Asking prices fall sharply in final three months of 2011

Ronan Lyons, Economist

3rd Jan 2012

Ronan Lyons, Daft's in-house economist, commenting on the latest Daft research on the Irish property market.

What's another year? Confidence and finance the keys to recovery

And so another year of Ireland's property market crash draws to a close. It is unlikely that years down the line, 2011 will be remembered in the annals of Ireland's property market. It is much more likely to be tucked away between the start and end dates of what will be regarded as the legendary Irish property market crash.

But that does not mean that nothing of note happened in the Irish property market in the twelve months just past. I would highlight three significant developments, all of which happened in the final three months. The first was the announcement the Government is going to unveil its property tax plans early in the new year. By telling future buyers of property what their annual tax bill will be, this will reduce the uncertainty they face.

The second important development is the Budget announcement that rent supplement thresholds will be reviewed in the new year. By reducing the price floor in the rental market, this will have implications far beyond those in receipt of the supplement. For other renters, it will mean cheaper rents. And for property owners, it will mean lower house prices, because of the fundamental relationship between house prices and rents. A property's price is best thought of as a multiple of the annual rent that would be paid. In healthy markets, this is usually about 15 times the rent so if market rents fall, house prices should fall too.

Sharpest falls yet in late 2011

The third significant development was the dramatic fall in asking prices in the final three months of the year, outlined in this report. Until the third quarter of this year, the case could be made that house price falls had been slowing down. The typical quarterly fall had been over 5% in 2008 and 2009 but was under 4% in 2010 and into 2011. However, in the final three months of the 2011, the average asking price fell by almost 8%, by far the largest quarterly fall yet. It means that the fall in asking prices over the course of 2011 was 18%, as large as any of the falls seen in 2008, 2009 or 2010.

Such a dramatic fall in asking prices could reflect greater realism on the part of sellers, as they see fire-sale auctions resulting in prices 70% below the peak and cut their prices to compete. Or it could reflect the impact of on-going international economic uncertainty and pessimism about Ireland's economic future. More than likely it reflects both.

It is somewhat ingrained in Irish commentary to see larger falls as a bad thing and no doubt many, particularly those in negative equity, will see this dramatic fall in those terms. However, if you think of the fall in house prices as a necessary correction, whose size is determined by fundamental factors, then it is better for the prices to race to the finishing line than to crawl there.

Predicting the bottom

But how far must prices fall? Picking the bottom of the market is a mug's game. Nonetheless, income multiples and more reliable rental multiples do give us some indication of what to expect. They suggest that a fall from peak prices of around 60% is to be expected, provided rents do not fall substantially after rent supplement thresholds are reviewed. Given that the average asking price nationwide has already fallen 50%, one more year of house price falls could suffice.

Indeed, in parts of Dublin, the average asking price has already fallen by 60%. Does that mean we should expect to see prices rising again sooner rather than later? First things first: rising house prices is a bad thing. The golden rule of house prices is that over the long run, they don't increase any faster than inflation. We can see this everywhere: in Ireland up to 1995, in the US over the last fifty years or over the Netherlands over the last four hundred years. So, if we're seeing house prices rising any faster than about 2% a year, as we did during our bubble, something has gone wrong. What the market needs is stable prices, not rising ones.

Finance and confidence

One of the key points to remember, when we talk about the property market recovering, is that recovery in the property market does not mean an increase in prices. Recovery means an increase in activity. In 2011, banks issued about 13,000 mortgages. In 2006, the same banks gave out over 200,000 mortgages, meaning we've seen a fall in lending of almost 95%. Given that the property market in any developed economy is inextricably linked to the mortgage market, it's no surprise that prices are down 50% or more, if lending is down by over 90%.

Banks will say that much of the fall in their lending is due to a lack of demand: trader-uppers are stuck in negative equity, while first-time buyers are either unemployed (and possibly emigrating) or, if they are employed, worried about their jobs and their take-home pay.

But while fifty thousand 25-34 year-olds have emigrated and another fifty thousand are newly unemployed, there are still over half a million 25-34 year-olds - the household-forming age - at work. These are the people who would, in other circumstances, be kick-starting activity in Ireland's property market.

They are not doing so because of two factors: a lack of finance, but also a lack of confidence. Finance is down to the banks and banks will not resume lending until the stress tests stop punishing them for doing so. Without finance, there's a real risk that prices will overshoot on the way down.

