Housing policy must learn the lessons of the past

Ronan Lyons, Economist

6th Jan 2014

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

Housing policy must learn the lessons of the past

The 2013-in-Review Daft.ie Report out today confirms the on-going trend of a two-tier housing market. Since late 2011, the rate of change in Dublin asking prices has gone from -22% to +11%, with all six regions in the Dublin market now showing strong increases in asking prices in year on year terms. Outside Dublin, the rate of change in asking prices has fallen from the -16% registered in late 2011, but prices are still falling, with an average fall of -6% during 2013.

Such a localised turn-around in housing market conditions, and the huge differences across regions, are by no means unique to Ireland. The US is also characterised currently by prices rapidly rising in some cities but not in others. However, while the economics may be universal, each market has its own unique context.

Recently, Irish politicians and policymakers have expressed concern about rapidly rising house prices. This is encouraging, as it signals an end to the mentality of perceiving house price rises as a good thing. However, as the government prepares to act, it must remember that its previous interventions brought costs, not just benefits. In a market as important as housing, which is the largest chunk of the CPI basket and the biggest asset in most households' portfolios, regulation is required - but it must show an understanding of how housing markets work.

While the exact timing of housing market cycles may forever stump households, policymakers and economists, the underlying economics is straightforward. House prices are the result of three forces: demand and two types of supply, the supply of credit and the supply of dwellings. Demand for accommodation reflects broader economic conditions, in particular the jobs market. Any government that wants to stimulate demand for housing in a meaningful sense must look at jobs.

Where Irish policy got it wrong in the past was thinking that increasing supply of credit was at worst neutral and at best a useful tool for promoting home ownership. If you have the same amount of dwellings and the same amount of households, increasing the supply of credit has the long-run effect of raising the price of housing. By raising wage demands without improving purchasing power, and thus deteriorating Ireland's competitiveness. Where the increase in credit is temporary - as Ireland's was in the run up to 2007 - another effect is creating a housing market cycle and thus large-scale negative equity.

In fairness, policy in the past also recognised the importance of the supply of the housing, as well as the supply of credit. However, housing was built without any consideration of long-run demand. Like all other economies, Ireland depends on its urban centres for creating jobs and wealth. A range of government policies, from decentralisation to the National Spatial Strategy, were predicated on the belief that somehow Ireland was different and that an economy of small towns could compete in a world of cities.

What we are seeing now in the Irish housing market is demand and the two supplies at work. Couples that assess their future and decide to stay in Ireland are overwhelmingly opting to be close to urban centres, and Dublin in particular. So demand is strongest in Dublin. Turning this latent demand into effective demand takes credit and banks are most interested in those couples with lowest risk - they have two incomes and are working in professional services or FDI-dominated sectors. This is why it is the more expensive areas of Dublin that are seeing the biggest increases.

And unlike large parts of the country, Dublin has next to no oversupply from the bubble years left. The vast majority of its "ghost estates" are apartments and even there, most units that are complete are occupied.

So the solution to rapidly rising house prices is simple: Dublin needs more housing. An obvious way to stimulate a one-off increase in supply would be to bring in a tax on the value of empty or derelict sites, not just in Dublin City Council but across the capital. This, indeed, would have been a much smarter property tax than the one brought in last year. But with perhaps as many as 8,000 new units needed in Dublin each year into the medium term, policymakers also need to think about the bigger picture.

A common response is that there is no empty land in Dublin. This misses the point. It's not just about greenfield sites - it's about land use. Why, for example, does the Dublin Industrial Estate take up 170 acres of prime land, close to Tolka Valley Park and Broombridge station, when the city suffers from both a shortage of family homes and a significant overhang of industrial space? (And this, of course, is leaving aside the 600 acres of green fields just around the corner in Dunsink.)

