bought for.

The painfulness of these reductions from a psychological perspective must be seen from the point of view of timing and motivation for purchasing a home. Apart from those who released large parts of their equity, an older generation purchasing their homes as their life-long dwellings throughout the 60's, 70's and 80's must be regarding with some degree of bemusement their growing - and now shrinking - wealth. There is some evidence that the bulk of them never viewed home values as a guide to what they should consume, and in some sense the housing boom has come and gone without deeply affecting them. It may affect some of their children who perhaps were banking on the value of these assets, but for those who like to link reward to effort, this will perhaps not be viewed as a tragedy.

On the other hand, there is the group of younger buyers who purchased since the mid-1990s. Their current position is now determined by the timing and price of purchase and whether their job is stable. You would have to possess a hard heart not to feel sympathy for those who purchased between 2003 and 2008 and who now face uncertain employment. They are the ones who have lost out from the chaos of what we now think of as the second phase of the Celtic Tiger years, the period of stagnation and illusory growth from about 2000 on.

This report - combined with the recent labour force figures - indicates considerable hardship for those in once solid middle-class jobs that are now facing a potential double-whammy. People will inevitably feel even worse when they see neighbours and friends who are in better situations. Consider the position of a college graduate who purchased in Dublin in 2006, based on the income from his financial services job (now gone), to the position of his neighbour who secured a public sector position on leaving college and purchased in 2001. While neither is laughing, the latter must at least be considering himself the better off of the two. They are certainly not in the same boat and the widening rift in society being generated by asset price decline and employment uncertainty is the defining theme of our time. As described by John Fitzgerald and others, there are many who are currently better off than last year, as they are facing declining prices and interest rates in the context of stable employment in their sector.

There is a wider story being played out. In their recent book "Animal Spirits", Robert Shiller and George Akerlof talk about, among other things, the key role of stories and narrative in conditioning economic outcomes. Such stories often take their cues from the prevailing economic climate. But they can take on a force of their own and change people's expectations, for example what they think is the value of their house or the prospects for the future.

One version of a national narrative that was articulated in the previous commentary by Gerard O'Neill was the idea that the Irish cultural and psychological need for property may be displaced by a culture where renting is given more credence as part of a normal adult life. Were such a story about the Irish relation to property to take hold, it would clearly have substantial implications for any potential future rebound in property prices. Key players at the moment are those who can afford property but are riding out the current uncertainty by taking advantage of falling rents. If they follow Gerard's story, they may never come back into the buying market and the next generation may follow them into long term renting.

Yet, we still hear strongly the story that the Irish have always been and will always be wedded to the idea of home ownership as a fundamental part of maturing into adulthood. If such a story about Irishness and adulthood maintains its hold, house prices will eventually settle at a higher level, and changes in the market will depend on macroeconomic conditions, rather than on the type of seismic shift in Irish culture described by Gerard.

This report raises another story embedded in the Irish psyche, the idea that the potential of a generation can be "lost". With mounting job uncertainty and falling property prices, this story is prominent again. There is, of course, another story, one of a creative nation woken from a property-induced slumber to think once again about how to create real value doing things that its people are skilled at. In the face of such a deterioration though, who has the vision and leadership to tell this story?


HIGHLIGHTS:

Asking Price Index
Asking Price Index

Stock of Properties
Stock of Properties


SNAPSHOT:

Snapshot
Snapshot of Asking Price Nationwide

Discuss This Article

  • Re: The Daft House Price Report Q1 2009

    Posted By: SteveG Date: Monday April 6, 2009 @03:48PM

    No doubt, the 3 blind mice on this site will be back on to say that this is the bottom, buy now or you'll miss the boat. Wake up, take a reality pill Irish house prices will only be going down for the foreseable future ( 2011 at a minimum, 2015 realistically before you get any return from property ).

    P.S, before you rush off to invest in Gold you've missed that boat too. the only people encouraging gold as an investment now are those that are sitting on it waiting for all the fool's to jump. And it will happen, it will be the same people who rushed in to buy houses in 2006... Fools!