Confidence is trickier - government policy can do little overnight to boost perceptions of Ireland's economic future. It can have an impact, though, by removing uncertainty about property tax, which it is doing, but also by publishing transaction prices, bringing in lending guidelines (including a maximum loan-to-value) and changing how banks fund mortgages. Because overshooting on the way down increases the likelihood of another bubble down the line, these measures are not so much luxuries as necessities.


HIGHLIGHTS:

Sale Index
Asking Prices, Residential Sales

Stock and flow of properties
Stock and Flow of Sale Properties


SNAPSHOT:

Snapshot of Asking Prices Nationwide
Snapshot of Asking Prices Nationwide

Discuss This Article

  • The Daft House Price Report Q4 2011

    Posted By: Anonymous Poster Date: Tuesday January 3, 2012 @04:54AM

    It is incredible however that the Real Estate Agents prices for Dublin City do not reflect the falls shown in the Daft report and you will find Dublin City centre apartments asking for 5000Euros per m2, not far away from PAris prices after a published 50% fall. Surely they are not doing their vendors any favours by not advertising more realistic prices. Are there any statistics for falls in 'upmarket' apartment market in city centre, does it also reflect the average falls or are they performing better?

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  • Re: The Daft House Price Report Q4 2011

    Posted By: NAMAwinelake Date: Tuesday January 3, 2012 @08:27AM

    Well done to DAFT.ie for spending the time and money on producing this report and to Ronan for the analysis and commentary, particularly about the all-important future.

    So a 60% peak to trough decline? And with prices down 52% on average, that would mean that from today, prices would decline 17% (if property was 100 at peak and is 48 today then 17% of 48 is 8 and 48 minus 8 is 40 which would represent a 60% decline from 100, if that makes sense).

    A 17% average decline in prospect from today is still pretty sobering.

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  • Re: The Daft House Price Report Q4 2011

    Posted By: Tom Date: Tuesday January 3, 2012 @11:18AM

    Did the government pass the legislation in 2011 for the publication of sale prices? I didn't hear that they did.

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  • Re: The Daft House Price Report Q4 2011

    Posted By: Brian Date: Tuesday January 3, 2012 @11:30AM

    Good Article. One thing missing from it, & which has been missing from articles anywhere else I've seen, is the Mortgage Interest Relief measures. It seems sellers factor this into their sales price.

    Prior to budget 2012 it was anticipated that the Government would eliminate Mortgage Interest Relief for new FTB. This was well flagged in the Program for Government. The sharp fall in asking prices in the final quarter reflects sellers panic to offload their properties before the relief is taken.
    This is important because the bank calculates how much they can lend you based on how much they expect your repayments will be. If the government is contributing €100/month to your mortgage & then they say they won't - the bank will lend a lot less. & therefore sellers lose out bigtime.

    I can only speak from the area I want to buy, & in this are there was a sharp decline in final quarter, followed by a sharp increase in asking prices for properties loaded to Daft after budget day. Sellers saw Minister Noonan retain the Interest Relief supplement & used it as a basis to keep prices artificially high.

    I predict the statistics will show an increase in prices in 1st quarter 2012 - followed by a sharp drop when the relief is taken away in 2013. It's sad to say, but keeping the relief has only prolounged the pain of the falling market.

    Brian

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  • Re: The Daft House Price Report Q4 2011

    Posted By: Nollaig O Néill Date: Tuesday January 3, 2012 @02:20PM

    inaccurate article - written with a vested interest - properties are generally valued at 10/11 times their rental income - this is a well established rule (and all London estate agents would confirm this - 15 is for the birds and property bubbles) estate Agents milked the cow while they could and now are doing their utmost to generate a positive spin on a moribund property market - My Advise to Buyers - wait til the gov reduce income supplement for those renting and signing on and watch prices freefall - too many landlords (with the aid of estate agents and letting agents) in this country milking the working man - buyers wait wait wait - there will be firesales to beat the band within the next 2 years - govts and local auth should not be involved in residential properties - but they are - wait and you will reap the rewards -

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  • Re: The Daft House Price Report Q4 2011

    Posted By: Geoff Date: Tuesday January 3, 2012 @03:29PM

    We have a problem that keeps rearing its ugly head Rights of way to the property we are trying to buy
    in these treacherous times I feel that the sellers agent should be more aware of this and if they are not then the Agents selling these properties should be reading up on the new rules that are now in place put there by the Democratic EU
    although there is another easing on prices in Ireland about to fall on us there are still a few avid buyers out there looking and when selling properties make sure everything is in place for a smooth exchange Geoff

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  • Re: The Daft House Price Report Q4 2011

    Posted By: Robert Date: Wednesday January 4, 2012 @05:40PM

    don't be too quick to blame the builders for the prices - - remember almost half of the cost of every house was ending up in govt pockets through one form of tax or another. That's why they wouldn't stop the tax breaks because they were generating revenue for the govt. Then of course when the market collapses and there's no more money coming in to their pockets they start talking about how unfair these tax breaks are...and renege on the incentives which brought in all that money in the first place.

