[…] leading property number cruncher, Ronan Lyons, has a post essentially explaining how he would have done the LTEV calculations if he had been asked. Key […]
As you demonstrate above, there is no problem with using NPV rules to induce LTEV values for Irish property – the problem is the political fudge.
Ideally, we should start by asking 1) what level of residential and commercial rents does Ireland need to descend to in order to restore competitiveness? Then 2) based on (1), what is the value we can back out for the underlying securities on the Nama loan book, using an NPV rule on a 6% yield.
(Voice from the tent): “Ah, but you see, there’s demographics…and using 1998 as a reference point…and factoring in the luck of the Irish…”
Ronan,
Absolutely delighted to see someone tackle the figures like this, thank you.
Small point regarding your assessment, I don’t think it’s prudent or neccessary to pro-rate the associated loans between land and development. Prudent, because we just don’t know; not neccessary, as I think the strong message of devalued unproductive land asset values comes across with just 36% or 50+%.
If the government want buy-in from an informed public for the LTEV argument, there topline 10% argument is not enough. They need to complete the analysis split by region, by asset class, and by productive capacity of the asset.
As if a lot are unproductive assets, we will need a lot more than a 10% increase over 10 years to cover the interest bill alone.
Hi John,
Thanks for that – agreed, my aim was to not confuse the issue by introducing different totals of €54bn and so on.
As discussed on irisheconomy.ie, the good news is that you can take out the associated loans, and the headlines and percentages stay the same, the only thing that’s different is the size of the pie.
R
adrem
,
According to DAFT (do you still work for them) the average rent on a 1 bed apartment in Dublin 1 (just as an example) is c900 per month. According to you that represents a 3% yield – implying a purchase price of 360,000. However in actual fact, again according to DAFT I can purchase a 1 bed apartment I can buy such property for c175k. That would imply a yield of 6%.
What am I missing here Ronan – your own numbers as at mid August as published on Daft seem to contradict completely what you have posted here today? I did the same check against 3 beds in D24 – again the yield using DAFT average rents and current prices is more than 6%.
Hi Adrem,
Thanks for raising this – one quick thing I should note here is that what I’m writing on this site, which is my personal site, is an economist’s thoughts on the world around him. It shouldn’t be taken to be an official daft position or anything like that.
All that said, one thing I would direct you to is the daft.ie yield series, published each quarter towards the back of each rental report. It calculates the yield by bedroom segment and region of the country, just what you’re looking for I think. You’ll find that, as of Q2 2009, the highest yield in the country is in Dublin city centre (4.6%), while West Dublin is 4.2%. The national average yield is just 3.3%, though, down from 3.4% earlier in the year because of the speed at which rents are falling.
The important thing is not to find one example that makes sense, it’s to find the average and see if that makes sense.
Henry Withinshaw
,
Ronan
I agree with you and think that you have highlighted something that is very important in the valuation debate. I have written about residential property yields a couple of times on Irisheconomy.ie but only from an anecdotal perspective. I also feel that there is a significant way to go.
However, I do wonder if you are not underestimating the current fall in property values. Your 35% reduction from peak correctly reflects asking prices, but asking prices do not reflect market value (though they may be the best we have to go on, I admit).
Although reluctant to do so, I would expect honest estate agents in Dublin would confirm that realised sales currently would suggest a 50% discount to peak – though I realise that this doesn’t reflect a country average.
Although I think a 6% yield would be optmistic, even a 4.33% long term normal expected yield would bring a similar answer to the one you are getting at €4.2bn. 6% would be considerably worse (€3.1bn).
But when we’re only talking a difference of €1.1bn, who’s counting??
Adamirer
,
Excellent work. The 47bn is never an accurate figure to begin with, I just hope some of this level of analysis seeps through to the national media.
Henry, thanks for the comment.
I rounded significantly up from the average fall in asking prices nationwide (while Dublin is indeed falling fast, Munster is playing hard to get!), which is about 25%, i.e. is it reasonable to assume the typical buyer gets somewhere in the region of a 10% discount from the asking price at the moment?
The other thing I would suggest, as you yourself note, is that Dublin-based estate agents may well be right in talking about falls of 40% or more, but I would like to hear more from country estate agents, who are discounting much less and whose clients are seeing a much larger time to sell.