There is plenty of scope for increasing housing supply in the capital, once we as a society not only make better use of empty sites, but are also prepared to re-designate land so that it can be used more effectively and facilitate building up where it pays off. If we are not, we will have to accept that Dublin will increasingly become an enclave for those with the highest incomes

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

  • Re: The Daft Sale Report Q4 2013

    Posted By: Seán Date: Monday January 6, 2014 @09:05AM

    Another engaging report from the Daft team with one exception. Whilst it is entirely understandable that the reports and their commentary strongly focus on Dublin, over 60% of the population live outside of Dublin (CSO 2013) and well over half of the GDP of the country is generated there too (Dublin Chamber of Commerce 2013).
    Is there a possibility that more analysis of the housing market in the rest of the country could be undertaken, on top of the usual snapshot of asking prices/ rents nationwide?

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  • Re: The Daft Sale Report Q4 2013

    Posted By: Kieran (from Daft.ie) Date: Monday January 6, 2014 @03:56PM

    **Full Disclosure - Daft.ie employee**

    Hi Seán - thanks for your feedback.

    If you download the .pdf version of the report we break down the data by regions (Leinster / Munster / Connacht & Ulster) and counties.

    Please let us know if you have suggestions on what other information you might like to see.

    http://www.daft.ie/report/Daft-House-Price-Report-Q4-2013.pdf

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  • Re: The Daft Sale Report Q4 2013

    Posted By: Gerry Date: Wednesday January 22, 2014 @09:16PM

    Hi Ronan,

    I am confused by todays announcement on the RTE Radio News of a survey carried out by theSociety of Chartered Surveyors Ireland of 400 estate agents which says that there is a rise in house prices nationally;

    ( A ) Take Munster for example it states that prices have risen by 8.1% . The report on the news does not say whether they are asking or selling prices so I'm assuming the latter.

    (B ) The Daft.ie report seems to totally contradict this.It says that asking prices have fallen in Munster (outside of the cities) by between 8% - 10% . I haven't delved into your report as to what the percentage fall is if we include the Munster cities.

    (C ) A Sunday Independent survey 19th Jan. 2014 states that house prices ( seems to be actual) in Munster have fallen by on average 9 %.

    (D) A MyHome.ie survey published on the Irish Independent 2nd Jan. 2014 states that asking prices nationally have fallen by 5.6%. I'm not able to access the breakdown for Munster in their report.

    So it seems to me that we have three reports contradicting the report by the Soc. of Chartered Surveyors Ireland. Perhaps I,m missing something here in property market reporting.

    I'd be grateful if you might clarify the situation for me.

    Thanking You,

    Gerry

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  • Re: The Daft Sale Report Q4 2013

    Posted By: Matt Date: Monday January 6, 2014 @06:38PM

    I agree with Sean that the focus in the media is always on Dublin. If we really want a good society and distribution of wealth and population around the country we should focus on increasing employment in our main regional centres/towns. The infrastructure in thankfully good enough now for some form of decentralisation(which was a good idea despite opposition from those with their own selfish concerns).

    We can't allow a situation to occur where investing around the country is futile. At that rate why bother live in Ireland?

    At one time people saw positivity in where they lived around the country and were happy and proud to be Irish. Because of a combined drive by the media, lack of credit by banks and race to the bottom orchestrated by estate agents and others people around the country have seen the value of their assets plummet way beyond a fair correction.

    Did we invest in Ireland to see our wealth pillaged by white collar in Dublin and abroad.

    Are they going to drive our asset values so low that they can lend out risk free when people have lost everything? What kind of society is that? It's time to get a grip.

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  • Re: The Daft Sale Report Q4 2013

    Posted By: al Date: Tuesday January 7, 2014 @09:01AM

    The figures in relation to the commuter counties KIldare Wicklow and Meath are surely vastly different in the rural and suburban sections of these counties. It would seem likely that figures in North Wicklow, North Kildare and East Meath would be much closer to those of bordering regions in Dublin with which they have much more in common than rural districts.

    It is unfortunate that this is not reflected in the report so that a more accurate reflection of the situation for all of Greater Dublin can be ascertained.

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  • Re: The Daft Sale Report Q4 2013

    Posted By: Anonymous Poster Date: Tuesday January 7, 2014 @07:26PM

    What I would like from Daft is a supply side analysis for each urban area i.e
    Limerick,Galway etc.