    ..a burned investor....
    paid 300k for an apartment...about 150k of taxes went straight into govt coffers...which I had to borrow over 20 years to give them, now they've restricted the tax relief...brought in 2nd home levey, prsi on rental income, USC, house rates, water rates on the way and the bloody thing is worth about 100k (on a good day)...oh and if I did sell it for that, they want back the bit of tax break that I did get..

    so I bought it for 300k ..gave the govt half of that (150K) they were to give me back about 5k a year for ten years but they won't and if I sell it the bank will take all the money from the sale leaving me with an extra bill to the tax man and owing the bank the remainder of the loan. Taxed getting in and taxed getting out

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  • Re: The Daft House Price Report Q4 2011

    Posted By: Peter Date: Wednesday January 18, 2012 @09:41AM

    Germans don't invest in real estate. They learnt it the hard way through the collapse of the east german real estate industry in the 90s and 2000s. That s the reason why the m² for a 19th century villa in berlin-wannsee is still cheaper than the soulless investor crap ireland is covered with.

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  • Re: The Daft House Price Report Q4 2011

    Posted By: Nostril O'Toole Date: Tuesday January 3, 2012 @08:10PM

    Good report.
    Some good insights.

    The Dutch knew that house prices were 14 times annual rental for 400 years ... wonder they never told us!

    Loan to value should strictly be "loan to cost" as "value" can be inflated which happened in the bubble. Lenders please note.

    Stable house prices are key (CPI linked only). Seems only engineers know how to design for stability of active/dynamic systems. Need some engineers on the New Finance Commission. I have confidence in aircraft, air traffic control, traffic lights, cars, power grid, telecomms, washing machines ....... not so in Financial systems.

    "fall in asking prices over the course of 2011 was 18%" Getting close to Irish cost of build ... but French build cost (Languedoc) is still 50% of Irish build cost today ... daft Irish builders .

    The Germans love the west of Ireland .. gov should give them free Ryanair flights into Knock airport and do a Blitz promotion on all that good property. The Germans have the money ... our banks don't in reality due to the stress test requirements on them.

    Good wishes for 2012.

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  • Re: The Daft House Price Report Q4 2011

    Posted By: peter Date: Friday January 13, 2012 @12:57PM

    If interest rates climb to 7 percent then ever western country that had a property bubble will default due to the massive mortgages taken out, why do you think it will average at these high level?

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  • Re: The Daft House Price Report Q4 2011

    Posted By: Crazydays Date: Wednesday January 4, 2012 @07:05PM

    Interest over the long term will average at least 7 % percent. This means that house prices will stabilize over the long term, and there will be an end to the equity bubble days, house prices will increase but no further paper money of a substantial amount will be made in the irish property market

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  • Re: The Daft House Price Report Q4 2011

    Posted By: Anonymous Poster Date: Wednesday January 4, 2012 @09:15PM

    I am a landlord with bedsits in several parts of dublin. I had thought that the rent allowance threshold would provide a floor for rents, this has not turned out to be the case. I have bedsits which rent from 320 Euro upwards, the rent supplement amount for a single person is 520 which means that a single person in receipt of rent supplement wants to rent a flat for 520 (these days this means a decent size one bed flat). My bedsits although of a good standard are not good enough for your average single person in receipt of rent supplement as there is no incentive for them to take a cheaper property as they pay the same proportion no matter what. I rent these cheaper properties to people in employment.

    When the rent supplement amount changes this may mean that the renters just move to smaller properties. It will be interesting to the impact when the change is made

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  • Re: The Daft House Price Report Q4 2011

    Posted By: Patso the Fatso Date: Monday January 16, 2012 @11:05AM

    It appears that the prospect of a double dip recession is now more plausible than thought before. If it does come to pass that a second European recession is announced over the coming months, property prices will be the first area to suffer. Indeed, as postulated by one of our most famous economists, in the event of a second dip scenario, Irish property prices could suffer a 70%- 80% devaluation from peak to trough values.
    This scenario might appear unreasonable and unimaginable to some, however the idea of a soft landing for the property market was broadly touted as the most likely outcome to our initial recession. As we all now know that did not happen.