@Adamirer, thanks for the comment.
Henry Withinshaw
,
Ronan,
Many thanks for this explanation. It helps a lot in my undertstanding of the national picture.
A couple of thoughts for the sake ot it! 1) I think your 10% is fair. 2) It would seem that country estate agents are not discounting enough (out of fear, and hope, I suspect). 3) My instinct in South Co. Dublin is that, on the whole, many areas are woefully over-valued still, but I expect the recived opinion of significant (stupid?)premium for better areas will soon be a thing of the past. I know it’s just one area but I would expect it to have a fair few development loans for NAMA in it. Now that would be an interesting map!!
david mc williams
,
excellent work ronan, i don’t know whether to laugh or cry! all the best david
Congrats Ronan, Excellent work. What really scares me is that it appears that no one in the Dept of Finance, NTMA etc. is listening (or has a calculator!). The anti-NAMA arguments put forward by you, David McWilliams, Brian Lucey, Constanin Gurdgiev, Dermot Desmond and many others have not been rebutted yet NAMA keeps rolling forward.
kevin denny
,
Ronan, I wouldn’t bet on getting your commission- nice try ‘though. Even a .001% penalty for wasting €10b might change some people’s behaviour.
adrem
,
Ronan I have to disagree !!! If you take your DAFT report and gross up the average rent by the yield also shown in the DAFT report you get prices way above the current sale prices of properties again shown on DAFT. In other words the prices have fallen by more than you are allowing for and thus the current yields (all based on a single source of data – DAFT rental levels and DAFT house prices) are higher than you are showing above.
@adrem,
There’s not a lot more I can do for you, as we’re both using the same data and getting different results! All I can do is restate is that looking over the entire sample of daft properties, the average yield in the country, using Census 2006 weights, is 3.3%, which is much closer to the ‘just above 3%’ I quoted than it is to your 6%.
One other comment I’d make is that both are based on asking price, so if you’re prepared to make discounts from the ask for house prices, you have to do the same for rents, although the size of the discount of course may be different.
One could argue that yields in the more important areas for the lettings market, e.g. Dublin city centre, are higher. That’s certainly true, but the lettings and sales markets throughout the country have become much more integrated over the past 5 years – i.e. you can buy or rent in an segment of the market. Therefore I think it’s reasonable to say that the Census-weighted average yield is a very pertinent measure.
adrem
,
Ronan – that’s not a reasoned response – you are supposed to be using data to rationally make an argument – the data simply doesn’t add up though. I’m not discounting anythin – I’m simply picking rents from Daft and house prices from daft dividing one by the other and you get a yield that is much closer to 6% than 3%. Equally if you gross up the rents by the 3% yield you are using you end up with prices massively over the factual current market prices. These are facts Ronan – easily verifiable.
To be fair adrem, I was being quite generous in my last response. In truth, you are using a handful of samples, perhaps no more than 5, to reach your conclusions.
On the other hand, the method employed in calculating the daft.ie yields is a series of econometric regressions, controlling for measurable attributes of the properties in question and – as is done by the ESRI/PTSB – is two-stage to exclude outliers. The regressions’ estimates are all highly statistically significant. The most telling part, though, is that the sample sizes are tens of thousands times the size of yours. For example, the 2nd quarter of 2009 comprised just over 99,000 observations across sales and lettings.
In sample sizes that large, of course you are going to be able to find at least one observation that matches what is clearly your prior belief about yields for residential property. My job, however, is not to validate anyone’s prior beliefs but to uncover as best as possible the true figures. So for every matched pair you find that has a yield of about 6%, there is some other property out there with a yield of say 2%.
adrem
,
Ronan, I’m not going to continue arguing with you on it – your numbers are wrong – fact. Not my estimation – a fact. Look at the average prices for any of the regions or house prices on Daft or on Myhome and compare that to the rentals shown on Daft divided by 0.03 and you get significantly higher figures using your 3% yield than the factual average house/apartment prices. I agree 6% is probably too high but the real number is closer to 4.5% than to 3%. And whilst in nominal terms that’s a small difference – as an economist you know that a 50% higher yield is a fundamental difference.
