Ronan Lyons | Personal Website
Ronan Lyons | Personal Website

Property Market

Property in 2017 – the year ahead

2016 saw a number of important policy shifts in relation to property in Ireland, particularly in the final few months of the year. The first was creation of a Cabinet-level Minister for Housing, a sign that – with the change of government – the severe shortage of housing was finally being taken seriously by those in power.

The second substantive change was the long announcement, from about mid-summer until the Budget, of “help” for first-time buyers of newly built homes in the form of a tax rebate. This kicks off in earnest with the new year and is likely to combine with the third change. This was the revision of the Central Bank’s mortgage rules, which came through in November. These revisions mean first-time buyers no longer require a deposit larger than 10%, even if they borrow more than €220,000.

Combined, these two measures create something of a two-tier market. Take two otherwise identical families, on the same household income and with two young children. Their only difference is that one rents the two-bedroom apartment they live in currently, while the other owns it.

Both families are looking to buy a newly built family home in the Greater Dublin Area, at a cost of €400,000. The family that own their apartment will need to produce a deposit of €80,000 (20%), while the family that rent their apartment will – once the tax rebate is factored in – need a deposit of just €20,000 or 5%.

In terms of how this will affect the market, both the rebate and the change to Central Bank rules will have the effect of further stimulating demand and thus pushing up prices. In a way, they are complementary measures. The tax rebate will have the biggest effect on cheaper new homes (those costing between €200,000 and €400,000), while the rule change will have a bigger effect on more expensive homes, including second-hand ones.

Either way, the expectation for the year coming is for a return to house price inflation in Dublin after something of a two-year pause, with average prices in the capital increasing by just 4% between early 2015 and late 2016.

Increases of at least 5% and probably closer to 10% will also be expected in the rest of the country, as strong demand interacts with a lack of supply. The country needs at least 40,000 new homes a year – and probably closer to 50,000 once obsolescence and immigration are factored in. But the current hope is to get construction of 25,000 new homes by 2021.

There is an excessive focus on the “starter home”, however. In fact, when you look at Ireland’s demographic structure, there are close to enough family homes in the country to cater for our families. What Ireland lacks – more than any other high-income country – is apartments.

This shortfall is unlikely to be addressed in the coming year, however, as the cost of building apartments is prohibitive, compared to average incomes. The break-even monthly rent for a two-bed apartment – even with free land – is roughly €1,600 but in most parts of the country, a two-bed rents for less than half this.

So, while there will be a fuss about the vacant site registers (and in time the vacant site levy), until the hard costs of construction have been dealt with, expect little improvement in the chronic lack of accommodation for one- and two-person households. Government Ministers lodging complaints against developments in one of the small number of areas where apartments are viable certainly doesn’t help.

One area that has recovered somewhat in recent years and is likely to continue to strengthen in 2017 is purpose-built student accommodation. Ireland is in the middle of a long higher-education boom. This appears to have been missed by the Higher Education Authority: a 2015 report of theirs predicted student numbers to rise from 168,000 to 193,000 in the decade to 2024. Instead, there are likely to be 193,000 students as early as this September, seven years ahead of schedule!

In that context, all new purpose-built student accommodation is welcome, even if it will only really cater for better-off students. The reason this is the case is the same problem that bedevils residential construction in Ireland currently: how expensive it is to build. Looking at the pipeline of student accommodation, it is likely that this will be only just enough to meet new demand and will do little to take existing students out of the general private rented sector.

So 2017 is likely to be another year of very strong demand for all types of residential property: sales, rental, new, second-hand, urban, rural, houses, apartments, student living and assisted living. It is also likely to be yet another year of weak supply in all these segments.

Solving this would mean dramatically reducing the cost of building a home – by something like 35%. Even if the causes of this cost gap are identified, it is likely to take a year to bring costs down and then a further two years before these lower costs translate into anything like the level of construction the country needs.

So don’t be surprised if there’s a similar-sounding piece this time next year!

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This piece originally appeared in the Sunday Independent on January 8th, 2017.

Supply, supply, supply: the new housing mantra

Below is my commentary to the latest Daft.ie Sales Report, which reviews the market in 2016. Its overall point is that Ireland needs roughly three times as many new homes to be built per year as is currently the case.

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Nationally, the average list price rose by 8% in 2016, very similar to the 8.5% seen in 2015. Compared with static prices in 2013 – although this masked huge regional differences – and an increase of almost 15% in 2014, perhaps this, then, is the new normal. The graph below shows the number of markets (out of a total of 54) that fall into one of four categories: falling prices (in year-on-year terms), rising slightly (0-5%), strongly (5-10%) or unsustainably (above 10%). As you can see, the most common change has gone from falling (the blue line; pre-2014) to 10% increases (red line; 2014 and 2015) to 5-10% increases in the last couple of quarters. The green line (0-5% increases) only briefly emerged as “normal” before fading away in recent quarters.

House price changes, by market, quarter and inflation bracket
House price changes, by market, quarter and inflation bracket

Normal does not mean healthy, however. We know that in a healthy housing system, any extra demand for more housing is offset by more supply – in other words, the real price of housing should be stable, once general inflation is taken account of. In Ireland, general inflation has effectively been zero not just over the last 12 months but indeed over the last decade.

So Ireland is currently trapped in a situation where housing prices are increasing far faster than prices in the rest of the economy. This is not sustainable but the latest indications are that this high rate of inflation is embedded in the market, due to strong demand and weak supply.

We know from the initial Census results that the country added 170,000 extra people between 2011 and 2016. Given the likely composition of new households – between 2 and 2.5 people per household on average – this means that the country added almost 75,000 new households in those five years.

