Ronan Lyons | Personal Website
Ronan Lyons | Personal Website

An all-island property slump? Half of property listings live to see their first birthday

Today sees the launch of the latest Daft House Price Report. Its main findings make probably unsurprising reading for most, given the ongoing economic turmoil: asking prices fell a further 3% in the first three months of 2011 and by more in Dublin, where some parts of the city saw falls of 5-6%. Optimists will point to perhaps two things: firstly, that asking prices actually rose in a number of counties in Q1 2011 compared to the final three months of 2010, and secondly, that the quarterly fall of just over 3% is the second smallest one.
Pessimists could counter that rises in some counties may mark little more than relatively thin listings on the property market (“relatively thin” when it comes to Daft’s sample size still means almost 30,000 new listings in a quarter). They may also point to the commentary by Eoin Fahy, erstwhile member of the Commission on Taxation and Chief Economist with Kleinwort Benson Investments (previously a part of KBC’s asset management operation in Ireland).
Eoin’s commentary highlights three factors which he believes drove “Wave One” of house price falls: artificially high prices to begin with, large increases in unemployment and a sharp contraction in lending. He believes that these have largely run their course, in terms of driving significant price falls. However, he believes that there are factors which may bring about “Wave Two” of house price falls. He mentions repossessions and indeed strategic defaults as potential risks to house prices, especially in light of the scenarios envisaged in the Central Bank’s stress testsToday sees the launch of the latest Daft.ie House Price Report. Its main findings make probably unsurprising reading for most, given the ongoing economic turmoil: asking prices fell a further 3% in the first three months of 2011 and by more in Dublin, where some parts of the city saw falls of 5-6%. Optimists will point to perhaps two things: firstly, that asking prices actually rose in a number of counties in Q1 2011 compared to the final three months of 2010, and secondly, that the quarterly fall of just over 3% is the second smallest one since the real economic crisis began in 2008.

The latest Daft.ie Report is out today. Its findings will make largely unsurprising reading, as asking prices fell by a further 3.1% in the first three months of the year and are now 43% below the peak prices of 2007. Optimists might point to two things: firstly, that some counties actually saw asking prices increase in the first three months of the year, and secondly that the quarter-on-quarter fall was the second smallest fall since the credit crunch began in 2008.

Pessimists could counter that rises in some counties may mark little more than relatively thin listings on the property market (“relatively thin” when it comes to Daft’s sample size still means almost 30,000 new listings in a quarter). They may also point to the commentary by Eoin Fahy, erstwhile member of the Commission on Taxation and Chief Economist with Kleinwort Benson Investments (previously a part of KBC’s asset management operation in Ireland).

Eoin’s commentary highlights three factors which he believes drove “Wave One” of house price falls: artificially high prices to begin with, large increases in unemployment and a sharp contraction in lending. He believes that these have largely run their course, in terms of driving significant price falls. However, he believes that there are factors which may bring about “Wave Two” of house price falls. He mentions repossessions and indeed strategic defaults as potential risks to house prices, especially in light of the scenarios envisaged in the Central Bank’s stress tests. He believes the main factor for house prices, though, to be interest rates, which may rise as early as this week:

“New buyers will get a smaller mortgage approval for a given level of income, as the monthly mortgage payments increase.

Existing mortgage borrowers will have to finance higher monthly repayments. In many cases the extra strain could push borrowers into arrears and for some that could mean that they have to sell their homes, increasing the supply of houses on the market.

Potential buyers, even those that are not significantly directly affected by the increase in mortgage rates, will be concerned that higher interest rates will lead to further house price declines, and may defer their purchase.”

As author of the Daft Report, I am often accused by some of overstating the degree of certainty about how far house prices have fallen, given the information is asking prices. In truth, the fight is largely the other way: if sellers in Dublin have discounted their prices 50%, my contention is that it is hard to argue – as many still do – that their home is still worth something closer to 30% off the peak (even as they admit properties “somewhere else” have been very badly hit).

Also, I do think it’s worthwhile to highlight differences across regions. Asking prices in Dublin city centre are down over 50% from the peak, compared to just 30% in Limerick city. This is a significant difference and should not be ignored.

However, the Daft report has not rested on price metrics alone, as asking prices are just one source of information from ads posted. A long-standing measure of quantities – rather than prices – has been the stock and flow on the market. That is falling, but only ever so slightly. In round terms, the total stock sitting on the market on April 1 was close to 60,000, as it has been on the first of every month for almost three years.

It could be argued, though, that there are two property markets at work: new properties which come on at realistic prices, get sold, and are replaced by fresh stock, and long-standing ads with unrealistic prices, which sit on the market for at this stage years. To see whether this is happening, and indeed to see whether market conditions are improving, I started looking a year ago at the percentage of properties advertised in one period still listed for sale at a certain future date.