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  • Re: The Daft House Price Report Q1 2009

    Posted By: Orl Date: Monday April 6, 2009 @09:20PM

    An economist with a heart! a well-written article.

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  • Re: The Daft House Price Report Q1 2009

    Posted By: BM Date: Tuesday April 7, 2009 @11:30AM

    It certainly is positive news to see that the decline in prices is slowing ...Lets hope this continues..Confidence will gradually come back..but will probably be late 2009...House prices are low,interest rates are low and the banks will be keener to lend mone as they gradually are getting themselves in order...

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  • Re: The Daft House Price Report Q1 2009

    Posted By: Damian Date: Tuesday April 7, 2009 @04:12PM

    The only thing thats going to get the economy going again is job creation. Whose going to purchase a home in the current climate? Irelands economic future needs to be based on real production......not speculation. The government needs to implement policies that encourage home grown businesses to develope. This is our only way forward. We have depended on US multinationals and personal asset growth for to long and now we are paying the price. Its time for people to get up of their arse and do something to help this great nation get itself back on track. The politicians aren't going to do it for us. They are too busy lining their own pockets.

    "Ask not what your country can do for you but what you can do for your country"

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  • Re: The Daft House Price Report Q1 2009

    Posted By: Anonymous Poster Date: Friday April 10, 2009 @02:01PM

    I have been reading the daft reports for the past 2 yrs since arriving in Ireland from New Zealand. I thought the houses were overvalued in 2007 and now, despite a 20% drop in asking price and reduced mortgage interest rates, I feel they are more unaffordable than ever. Buyer confidence/demand seems extremely low. Increased taxes, poor job security, the uncertain economic future, emigration and a large oversupply mean houses are going to continue to lose value for years to come. Anyone who predicts an improvement in the next 6-12 months is dreaming, in my opinion!
    Traditionally, the daft report sparked debate between those that thought houses remained a good investment and those that predicted the crash in prices. Now, it seems the voice of the former camp has been silenced.

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  • Re: The Daft House Price Report Q1 2009

    Posted By: Anonymous Poster Date: Thursday April 16, 2009 @12:16PM

    your argument is a logical one but the strategies taken by people selling houses at the moment is that they are stopping the sale and waiting. They too have decided their house is worth so much and will not accept anything less, so in essence, the 'trough' is being implemented already by sellers. Why loose your shirt on a house and probably have to borrow to pay it back to the bank when you sell. People are waiting so the price falls are reducing in speed. And if you do see a house for sale for half nothing, its either a developer trying to do damage limitation, or a divorce, everyone else refuses to be made a fool of.......

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  • Re: The Daft House Price Report Q1 2009

    Posted By: Bob Date: Monday April 13, 2009 @07:46AM

    I bought a buy-to-let apartment in 2005 for 220K on an ECB-tracker rate, so I pay about 450 in interest and 500 in capital each month. I receive 950 in rent (down from 1100), so my nice tenants are buying the property for me.

    I won't care about the value of the apartment until I sell it in the distant future as it costs me nothing. Equally, while I want to obtain the maximum price for the property at that stage, I won't be too upset if its value decreases because I won't have contributed to the purchase of the unit and the final sale price will all be profit.

    Yes, I hope that correspondents here keep renting and buying properties for other people.

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  • Re: The Daft House Price Report Q1 2009

    Posted By: Anonymous Poster Date: Tuesday April 14, 2009 @11:59AM

    Lucky you... :-)

    You have tenants, and furthermore, they are nice... :-)

    But what about other landlords who face real difficulties to get tenants?
    And in your case, are your tenants irish, Polish, German, French, Spanish?
    You need to take this in consideration as your policy is long term based.
    But it's now extremly difficult to predict how things will be in Ireland next year and the following ones...

    A good point for you is the value of your property which seems to be really reasonnable compare to average value in Ireland.