We know from the same source, the Census, that there were just 17,000 new homes added to the stock of dwellings in the last five years, once holiday homes are excluded. In other words, for every ten new families formed, just two new dwellings were built, for the entire period from 2011 to 2016. (Completions numbers were much higher than this, but this includes properties built during the bubble and only connected to the electricity grid more recently. It is also a measure of “gross” construction and doesn’t account for buildings going obsolete.)

Bad as that may seem, the picture is worse again. Firstly, the period 2011-2016 was largely one of net emigration, with 125,000 people leaving between 2011 and 2015. There is a clear move toward net immigration, though, emigration falling from 90,000 to 75,000 since 2013 while immigration has risen from slightly more than 50,000 in 2012 to 80,000 this year.

Migration is driven by those in their 20s and 30s, in other words the very groups forming households and starting families. Based on the 2011 Census, we know that every additional 10,000 migrants require on average 4,000 dwellings, so even if net migration remains relatively low – at say 20,000 a year over the next few years – that will add 8,000 to the number of new homes required annually.

This is in addition to the core demand resulting from “natural increase”, in other words a surplus of families being formed over families dying. A fast way of checking the size of this natural increase is to compare the size of the cohorts of women aged 30 and 80. There are roughly 35,000 women aged 30 in Ireland currently, which gives a good baseline of household formation – ultimately, the vast majority of these women are likely to be part of one household each. There are just 10,000 women aged 80. Thus, there is a natural increase in number of households each year of at least 20,000 and closer to 25,000.

On top of this, demographics are changing – not least, people are living longer. Coupled with other factors, including a greater fraction of people who do not have any children, separation and divorce, Ireland’s average household size has fallen from more than 4 people in 1971 to roughly 2.7 people today. However, it is still the highest in Europe, where the average is just 2.3.

This may sound like a small difference but it is hugely important for how many new homes are needed per year. For example, if Ireland’s population did not increase but the average household size fell from 2.7 to 2.3, an additional 300,000 dwellings would be needed. Realistically, that convergence will take time, but it is likely that declining household size will add at least 10,000, if not 15,000, to the number of new homes needed each year.

The last factor when figuring out how many new homes are needed each year is one that is most often forgotten: obsolescence. The Department of Housing and CSO estimate that roughly 0.8% of the housing stock goes obsolete each year: in other words, the typical dwelling lasts about 125 years. This means that, every year, about 16,000 dwellings fall out of use.

That figure seems somewhat high and, while 125 years may be an accurate guide for rural cottages, urban properties typically remain in use due to renovations. But even a depreciation rate of 0.5% a year would mean 10,000 dwellings are needed annually just to stand still.

Adding all these up, there are roughly 10,000 dwellings needed each year to offset obsolescence, a further 10,000-15,000 needed to accommodate Ireland’s smaller households, between 20,000 and 25,000 on top of that to house the natural increase – and to top it all off, likely a further 8,000 or so due to net migration.

In total, Ireland needs at least 40,000 new dwellings a year and probably closer to 50,000. These will be concentrated in and near the urban centres and will be disproportionately homes for one- and two-person households, such as apartments, downsizer homes and student accommodation. As the latest figures show, without this kind of supply, we will all have to spend more and more of our income just to have a home.

When does a housing bubble start?

Yesterday, former Minister for Finance Charlie McCreevy appeared before the Oireachtas banking enquiry. His refusal to answer whether or not he believed Ireland suffered a property bubble that burst in 2007 was not only great TV, it also brings up some important issues. For example, the Irish Independent reports:

The conflict arose when Mr Doherty asked the former minister if he believed there had been a property bubble in the previous 15 years before the financial crisis. Mr McCreevy insisted he would only answer for his time in office and there had been no property bubble during that time… [after legal advice] Mr McCreevy said from 2003 to 2007 house prices grew at an extraordinary rate. He supposed that was a bubble. But he said: “I don’t believe the policies I pursued helped to create that bubble.”

The clear implication is that Mr McCreevy believes that, if there was any housing bubble at all, its roots do not lie in decisions made in the period 1997-2004, and that in reality there was no bubble at all. Given the title of my doctorate at Oxford was called “The Economics of Ireland’s Housing Market Bubble”, you might not be surprised to learn that I disagree.

First, I think it is important to note that there are two ways of diagnosing bubbles. They can be thought of as statistical bubbles and economic bubbles. A statistical bubble is one where the growth rate in the price of an asset, such as housing, grows at a rate that is unsustainable for any reasonable period of time. Between 1995 and 2007, house prices in Dublin increased by 300% in real terms (i.e. stripping out inflation), or 12.2% a year. Between 1997 and 2004, McCreevy’s term in office, the increase was 136%, or 13.1% a year. (Nationwide figures are comparable, although slightly lower for the period as a whole, although not necessarily in every year.) Thus, by any statisticians metric, it was a bubble – put another way, if 12% growth had continued for 25 years, a house costing €100,000 in 1995 would have cost €1.7m by 2020.

Economists like to get at causes, though, and a 10% increase due to – for example – a lack of supply has very different implications for what policymakers should do than a 10% increase due solely to first-time buyers needing a smaller deposit and thus being lent more. To economists, a bubble in asset prices is not just any old increase in prices, it’s an increase in prices due to excess capital/money. In the housing market, this means too much mortgage credit. Of course, to sustain people borrowing and lending too much, you need expectations. So the two ingredients for an economic bubble are over-optimistic expectations and excessive credit.

