Last week saw the third of the so-called “fire sale auctions” in Ireland in recent months. While there are those who are set against these types of auction, viewing them as some sort of return to the evictions which haunted the Irish countryside in the 1800s, most see them as the crystallization of what everyone knows, i.e. that property prices have fallen dramatically in Ireland over the last five years. There are those, such as myself, who believe they offer a unique insight in to real transaction prices.
In particular, on previous occasions, I’ve used the model of the Irish property market that I’ve developed for my academic research (which is related to the model that underpins the Daft.ie Report) to see what we can infer from these auctions about exactly how far Irish property prices have fallen and where the fire-sale prices are relative to current asking prices.
In this post, I’ll do the same analysis on the sixty or so residential properties sold last week and I’ll also take stock of the three auctions so far, and see if there are any trends.
Results from the third auction
This third auction, while still very successful in an international perspective, did see a number of properties not sell – a fuller report is given over on NAMA Wine Lake. Some were very close to their reserve and will probably sell when the dust settles, while it seems for others there just did not seem to be the appetite.
For those that did sell, prices ranged from less than €50,000 for apartments in Limerick city or a four-bed semi-d in Athlone, to more than €250,000 for family homes in Drumcondra and Blackrock. Of the 61 properties included in this analysis, 38 were existing investor opportunities (i.e. with tenants in place). This is extremely useful as the information on current rents gives us information on the rent-price relationship, which is one of the most important in the property market –I’ll return to this later.
First, though, I put all the properties through the housing market model, building them up component by component to get an estimate of the asking price for each property at the peak and now. This in turn gives an estimate of how much each property that sold has fallen from the peak. This ranges from 46% to 83% but one must be careful that there will always be a few “exceptional” properties (in either a good sense or a bad one) so it’s better to look at the mean and the median than either end.
According to my analysis, the typical fall from the peak for the properties sold last week is 70% (mean, 71% median). This can be broken down into Dublin and Rest-of-Country (ROC), with Dublin prices down by two thirds (67% mean, 68% median) and prices elsewhere down by a pretty astonishing 75%. This is the third auction in a row where that gap between Dublin and the rest of the country is there – and it’s worth noting that this gap is the reverse of the trend seen in asking prices, where Dublin has seen the largest falls.
The third auction in perspective
That median fall in Dublin of 68% compares with 66% in the second auction and 61% in the first fire-sale. Similarly, the 75% median fall outside Dublin is just above the 74% seen in the second auction and a few percentage points larger than the 70% falls seen in the first fire-sale. These figures – for both the mean and the median – are shown in the graph above.
Conclusions from the first two analyses showed that there was a noticeable gap between the fall in asking prices (40%-50%) and the estimated falls seen in the fire-sale auctions (65%-70%). That gap is still there – asking prices are probably 45%-55%, while fire-sale prices are 65%-75% – but what has emerged is another conclusion: prices are falling across the auctions.
A slightly different picture emerges when we look at yields, rather than price falls. I mentioned above 38 properties with rental information. On those 38, the typical yield was about 9.5% (median, 9.3% mean). For the first time in three auctions, the gross yield (annual rent as a proportion of the price) was noticeably higher outside Dublin than in Dublin. This is quite interesting, as it’s the first time in three auctions that it matches the prior belief that the “risk premium” is greater outside Dublin (where the downside to rents is greater).
The typical yields achieved over the various auctions are shown in the graph below. Unlike the graph above, there’s no obvious up or downward trend. One thing that is clear, though, is that comparing the July and September auctions, especially outside Dublin, the yield has increased. Put another way, to tempt the cash out from under mattresses, people now need to see effectively a double-digit return (pre-tax).
It’s the credit crunch… again
Two weeks ago, I wrote about Ireland as the unwanted experiment, a modern economy trying to run without any credit. As outlined then, there are serious effects on job creation when there is a lack of credit available to small businesses which could be hiring and selling their wares on international markets. I made mention then that this is just one aspect of credit starvation: the other big one is couples with jobs not being able to get a mortgage.
But the results from Friday also show that the lack of credit is having an effect even in property market fire-sales. Ireland appears to be running out of cash-buyers for properties located here. One could of course make the case that there are plenty of alternative asset classes for people to invest in. Even taking into account the remaining downside risks to Irish property, it does seem odd that gross yields of almost 10% are not enough to attract investors out of the woodwork, particular as developed economies typically hold up to three quarters of their wealth in real estate.
So, rather than some odd preference shift away from property, I think it’s much more likely that Ireland’s credit crunch is kicking in, even among the investor class.