    Sincerely hope you'll keep your nice tenants as long as possible...

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  • Re: The Daft House Price Report Q1 2009

    Posted By: Quint Date: Tuesday April 14, 2009 @03:55PM

    Bob,

    You seem to have forgotten paying tax on your rent, maintenance for the apt, general upkeep not to mention potential vacant time.
    Taking tax at about 300pm after interest relief, 80 Maintenance and vacant times of about 1 months rent per year (80 pm) you are supplimenting by ~460pm. Which means for an outlay of 460 you are pulling in 500 (capital reduction in the apt).
    After 30 years you'll make some money on it but I'm not sure it's quite as canny as on first inspection.

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  • Re: The Daft House Price Report Q1 2009

    Posted By: Anonymous Poster Date: Tuesday April 14, 2009 @07:27PM

    I intrigued by your maths Bob. I wonder if you maybe a politician as your maths seems fundamentally flawed.

    I would be very interested if you would lay down your all your numbers i.e if you had a 100% mortgage at 25 yrs your mortage repayments would be more in the realms of 1200 Euro/mth. If however you made a substantial deposit i.e 40000euro then 950 euro/month in mortgage repayments might be possible.
    Combine that with Quints information of your rental property costing you at least 460 euro/mth (tax and maintanence) may be an investment property with your rental returns may not be the best investment.

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  • Re: The Daft House Price Report Q1 2009

    Posted By: Bob Date: Wednesday April 15, 2009 @03:41PM

    Please brush up on tax law and on the ways in which one's profits can legally be reduced; its not as draconian as suggested. My houses are rarely vacant, as I treat my tenants well. As for Quint's mesaage,whats the difference between maintenance and general upkeep, as they are listed separately in your text, thus indicating higher costs!

    Yes, I agree, its quite possible that the world could come to an end tomorrow. It's best, however, to reach decisions based, not on what could theoretically occur, but on what is more likely to happen and I'm so glad that I invested in bricks and mortar.

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  • Re: The Daft House Price Report Q1 2009

    Posted By: RAYMOND Date: Wednesday April 15, 2009 @03:58PM

    I agree .. House prices will be ok dont worry be happy

    Raymond

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  • Re: The Daft House Price Report Q1 2009

    Posted By: Quint Date: Wednesday April 15, 2009 @05:36PM

    Don't get me wrong property can be a great investment. I just think its a pretty terrible one in the current climate.
    And while I'm not a tax accountant as bob pointed out I am an accountant and it never fails to surprise me how people politely ignore costs and expenses which don't fit into their worldview. Its called confirmation bias.
    I didn't even mention solicitors, stamp duty, fitout, opportunity cost of deposit, advertising costs, EA costs when selling or capital gains or the quite likely property tax not to mention paying yourself a decent wage for the hours you spend on the place.
    Personally I'd be looking for 12% gross.

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  • Re: The Daft House Price Report Q1 2009

    Posted By: Steve Date: Wednesday April 15, 2009 @07:28PM

    Bob, I agree with your investment theory, look at things in a long-term way and you cant go wrong.
    Unfortunately however, when a entire nation simultaneously thinks something is a good investment, i.e property, it will become overvalued, simple supply/demand economics. The flow on of this is that supply (crazy property developments) will outstrip demand and property will loose value-the property cycle.
    What seems different with the current situation is the recent boom is unprecedented and the world hasn't seen a recession like the current one since the 1930's. This makes the future a bit more difficult to predict.
    I'm also struggling with your figures Bob, but if your property is paying itself off and you had no other initial outlays - deposit etc...then well done, you got in early enough to make property a decent investment. That isn't the case now.