The graph below is, in effect, the one-chart summary of one of my D.Phil. chapters: what drove real house prices in Ireland during different market cycles (measured in changes per annum). Falling income (measure here relative to supply), pushed down house prices in the 1980s, together with higher real interest rates (a term that includes house price expectations). This reversed somewhat during the period 1987-1995, which income, as well as demographics (fewer people per household) pushing up prices by nearly 5% a year. Note, however, that credit conditions – measured by the ratio of mortgage credit to deposits – were not pushing up house prices as this time.

Irish annual house price growth, by driving factor, 1975-2012

The period 1995-2001 saw very strong house price growth, driven by a combination of tailwinds, including incomes growing proportionately faster than housing supply. By the time these supply constraints were removed – through the follow-up to the Bacon reports and other measures – borrowers and lenders now expected rapid house price growth. These unrealistic expectations were facilitated by rapidly easing credit conditions. Crucially, almost all house price growth from 2001 to 2007 was driven by a relaxing of credit conditions.

What this means for Mr McCreevy is that it is simply not credible for him say that there was no housing bubble on his watch. Bubbles, driven by asset factors in particular expectations and credit, grow out of booms, when demand outstrips supply. The 1995-2001 boom created the 2001-2007 bubble. A Minister for Finance in 2004 could have tried to burst the bubble, but not prevent it. To do that, the Central Bank mortgage rules would have had to have come in not in the mid-2010s but in the late 1990s.

A post-script. Mr McCreevy has come to be known as a man who strongly believes in pro-cyclical fiscal policy. As he clarified yesterday, as Minister, he believed “When you have it, you spend it.” Exhibit B below is a graph I show my first-year Economics students. It is the average all-in tax rate paid by a household on an average income, by country and year from 2000 to 2007 (source: OECD). At a time when the Irish economy was growing more rapidly  than ever before, the state took a declining share of these higher incomes. I think a strong case can be made that much of the austerity undertaken by Ireland in the period since 2007 would not have been necessary if tax rates had been in line with other developed countries and that Ireland sorely missed a Minister for Finance able to spot that Irish fiscal policy was increasingly unsustainable and take the steps necessary to correct the path.

Average all-in tax rates, by country and year

 

Expectations, credit and house prices

Happy new year to all readers – after an-almost two-year hiatus (or at least severely restricted service), I hope to return to regular blogging this year and have revamped the site to reflect how times have changed since 2008, when “Version 1” launched.

Of course new year means new quarter and new quarter means house price reports… The latest Daft.ie House Price report is out this morning. The PDF is available here. For me, the key takeaway is as follows: house prices fell in the final quarter of 2014 and it seems very unlikely to have been statistical noise or a seasonal effect.

35 areas are analysed in each report. For each of the first three quarters of the year, an average of 32 showed quarterly gains in asking prices. For the final quarter, this flipped, with 30 of 35 regions showing a fall. For Dublin, this was the first quarterly fall since mid-2012. (Given the size of increases earlier in the year, a one-quarter fall still leaves the year-on-year change large and positive: 20% in Dublin and 8% elsewhere.) Broadly speaking, a mix-adjusted analysis of Price Register transactions shows the same. While it is only one quarter, it seems more than just a statistical blip.

For me, the check-list of what matters for house prices contains five items: [1] household incomes, [2] demographics and [3] housing supply (“the fundamentals”); and [4] credit and [5] expectations, these last two being the “asset factors” that can create and destroy housing bubbles. None of the fundamentals changed dramatically in the final three months of the year (the only thing you could argue was a slightly higher volume of listings in Dublin), so the change after September must be due to asset factors.

The Central Bank proposed in October to cap residential mortgages as early as January 2015, although this could not affect prices directly in 2014. So the last remaining candidate is expectations.* The quarterly Daft.ie report includes findings from a survey of housing market sentiment. This survey indicates that, yes, those active in the housing market did revise downward their expectations about future house price growth, particularly in Dublin. Whereas those surveyed in September expected a 12% increase in Dublin house prices over the next 12 months, this had fallen to less than 5% by December. I expect that the Central Bank would be happy if it were the case that their proposals strengthened the link in people’s heads between fundamentals (in particular people’s incomes) and house prices.

As for my opinions on the Central Bank guidelines themselves, I submitted a response to the Central Bank’s Consultation Paper, which is available online here. The TL;DR version is “max LTV good, max LTI bad”. I made similar points at an Oireachtas hearing on this and related topics in late November.

* Some have argued that the end of Capital Gains Tax relief was what drove trends in the final months of 2014. The theoretical reasoning behind this is unclear – it is not obvious that this would affect supply more than demand – while practically speaking, it is also not clear how this would have managed to infiltrate the vast bulk of the market which is not of interest to investors. When asked what they thought was driving house prices, those active in the housing market rarely mentioned tax factors, instead picking credit and supply as the main factors.

Rent allowance and the curse of good intentions

Earlier this week, the Irish Times ran a story entitled “Daft.ie to continue use of ‘rent allowance filter’ on searches“. The thrust of the story was that the Department of Social Protection (DSP) had asked Daft.ie to remove a function that allows landlords to refuse to let to people on rent allowance and that Daft.ie said no. With the local and European elections just around the corner, unsurprisingly politicians jumped on board. Labour TD Aodhan Ó Ríordáin said that he was disappointed over this decision and would like Daft.ie to come before the Social Protection Committee – of which he is a member – to explain themselves. Perhaps summing up the mood for some, a spokesperson for Focus Ireland said: “Can you imagine the uproar if landlords were allowed to say, ‘Travellers or Muslims not accepted’?”

One of life’s big lessons, in my opinion, is that nine times out of ten, if someone else is acting in a way that seems odd to you, you probably don’t know the full story. And so it proves with this. As most readers will know, Daft.ie employ me to undertake the analysis for the quarterly Daft.ie Reports and, by coincidence, the latest Rental Report was out on Monday. So, the day the story broke, I was in Daft HQ and was able to find out the real story. For me, it is a salutary lesson on the curse of good intentions.

