Hi Shane, thanks for the visit and the question. The boom period was associated with house prices rising a lot faster than rents, so yields continued their long fall from the 1990s (as lower interest rates in preparation for ECB kicked in) right through the 5-7% one might have expected them to stabilise at. The yield troughed in 2007 at just above 3% (3.05% was the expected yield nationwide mid-2007) before rising slightly up to mid-2008 – currently, with rents and house prices in a race to the bottom, the yield has stabilised again, at about 3.5%.
R
Brian
,
Excellent website. A comment on the projections for house prices – whilst appropriate in analysing an investment does it not ignore the fact that residential housing isn’t (in the main) an investment vehicle? As the Irish home ownership levels are unlikely to fundamentally change (it’s part of what we are and all that) houses are homes not investments – therefore prices will be influenced by supply/demand issues and changes in incomes. As the world recession eases one would expect employment and income levels to improve – couple that with the expected erosion of our massive stock overhang and I would expect that prices will go back up quicker than you are anticipating.
Hi Brian,
Thanks for the visit and the comment. You make a fair point, but it should be noted that Ireland’s sales and lettings markets are better integrated now than they were 20 years ago. (What I mean there is that if you think of a property type, there are now significant sales and lettings cohorts, be it a detached dwelling in Ballsbridge or a one-bedroom apartment in Cork city or a commuter belt 3-bed semi.) This level of integration means that yields will be every bit as important as investors will be trading with owner-occupiers, meaning that they will not be on separate price planes.
I agree, though, that changes in the unemployment rate will be significant for the trends in house prices (in fact I posted a correlation between the two over the past 25 years on this site recently).
One final point would be to note that pre-2000 growth in nominal house prices should be viewed through the lens of inflation. Real house prices don’t necessarily go up over time, they were just good hedges against inflation in the past. 3% annual growth in house prices over a 40-year period would be relatively high.
R
Brian
,
On the calculation of the “haircut” are you allowing for the difference between the haircut now to be taken and the reduction in value in the properties? You are primarily looking at completed residential property above (in that you are using rental yields etc in your calcs) so presumably you have allowed for the fact that the LTV on the debt was initially set at (on average which is all we can look at across the market) c75%. So a 25% reduction in property prices would result in zero haircut being required (as the debt value would equal the property value). Then (presumably) you have also allowed for the writedowns already taken by the bank of c10%/15% – meaning that if property prices fall by up to 35% the additional haircut is still zero. So a 30% haircut now implies a fall in property values of over 55%.
if you bought property (for instance) for €100m and had a mortgage of €70m and the market drops by 40% (new mrkt val: €60m) then a 20% haircut from €70 – it’s based on the loans not the valuations at time of purchase- then the price paid for the loan would be €56m.
obviously not every property was bought at peak prices so using peak to trough isn’t exactly a fair demonstration either.
I think people will be shocked when the pricing comes through, because (and I said it from the beginning) i suspect that the only way to resolve this is to overpay on some level otherwise banks won’t sell the loans.
Brian and Karl, you’re both right. I used the wrong concept of haircut, hopefully the true meaning (peak-to-trough) comes out clear enough from the blog post itself.
Incidentally, does anyone know where one might find LTVs for developer loans? What’s a typical LTV, 70%?
Brian
,
I had a look at the AIB results (HY2009) presentation and on slide 15 they indicate that the original LTV on their “Land & Development loans” was 75%. After their own write down they are saying that the current loan o/s is c65% of the original values. So on that basis if we assume a 20% haircut from those levels you would be implying a fall in the value of the land of c48%. I personally think that the majority of media commentators are missing this point – a 20% haircut implies approx 50% fall in property values. They are reading “haircut” as being equivalent to the assumed fall in property values and are (correctly when operating off this false premise) concerned/angered that developers/banks are only being hit by a 20% reduction.
Stephen D
,
See Alan Ahearne 4 a much much rosier scenario uhm is it another wa of arriving at a similar prediction: ‘…Between 1991 and 2004, real estate prices in Japan dropped 60 per cent. House prices in Tokyo plummeted 90 per cent. To put things in perspective, if house prices here were to follow a similar pattern, the average price for a house in Dublin in 2022 would be about €42,000!…’
Shane ,
Ronan – good article. I have one quick question – what was the average yield when property was at its peak?