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  • Re: The Daft House Price Report Q1 2009

    Posted By: Anonymous Poster Date: Thursday April 16, 2009 @12:27PM

    I agree with you as I am a landlord too with little difficulty getting tenants. You are right, very little maintenance is needed, regular checks on the house will see to this, a contract sets out what a tenant is expected to do in the house with regard to its care etc etc and finally, who pays tax on rent, like we are making a profit on our properties at the moment?? I would hazard a guess that 50% of landlords at the moment are lucky to cover their mortgage on their house or even need to supplement it, so no tax on rent I'm afraid, no profits expected for many years, that why we do it, its a long term thing, its not a get rich quick scheme - far from it......

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  • Re: The Daft House Price Report Q1 2009

    Posted By: Bob Date: Thursday April 16, 2009 @10:07PM

    Lads, especially if any of you have investment houses, you may wish to check out pension contribution rules as a way to reduce taxes. Its not flawless but a legitimate way to keep a few extra euro for yourself, in the long term.

    By the way Quint, property esentially looks after itself except where the tenant is a pain or a vandal!

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  • Re: The Daft House Price Report Q1 2009

    Posted By: andi Date: Saturday April 25, 2009 @03:18PM

    What you say is what has been said since worldwar II.
    So then, good luck to keep Your tenants for another 20 Years at this price...

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  • Re: The Daft House Price Report Q1 2009

    Posted By: Massimo Date: Tuesday April 14, 2009 @01:43PM

    do you have forcasting for the next 2 years?

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  • Re: The Daft House Price Report Q1 2009

    Posted By: Bob Date: Wednesday April 15, 2009 @07:10PM

    Prices will stabilise then start to increase, given the historically low interest rates (which are forecast to fall further) and a strong latent demand for housing.

    Buyers in the construction trades and in retailing will be the exception, in that they will fear losing their jobs but others will elect to buy, partly in the belief that prices have hit rock bottom, as currently in West Dublin.

    Prices will recover initially in and adjoining the capital and in neighbouring locations, especially those well-served by good public transport links, but rural towns away from the coast will rise at a much slower rate.

    Hope this helps.

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  • Re: The Daft House Price Report Q1 2009

    Posted By: Alan B Date: Thursday April 16, 2009 @01:29PM

    How are prices going to increase?

    Unemployment rising to 12% and higher.
    Government focus on reducing labour costs in order to increase our competitive position as a small export led economy.
    Excess housing supply plus the NAMA which will have to try liquidate a portfolio of bad assets (ie. property) in an falling market.
    House values which are still already extremely expensive on price versus income basis (relative to nearly all other countries).
    Increased restrictions on borrowing by our major banks.


    Cheap credit is the argument against this and indeed in the short term this should help, if available to new purchasers. However as we were beneficiaries of a cheap artificial credit environment in the past we are likely to be hurt as interest rates rise again faster than our economic circumstance would ideally dictate. Europe (France & germany) will leave the recession first bringing an increase in rates, don't kid yourself as to the perilous position Ireland is in.

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  • Re: The Daft House Price Report Q1 2009

    Posted By: Quint Date: Friday April 17, 2009 @11:15AM

    If you want to see what's going to happen in Ireland - look to what's happened elsewhere...


    http://en.wikipedia.org/wiki/Japanese_asset_price_bubble

    "Prices were highest in Tokyo's Ginza district in 1989, with choice properties fetching over 100 million yen ($1 million US dollars) per square meter ($93,000 per square foot). Prices were only marginally less in other large business districts of Tokyo. By 2004, prime "A" property in Tokyo's financial districts had slumped to less than 1 percent of its peak, and Tokyo's residential homes were less than a tenth of their peak, but still managed to be listed as the most expensive in the world until being surpassed in the late 2000s by Moscow and other upstarts. Tens of trillions of dollars worth were wiped out with the combined collapse of the Tokyo stock and real estate markets. Only in 2007 had property prices begun to rise; however, they began to fall in late 2008 due to the financial crisis."