Actually, I had been aware that Daft.ie was working with the DSP. In early April, the unit responsible for Rent Allowance got in touch with me originally about this and I passed them on to Daft.ie. Over the following few weeks, Daft and the DSP worked through a plan and in late April, the filter was removed on a trial basis. The trial was supposed to last a week – but collapsed after just two days due to overwhelming user feedback. The users who complained were – wait for it – those in receipt of Rent Allowance. They were joined by one of the country’s largest charities, who got in touch with Daft.ie, asking them to reinstate the filter.

To see why, put yourself in the shoes of someone on Rent Allowance. With the filter, you go to Daft, tick the box that says “Are you looking for places that accept Rent Allowance?” and (as of this morning) are given about 700 results for Dublin city. If you follow up on any of these ads, there is no question of being turned away because you are on Rent Allowance. If that box is taken away, you would be given all 1,800 rental properties in Dublin. This sounds like good news, but the true cost of the missing box is revealed when you start following up on these ads. Roughly speaking (based on today’s numbers), you have look three times as hard to find a property that will even consider you. And time has a cost, whether you’re on Rent Allowance or not.

The removal of the filter – while no doubt well-intentioned by all concerned – actually made matters worse for the very people everyone is trying to help. Much as with rent caps, which I discussed earlier in the week, hiding what you don’t want to see will not address the underlying causes. So, why are landlords so keen to discriminate against Rent Allowance recipients?

Note that in Dublin, where rents are rising at almost 15% year on year, roughly two thirds of landlords currently will not consider someone on Rent Allowance. In contrast, if you were to search in Donegal, where rents are actually still in decline, almost all landlords would accept someone on Rent Allowance (190 out of 230, based on this morning’s numbers). While this story started out with a technical issue, namely a button on a website, the underlying issue is economic and inextricably linked with Monday’s Daft Report and indeed the broader housing crisis: a lack of supply. The tighter supply is, the more picky landlords can be. For example, I know of houses in Dublin currently where landlords are able to say “no, I don’t want three 20-something professionals renting here, I want a family”. No landlord in Dublin would have been that choosy in 2009, when rents were collapsing.

We could of course simply make it illegal for landlords to discriminate on the basis of Rent Allowance, being a 20-something professional or any other criteria we don’t like. But again, that doesn’t address the underlying issue and merely pushes the problem out of view. If those of us who do not have to depend on Rent Allowance want to help those who do, hiding the problem will not make it go away. To assuage our “middle class guilt”, for want of a better term, we need to look at the underlying issue of a lack of supply. And for that, as I argued on Monday, we need to look in particular at how the government controls planning and land use. Hopefully Deputy Ó Ríordáin will be to the forefront in calling for land use and planning reform – I’m more than happy to share my thoughts with him.

House prices: bubbles versus booms

The end of one quarter and the start of another sees the usual slew of economic reports and the start of Q4 is no exception. Today sees the launch of the Q3 Daft.ie Report. In line with other reports in the last week or so, and indeed with the last few Daft.ie Reports, there is evidence of strong price rises in certain Dublin segments. What is new this quarter is the clarity of the divide between Dublin and elsewhere: all six Dublin regions analysed show year-on-year gains in asking prices (from 1.4% in North County Dublin to 12.7% in South County Dublin), while every other region analysed (29 in total) continues to show year-on-year falls (from 3.1% in Galway city to 19.5% in Laois).

The substantial increases in South Dublin over the last 12 months have led to talk of “yet another bubble” emerging, with internet forums awash with sentiment such as “Not again!” and “Will we never learn?”. To me, this is largely misplaced, mistaking a house price boom for a house price bubble. Let me explain.

Firstly, I should state that, unlike “recession” which is taken to mean two consecutive quarters of negative growth, there is no agreement among economists on what exactly constitutes a bubble, in house prices or in other assets, but the general rule is that prices have to detach from “fundamentals”. For example, the Congressional Budget Office defines an asset bubble as an economic development where the price of an asset class “rises to a level that appears to be unsustainable and well above the assets’ value as determined by economic fundamentals”. Charles Kindleberger wrote the book on bubbles and his take on it is that almost always credit is at the heart of bubbles: it’s hard for prices to detach from fundamentals if people only have their current income to squander. If you give them access to their future income also, through credit, that’s when prices can really detach.

In that vein, I think it would be useful for commentators to distinguish between price bubbles and price booms, even if that distinction may be less clear in real life than in theory. Stop any friendly economist and they will tell you that the price is just the outcome of the interaction between supply and demand. If supply falls, or if demand rises, this will push prices up. We are familiar with house price booms in Ireland: between 1995 and 2001, significant growth in house prices – even adjusting for inflation – was the result of a number of factors (fundamentals). These include demographics (how many people per household on average), household income and the supply of housing.

House price growth between 2001 and 2007 was, in contrast, a bubble, driven by banks over-extending themselves (lending relative to deposits) and over-extending borrowers (higher loan-to-value). Every increase in incomes that happened in that period was offset by an increase in the supply of housing. House prices rose because banks went from lending out 80% of their deposits to lending 180% (by borrowing themselves from abroad).

Somewhere in the middle of this split between boom and bubble is what’s known as “user cost”, basically how interest rates compare to people’s expectations about house prices. Expectations are clearly central to bubbles as no-one will pay €400,000 for a 1-bed apartment unless they expect it will be worth at least as much in the future – so we can say that expectations are a necessary precondition. However, while I may expect that this apartment will be worth at least €400,000 in ten years, unless I can turn my desires into effective demand, that’s not enough. And that’s where credit comes in. So, when we are talking about prices being a multiple of average incomes, expectations are necessary but not sufficient to bring about a bubble.