Ronan Lyons ,
Hi Shane, thanks for the visit and the question. The boom period was associated with house prices rising a lot faster than rents, so yields continued their long fall from the 1990s (as lower interest rates in preparation for ECB kicked in) right through the 5-7% one might have expected them to stabilise at. The yield troughed in 2007 at just above 3% (3.05% was the expected yield nationwide mid-2007) before rising slightly up to mid-2008 – currently, with rents and house prices in a race to the bottom, the yield has stabilised again, at about 3.5%.
R
Brian ,
Excellent website. A comment on the projections for house prices – whilst appropriate in analysing an investment does it not ignore the fact that residential housing isn’t (in the main) an investment vehicle? As the Irish home ownership levels are unlikely to fundamentally change (it’s part of what we are and all that) houses are homes not investments – therefore prices will be influenced by supply/demand issues and changes in incomes. As the world recession eases one would expect employment and income levels to improve – couple that with the expected erosion of our massive stock overhang and I would expect that prices will go back up quicker than you are anticipating.
Ronan Lyons ,
Hi Brian,
Thanks for the visit and the comment. You make a fair point, but it should be noted that Ireland’s sales and lettings markets are better integrated now than they were 20 years ago. (What I mean there is that if you think of a property type, there are now significant sales and lettings cohorts, be it a detached dwelling in Ballsbridge or a one-bedroom apartment in Cork city or a commuter belt 3-bed semi.) This level of integration means that yields will be every bit as important as investors will be trading with owner-occupiers, meaning that they will not be on separate price planes.
I agree, though, that changes in the unemployment rate will be significant for the trends in house prices (in fact I posted a correlation between the two over the past 25 years on this site recently).
One final point would be to note that pre-2000 growth in nominal house prices should be viewed through the lens of inflation. Real house prices don’t necessarily go up over time, they were just good hedges against inflation in the past. 3% annual growth in house prices over a 40-year period would be relatively high.
R
Brian ,
On the calculation of the “haircut” are you allowing for the difference between the haircut now to be taken and the reduction in value in the properties? You are primarily looking at completed residential property above (in that you are using rental yields etc in your calcs) so presumably you have allowed for the fact that the LTV on the debt was initially set at (on average which is all we can look at across the market) c75%. So a 25% reduction in property prices would result in zero haircut being required (as the debt value would equal the property value). Then (presumably) you have also allowed for the writedowns already taken by the bank of c10%/15% – meaning that if property prices fall by up to 35% the additional haircut is still zero. So a 30% haircut now implies a fall in property values of over 55%.
karl deeter ,
Hi Ronan,
if you bought property (for instance) for €100m and had a mortgage of €70m and the market drops by 40% (new mrkt val: €60m) then a 20% haircut from €70 – it’s based on the loans not the valuations at time of purchase- then the price paid for the loan would be €56m.
obviously not every property was bought at peak prices so using peak to trough isn’t exactly a fair demonstration either.
I think people will be shocked when the pricing comes through, because (and I said it from the beginning) i suspect that the only way to resolve this is to overpay on some level otherwise banks won’t sell the loans.
Ronan Lyons ,
Brian and Karl, you’re both right. I used the wrong concept of haircut, hopefully the true meaning (peak-to-trough) comes out clear enough from the blog post itself.
Incidentally, does anyone know where one might find LTVs for developer loans? What’s a typical LTV, 70%?
Brian ,
I had a look at the AIB results (HY2009) presentation and on slide 15 they indicate that the original LTV on their “Land & Development loans” was 75%. After their own write down they are saying that the current loan o/s is c65% of the original values. So on that basis if we assume a 20% haircut from those levels you would be implying a fall in the value of the land of c48%. I personally think that the majority of media commentators are missing this point – a 20% haircut implies approx 50% fall in property values. They are reading “haircut” as being equivalent to the assumed fall in property values and are (correctly when operating off this false premise) concerned/angered that developers/banks are only being hit by a 20% reduction.
Stephen D ,
See Alan Ahearne 4 a much much rosier scenario uhm is it another wa of arriving at a similar prediction: ‘…Between 1991 and 2004, real estate prices in Japan dropped 60 per cent. House prices in Tokyo plummeted 90 per cent. To put things in perspective, if house prices here were to follow a similar pattern, the average price for a house in Dublin in 2022 would be about €42,000!…’
http://www.irisheconomy.ie/index.php/2009/08/28/nama-and-best-practice/#comments
Where does another metric nameli longterm ratio of average domestic properti price: average wage get us I wonder?