Agreed, as I noted a few comments ago, this is clearly going nowhere, as you have your prior beliefs and no amount of evidence is going to shift you. I am happy to send on my regression do-files, so you can see the method employed and you’re more than welcome to make any constructive comments to improve it, but you can’t just continue make wild assertions with no evidence.
adrem
,
Ah come off it Ronan – it’s nothing to do with prior beliefs – I’ve not made any wild assertions either, I’ve told you exactly what my calculation basis was – how much information do you want? The implied price (using your info and the DAFT rent) of a 1 bed in D1 is 356,800, in D2 it is 406,800 in D3 it is 340,000, in D4 it is 416,000 in D5 it is 326,800 in D6 it is 334,000 in D6W it is 328,000 in D7 it is 321,600 in D 8 it is 339,600 in D9 it is 325,200 in D10 it is 320,400 in D11 it is 331,600 in D12 it is 323,600 in D13 it is 343,600 in D14 it is 385,600 . . . . I’ll stop now – point being if you look to purchase 1 bed apartments in any of the above locations there are units available significantly below those implied prices. As you seriously trying to asset that the above are average prices in those locations? Come off it. Maybe the Daft rental data is not accurate but (again) I am not making these numbers up they come from your employer and from you, don’t attack the messenger.
One last time before I call troll:
The last Daft rental report says:
– page 7: typical rent for a 1-bed in Dublin city centre is probably about €950 (€900 in Dublin 1, €1,000 in Dublin 2)
– page 11: the yield for 1-bed in Dublin city centre is 4.7%
– so 11 times the rent (allowing for the standard month’s vacant/maintenance) = €10,450
What average price gives you a yield of 4.7% on €10,450 a year? €222,000, about half the price you’re talking about.
Now, do that for each region in the country and weight them by their populations and you get 3.3%.
End of.
adrem
,
OK.
I wasn’t trolling (and never have been) – you asked for comment and feedback and I gave it to you.
I was using the same rent levels as you. At a 3% yield on 950 per month you get a purchase price of 380k.
4.7% is significantly higher than the 3%.
Also I wasn’t allowing for vacancies/maintenance in my numbers so I was applying the 3% yield to the full rental amount
I’m sorry to be harsh on you, but one of the first things I said to you was to look at the details of the daft.ie rental yield and not just take the national average and find one example that seems to run counter to it. Look at the detail of the daft yield table, go back through past reports and see its evolution over time, look at how it differs across segments and you’ll see what you’ve done is either by accident or design pick a combination of the type (1-beds have highest yields in the country) and location (Dublin city centre has the highest yields in the country) that best portrays yields in a positive light.
Unfortunately, the vast vast majority of properties in Ireland are not 1-beds in Dublin city centre.
adrem
,
Ok ok – sheesh !!
It wasn’t by design – I just went to the top of the table and it starts with Dublin so I went with that – also the highest population density and property densisty so I reckoned it was a useful proxy – obviously not so much !
[…] showing potential flaws with the long-term economic value (I have two modest examples here and here) was zero. The estimate of long-term economic value is explained just as before: It is estimated, […]
[…] Smart Taxes Network member and leading property economist Ronan Lyons has asked if the numbers add up and has done his own calculations in relation to “long term economic value”. A summary of his conclusion is below and his excellent post can be read in its entirety here. […]
[…] just reallocates the flooding problem. The approximately €8.4bn in Irish residential projectscovered by NAMA translates into about 34,000 residential units, taking €250,000 as an average […]
[…] this is not 20-20 hindsight, this is using the information available at the time. Many people, myself included and on more than one occasion, tried to make NAMA aware of this at the […]
The Irish Economy » Blog Archive » Ronan Lyons on Long-Term Economic Value ,
[…] leading property number cruncher, Ronan Lyons, has a post essentially explaining how he would have done the LTEV calculations if he had been asked. Key […]
Graham Stull ,
Ronan,
Excellent stuff.
As you demonstrate above, there is no problem with using NPV rules to induce LTEV values for Irish property – the problem is the political fudge.