    What are the likely outcomes in the event of a second dip into recession?

    There are countless outcomes, but the most salient ones affecting the property market are as follows;

    1. Increased unemployment
    2. Further restrictions on the banks ability to raise/ release credit to prospective property investors.
    3. Tougher budgets.
    4. Abandonment of Croke Park deal, culling of core services and personnel.
    5. Blanket reduction in salaries across all sectors.
    6. Reductions in farm supplements and grants.
    7. Severe drop in property prices.

    I know it sounds very pessimistic but these are the listed causes and likely outcomes in the event of a second economic recession.

    It looks like property prices are going to take another battering with falls in excess of 15% for this year from January to January 2013.

    Conclusion,
    On the one hand, now is not a good time to buy property if you are a property investor. On the other hand, if you can secure a bank loan now would be a good time to get mortgage approval as in the near future it will be more difficult.

    I think that I myself would rather not buy into a market where there is a higher likelihood of buying into negative equity than buying and expecting property prices to increase.

    Effectively, all the measures introduced by the government to spur some life back into the market will be null and void in the event of a second dip recession.

    Anybody else agrees or disagrees with what I have said in my short summation of the current circumstances, please feel free to respond.

    Thanks,

    Patso

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  • Re: The Daft House Price Report Q4 2011

    Posted By: Anom13 Date: Wednesday January 18, 2012 @02:00PM

    Completely agree Patso, in fact I think we are probably looking at an overshoot with property prices being slightly undervalued. I would be of the opinion that we will at some stage approx mid 2015 reach an 85%-90% fall from peak. I think this is reality. We have only just hit the iceberg, get ready for the crush!

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  • Re: The Daft House Price Report Q4 2011

    Posted By: paul Date: Friday January 20, 2012 @02:00PM

    85 to 90 percent, so we can pick up a 3 bed semi for 50k?, that is the same price as the 80s when we had 20 percent unemployment and an average wage of around 15k, so we will need to hit the same unemployment rate and average pay to get to this.
    So basically we would be in a 1930s depression, you and everyone else would be totally screwed in all countries, house or no house.

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  • Re: The Daft House Price Report Q4 2011

    Posted By: Damien Date: Thursday January 19, 2012 @01:56PM

    I am sick of Economists.... they will only suit their pay masters.......

    This is all based on Asking prices, If they could only base it on Getting prices....

    No report is from Daft or MyHome, will ever be accurate or be able to call the bottom as they are based on superficial pricing...

    We here that 1/3 of sales are Cash, these do not get recorded either.....

    The Land Registry is the only place to start all of these recordings of property prices for this database.... and do you know what, this is where the property Charge/Tax, will come from or should come from..... that whole ESB thing is just typical of the government no forthought or forsight!!!!

    By the way a Charge implies you recieve a service..... what service do we get for any of the charges that have been applied,...

    And as ever I will probably be coming across as a Crank.... But lets face it, if you believe the government are working in our interests, would you not think that they would pay themselves only the industrial wage or minimum wage as a suggestion of solidarity until the Troika leaves and that goes for all in high paid jobs in the Civil Service..... Advisors etc....

    I would back any policy they like if they did that!!!!! instead of taking from the poorest in society.... I mean tax me more by all means you have to anyways, but be conscious of the people because if you push us too far... you will see riots!!!

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  • Re: The Daft House Price Report Q4 2011

    Posted By: paul Date: Tuesday January 31, 2012 @07:12PM

    If we do end up in a depression then we are all screwed, it would be a global depression which would see many countries default, no winners including you

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  • Re: The Daft House Price Report Q4 2011

    Posted By: PAUL 1 Date: Wednesday January 25, 2012 @07:32AM

    Hi Paul, you seem to think that a depression like the one in the 1930's can not happen again. Check out what happened in Cuba and also Argintina. If the euro fails then a 1930's depression is exactly what would happen in Europe. And by the way, change your name, your making me look bad.

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  • Re: The Daft House Price Report Q4 2011

    Posted By: joe Date: Thursday January 26, 2012 @05:51PM

    I have made one observation and it goes something like this. The vast majority of the so called experts from celebrity economists- to estate agents, banks, estate agents and politicians as well as journalists have one thing in common, they are consistently calling it wrong. They probably will continue to do so. particularly regarding the housing sector.

