Ronan Lyons | Personal Website
Ronan Lyons | Personal Website

Is Ireland running out of cash buyers? Insights from another property fire-sale

  • kennyk ,

    Interesting. Maybe investors are waiting to see what NAMA does. Also, what’s going to happen regarding repossessions? Doesn’t help that the price of apartments is plunging.

    • Dreaded_Estate ,

      Interesting analysis again Ronan.

      Could the latest extremely large prices falls, in particular for Dublin apartments, be as a result of the achieved yield indications from the 3 latest auctions?

      The latest Daft report has Dublin yields ranging from just 4% to about 6.5% but this is still well below the auction yields of over 9%.

      Rents have been static over the last 12 months but with the likelihood of rent allowance reform in the December budget we could see further pressure on rents over the next few months.

      This would suggest non auction prices still have significantly further to fall to get close the yields achieved at auction.

      I did a more basic analysis of the Auction results here

      http://www.irishpropertywatch.com/viewPost.php?Post_ID=178

      https://docs.google.com/spreadsheet/ccc?key=0AutgOtkznKxIdHVHaTdVWWpqSGNmS1FURE85eWZfbXc&hl=en_US#gid=0

      I have tried to compare the auction sales price with the asking price of the exact same property or a similar one from close to the peak.
      Results are similar to your own analysis showing that prices are down about 67% from peak.

      • Ronan Lyons take on the latest property fire-sale | Machholz's Blog ,

        • Jagdip Singh ,

          Hi Ronan,

          Very interesting analysis of prices.

          I see you are placing some store in yields which is understandable but I wonder of yields at present are a bit of a distraction. With Upward Only Rent Review legislation due for publication shortly which will lead to a decline in commercial rents and with the sign-posting of cuts to rent assistance payments which can only put pressure on private rents, I wonder if yields on auction firesale prices of 9-10% are a reliable guide?

          • Ronan Lyons ,

            Hi Jagdip, thanks for the comment.
            In my own opinion, I think residential yields – which are the only ones I’m looking at here and during previous auctions – are a separate market (but not completely obviously) to commercial yields, for the regulatory reasons you point out. On upward-only rent reviews are very different to new leases. I would pay next to no attention myself to yields on old leases and almost all my attention – from a commercial property perspective – on what yields on new leases are indicating.

            In relation to rent allowance, I think the issue there is pertinent for 1-2 beds in particular. It is in those segment, if anywhere, where the price floor is binding. Nonetheless, I remain to be convinced that the bulk of landlords advertising on daft.ie, who will not even entertain rent allowance applicants, are going to change their mind en masse when rent allowance goes 5% above market rents for their properties. Still, this property market has many surprises up its sleeve the last few years, I’m sure there are a few more.

            • Roger ,

              Interesting analysis Ronan. A potential problem with your comparisons with prices at the peak of the market is that it is not clear that they are like-for-like.

              The catalogue for the auction shows that some of the houses were investment properties with tenants at impossibly low rents. For example, some were big houses divided into flats where some flats had annual rents of 8-9K, whereas others had annual rents of 1-2K. The latter suggests that there are sitting long-term tenants on very low rents who would be impossible to remove, and probably cost more in taxes and maintenance than they bring in in rent. These were the properties with the really low prices and the really high yields.

              More generally, there is a tendency to sell “problem” property in auctions, in the hope that some naive buyer will purchase it in the heat of the moment without checking it out properly. I think everyone saw the post from the guy on askaboutmoney who bought the property with the title problem in the first auction, and was astonished to discover he had no come back. This suggests that the average property sold at auction is much more likely to have title, planning, sitting tenant, structural, or other problems, than a house sold by the normal route. It’s just not clear to me that the prices of these problem houses can be compared to the prices of other, non-problem properties.

              • Yields or Bust ,

                @Ronan

                Perhaps the penny is finally beginning to drop. I notice that your commentary on rental yields in relation to residential properties is becoming the real guide to where property prices are likely headed.

                I don’t want to come across smug or part of the I told you so brigade but I’ve been blogging this message it seems ad infinium for the past number of years and it seems like the message is now getting through.

                I say it again The only reliable long run metric to value any property is to base the price of its long run average net rental yield. The long long run average net rental yield in the RoI since records began is about 6.98% ~ 7%. This equates to about 14.3x times current net rentals as a guide to pricing.

                At the peak of the boom in large D4/D6 dwellings the multiple got to 100x rentals. Crazy or what?

                Given that the property market is like any other risky asset market in that it exhibits all the known characteristics of mean reversion over time the market net yield will get to 7% – that’s a given – on that basis using the Daft.ie top of the market rental yields the minumm peak to trough falls will be 67% for the market as a whole.

                As follows:

                Peak average market yields per Daft.ie = 3.1%

                Known falls in rents to date from peak to Q2 Pper Daft.ie = 26.4%

                Peak returns now (3.1 * 0.736) = 2.28%

                At long term capitialisation rate of 7% = 2.28/.07 = 32.5% implying a PTT fall of 67.4%

                As indicated this is the MINIMUM PTT fall that we are likely to see. Anyone (including the Central Banks PCAR numbers) will be proven to be wrong over time. I don’t have a crystal ball to make this prediction its simply a case of reading the history and understanding the long term dynamics of the market.

                • Liam Clancy ,

                  Roana, you are right the rental yield on newly purchased property is fantastic now. For a Euro 100,000 investment you get 8,500 per year on rent. Compare that to a gross 2,000 per year on deposit before DIRT tax. Its never been a better time particularly as the rental market is proving strong in the absence of sales. SO WHAT WRONG? I agree with you that the Banks are starving potential purchasers of credit. The buy-to-let market is being particularly badly hit. For example its almost impossible to get a loan to buy a one bedroom apartment in central Dublin – even though these rent really well. So property will continue to languish until the government force the banks to lend out the money they have been give by US, the taxpayers.

                  • Property prices rising?! Thoughts on the latest firesale auction | Ronan Lyons ,

                    […] feature, with at least six auctions held by Allsop/Space in Dublin in that period. Last Autumn, I analysed the results of the first three auctions and concluded that, comparing the September auction to the April one, the price level had […]

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