    I would also like to see what supply will be needed in each of these areas going forward.


    By the way the article was really informative as usual.

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  • Re: The Daft Sale Report Q4 2013

    Posted By: Ken Date: Wednesday January 8, 2014 @11:43AM

    Some very good points have been made in this, the most recent of Daft reports. Ronan has put it very well when saying that “House prices are the result of three forces: demand and two types of supply, the supply of credit and the supply of dwellings”

    Demand for properties will always be there. As people grown up, they naturally move out, get married, have kids who in turn grow up and move out and so on and so on.

    Nobody will argue that the supply of credit is not, and is not likely to ever be again at the levels we saw just prior to the recession. Ronan again correctly points out that “banks are most interested in those couples with lowest risk”. This is no surprise. Banks lent large amounts of money out on dwellings that are now worth far less than the mortgages held on them. So I think it’s fair to say that credit will be accessible, but not in the same volume and not at as high a risk as before.

    Ronan’s third factor was the supply of dwellings. This is the one area of the report I feel missed a very important factor. There is a shortage of available dwellings for sale. It is evident that this is driving the house prices seen in Dublin up far faster than they should. As noted by Ronan, since 2011 asking prices have gone from -22% to +11%, that’s some market swing!!

    The area I feel has been underrepresented in the report is that the report only notes that Dublin needs more properties to be built to cope with demand. While the need for additional dwellings as a standalone statement is correct, it misses a large area for the supply of dwellings which must be addressed.

    People are still unable to sell dwellings they own due to the fact that the sale price in many cases will not clear the mortgage held on the dwelling. Property markets have always seen a healthy level of trading up and trading down but this part of the market is hampered by negative equity.

    Example: If I own a 2 bed apartment and want to trade up to a 3 bed semidetached house, I’m likely to need to sell the apartment to buy the 3 bed. I’m likely to have a mortgage on the apartment so that will need to be cleared. This means that before I can even consider the move, I need to do my sums. Ordinarily the sale of the apartment would cover the mortgage and even leave an excess which can be put towards the purchase of the new bigger property. This in many cases is no longer the case. Now I’m more likely to be covering a shortfall on the mortgage from the sale so before considering the move, I need to consider how much the sale of the apartment will leave as a shortfall. Once I have an idea of that figure, I need to add the deposit for the new property. Only then, if the maths work can I look at making the move.

    The same can be said for the “wannabe” investors from the boom. We all know someone who bought a second property to rent out during the good days. Many of these investors were a bit wet behind the ears when it came to property investment and are now paying the price. Selling will likely bring a loss with it so it makes more sense to keep the property and try to rent it

    The same can be said for those looking to trade down. I’m talking about people with a large house where the kids are grown up and moved out. Many in the past chose to retire, sell the big house and move to somewhere more appropriate and the profit from the sale of the big house covered the purchase of the smaller one and left a nice little nest egg for the golden years. This is now less likely. This is not so much the issue of large mortgage debts but more of not being worth it so much anymore. As people are not trading up, smaller properties are in less supply. If you want to trade down, you want a nice property to retire into, but a shoebox in the backend of nowhere!

    The issue of mortgage correction needs to be addressed. It’s not a pretty topic and not many like to discuss it but it’s a noose around many buyers and sellers necks. I would appreciate any responses, from Daft or other posters about this issue and its effect on the property market. I would argue that if property owners could sell and purchase again without the crippling effects of negative equity, we would see a large improvement in the quantities of properties being bought and sold.

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  • Re: The Daft Sale Report Q4 2013

    Posted By: Mortgagee Date: Saturday January 11, 2014 @10:39PM

    I agree - it is disheartening for all of us in negative equity to hear that more property needs to be supplied in Dublin.
    That will just drive the prices down and keep those in negative equity in negative equity for longer and delay the loosening of the supply for longer.

    Just think of the number of people who bought one bedroom apartments, two bedroom houses, for 400, 500, 600k, who would love to sell but can't.

