House prices edging downwards, but supply response has been immediate

Rossa White, Economist, Davy

30th Apr 2007

Rossa White is our guest blogger, commenting on the latest Daft research on the Irish property market.

Ireland's housing market downturn in now almost nine months old. That makes its duration much longer than the blip in late-2001. At that time, more than five years ago, the market cooled for less than six months. In contrast, this slowdown may continue for the rest of the year at least.

The latest Daft.ie figures show that vendors have revised their expectations for prices, as a result of weaker demand from potential buyers. But the data also continue to suggest that the most likely outcome for prices is a period of stagnation rather than significant decline.

Asking prices increased only 2.1% year-on-year in April. That marks quite a change from a growth rate 13.8% when the market was hot in the same month one year ago. But year-on-year changes hide the turning point. In quarterly terms, prices slipped 0.5% in Q1 2007 compared with Q4 2006, an annualised rate of decline of 2%.

The Daft.ie Asking Price Index highlights that the housing market overheated in the year to mid-2006. Since then, Dublin has seen the sharpest drop in asking prices. Yet the data on final selling prices from PTSB/ESRI records that Dublin prices have held up better than in the rest of the country over the last four or five months. This implies that sellers in the Dublin area became greedier than elsewhere during the buoyant first half of 2006. Asking prices were quickly pared from an unrealistic level. The reversal in expectations is conspicuous in high-end areas of the market: Between Q3 2006 and Q1 2007, asking prices plunged 17% in Howth, 13% in Rathmines, Rathgar and Ranelagh and 10% in Clontarf, Killiney and Dalkey.

The recent slide in house-building has important implications both for the future direction of house prices and the economy as a whole. Builders and developers have reacted swiftly to falling demand thus far: it is the salient reason why overall asking prices were down only 2% in Q1 compared with the last three months of 2006. Housing starts decreased 22% year-on-year in October 2006-March 2007. The twelve-month running total has slipped to around 80,000 from a peak of 90,500 last September.

The Irish experience contrasts somewhat with US house-builders' response to the inflection point in that market in late-summer 2005. Our American counterparts kept building liberally and did not pull in their horns until the start of 2006. Housing starts were finally slashed throughout last year but developers' delayed reaction meant that the over-supply problem was relatively contained rather than calamitous.

What has happened in the US over the last 18 months may also provide a useful guide to future price trends here. Despite the biggest overhang of unsold stock in 16 years, their prices dropped only 5% year-on-year at worst.

Selling prices are unlikely to decline sharply here for a number of reasons. First, Irish builders have cut supply immediately and radically. That may help prevent a debilitating overhang of unsold stock. Second, the majority of new home developers are cash-rich after years of high retained earnings. They can afford to sit and wait for sales to materialise without having to drop prices significantly. Third, existing home-owners wishing to trade-up invariably take their homes off the market rather than sell at a discount. In some cases, they may prefer to extend or renovate their homes rather than settle for a lower price. Our guess is that prices will be unchanged to slightly down over the next six months.

But it is not easy to know when housing starts will bottom. Ireland has not witnessed a construction boom like this before. At least in the US, analysts can refer to the cyclical downturn in house-building in 1990/1991 as a guide. We no longer control interest rates, which is an added complication.

Many issues are of particular relevance to the prospects for house-building. Near term, sentiment may improve if the stamp duty matter is resolved straight after the election.

But stamp duty was not the salient reason why demand dried up. First time buyers (FTBs) neither pay stamp duty on new houses nor on second-hand homes valued at the national average. First-time buyer (FTB) demand weakened due to deteriorating affordability from rapidly rising house prices in the year to mid-2006 and from the increase in interest rates. This is reflected in rapid rent inflation, as potential buyers who could get approved for a mortgage were squeezed into the rental market (the Daft.ie index showed rents up 10.5% year-on-year in February). The challenge faced by FTBs was confirmed by the statistic that they took out 20% fewer mortgages in Q4 2006 compared with the same period a year ago. Affordability will improve with stagnant prices, but two more interest rate hikes may counter the potential boost to sentiment from stamp duty reform.

Looking ahead to 2008, other variables will determine housing demand. Increased net inward migration between 2004 and 2007 raised demand by as much as 20,000 units. Will the rate of immigration slow, as employment prospects deteriorate? To what extent was demand brought forward from the future when the market was hot in the year to mid-2006? Will the expiration of tax incentives curtail appetite for second or holiday homes, which have accounted for at least 20,000 units per annum in the last few years?

The implications of the downturn in new housing construction for the whole economy are broad. Growth in tax receipts from housing - VAT, stamp duty and capital gains - will moderate. As a result, tax revenue may miss the government forecast this year. Luckily, robust non-residential building will largely compensate for lower activity and job losses in housing. And the release of SSIA funds acts as a buffer. So the economy will be resilient in 2007. The real issue is 2008; from that perspective we hope that our forecast of 75,000 house completions next year does not prove overly optimistic.