What do we see in the Irish market at the moment? We certainly do not see easy credit: fewer than 2,000 mortgages are given out to first-time buyers each quarter at the moment, one fifth of the number given out in 2005 and 2006. But whereas now is too few, then was almost certainly too many. What is the right level? Well, there are about 7,500 births to first-time mothers per quarter, which gives us an idea of how many households are being formed. Allowing for households that never buy (and for the moment excluding households that never have kids), this means a healthy market would see perhaps 6,000 mortgages being issued each quarter to first-time buyers. What we have is – still – a housing market starved of fresh credit, not stuffed with it.

This suggests that what we are witnessing is being driven more by fundamentals than by credit. For simplicity, if we think of house prices as demand divided by supply, it is clear that rising prices may be nothing to do with too much demand and may instead be driven by too little supply. This helps explain why it is Dublin, and not the rest of the country, that is seeing rising prices at the moment: Dublin has no oversupply from the bubble. This is being compounded by negative equity preventing trader-upper type moves, creating a crunch in a market where there is at best moderate demand.

The limitation to a neat split between house price booms driven by fundamentals and house price bubbles driven by credit is market momentum. Rising prices now may generate rising prices in the future because rising prices now affect people’s expectations. But the point made above still remains: unless those expectations can tap in to credit, they will not translate into a rise in demand.

Does this mean there is nothing to worry about? Absolutely not! The graph above shows the ratio of prices for a four-bed semi-d in South County Dublin to one in Mayo, and the same ratio for a one-bed apartment. The “Dublin differential”, which was steady from 2006 to 2009 and falling until early 2012 has increased dramatically since then. For a one-bedroom apartment, it has doubled (from 120% to 240%).

Rising prices may be good for those who already own their homes but for those looking to buy, affordability of property in the capital is paramount. When prices rise because of a bubble, you can prick the bubble by restricting the supply of credit, but this is invariably messy (UK: take note!). When prices rise because of a boom, what is needed to moderate prices to simply an increase in supply. What we need to understand now is why there is so little construction happening in Dublin, when the city clearly needs it.

Thoughts on the above welcome in the comments below.

How much is that house worth? A note on property tax calculators

Over the weekend, Revenue Commissioners launched their guidance for the Local Property Tax, in the form of an interactive map. With just a couple of pieces of information (location, property type and whether it was built before or after 2000), it takes you to a map of the country where when you click on an area, it gives a guidance for the likely band for properties of that type in that area. So for example, detached homes in Dublin 4 are estimated to be in the “greater than €1m” band.

The calculator has generated much discussion over the last few days, with many people claiming that for their properties, the valuations are “way off”. Revenue Commissioners economist, Keith Walsh, was on a range of media outlets on Monday trying to explain that this is the starting point for a valuation, and not the definitive say-so on what your home is now worth.

Some people have phrased the question in terms of “how did Revenue Commissioners get it so wrong?”. To me, this is looking at it the wrong way. As soon as the Government had decided that it was not going to ask people to return in Year 1 the information needed by Revenue Commissioners to audit the system, Revenue were stuck. While there is a register of who owns what plot of land, there is no such register of what is on the land. There is a system – Geodirectory – that can tell Revenue what type of structure is at each address (apartment, semi-d, etc). But it can’t say anything about the size of the property in any detail.

And that is why the Revenue system is only a start point. No-one, certainly not Revenue, are saying that a two-up two-down terraced in Stoneybatter is worth the same as a five-bed Victorian house with a garden around the corner on North Circular Road. And if of course the owner of the latter tries to pretend that they are in the same band as the former, ultimately that will catch up with them.

But what impact does bedroom number and bathroom number have on the price? Working with the guys at Daft, I’ve been trying to help people out on that one. The result is the Daft.ie Local Property Tax calculator. You choose where you live, the number of bedrooms and bathrooms, whether you have a garden, and the property’s type, and it produces an estimate not just of your tax bill but also of the value of the property itself, as of Q1 2013.

Daft.ie Local Property Tax calcualtor

How does it work?

The valuation you are given uses all information from the daft.ie archives since the start of 2011 – over 150,000 properties in total. For each property, information on location, size and type is known, meaning that the effect of these can be estimated. It is also possible – as is done every Daft Report – to capture how prices change over time, so that we can estimate relative prices (of say Cobh relative to Cork city centre) and not worry that this relative price is affected by when properties were listed.

For those who like the detail, the model is a hedonic price regression that – like the CSO’s index – uses a filter called Cooks Distance to exclude unusual properties which have a disproportionate effect on the results. Each property is assigned into one of five regions (Dublin, Other cities, Leinster, Munster and Connacht-Ulster) and one of 365 “micro-markets” around the country. (Meath, for example, has the following micro markets: Navan, Ashbourne, Dunboyne-Clonee, Trim, Enfield-Kilcock, West/North Meath, Kells, Laytown-Bettystown, Gormanstown+, Mornington-Drogheda, Dunshaughlin, Ratoath, Duleek+, Tara+, Meath (other), where a “+” denotes areas close by.)

Each property is also categorised by type, number of bedrooms, number of bathrooms relative to bedrooms and whether it has a garden. As mentioned above, it is also classified by month (actually by month and region, recognising that prices trends have varied across the country). The model then takes all the observations and through the magic of matrix algebra and modern computing gives a series of coefficients.

Those coefficients are actually factors, such as how the price of a 5-bed is relative to that of a 3-bed, everything else being equal. So, even with the same location, property type, and number of bathrooms, the model is telling us that 5-beds in Dublin relative to 3-beds are twice as expensive on average. This has obvious implications for the Property Tax.