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  • Re: The Daft House Price Report Q1 2009

    Posted By: Watchman Date: Friday April 17, 2009 @09:58AM

    Small slightly telling anecdote: I was walking by Lisney on Stephens green (posh estate agents) last week and 4 well dressed middle aged English people (Shelbourne looking types) were roaring laughing at the 1.2m price tag on a surburban 3/4 bed semi D in Rathgar or Blackrock.
    It was pretty telling - these are the type of people who would live in this house except they have some external perspective.

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  • Re: The Daft House Price Report Q1 2009

    Posted By: Adrian Date: Friday April 17, 2009 @02:33PM

    Property prices in Limerick are collapsing - With Dell bailing out of town; it has caused a much worse crash locally here in Limerick. I fear worse is yet to come in the city with other companies looking shaky! 2 bed apartments now at 112k and dropping as the days go on.

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  • Re: The Daft House Price Report Q1 2009

    Posted By: Anonymous Poster Date: Thursday April 23, 2009 @11:24PM

    I have some rental property in Limerick and the rental income has really decreased from the beginning of the year. I am frightened to think what it will be like when the full impact of the Dell closure kicks in. I am wondering should I try and offload a property or try and hang in there for the ride which by all accounts sounds fairly bumpy.

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  • Re: The Daft House Price Report Q1 2009

    Posted By: RAYMOND Date: Saturday April 25, 2009 @12:10AM

    Hang in . I am in a similar situtation just wait it out


    Sorry


    Raymond

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  • Re: The Daft House Price Report Q1 2009

    Posted By: Pat Date: Monday May 4, 2009 @02:13PM

    Sell now. What is the mortgage repayment capability of e.g. an engineer, spouse at home, two small kids, moving up the property ladder, in two years time? Unemployment will have increased, salaries fallen. Assume a gross salary of 50K. Any capital gain on a first property will be needed for the 20% deposit. Repayment capacity will be maximum of 1,000 per month; 25-year mortgage, 20% deposit, means the maximum house price affordable to this family is 260K. The asking price for a three-bed house in Churchtown, Dublin, is currently 500K. Logic suggests that these house prices will fall by another 50%. In less attractive areas, falls may be greater.

    Pat.

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  • Re: The Daft House Price Report Q1 2009

    Posted By: Owenc Date: Saturday April 25, 2009 @08:27AM

    When talking averages I would like to see the reports mention the volume of sales on which the averages are computed, even for year on year averages.

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  • Re: The Daft House Price Report Q1 2009

    Posted By: Masie Date: Monday April 27, 2009 @09:57PM

    What is the average percentage drop in house prices since 2007?

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  • Re: The Daft House Price Report Q1 2009

    Posted By: Kango Date: Wednesday May 6, 2009 @09:10AM

    Employment has to be the key to this dilemma. The Government are being let off on this issues. I accept that in the background the IDA, Enterprise Ireland etc are doing their best. What about the local authorities - County Councils and City Councils. In Spain and other countries local authorities are using this period to upgrade the environment in towns etc on low cost improvements and taking some workers off unemployment benefit at little overall cost to the state.

    We need to see this Government rising up and demanding from Brussels that we can use our own local resources from the Sea and Land etc. to make employment. Our labour costs and other costs are crashing down so we must become competitive. We are only 5 million people here. We can no longer depend on US industries coming in here and Pres. Obama is insisting they pay their due taxes back in USA so some attractions may go.

    We also have to tell Brussels that we can no longer be a haven and financial support for immigrants to Ireland and that if the come here they will at a maximum only receive the same financial support as would apply in their home countries. I welcome them here but on egual footing but I am sorry but I/we cannot subsidise them out of the very little we now have.

    Finally can anyone tell me why in equivalent areas of the UK house prices are still ahead of ours despite the sterling fall( I am not talking about the empty rows of back to back terraces in Manchester etc. but in equivalent areas to ours that I have visited). Is a bigger crash coming there or is there hope for us here that the bottom may not be that far away.Also what will be the effect of new house building practically freezing here over the next 2 years ( I note despite the gloom in Daft that overall numbers of rentals are increasing)

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