HIGHLIGHTS:

Daft Asking Price Index (API)
Daft Asking Price Index (API)

Year-on-year inflation in asking prices
Year-on-year inflation in asking prices


SNAPSHOT:

Average House Prices across Ireland in Q1 2007
Average House Prices across Ireland in Q1 2007

Discuss This Article

  • Re: The Daft Report Q1 2007

    Posted By: Kevin Date: Monday April 30, 2007 @09:15AM

    Sounds a bit optimistic to think that builders and developers have the power to effectively strangle supply in the ensuing residential downturn. Are we forgetting about the huge amount of vacancies identified by the CSO?

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  • Re: The Daft Report Q1 2007

    Posted By: john Date: Monday April 30, 2007 @10:51AM

    strangling supply means job losses

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  • Re: The Daft Report Q1 2007

    Posted By: Bazookajoe Date: Monday April 30, 2007 @11:11AM

    I too am surprised the author failed to address the fact that 12.8% of total housing stock (exc. holiday homes) remains in a benign state neither appearing in rental or sales inventory. With interest rates rising and capital appreciation turning, how long will these units remain in such a benign state?
    Also the downward revision of GDP is in direct correlation with reduction in housing starts even in the face of maturing SSIAs is an ominous sign?
    The reduction in employment growth will occur first in construction, then low end services so the only magnet attracting migrants will what?

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  • Re: The Daft Report Q1 2007

    Posted By: Peter Date: Monday April 30, 2007 @09:22AM

    Anyone who bought their property more than 3 years ago can easily afford to sell their houses at a huge discount to current asking prices and still walk away with a profit. For this reason, the argument that trader uppers will refuse to sell at a discount is nonsense.

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  • Re: The Daft Report Q1 2007

    Posted By: TheOrb Date: Monday April 30, 2007 @11:03AM

    The leafy Suburbs of South County Dublin down 12% , what kind of spin will the vested interests spin now ??

    As bertie would say there is a hell of a lot more falling to be done by Dublin houses prices .

    With interest rates of 4.50% by year end , i fear we are already over the cliff edge .

    The question now is, not will house fall but how low will they go.

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  • Re: The Daft Report Q1 2007

    Posted By: SafeAsHouses Date: Monday April 30, 2007 @11:41AM

    I'm glad to see we got a real Economist this time. (i.e. not and Estate Agents or Mortgage lenders sales man)

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  • Re: The Daft Report Q1 2007

    Posted By: Steve Date: Monday April 30, 2007 @11:54AM

    Rossa documents the great risks facing our distorted credit based economy and talks about prices already "plunging". He also outlines the uncertainties we face in the future with so many risks to the downside.

    And yet from this we jump to the confident prediction of price stagnation !!

    This conclusion stated as "most-likely" is at odds with the facts the risks and the uncertainties.

    In order for the financial sector to retain some credibility, it's time they moved on from soft-landings and stagnations to find some other therapeutic phrase for the overindebted masses. How about trying "mild correction" for a few months ?

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  • Q1 2007

    Posted By: LiamGeatai Date: Monday April 30, 2007 @03:56PM

    I believe that the final figure for home construction in Ireland will be nearer 70k units than 90k units this year. This means at least 2% of GDP will be shaved off growth ...all other things being equal.

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  • The Daft Report Q1 2007 "PRICES EDGE DOWNWARDS"

    Posted By: Elvis Presley Date: Monday April 30, 2007 @05:11PM

    Prices wont stop "edging downwards" until houses yield investment returns for investors. Investors were a huge % of buyers and until the market can get these back in prices will not rise. First time buyers and people trading up are not a large enough %

    Prices will "edge downwards" until they hit somewhere in the region of 2000/2002 prices adjusted for inflation.
    If the fundamentals of our boom pre 2002 were still in place then we would hit no less than 2002 prices accounting for inflation. However our export/manufacturing sector has been bleeding jobs away which have been taken up by our expanding construction industry.

    A bumpy ride ahead for all of us. Dont let any smiling politician or other person fool you. The whole country will be affected by this but its not the end of the world. Prices will rise again once this is over with. The sooner the crash happens the sooner we get this, correction/crash/soft landing whatever you wanna call it, over with.