    I would be interested to see figures on the numbers of houses/apartments sold area by area in 2007 and the number on sale in 2013/2104.

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  • Re: The Daft Sale Report Q4 2013

    Posted By: frank Date: Friday January 10, 2014 @09:39AM

    Due to unforeseen international events, of a type and on a scale not been seen for 80 yrs., few people are buying now and, budget changes aside, this will continue into 2014.

    The overall need for accommodation has not decreased in the interim, especially in and near large cities and most individuals, including those posting messages here, will try to buy a home at some stage. The key question is when.

    House hunters are putting off buying on the basis of poor economic conditions and the underlying fears of rising property values, possible job losses, interest rate uncertainties and questions as to overall inflation (etc.).

    A time will come when such unfavourable conditions will wain, individually or collectively and then, buyers will simultaneously re-enter the market. Due to the pent-up demand for housing and the lack of accommodation being built, the sheer number of purchasers seeking to buy homes will certainly result in a new wave of price increases.

    I don't know why house hunters are waiting for this to happen when buying now, whilst in a position of strong bargaining power, would avoid this. Many who bought in 2000 are sorry that they didn’t buy in 1999 and those who made their purchase in 2012 regret not buying in 2011.

    Don’t make the same mistake and ignore the cyclical nature of property prices merely because it is inconvenient or think you know better than those who went before you

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  • Re: The Daft Sale Report Q4 2013

    Posted By: Bob Date: Friday January 10, 2014 @10:51AM

    Frank,

    Apologies but I don't think you could have got it any more wrong.

    Who is putting off buying at the moment? Who is in a strong bargaining position at the moment?

    I've never seen so few properties available for sale in Dublin as we are seeing now. Go to any half decent looking house/apartment at the next open viewing and be prepared to see 20 or 30 couples looking too.

    Throw an offer in close to the asking price and expect it to be declined for one of two reasons, 1. they already have one higher or 2. they will hold your offer for a while anticipating a higher offer.

    The time to buy was 6 to 12 months ago. THATS when people had bargaining power. Now you have a shot at an ordinary property but be willing to pay above the odds for it.

    We have a mismatch of supply and demand. 12 months ago we had no demand. This resulted in bargaining power for buyers. Now we have no supply. This is giving the power back to the sellers. I'm not surprised sellers are not putting their properties up for sale yet. They will keep supply low to drive prices up. If they get the timing right, they will get more for their property.

    If you ask me, now is not the time to buy. Now is the time to step back, see that most of the properties for sale are the dregs from the bottom of the barrel. Lets see some new properties come on the market, lets see the government address the lack of supply and then for once in Ireland's history, let's have a property market that is fair.

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  • Re: The Daft Sale Report Q4 2013

    Posted By: Richard Date: Friday January 10, 2014 @12:12PM

    Bob,

    When you mention "the government address the lack of supply" I think you have lost the plot with respect .

    Even in the boom times , when the goverment had the tax payers money , they with local authorities could hardy build any homes , it was all left open to the private sector " the developers". Only thing differant this time round the developers are gone and no one wants the developement risk . Demand will soon result in rocketing prices.

    Regards

    Richard

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  • Re: The Daft Sale Report Q4 2013

    Posted By: Bob Date: Friday January 10, 2014 @12:51PM

    Richard,

    Relax, I'm not going to take offence to the "lost the plot" line. I welcome all debate on the matter.

    It is up to the government to address the lack of supply as the private sector clearly wont. There is no incentive to build. Builders built when they could make a pile of cash for it. This is no longer the case so if you are holding out for that, happy waiting to you.

    Demand is already driving prices up at alarming rates, have you not read Ronan's report.

    I'm calling for change, not a recycling of the same mistakes we (the country) made during the boom

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  • Re: The Daft Sale Report Q4 2013

    Posted By: Phil V Date: Wednesday January 15, 2014 @09:36PM

    From what I see, the property market is being manipulated by investors and auctioneers . There is no way for a potential buyer to authenticate a bid.