Ideally, we should start by asking 1) what level of residential and commercial rents does Ireland need to descend to in order to restore competitiveness? Then 2) based on (1), what is the value we can back out for the underlying securities on the Nama loan book, using an NPV rule on a 6% yield.
(Voice from the tent): “Ah, but you see, there’s demographics…and using 1998 as a reference point…and factoring in the luck of the Irish…”
John O'Connor ,
Ronan,
Absolutely delighted to see someone tackle the figures like this, thank you.
Small point regarding your assessment, I don’t think it’s prudent or neccessary to pro-rate the associated loans between land and development. Prudent, because we just don’t know; not neccessary, as I think the strong message of devalued unproductive land asset values comes across with just 36% or 50+%.
If the government want buy-in from an informed public for the LTEV argument, there topline 10% argument is not enough. They need to complete the analysis split by region, by asset class, and by productive capacity of the asset.
As if a lot are unproductive assets, we will need a lot more than a 10% increase over 10 years to cover the interest bill alone.
Ronan Lyons ,
Hi John,
Thanks for that – agreed, my aim was to not confuse the issue by introducing different totals of €54bn and so on.
As discussed on irisheconomy.ie, the good news is that you can take out the associated loans, and the headlines and percentages stay the same, the only thing that’s different is the size of the pie.
R
adrem ,
According to DAFT (do you still work for them) the average rent on a 1 bed apartment in Dublin 1 (just as an example) is c900 per month. According to you that represents a 3% yield – implying a purchase price of 360,000. However in actual fact, again according to DAFT I can purchase a 1 bed apartment I can buy such property for c175k. That would imply a yield of 6%.
What am I missing here Ronan – your own numbers as at mid August as published on Daft seem to contradict completely what you have posted here today? I did the same check against 3 beds in D24 – again the yield using DAFT average rents and current prices is more than 6%.
Ronan Lyons ,
Hi Adrem,
Thanks for raising this – one quick thing I should note here is that what I’m writing on this site, which is my personal site, is an economist’s thoughts on the world around him. It shouldn’t be taken to be an official daft position or anything like that.
All that said, one thing I would direct you to is the daft.ie yield series, published each quarter towards the back of each rental report. It calculates the yield by bedroom segment and region of the country, just what you’re looking for I think. You’ll find that, as of Q2 2009, the highest yield in the country is in Dublin city centre (4.6%), while West Dublin is 4.2%. The national average yield is just 3.3%, though, down from 3.4% earlier in the year because of the speed at which rents are falling.
The important thing is not to find one example that makes sense, it’s to find the average and see if that makes sense.
Henry Withinshaw ,
Ronan
I agree with you and think that you have highlighted something that is very important in the valuation debate. I have written about residential property yields a couple of times on Irisheconomy.ie but only from an anecdotal perspective. I also feel that there is a significant way to go.
However, I do wonder if you are not underestimating the current fall in property values. Your 35% reduction from peak correctly reflects asking prices, but asking prices do not reflect market value (though they may be the best we have to go on, I admit).
Although reluctant to do so, I would expect honest estate agents in Dublin would confirm that realised sales currently would suggest a 50% discount to peak – though I realise that this doesn’t reflect a country average.
Although I think a 6% yield would be optmistic, even a 4.33% long term normal expected yield would bring a similar answer to the one you are getting at €4.2bn. 6% would be considerably worse (€3.1bn).
But when we’re only talking a difference of €1.1bn, who’s counting??
Adamirer ,
Excellent work. The 47bn is never an accurate figure to begin with, I just hope some of this level of analysis seeps through to the national media.
Ronan Lyons ,
Henry, thanks for the comment.
I rounded significantly up from the average fall in asking prices nationwide (while Dublin is indeed falling fast, Munster is playing hard to get!), which is about 25%, i.e. is it reasonable to assume the typical buyer gets somewhere in the region of a 10% discount from the asking price at the moment?
The other thing I would suggest, as you yourself note, is that Dublin-based estate agents may well be right in talking about falls of 40% or more, but I would like to hear more from country estate agents, who are discounting much less and whose clients are seeing a much larger time to sell.
@Adamirer, thanks for the comment.
Henry Withinshaw ,
Ronan,
Many thanks for this explanation. It helps a lot in my undertstanding of the national picture.