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  • Re: The Daft Report Q1 2007

    Posted By: Ricky Date: Tuesday May 1, 2007 @06:44AM

    CPI in Ireland now exceeds 5%-inflation adjusted yields despite uplift in rents are trending negative.Solution is either higher rents-unlikely as demand reduction due to decline in construction jobs from 260k to sustainable 160K by start of 2008 with bulk of lossses occuring in last half of 2007.Job losses modified somewhat by increased service and net emigration(mostly eastern europe)in late 2007 but current supply overhang in excess of 250k units will increase to closer to 300k residential units-significant downturn in prices unavoidable unless euro interest rates drift lower-unlikely due to recovery in Germany.Only solution is to destroy housing stock as is currently happening in parts of Germany-most likely outcome severe correction in prices which will overshoot on the way down as much as it did the same on the way up

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  • Re: The Daft Report Q1 2007

    Posted By: Holger Date: Tuesday May 1, 2007 @03:35PM

    >>>First, Irish builders have cut supply immediately
    and radically. That may help prevent a debilitating overhang of unsold stock.<<< I can go with that - This will surely help keep the prices stable - although I think the supply is still high level

    >>>Second, the majority of new home developers are cash-rich after years of high retained earnings. They can afford to sit and wait for sales to materialise
    without having to drop prices significantly.<<<

    I think this is nonsense - either they will have to drop the selling prices or at least rent the new capacities cheap - surely leaving capacities empty is extremely expensive

    >>>Third, existing home-owners wishing to trade-up invariably take their homes off the market rather than sell at a discount. In some cases, they may prefer to extend or renovate their homes<<<

    well this is shouldn`t have a significant effect - they sell one unit and buy one unit

    I think 80000 new units is still a lot in a country with 4 million inhabitants

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  • Re: The Daft Report Q1 2007

    Posted By: Scorpio Date: Wednesday May 2, 2007 @10:34AM

    I take your point about 80,000 units being alot on a per capita basis, however there are serious question marks about the trend in completions based on how the Dept of the Environment gets those figures.

    They're based on ESB connections, which were interrupted towards the end of 2005 - more than likely, supply of new units peaked in 2005 at about 90,000 and fell back last year to 80,000 and should fall again to 70,000 or so this year.

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  • Re: The Daft Report Q1 2007

    Posted By: optional Date: Wednesday May 2, 2007 @03:17PM

    I am sure that the increase of the house prices have already started to create problems in the market. Less jobs because the people want to work more to pay the rents or the bank. All the prices go higher and higher. The property market destroys the one of the strongest economy of europe. Ireland was the best example for all europe. Now ireland follows the way of Italy, France, Germany and all the south high-unemployment countries where you can find people living in a house 5 and 10 together because they cannot pay the whole appartment. Because the house prices increase the level of life gets lower. I cannot see future in Ireland if this won't stop. You cannot be rich by housing. The rent is just extra money to coplete your incomes. It's not a job. And the lanlords they cannot understand that. Be carefull the future will be very dificult

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  • Re: The Daft Report Q1 2007

    Posted By: Kit Date: Saturday May 5, 2007 @04:45PM

    The whole thing is a bit mad. It seemed that the property market in Ireland was like the stock market. Invest to make a profit, big profit hopefully. A house was not a house to live in but a stock to gardiner big profit. The government used the house to fill their coffers, getting hugh stamp duty and other taxes in the building process. A house to live in should be afordable to the average salaried persons ie teachers, nurses, garda, civil servants, etc. A house should be affordable to the hard working sector of our society, and it should not have to take two saleries for affordability of a house. One parent should have the option of staying at home to mind small children, no one can afford to parent their own children anymore. The government and the investors drove the prices mad. Now the investors will loose and the government should loose. This government moved all the money up to the wealthiest in our land, the developers, they have robbed the middle and lower class. I support a big drop in house prices as the ordinary people once again can put a roof over their head and the option to stay home to care for our children would be fab. Some of us wish for the old days not this madness.

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  • Re: The Daft Report Q1 2007

    Posted By: Holger Date: Monday May 7, 2007 @07:44AM

    @Kit

    you are right - it really reminds of the bubble at the stock market in 1999/2000 - my only hope is the fall won`t be so deep here - I would like a price reduction of 20-25% because then I would have a chance to talk my wife into buying a house here in Ireland :)

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  • Re: The Daft Report Q1 2007

    Posted By: joebloggs Date: Thursday May 24, 2007 @01:17PM

    The recession in house prices is definitely on folks! After the auctioneers giving out to politicians and commentators for talking down the market, one of their own gives the biggest signal yet - Mark Fitzgerald has just let the cat out of the bag by hiking his fees by 50% becuase he has too many houses to sell. I can see why - just walk through Ranelagh and see how many Sherry Fitzgerald signs you can see - it ain't the quality service that's upping the numbers for SF - its the slow turnover.

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  • Re: The Daft Report Q1 2007

    Posted By: Holger Date: Friday May 25, 2007 @09:03AM

    well I found the article

    25 May 2007

    Estate agent fee increase of 50% is ‘naked greed’

    By Paul Kelly, Consumer Correspondent
    CONSUMER groups last night described the decision by the country’s largest estate agent to increase fees by 50% as “naked greed”.