    We are in uncharted territory, everything has changed utterly. The changes are so deep and fast it is a fools game to predict.

    basically ireland is a very corrupt country, and i dont mean the plumer or taxi driver but the lads at the top. let me give you a seemingly irrelevant example, when i go to see my doctor in Dublin i hand her fifty quid cash, now she knows i come every month so basically i can sway her if you know what i mean. I am a cash cow not really a patient.

    ireland needs rigerous transparency. the bubble was a culmination of corruption at the top planners and banks spring to mind. History will teach us nothing unless we get the powers to jack these lads up and have a really good look underneath. Problem is the lads hold the power. God i admire the French

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  • Re: The Daft House Price Report Q4 2011

    Posted By: Peter Date: Friday January 27, 2012 @07:42PM

    And you think the French are not corrupt?? Its true that it's hard to borrow to buy in France; but the anti speculator tradition if it does exist is not in favour of the 'little man' it's in favour of the huge businesses who have a hand in everything. The grass is not greener on the other side. Ireland brought a lot of troubles on itself. 80 percent property ownership for its citizens means there was a mutual agreement somewhere between lenders and citizens to ignore economic fundamentals, the main one being you can only sell the dream to someone if there is a realistic chance of it being attainable. Ireland will continue to suffer financially as so many houses were built. With emmigration of populations. Its a buyers market, with little sign of econmic activity for at least a year

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  • Re: The Daft House Price Report Q4 2011

    Posted By: Del Date: Saturday January 28, 2012 @08:54AM

    A lot of rambling comments thus far. All just individual opinions, no one can predict whats going to happen. However, as a cash investor there is value out there if you know what you're doing and have a long term strategy. When there's blood on the street .... etc.

    Thanks for the data Daft, shall plug it in!

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  • Re: The Daft House Price Report Q4 2011

    Posted By: zak Date: Monday January 30, 2012 @12:52AM

    We came to Dublin for a holiday in July 2006 and happened to look at the home prices. I couldn't understand it, an average home was selling for 900K euros ! From an outsider looking in, we could see that the prices were unsustainable. At the time, if you were a resident and needed a home, do you keep renting to only see the prices double next year? In the end incentives are to blame. Incentives for the bankers to lend, for government to create development, speculators turning properties, developers overbuilding. Ireland and Arizona have something in common. The best solution is regulating lending standards, so that development is sustainable.

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  • Re: The Daft House Price Report Q4 2011

    Posted By: Ryan Date: Thursday February 2, 2012 @10:49AM

    Del, your observation that there are a lot of rambling comments posted here says a lot about you. Obviously the common consensus that property prices will continue to decline does not agree with your own interests. You then say "however, as a cash investor there is value out there if you know what you are doing". What a way to talk down to people. Talk about making an obvious statement. What you have failed to include is the fact that at present if you are a cash investor, you can get a good return on bonds, or by buying into a speculative share market. Easy to make money really, all you need is to know what to buy. No cash investor would buy into a property market where there is a 96% chance that that property will devalued by more than 14% in the coming year.

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  • Re: The Daft House Price Report Q4 2011

    Posted By: PAUL 1 Date: Wednesday February 22, 2012 @04:56AM

    Way to go Ryan, well said. Nobody in their right mind with cash to invest would buy into property when the return on bonds is comparitivly so attractive. And since property continues to loose value your point is doubly valid.

    That is the kernel of the property scenario at present. It couldn't be explained in a more simple way. Even Del should understand.

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  • Re: The Daft House Price Report Q4 2011

    Posted By: Patso the Fatso Date: Monday February 27, 2012 @04:18PM

    I read a report in one of the newspapers that some 4500 retiring public sector staff will be getting a golden handshake, somewhere in the region of 150,000 euro with which they will either do up their existing properties or go on a mad spree to "buy outright" some of the cheaper porperties on the market.
    To me such fanciful reporting is what I would describe as desperation news. If that is what such reporters really think will spark the market back into action, then I would respectfully ask said reporters to do the honourable thing, and quit the news and media industry.

    It was such reporting that is partially responsible for the current situation in the first place.
    In fact, I would have to agree with Ryan, whose post on this site of Thursday the 2nd Feburary suggests correctly that at present there are far more lucrative and less risky investment propositions available to people than property.
    Although Ryan, in his post appears to be rebuking sombody else the example he uses in his post of Government bonds and shares to some extent have recently been returning fair to good yields depending on the stock or bond chosen.
    My point is that, if property owners are expecting the 4,500 retirees to suddenly reverse the downward trend in the property market, then please do not fool yourselves. As with all retirement schemes the money these retirees are getting is a payment that will help them secure a good future for themselves and their children. The money in in most cases will be used to cusion the cost of property upkeep, utility bills, health insurance, travel costs and

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