Technically, the prices the model produces are asking prices, not transaction prices. Evidence from 2012 is that on average transaction prices were 10% below asking prices, so 10% has been deducted from the model output, to reflect market conditions.

And now the “buts”…

Of course, this is not the be-all-and-end-all either. While accounting for location, type and size will get you about three-quarters of the way in explaining variation in house prices, there is still a quarter to go. This is made up with factors that are not available across all properties, from things that hopefully soon will be measured, like size of the property and site in square metres and the building’s BER, to things are always going to be tough to capture, like the quality of the structure and of the finishing.

As with the Revenue system, this is meant to a step on the way, not the final destination. My advice for those whose properties are coming out with wildly different prices across the two tools is to first check the Property Price Register and if all those three sources don’t leave you relatively clear on your property’s value, you may need to get a professional valuation if you want to challenge the Revenue’s initial guidance.

A new dawn or the morning after the night before?

As with every New Year’s period, the end of 2012 and start of 2013 has brought a significant amount of taking stock, from the global economic outlook down to the prospects for the Irish property market. The “2012 in Review” Daft.ie Report has been released and marks an expansion of the range of information covered in the reports.

In particular, the report includes information from the Property Price Register in a like-for-like manner. As NAMAwinelake has noted, this is the first ever house price index for Ireland that has both the following features: (1) it is hedonic (i.e. compares like with like), (2) it includes both cash and mortgage-based transactions (current indices are based on either listings or just mortgages).

Asking price, closing price

An important question is how closely does it match one based on asking prices? This is important for two reasons. Firstly, the Property Price Register only goes back to 2010, so for example for those who bought in the latter stages of the Celtic Tiger to understand the scale of their negative equity, other sources will be needed to understand what happened up to 2010. Secondly, as explained recently, quantity and quality are highly related when it comes to property market reports, so to have county- or size-specific findings, we will need more voluminous sources than the Residential Property Price Register (RPPR). A comprehensive dataset of listings (such as the daft.ie dataset) is of sufficient size to estimate in a statistically reliable way not just differences in prices over time but also across space.

Average house prices (asking and transactions), 2006-2012

Falling – but not so fast

So, how do the two measures compare? The first graph above shows the average house price (using county population weights) according to both the asking and price register datasets. It is clear that the average price from the price register is below the average list price – with the gap 13% on average. (Slight digression: it is not correct to interpret this 13% as the average gap between what someone asks and what someone gets, as transactions and listings do not automatically match up. Transactions from December are associated with listings from earlier in the year.)

The second graph, below, compares the annual rate of change in house prices, as measured by asking prices and the price register. The key contribution of an index is how it measures changes over time, so this is the key comparison between the two. What is striking is how similar they are (the correlation between the two is over 97%). Both suggest that the year-on-year fall in prices accelerated from 14% in early 2011 to close to 20% by early 2012 – but that by end-2012, the rate of decline was below 10%.

Year-on-year change in house prices (asking and transactions), 2011-2012

So the conclusion seems to be that asking prices do actually do a very good job in mimicking transaction prices. For a range of purposes, from estimating negative equity to valuation of amenities, this is good news.

Town and country

But that is the answer to a relatively specific question. The broader question is what state is the property market in, as 2012 finishes and 2013 starts. The first graph above – particularly the RPPR line – points to a slow-down in price falls. Taking on board the point made above, that asking prices can shed light on regional trends not available form RPPR figures, asking prices tell us that the annual rate of change in prices varies hugely around the country.

This is shown in the third graph, below. In rural property markets of Connacht and Ulster, prices are falling at rates of close to 20%. In Dublin, on the other hand, there are actually some segments – in particular, South County Dublin, which might be regarded as a bellwether (or alternatively, exceptional) – where asking prices are stable or even rising.

Annual change in asking prices, Q4 2012, by region

This picture of stabilising prices in the capital is reinforced when one looks at measures of market activity. The fourth and final graph shows the proportion of properties sale agreed (including those subsequently taken off the market) within four months of their original listing. The graph shows the figure currently, compared to the figure from a year ago.

Finding a buyer

While there is an improvement in all regions, that improvement is being driven by Dublin in particular, where almost two thirds of properties find a buyer within four months, and to a lesser extent by the other cities (half find a buyer). In Munster, Connacht and Ulster (outside urban areas), between two thirds and three quarters of properties are still on the market after four months, a proportion that has not fallen significantly in the last twelve months.

Proportion of properties selling within four months, by region

So on the face of it, the signs from Dublin are unambiguous – and one may conclude that 2013 will be a new dawn. The fly in the ointment is the extent to which the Government removing itself from fiddling around with the property market had the effect of fiddling with the market one last time.

Until the end of December, first-time buyers were entitled to generous income tax rebates on their mortgage interest relief. The removal of this very generous subsidy may have had the effect of taking some of the demand from 2013 and cramming it into 2012. The result may be that even the Dublin market finds it tough in the first half of 2013 and maybe even beyond, as would-be buyers also factor in a new annual property tax.

2013 might yet turn out to be not a new dawn, but the morning after the night before, a hangover (albeit on a much smaller scale) following the end of the (interest relief) party. My sense is that, for the major cities at least, this will not prove to be the case. But who knows?

Happy new year!

The first house price index based on the house price register

Over the weekend, the Sunday Independent featured some analysis I’ve done with the help of the team at Daft.ie on the Residential Property Price Register (RPPR). The full report is available here (PDF) – in this post, I’ll give a quick overview of what we did and what we found.

What is it?