In a way, this gives something like the probability of a successful sale. If 50% of properties listed for sale in October are still for sale now, then half have met some fate, typically finding a buyer. The graph below tracks the percentage of properties put up for sale in a year ago (in April 2010) and six months ago (in October 2010) that are still listed for sale (and not sale agreed). It does this for Dublin and the rest of the country, and also includes a comparative statistic for Northern Ireland listings from October 2010.

Percentage of properties still for sale after number of months on the market, certain regions
Percentage of properties still for sale after number of months on the market, certain regions

I think three things are of note:

  1. Firstly, there is a large gap between Dublin (the dark brown lines) and the rest of the Republic of Ireland (red lines). After six months on the market, only about half of Dublin properties are still available, compared to two thirds elsewhere in the country.
  2. Secondly, conditions in the market do not appear to be improving. If anything, they’ve drifted back slightly. Improving conditions would be seen by the solid lines being noticeably below the dashed lines; as you’ll notice, they’re actually slightly above.
  3. Thirdly, it appears the Republic is not alone: the Northern Ireland property market is –at least based on daft.com listings – every bit as tough a market for sellers as the non-Dublin market, and perhaps slightly tougher.

The gap between Dublin and the rest of the island is clear. But it does not appear to be the case that Dublin is leading the rest of the market back to stability and a healthier level of transactions. Instead, the entire market seems stuck at a low level of transactions and falling prices. Half of properties listed for sale outside Dublin are still for sale a year later, at current market trends.

The fight over the coming months and indeed years will be whether factors such as the supply of credit and supply of jobs will be enough to outweigh in particular higher interest rates and deliver noticeable improvements in these trends.

  • Edmund Burke ,

    I understand house prices now stand at 5 times earnings. In my view they will fall to 3 times before rebounding.(Historically 3-3.5 times earnings was the median price of houses across the English speaking world) And of course earnings may have further to fall. What do you think Ronan.

    • Liam Kidney ,

      I think the asking price is a joke anyway and was one of the things that fueled the boom. Till the Actual selling price is published we are at nothing. When was the register of sale prices suppose to happen….heard rumours for years…..

      • Treasa ,

        Ronan,

        do you have the data to see if houses which were on the sales market subsequently hit the rental market and vice versa?

        I just question whether it’s safe to make the assumption that all those houses that disappear from listings, particularly in Dublin and Cork, actually sold. Anecdotally I know of a few houses which, for reason of not getting an acceptable sales price started swapping between the letting and sales market.

        • Ronan Lyons ,

          @Liam, I can assure you that if you are selling your home, your asking price is not a joke! I do agree though about the importance of closing prices. The CSO are at a well advanced stage in terms of publishing an index of house prices, but I think that will be highly aggregated. The Department of Justice and the PRA have been tasked with the public-facing database/map of closing prices. I haven’t heard how that is progressing but it was supposed to happen this year.

          @Edmund, the danger with historical comparisons is that they throw out useful financial innovations over time as well as harmful ones, as well as ignoring changes in household earning patterns (e.g. in Ireland 1.6 incomes now, versus 1.3 a generation ago). I think the yield (house price to rent ratio) is a better metric as you can look at the components such as borrowing costs, rents, risk, etc. The general consensus on the yield is that it too suggests house prices are somewhat overvalued still.

          @Treasa, that’s a point well made. We do know when they come off whether they are coming off having been marked sale agreed or not and the bulk (about three quarters) of properties that come off do so having been sale agreed before they come off. I think it’s relatively safe to say that those have sold. Of the remainder, it is unclear what the division is between properties that are withdrawn completely, switched to rentals or did actually sell but the agent never got around to marking the ad as agreed. I will put an address matching exercise between “off-coming sale ads” and “on-coming rental ads” on to the to-do list and see what we can do in-house on that.

          Thanks for the comments,

          Ronan.

          • Treasa ,

            It might be worth seeing if they subsequently appear for sale a second time after going sale agreed too – this might give an indication of the rate of fallen through sale agreeds. I’m not sure if that’s so much a problem now but there were some suggestions that it could be a serious issue in the last year if financing fell through. Unless of course you’ve catered for that?

            • ellie ,

              Hi Ronan. Just wondering if there is any sort of difference appearing between the different properties. What i mean is if there is any evidence of any particular type of property that is holding its value better eg. distance from the city centre, three bed semi vs appartment. Is there any way of dissecting the total fall in Dublin? It just seems very general.

              • john ,

                Let’s not forget, widespread European surveys showed that Irish property was 30% OVER priced to begin with so in reality we’re talking 10-15 % of what should have been the norm. I’ve no sympathy for profiteers.

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