    Sherry FitzGerald, which has 120 branches nationwide, has raised the commission rate for sales on residential properties in Dublin from 1% to 1.5%, a move which could force other agents to follow suit.

    Based on an average Dublin house price of €429,151, Sherry FitzGerald has increased its commission from €4,292 a sale to €6,437, a hike of €2,145.








    Consumer champion Eddie Hobbs said the rise was unjustified and was a sign of a slowdown in the housing market. “The likelihood is that sales volumes have collapsed by 50% if they are pushing through a 50% rise in commission to try to recover their profits,” said Mr Hobbs.

    “They’ve had a boom market for 10 years and they’ve built up big overheads as a consequence, but now the market is going in the other direction.

    “Sales volumes have collapsed, so to maintain their profits they are getting consumers to stump up more without getting anything extra in return.”

    Mr Hobbs, who sits on the board of the new National Consumer Agency, said other estate agents would hike their commissions as sales start to fall.

    “Sherry FitzGerald have just been the first to come out and admit their commissions are rising, but there’s anecdotal evidence of commissions rising throughout the country.

    “There might be a case and maybe an economic case to argue for the increase in commission, but a rise of 50% is outrageous.”

    A logical step when faced with falling sales would be to reduce overheads through redundancies but the result would be dented confidence in the housing market, he added.

    The Consumers’ Association of Ireland said Sherry FitzGerald’s rise was “naked greed” and said there was no reason for the firm to charge more than others.

    But yesterday the chain’s chief executive Mark FitzGerald defended the rise, claiming it was justified because the company was having to work harder to sell homes in Dublin.

    “There is a lot more work involved in selling a house. We are a professional company and it would not be good if we did not offer the best service. You do get what you pay for.”

    The Irish Auctioneers and Valuers’ Institute, which represents estate agents, said fees charged in Ireland were relatively low compared with continental Europe and the US where rates were as high as 6%.

    The institute’s chief executive Alan Cooke said agents were free to set their own fees while consumers benefited through real competition in the market.

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  • Re: The Daft Report Q1 2007

    Posted By: Anonymous Poster Date: Monday May 28, 2007 @08:33PM

    property in ireland has stagnated but we must have hope that there will be a consumer confidence boost when stamp duty is addressed by the new government before the summer recess.Interest rate hikes have made property unfashionable over the last nine months but as a nation we always strive for bigger and better homes-a trend that in my opinion will return.

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  • Re: The Daft Report Q1 2007

    Posted By: anonymous Date: Tuesday May 29, 2007 @11:44AM

    In the longer term, Irish penchant for property will offset the current glut of supply but the real concern is the secondary impact of job losses in the construction sector. We really don't know what impact unemployed construction workers will have on the wider economy. Combine this with higher interest rates and slowing US economy and a 15-20% mark down in prices sounds reasonable. This could play out in the following 12-24 months until we get more clarity on if the ECB gets to the end of the current rate cycle.

    Looking at the numbers, €100k on deposit will be worth €110k in 2yrs time. Leveraged to buy a €500k house, wipes out your initial investment if the above scenario materialises (ex stamp duty and transaction costs).

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  • Re: The Daft Report Q1 2007

    Posted By: worried! Date: Wednesday May 30, 2007 @09:41PM

    I am in a real quandry having just read the article

    I am in process of buying a house in Killester for 485+36 stamp duty
    Having just gone on few to a few sites most houses around there are selling for 430-450
    I have approached the estate agent surprise surprise sherry and fitzgerald! and they are not willing to negogiate on the price. I can walk away and will get my deposit back
    I really want the house but think its over priced any advice
    Thanks
    Maree

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  • Re: The Daft Report Q1 2007

    Posted By: Aztec Date: Wednesday June 6, 2007 @09:16AM

    In a similar position myself. Looking at a few places in Clontarf, Fairview etc but the prospect of 3 interest rate hikes over the next year I'm not sure I can justify it. Just by holding off that same property will probably be going for 420ish I would imagine in 6 months time. If its the right place for you go for it though.

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  • Re: The Daft Report Q1 2007

    Posted By: Anonymous Poster Date: Wednesday June 6, 2007 @12:39PM

    i would walk away unless you are 1. really in love with the house and 2. it is very affordable for you.

    if its going to stretch you , i'd rent for a year and look again next summer particularly if you have a variable mortgage because interest rates are definitely going up and i think your mortgage payments will be 20% higher in 12 months time, good luck

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  • Re: The Daft Report Q1 2007

    Posted By: Holger Date: Thursday May 31, 2007 @04:11PM

    what I am currently wondering about is the correlation between prices for sales and for letting - seems to me that the prices for lettings have the stronger potential getting down - will further rising interest rates bring pressure to the bigger players in the property sector? would really like to know if at some stage they give leaving rooms empty and start lowering the rents - think would be the right move for the whole economy

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