The aim of the exercise was to produce a property price index for the residential market in Ireland, one based on transactions price (as per CSO but not the existing Daft.ie asking price index) and for all properties, not just mortgage-backed ones (as per the existing Daft.ie index, but not the CSO).

Many, such as NAMAWineLake, greeted the RPPR as the end to all existing property market reports but unfortunately, it’s not quite that simple. The Register certainly gives us valuable information on the number of transactions, by county and by month – and ultimately, it is volume, not value, where we will see a property market “recovery”.

The Register contains no information, however, on property type or size. Without this information, the only vaguely reliable statistic on trends in property prices is the median price. And even that is of limited use, in a market with an anaemic level of transactions, as I pointed out earlier in the month.

Luckily, where it is possible to connect up addresses in the RPPR with addresses in very large datasets of properties, such as the Daft.ie archives, then the attributes needed for a house price index – in particular location, type and size – can be added in and standard methods applied to develop a house price index for Ireland.

How was it done?

The first part of the exercise was matching up the transactions with properties in the Daft.ie archives. Fortunately – given I’ve no idea how to do this efficiently – I was not involved in this task, which was led by Paul, Head of Development at Daft. They managed to identify a property type (detached, semi-d, terraced, bungalow or apartment) for just under 20,000 transactions. Adding in information on bedrooms and bathrooms reduced the sample to about 13,500 transactions.

For these, we have all the information needed to conduct hedonic (i.e. like-for-like) analysis. How representative is this sample? The bad news is that we cannot know for certain – if we knew more about the properties excluded, we wouldn’t have to exclude them. The good news, however, is that for the main heading we do know (county), they look to be representative. The proportion of all transactions that made it in the sample for analysis varies only from 28% in Leinster (ex-Dublin) to 23% (in Connacht-Ulster), with the figure for urban areas and Munster being 25%.

The model applied breaks down each property’s price into five components: time of transaction (by quarter), regional market (six within Dublin, the other cities are each one, and each county is another regional market), number of bedrooms, number of bathrooms (relative to bedrooms) and the property type.

The full model interacts the bedroom and type variables, as well as the quarterly trend, with broad region (Dublin, Other cities, Leinster, Munster, Connacht-Ulster). This is to allow property differentials to vary around the country and also to allow the trend to vary by region. For technophiles, the method is a pooled semi-log hedonic regression. The model explains over two-thirds of the variation in house prices (the R-squared is 68.4%).

One other methodological point is warranted. The dataset is a messy one, with outliers due to errors and to extreme or unusual properties.  To combat this, a relatively standard two-step procedure is used. At the first stage, the model is run and then the model’s prediction is compared to the actual price. Where the actual price is more than twice or less than half the predicted price, clearly other factors are at work for this property. These are then excluded. It’s worth noting that the number of properties excluded by this method (roughly 7%) is below the similar proportion in the CSO index.

What did you find?

Now… on to the goodies. The first graph above shows the average property price for a number of methods. The national average is calculated with each ‘regional market’ having a weight equal to its Census 2011 share. Three datasets are used: the full RPPR (50,000 properties; median only), the subsample of the RPPR used here (13,500 properties; both median and the results from the hedonic exercise described above), and the Daft.ie listings 2010-2012 dataset (200,000 properties; the existing methodology (a variant of the above), the methodology described above applied to this dataset; and the median).

There are a couple of points worth noting. Firstly, while the two median series based on RPPR data point to a small increase in prices in Q3 2012, this increase disappears using the like-for-like method (as I suggested it might). Secondly, the average price in all three Daft.ie series is above that in all three RPPR series, and this is especially the case when the model described above is applied to Daft.ie listings. This suggests that in general asking prices are 10% above transaction prices. (This latter fact is probably due to the fact the full Daft.ie listings model can include a variety of sub-county controls, something the limited transactions in the RPPR cannot do.)

The second graph (above) shows the quarter-on-quarter change in RPPR transactions and in property listings. Again, I took two things from this graph. The first is that by and large, they tell the same story – when list prices fell more sharply, so too did transaction prices. The difference at the end is certainly not typical and perhaps more noteworthy for that.

Secondly, both series point to much tougher market conditions in 2011 than in either 2010 or 2012. The average quarterly fall in prices in 2011 was 5.1% (in the RPPR series, 4.5% in list prices), compared to 3% before/after. Put another way, prices in 2012 Q3 were just 2.3% lower than in Q1, whereas twelve months previously they had fallen 10% in the same period. (For reference, they fell by 6.3% during the same period in 2010.)

The Daft.ie RPPR index is shown in the table below, alongside the existing Daft.ie asking price index and the CSO index, each of which has been rebased so that the average for 2010 is set to 100. The correlation between the RPPR index and the CSO index is 99.8%, while the correlation with the Daft.ie asking price index is 99.7%.

So what?

Those whose time is tight might be wondering what’s new in all this. In one sense, there’s not an awful lot of “new news” in this. Prices are close to stable but are falling gently still… but not at anything like the speed we saw in 2011 – “but sure we knew that from the CSO and Daft.ie reports anyway”.

The value in adding an RPPR index (as the Daft.ie Report will hopefully be doing from now on) is not that it will reveal necessarily anything hugely different from other sources. Rather, it is another signal from the market and together all these signals will paint a picture. This will come as a disappointment both to those hoping prices had actually been rising secretly and to those hoping they’d been falling sharply still. But to the rest of us, the fact that all market signals are saying roughly the same thing is welcome news: it will make it all the easier to know when the property crash is over.

Reports of our death are greatly exaggerated: existing house price reports respond

There now follows a statement from Continuity EPR (Existing Property Reports), which was delivered to me anonymously in the dark of night.