A couple of thoughts for the sake ot it! 1) I think your 10% is fair. 2) It would seem that country estate agents are not discounting enough (out of fear, and hope, I suspect). 3) My instinct in South Co. Dublin is that, on the whole, many areas are woefully over-valued still, but I expect the recived opinion of significant (stupid?)premium for better areas will soon be a thing of the past. I know it’s just one area but I would expect it to have a fair few development loans for NAMA in it. Now that would be an interesting map!!
david mc williams ,
excellent work ronan, i don’t know whether to laugh or cry! all the best david
Fergus O'Rourke ,
Super stuff, Ronan
Stephen.kinsella@gma ,
Excellent article Ronan.
Damien ,
Congrats Ronan, Excellent work. What really scares me is that it appears that no one in the Dept of Finance, NTMA etc. is listening (or has a calculator!). The anti-NAMA arguments put forward by you, David McWilliams, Brian Lucey, Constanin Gurdgiev, Dermot Desmond and many others have not been rebutted yet NAMA keeps rolling forward.
kevin denny ,
Ronan, I wouldn’t bet on getting your commission- nice try ‘though. Even a .001% penalty for wasting €10b might change some people’s behaviour.
adrem ,
Ronan I have to disagree !!! If you take your DAFT report and gross up the average rent by the yield also shown in the DAFT report you get prices way above the current sale prices of properties again shown on DAFT. In other words the prices have fallen by more than you are allowing for and thus the current yields (all based on a single source of data – DAFT rental levels and DAFT house prices) are higher than you are showing above.
Ronan Lyons ,
@adrem,
There’s not a lot more I can do for you, as we’re both using the same data and getting different results! All I can do is restate is that looking over the entire sample of daft properties, the average yield in the country, using Census 2006 weights, is 3.3%, which is much closer to the ‘just above 3%’ I quoted than it is to your 6%.
One other comment I’d make is that both are based on asking price, so if you’re prepared to make discounts from the ask for house prices, you have to do the same for rents, although the size of the discount of course may be different.
One could argue that yields in the more important areas for the lettings market, e.g. Dublin city centre, are higher. That’s certainly true, but the lettings and sales markets throughout the country have become much more integrated over the past 5 years – i.e. you can buy or rent in an segment of the market. Therefore I think it’s reasonable to say that the Census-weighted average yield is a very pertinent measure.
adrem ,
Ronan – that’s not a reasoned response – you are supposed to be using data to rationally make an argument – the data simply doesn’t add up though. I’m not discounting anythin – I’m simply picking rents from Daft and house prices from daft dividing one by the other and you get a yield that is much closer to 6% than 3%. Equally if you gross up the rents by the 3% yield you are using you end up with prices massively over the factual current market prices. These are facts Ronan – easily verifiable.
Ronan Lyons ,
To be fair adrem, I was being quite generous in my last response. In truth, you are using a handful of samples, perhaps no more than 5, to reach your conclusions.
On the other hand, the method employed in calculating the daft.ie yields is a series of econometric regressions, controlling for measurable attributes of the properties in question and – as is done by the ESRI/PTSB – is two-stage to exclude outliers. The regressions’ estimates are all highly statistically significant. The most telling part, though, is that the sample sizes are tens of thousands times the size of yours. For example, the 2nd quarter of 2009 comprised just over 99,000 observations across sales and lettings.
In sample sizes that large, of course you are going to be able to find at least one observation that matches what is clearly your prior belief about yields for residential property. My job, however, is not to validate anyone’s prior beliefs but to uncover as best as possible the true figures. So for every matched pair you find that has a yield of about 6%, there is some other property out there with a yield of say 2%.
adrem ,
Ronan, I’m not going to continue arguing with you on it – your numbers are wrong – fact. Not my estimation – a fact. Look at the average prices for any of the regions or house prices on Daft or on Myhome and compare that to the rentals shown on Daft divided by 0.03 and you get significantly higher figures using your 3% yield than the factual average house/apartment prices. I agree 6% is probably too high but the real number is closer to 4.5% than to 3%. And whilst in nominal terms that’s a small difference – as an economist you know that a 50% higher yield is a fundamental difference.
