Three months ago, to much fanfare, Ireland had its first “fire sale” auction, courtesy of Allsop and Space. It was generally regarded as a big success and there was interest straight away in when the next ones would be. The second fire-sale auction took place earlier this month, to a good bit less fanfare but with about the same high level of success as the first one. 77 of the 87 lots were sold at the auction, with a further five likely to have sold on the day given the small gap between the highest bid and the reserve. As per usual, public servant extraordinaire NAMAWineLake has a wealth of information about the auction, including links to the brochure and a full table of the reserves and prices achieved.
Much of the focus in the immediate aftermath of the first auction was either on how many people turned up or how much above the reserves the properties sold for. My own analysis highlighted what I thought were two more important statistics: the fall from the peak, and the relationship between rents and house prices. In the April auction, prices were typically 65% below the peak (and about one third below prevailing asking prices in late 2010). More importantly (to an economist anyway), the annual rental income typically formed about 9% of the purchase price paid. Either of these statistics could be used by prospective first-time buyers to inform their decisions.
I felt at the time, though – and indeed one or two people made the same point in the comments on that post – that just as one swallow does not a summer make, so one fire-sale auction can’t on its own reveal the new level of house prices that will prevail. With 75 to 100 lots at these one-day auctions, it will take perhaps ten or twelve of these auctions to have a sample of properties large enough to be more definitive about what price will shift a property, especially if we want to say something about differences across regions.
In particular, it will be interesting to see what happens to prices across successive auctions. If the price level is broadly the same across auctions, that would suggest a floor is out there and each auction is helping to reveal it. If prices fall from auction to auction, that would suggest investors’ ideas about the “fundamental value” are worsening (perhaps if rents were still falling). Conversely, if prices rise with successive auctions, that could suggest conditions – especially, one would think, in the moribund mortgage market – are improving.
After a week’s holidays, I’ve taken down my Irish property market, dusted it down and plugged in the details (such as area, house type, bedroom and bathroom number) for each of the properties and calculated a ballpark asking price for each property, both for the peak (mid-2007) and currently (mid-2011). Excluding sites, commercial properties and a few other anomalies, there were 57 residential properties for which prices could be calculated. For me, two things stick out from the analysis: the key stats look unchanged, while it seems a Dublin/rest-of-country paradox is emerging.
As you were: two thirds below the peak, 8% yields
The typical residential property in the second fire-sale sold for €120,000, which is 70% below the estimated peak price of €400,000. Perhaps more surprisingly, this is a pretty substantial €100,000 below what the likely current asking price would be if these were “normally listed” properties. For comparison, the median price for the first auction was about 67% below the estimated peak (and about 35% below current asking prices then). So, given that these are small sample sizes (about 60 properties in each), it looks like broadly the same price level prevailed across both auctions. While asking prices fell by 5% during the second quarter of 2011, it’s unclear that auction closing prices budged by much.
The other key stat that prospective first-time buyers can use from these auctions is the yield, the relationship between annual rental income and the price. As long-standing readers of this blog may be sick of hearing by this stage, this should look like an attractive savings rate: NAMA used 6% as its benchmark, compared to just 3% at the height of the boom. The first fire-sale auction had a typical yield of closer to 9%. As it happens, this second auction had more vacant possessions and so less information on rents to work with, but the median rent for the residential properties that do have tenants was 8%, very similar to the first auction.
While this may look abstract, this is a very useful piece of information for prospective first-time buyers. It means that if you are interested in a property, you can work out what the typical Allsop auction buyer would pay for it by finding out how much it costs to rent a similar property. Three examples will hopefully make this a little clearer:
- If the monthly rent is €1,000 (think of a 3-bed in West or North Dublin, or a large family home in Galway or Cork cities), an 8% yield would mean a price of €150,000 (i.e. the annual rent of €12,000 divided by 0.08).
- If monthly rent is €1,500, as it would be for four-beds in many parts of Dublin, the buyers at this auction are advising you to pay €225,000.
- Lastly, if the rent is €750, as it is for the average four-bed home outside the cities and commuter counties, an 8% yield would suggest a price of €112,500.
I have the feeling that some sellers with properties listed at the moment would not even laugh at offers of this kind, they would genuinely be offended. However, that is what both the fire-sale auctions are telling us.
Are prices in Dublin falling by more or less?
One of the “stylised facts” of the property market bust so far is that Dublin has fallen by more than the rest of the country, from the 2007 peaks. In June 2011, asking prices in Dublin were just over 50% below their 2007 peak, on average. At the same time, prices in Munster and Connacht were about 40% below their peak. Ever the two-handed economist, there are two ways of reading this.
The first is that this is not at all surprising; Dublin prices rose by more and thus have more to fall. Attractive though this is, I’m not entirely convinced that this “gravity logic” – what goes up must come down – captures the full dynamic of a market, particularly given that markets are about supply and demand and supply has been extended hugely outside Dublin through boom-time over-construction. The second interpretation is current asking prices reflect “market thickness”, not what is actually happening closing prices – indeed prices could fall outside Dublin by more because over-construction was relatively light in Dublin.
This line of reasoning is as follows: the only reason that Dublin asking prices have fallen by more is because sellers in Dublin are being more realistic (relative to the true selling price), and the reason they are being more realistic is because sellers there have better information as to what kind of price will actually find a buyer than a seller in a remote rural region. Thus falls in asking prices reflect to some extent the sheer size of the market.
For the “market thickness” interpretation to hold, the gap between the auction prices and what I’ve estimated as the current asking prices would need to be larger outside Dublin than in Dublin. Looking at the results from the first two auctions, this is exactly the picture that is emerging. Current asking prices for the Dublin properties at auction are about 50% below the peak, compared to 42% for the rest-of-country (ROC): by asking prices, Dublin looks to have been harder hit. But Dublin prices achieved in the auction are between 60% and 65% below the peak, compared to 70% for ROC: by auction prices, Dublin looks to have escaped the worst of the falls. An overview of these figures are shown in the graph below, where – due to small samples – I’ve included both median and mean figures.
Put another way, if auction prices tell us something about the true price level in the wider market, Dublin sellers typically get about a quarter less than what they ask for, while sellers elsewhere typically face a discount from their asking price of almost a half. It certainly seems the case that “market thickness” – i.e. information – matters.
This is perhaps the most compelling argument I can make right now for the establishment of the house price database that the both this government and the last government have promised. If buyers and sellers could access information on transactions in real-time, this would minimise the dead-weight loss that we face in Ireland with a moribund property market. (Perhaps I should write in this case dead-wait loss, as the market is currently in a state of “sit and see what happens”.) If not, we’ll just have to keep on using asking prices and fire-sale auctions of a few dozen properties to understand what is happening house prices!