Hello. We are Continuity EPR. We represent existing property price reports. We would like to respond to NAMAWineLake’s recent obituary for us. We are not dead… Indeed nothing could be further from the truth!

It was very certainly interesting and rewarding to read NAMAWineLake’s assessment of our contribution over the last few years. However, NAMAWineLake – while incredibly strong on the legal and journalistic side of things – seems to be unaware of the economics and statistics that underpin solid property market reports like ours.

Take, for instance, this quotation “With the launch yesterday of a property price register in Ireland, we are now close to drawing a line under the relevance of the … indices which prevailed for so long” – which is quickly followed by a less than charitable “Good Riddance!”. There are three core reasons that, like us or lump us, existing property price reports are not only not dead but every bit as relevant now as they ever have been.

A register, not an index

Firstly, the new Property Price Register is not an index and not designed to be one. It is a register. As merrionstreet.com notes, “It is important to note that the Register is not intended as a ‘Property Price Index’. The details made available on the property register are limited to price, address and date of sale and do not include such details as property size or number of rooms.”

A NAMAWineLake partisan might say that it doesn’t matter and we can use averages or standard deviations or some such to throw off the shackles of existing indices and embrace the new register. As star economist and all-round nice guy Ronan Lyons has already outlined, even using something that sounds sensible like the median, which is unlikely to be skewed by errors or outliers is fraught with issues of interpretation and confidence.

Does anyone reading this believe that prices in Dublin rose 14% in the third quarter? That is what the PPR median would have you believe!

Quantity as well as quality

“But,” the NAMAWineLake fundamentalists cry, “surely someone somewhere will do something!” They write: “by January 2012 there should be some entrepreneurial move to create an index based on settled prices”.

It’s funny that they should mention this, because who will be best placed to compile such an index? That’s right, those already familiar with the data pitfalls and methodologies required. Unfortunately for NAMAWineLake, they may find that come January 2013, rather than celebrate the demise of existing reports, they are forced to report an expanded set of statistics from them.

Even aside from issues of individual errors, there is a major drawback associated with the Property Price Register in current market conditions. That drawback is volume. The greater the volume, the more reliable the findings from a rigorous property market report.

With just 400 transactions this year so far in all of Connacht and Ulster excluding Galway city, it will not be possible for even the best data wizards to ensure inclusion of structural differences in house prices between, say, the coastline north of Sligo town and the coastline west of it. This is something that at least one member of Continuity EPR, the Daft.ie Report, does every quarter, while another of our group, the CSO Index, can currently only compile indices for Dublin and the rest of the country.

So the quantity is there – while NAMAWineLake themselves argue that the quality is going to get better. Preliminary figures suggest a 96% correlation between asking prices and closing prices – more of that anon – but that may get even better. NAMAWineLake writes, remarkably in our very own obituary: “as a result of the transparency revealed in the property price register[,] asking prices should be more realistic… and buyer/seller expectations should be more closely matched.”

Remember 2006!

“But,” a NAMAWineLake fundamentalist might cry, “surely at some point in the future this problem will go away!” And indeed, it is presumably a question of when, rather than if, the volume of property sales is roughly similar to the volume of property listings. Surely then, we become defunct?

Cast your minds back to the second quarter of 2006. Ireland was getting ready for yet another Celtic Tiger summer and the ESRI-PTSB report showed annual house price growth of 16%, up from 13% in the first quarter. Yet along came the Daft.ie Report, which showed annual growth in asking prices slowing dramatically, from 14% in early 2006 to 6% in mid-2006. Indeed, it showed no change in effectively no change in asking prices between late 2005 and mid-2006.

It happened again in early 2007, when transactions-based measures showed house prices rising but the Sunday Times led with “Ireland’s Property Market R.I.P.”, based on the latest Daft.ie Report.

The point is: we did not come into existence because there was no other measure of house prices. The Department of the Environment produced an average house price series for decades before we came along. And throughout the last ten years, there has been either the ESRI-PTSB (a former member of our group) or the CSO index (a current member) tracking prices based on transactions.

The key point is that asking prices capture sellers’ expectations and this is generally a lead indicator for the market. The importance of indices based on asking prices will probably increase, rather than diminish, as Ireland (eventually) heads back into its next real estate boom.

Different Strokes

So, if we are so good, why do we vary so much? Why, every quarter, do the CSO, Daft.ie and myhome indices show different quarter-on-quarter percentages?

The first thing is to take a step back. Have a look at these indices from 2006 to now. Are they really telling vastly different stories? Not at all. Journalists would be well served by focusing less on the quarter-on-quarter changes and more on the bigger picture, such as annual or from-peak changes.

But why specifically do they vary from quarter to quarter? Remember that none of these metrics is equivalent. None of them are meant to be the same. They all use roughly the same methodology (hedonic regressions) but on different datasets. The CSO dataset uses all mortgage transactions, the two limitations being it cannot include cash transactions and that it is lagged by the length of time it takes between agreeing a price and drawing the mortgage down officially, which is typically at least a month. (Note that the Property Price Register also suffers from this timeliness drawback!)

The myhome index is based on a snapshot of all properties on the market at any one time. It captures a mix of past and present expectations on the part of sellers. The drawbacks here are its limited market share, especially outside Dublin, and the consequence of its design, i.e. that a property whose list price was set in 2009 but is still on the market is given the same weight as one whose price was set yesterday.

The daft.ie index uses only those properties newly listed or that have changed their price in a particular quarter. This leaves rich datasets – as many in one quarter on average as there are transactions in total in the Property Price Register from the start of 2010 – but excludes all but the most recently set expectations.

We look forward to NAMAWineLake’s extended coverage of our reports come January and forgive them for their premature obituary!

Regards,

P.R. O’Perty, Continuity EPR.