Ronan Lyons ,
Agreed, as I noted a few comments ago, this is clearly going nowhere, as you have your prior beliefs and no amount of evidence is going to shift you. I am happy to send on my regression do-files, so you can see the method employed and you’re more than welcome to make any constructive comments to improve it, but you can’t just continue make wild assertions with no evidence.
adrem ,
Ah come off it Ronan – it’s nothing to do with prior beliefs – I’ve not made any wild assertions either, I’ve told you exactly what my calculation basis was – how much information do you want? The implied price (using your info and the DAFT rent) of a 1 bed in D1 is 356,800, in D2 it is 406,800 in D3 it is 340,000, in D4 it is 416,000 in D5 it is 326,800 in D6 it is 334,000 in D6W it is 328,000 in D7 it is 321,600 in D 8 it is 339,600 in D9 it is 325,200 in D10 it is 320,400 in D11 it is 331,600 in D12 it is 323,600 in D13 it is 343,600 in D14 it is 385,600 . . . . I’ll stop now – point being if you look to purchase 1 bed apartments in any of the above locations there are units available significantly below those implied prices. As you seriously trying to asset that the above are average prices in those locations? Come off it. Maybe the Daft rental data is not accurate but (again) I am not making these numbers up they come from your employer and from you, don’t attack the messenger.
Ronan Lyons ,
One last time before I call troll:
The last Daft rental report says:
– page 7: typical rent for a 1-bed in Dublin city centre is probably about €950 (€900 in Dublin 1, €1,000 in Dublin 2)
– page 11: the yield for 1-bed in Dublin city centre is 4.7%
– so 11 times the rent (allowing for the standard month’s vacant/maintenance) = €10,450
What average price gives you a yield of 4.7% on €10,450 a year? €222,000, about half the price you’re talking about.
Now, do that for each region in the country and weight them by their populations and you get 3.3%.
End of.
adrem ,
OK.
I wasn’t trolling (and never have been) – you asked for comment and feedback and I gave it to you.
I was using the same rent levels as you. At a 3% yield on 950 per month you get a purchase price of 380k.
4.7% is significantly higher than the 3%.
Also I wasn’t allowing for vacancies/maintenance in my numbers so I was applying the 3% yield to the full rental amount
Ronan Lyons ,
I’m sorry to be harsh on you, but one of the first things I said to you was to look at the details of the daft.ie rental yield and not just take the national average and find one example that seems to run counter to it. Look at the detail of the daft yield table, go back through past reports and see its evolution over time, look at how it differs across segments and you’ll see what you’ve done is either by accident or design pick a combination of the type (1-beds have highest yields in the country) and location (Dublin city centre has the highest yields in the country) that best portrays yields in a positive light.
Unfortunately, the vast vast majority of properties in Ireland are not 1-beds in Dublin city centre.
adrem ,
Ok ok – sheesh !!
It wasn’t by design – I just went to the top of the table and it starts with Dublin so I went with that – also the highest population density and property densisty so I reckoned it was a useful proxy – obviously not so much !
Baz Grant ,
NAMA in a nutshell – a short film:
http://www.youtube.com/watch?v=CE3yKoMOEQI
Another look at yields on Irish property, for the benefit of NAMA | Ronan Lyons ,
[…] showing potential flaws with the long-term economic value (I have two modest examples here and here) was zero. The estimate of long-term economic value is explained just as before: It is estimated, […]
NAMA number crunching – long term economic value – Smart Taxes Network ,
[…] Smart Taxes Network member and leading property economist Ronan Lyons has asked if the numbers add up and has done his own calculations in relation to “long term economic value”. A summary of his conclusion is below and his excellent post can be read in its entirety here. […]
NAMA – a developer bailout – Smart Taxes Network ,
[…] just reallocates the flooding problem. The approximately €8.4bn in Irish residential projectscovered by NAMA translates into about 34,000 residential units, taking €250,000 as an average […]
10% in 10 years revisited | Ronan Lyons ,
[…] this is not 20-20 hindsight, this is using the information available at the time. Many people, myself included and on more than one occasion, tried to make NAMA aware of this at the […]