    I recently viewed a property in Dublin where the asking price was 250k and there was apparently a bid of 267k on the table since before Xmas. 17k over the asking price and not accepted .... Even though we were very interested in the property, we decided not to bid on the basis that we felt it was a scam.

    There should be more regulation and auditing of Auctioneers - it is a profession that I believe lack ethics and standards.

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  • Re: The Daft Sale Report Q4 2013

    Posted By: Jack Date: Thursday January 16, 2014 @08:56AM

    IT'S no secret that many of us are broke after five years of austerity. But a lot of people in this country are filthy rich as well. Cash buyers are out in force in the property market -- snapping up more than half of the properties that are up for sale. There's more than €90bn sitting in Irish savings accounts and many are getting a return on there deposits of less than 1% . The return on rental property in Dublin is 8 to 10 % so its now turning into a investor/ renters market with many not able to access mortgages . With limited supply of new homes in Dublin , prices are just going to go up.

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  • Re: The Daft Sale Report Q4 2013

    Posted By: Bob Ballox Date: Monday January 20, 2014 @03:44PM

    @''Jack'' What leads you to the conclusion that half of the properties are being snapped up?

    'snapping up more than half of the properties that are up for sale'

    Are you going by the data in the graphic in the chart?

    Many sellers have given up trying to sell and have taken their properties off the market.

    I've seen properties on the market for 6 years. There are other phantom properties supposedly listed which are not in fact for sale. You can tell because they put up sale agreed and then when you go back a few months later there is nothing in the property registry showing they have been sold. Nothing.

    Not every property that is sold is necessarily listed as sold on the property registry but for certain estates the amount of times I see sale agreed, then ther property disappears and then comes back again 4 months later is ridiculous

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  • Re: The Daft Sale Report Q4 2013

    Posted By: Will Date: Thursday January 16, 2014 @05:58PM

    People selling are falling into the pit of "Prices rising day in day out" so everyday they hang on is going to be more money for them.
    We seem to be afraid to tackle the estate agents, who blatantly lie to potential purchasers about offers in. There needs to be some sort time limit, similar to other countries, house A is for sale by 1st of March 2014 if you'd like to put in an offer please do so by 14 February 2014. All offers are then opened on the same day and presto the biggest offer is accepted.
    Not the way it's done now, I've been gazumped on 2 houses in the past 6 months, both of which are still on the market! Arghhhhhh

    • Reply to this message
  • Re: The Daft Sale Report Q4 2013

    Posted By: Bob Date: Friday January 17, 2014 @09:27PM

    To Phil V and Will,

    Good points well made. Some auctioneers are returning to old style selling practices. I'm looking to buy but like yourselves, offers are apparently higher than asking prices and asking prices are higher than they've been for a long time. It's interesting that so many auctioneers say that things are improving.

    Things aren't. Supply is down so prices go up. If things are improving, we'll see supply go up but prices remain the same or rise higher. With current access to credit, if supply increases, we'll see demand subside in the capital.

    I can't wait to see the property price register in March/April when the sales from the end of 2013 start showing. I wonder how many properties really sold for 30 to 50k more than 6 to 9 months ago. Asking prices are that much higher, I assume the increases are based on sales???

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  • Re: The Daft Sale Report Q4 2013

    Posted By: Kevin Date: Tuesday January 21, 2014 @02:35PM

    It's inevitable that we are having a correction to the house prices that have incessantly decreased for the past 6 years - in the long term - we can afford these increased prices.
    If you look at the jobs pages- for the jobs that are well paid- it is difficult to reconcile the rates of pay available to the cost of houses and apartments. Houses now seem a lot more affordable.
    In the 6 years we've had sections of the economy that have been doing really well on the back of the recession - many who have performance-related bonuses – rental estate agents, financial services for insolvencies. and people have who signed into 30 year mortgage tracker contracts can move homes on the strength of these. Fact is, and always was, that this is exceptional growth that was always going to be long term and would correct any fall in house prices.
    Many others supplemented their income in buy-to-let, flipping properties, property development, releasing equity, etc. - revenue streams that are now also returning to Irish market.
    The government have also allowed expansion of the private sector over this period and we now have very large IT led current private investments and as these are jobs-for-life and have limited scope for cutting, decreases in taxes will be required to reward these firms We have been used to tax rises throughout the recession and again people have assumed this would go on forever. It won't, and again disposable income will be rise.
    There might well be excessive on-going demand in the Dublin for housing, but at the prices we have currently available it makes prefect logic to buy now

