Slowing house price falls still raise questions for NAMA

Brian Lucey, Professor of Finance, TCD School of Business

7th Apr 2010

Brian Lucey, Professor of Finance, TCD School of Business, commenting on the latest Daft research on the Irish property market.

The importance of the database cannot be overestimated. It is surely unconscionable that in a country suffering the after-effects of a house price bubble, there is no real-time or even monthly house price index from any government agency. The unfortunate demise of the ESRI/PTSB index highlights this. now stands alone as the only national monthly index. We are, as a nation, steering blind, not to mention dumb, on the seas of house price deflation.

Given that, what do we find? Is the crash over? Yes, if you live in NAMA-land, a country wherein the valuation of assets to be transferred has been set at their value as of end-November 2009. In the world wherein the rest of us live, the crash continues. House prices continue to fall, albeit at a slower pace than heretofore. Nationally, in the first three months of 2010, the average asking price of a house was a shade under €235,000, down one third from the peak of early 2007. The fall during the first quarter was 3.4%, the smallest quarterly decline in almost two years. Year on year, the fall in the first quarter of 2010 was 18%, a slight decline on the record year on year fall of 19% in the third quarter of 2009.

So the crash is slowing. However, it is not over. The index peaked in May 2007. To expect the trough to be reached less than three years later is to fly in the face of historical evidence. Referring back to Morgan Kelly's prescient, eye-opening ESR article which for many of us represented the key moment when our critical faculties on property were rebooted, a fall of 50% is likely. Based on a straight line projection of average declines in value since the peak this would see another 18 months of declining prices. That would be 50 months of house price falls, or just over 4 years, towards the lower end of historical experience. It is probable that as we decline towards the trough, the speed at which house prices fall slows down. And this is what we are starting to see - in the last six months, the average decline has been lower than the previous six months, itself lower then the period before.

Further evidence that this could be the case is that the time to sell is again rising. In Dublin, houses are spending longer, over five months, before selling, a rise from just below 4 months previously. These Dublin figures are reflected countrywide. Buyers clearly are factoring in further deflation (apart from one buyer, NAMA, for whom the crash is over...) and the stock of houses for sale remains very high. Dublin is a partial exception - in the capital, there is some evidence of clearance is emerging, with the total stock for sale having fallen by 20%. Much of this decline was from houses that were on the market for more than six months - evidence that a buyer can be found even in a falling market, if the price is right. Rural markets appear to be "marking time".

Nationally, nowhere shows less than a 25% fall from peak prices, with Dublin leading the way, showing falls of 35% and more. The implications of these figures, continuing as they do a trend towards a bottom that we have not yet reached, are pretty horrid for NAMA. What's horrid for NAMA is horrid for all of us, because - for good or more probably ill - our futures are all bound up with the failures of NAMA.

House prices have continued to fall since November 2009, the date chosen (why, on whose advice?) by Minister Lenihan as the valuation date for NAMA. Based on figures, house prices have fallen by a further 4.1%. Applied to a €50bn portfolio, that's a €1.5bn excess that will be paid over what would have been the case had the minister waited. Put it another way - the entire public sector pension levy has been squandered on a needless overpayment. A further implication for the economy is that the emerging problem of negative equity will deepen - negative equity acts as a bar to labour mobility, to discretionary expenditure, and ultimately to economic growth.

The government cannot, try though it will, stop prices from falling further. It can only try to stem the losses to banks (and many suspect, with little evidence but much conviction, to developers) with our money.


Rental Index
Asking Prices, Residential Sales

Stock and Flow of Properties
Stock and Flow of Properties


Average asking prices across Ireland in Q4 2009
Asking Prices in Q1, 2010