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  • Re: The Daft Sale Report Q4 2013

    Posted By: Ben Date: Tuesday January 21, 2014 @05:39PM

    This is almost certainly an example of a 'dead cat bounce' ie a small, brief recovery in the price of a declining asset price.

    With more than half of the properties bought with cash.. the proof is in the pudding,, the fact is returning expats who have cleaned up in the mines of Oz, or more likely senior public servents enjoying massive tax free retirement lump sums,,are steaming in and out bidding everyone else, but these buyers do not represent the real first time buyers and normal everyday families around Ireland.

    We can all see the amount of properties for sale in Dublin is tiny. So a 17% increase sounds dramatic but is based on a very low volume of transactions..

    Strangely their are almost no repossions taking place, compared with the UK, this also is a contributing factor, but I wouldn't expect the same dangerous and unhealthy levels of price increases in 2014 as cash buyers are a finite number of people and lending remains poor, with the majority of new jobs based on contracts. Uncertainty relating to job security remains.

    Overall its a cultural problem, and their is an obsession with house prices.

    Relying on the government to do anything is pointless, they have a long history of infating property prices and also run NAMA so its in their best interest to see prices increase.

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  • Re: The Daft Sale Report Q4 2013

    Posted By: KEVIN Date: Thursday February 20, 2014 @07:24PM

    ben im not a expat but i can afford to buy a house with cash ,,both my parents where irish who worked for pea nut s all their lives i saw what they had to do to bring myself and brother up [deceased] nobody exploited me or my brother and we made a few punts now im trying to move my estate to ireland ,,its all going back in good time to help Ireland as a nation ,,i will pay all my tax s ect as req [simple ] not so its like the kiss of death ,,,try opening a bank account or dealing with estate agents they doent want to no ill get their in the end but you now what the problem in ireland its the irish they never learn ,,,,,,,,,

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  • Re: The Daft Sale Report Q4 2013

    Posted By: Tim Walsh Date: Wednesday January 22, 2014 @11:10AM

    When the cost of constructing a new home exceeds the price of a second hand home then a price correction will happen ... no other outcome is possible. this is why prices continue to rise.

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  • Re: The Daft Sale Report Q4 2013

    Posted By: MARK Date: Wednesday January 22, 2014 @01:14PM

    Prices continue to rise only because of a lack of supply nothing else. If there was enough housing to meet demand prices would continue to decline as credit and economic factors are poor.

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  • Re: The Daft Sale Report Q4 2013

    Posted By: Greg Quigley Date: Sunday January 26, 2014 @09:09PM

    The problem with looking at housing by itself is that it does not really define the overall housing market. One has to consider jobs available and the ability to pay. Certainly, there will be growth in tourism buys given what those in Europe regard as relatively cheap prices, however, the real assessment on future growth has to be based on a population's disposable income and the ability to acquire housing. The economic outlook regarding jobs is not good, hence I doubt that we have seen the bottom of this housing market. Dublin may be doing well, however, all capital cities throughout the world usually fair better than the rest of their respective countries during hard market times owing to government and foreign service turnovers keeping demand.afloat

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  • Re: The Daft Sale Report Q4 2013

    Posted By: James Date: Thursday March 27, 2014 @02:30PM

    Hi, sorry if this question isn't in context with the rest of this report, but just looking to see if anyone has some advice on the following -

    I am considering purchasing a large (7 bed ) detached house with a friend and spliting it into 2 Semi detached houses. Has anyone been through this process? Survey requirements, planning permission etc to get the 2 properties onto seperate titles.

    Thanks

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