Budget 2012: stealing from the future?

Two principal moves in the Budget have the feel of desperation about them: a philosophy of “if we can steal demand from 2014 and cram it in to 2012, we will”. For example, the Government has increased Capital Gains Tax from 25% to 30%, but made an exemption for commercial property purchased in 2012 and 2013 (once it’s held for seven years or more).

Would-be residential property purchasers have even less time to move: tax relief for owner-occupiers has been extended for 2012 but is cut after that. The Mortgage Interest Relief scheme will continue into 2012 and at an increased rate of 25% for first-time buyers and 15% for other (residential) buyers. From 2013, there will be no mortgage interest relief.

The fact that mortgage interest relief for homeowners who bought between 2004 and 2008 (i.e. the bulk of those in negative equity) has been increased to 30% is an almost entirely unrelated measure. The move on bubble-era mortgages is one about alleviating the debt burden (if only slightly), rather than one about stimulating demand (if only temporarily).

To see this, the graph below shows the monthly mortgage payment in 2014 for the same property (the average house) bought in different circumstances. The first two are the 35-year 100% tracker mortgage, enjoying a 2% interest rate in 2014 and with the old 20% mortgage interest relief [MIR] and the new 33% mortgage interest relief. The monthly mortgage repayment for that boom-time buyer will fall from about €970 to just under €850, a welcome relief to boom-time borrowers no doubt (albeit one that has to be funded by other taxpayers or more borrowing).

Mortgage repayment in 2014 for various mortgage set-ups on the same property

The third bar shown is the 2012 buyer, where prices have fallen by 50% and instead of a 100%, 35-year, tracker mortgage, the borrower faces a 90% LTV, 30-year variable interest rate of 5% and mortgage interest relief of 25%. Their repayment is just over €650. The final buyer (say 2014) enjoys prices 60% below peak but no mortgage interest relief. The state has imposed a maximum loan-to-value of 80% but other than that, she enjoys the same borrowing circumstances as someone in 2012: 30-year mortgage and a 5% variable rate. Her repayment is lower again: just below €650.

The preservation of tax-incentive properties (such as Section 23) in Budget 2012 where annual income is less than €100,000 is basically cut from the same cloth: a debt burden measure, not a market stimulant. (The generosity shown to these investors will be funded by a surcharge on those tax-relief investors with an income of more than €100,000, who are now subject to a surcharge of 5%.)

Stamp duty on residential property was reduced to 1% (below €1,000,000 and 2% on the balance) a year ago. That has been preserved this year and effectively extended to commercial property, where a flat rate of 2% now applies.

An addiction by any other name…

An economically literate medical professional will know this type of behaviour immediately: it is addiction. Ireland is addicted to property. And not in the romantic historical we way like to think… “It’s a whole post-Famine thing. Sure didn’t you watch The Field? We could never rent long-term here.”

No, Ireland’s addiction to real estate is quite modern and quite easy to explain. A 2004 paper in the Central Bank’s Financial Stability Report highlighted that actual cost of owning housing was negative for the bulk of the period 1976-2003. The most significant contributory factor was that the capital gain went untaxed: with any other asset, if you bought it at £10,000 and sold it 20 years later at £110,000, there would be tax liable on the £100,000 profit. If capital gains tax of 20% had applied to housing, this would have cooled down house prices as the war-chest you bring to your next deal is £80,000, not £100,000.

But it’s not just untaxed capital gains in isolation. Ireland has the most generous tax treatment of property in the developed world. A 2006 report by the OECD highlighted this: Ireland was the only country that both allowed owner-occupiers tax deductions for mortgage interest payments AND did not tax property values, capital gains or imputed rents.

In fact, the only tax there was on property was stamp duty. And that’s now effectively gone (or at least down to 1%). And the Government has extended tax relief, an integral part of the problem. After an intervention-fuelled bubble, the response has been to intervene more. This is just like the addict who says “Honestly, if I can get just one more hit, then I’ll be fine. Honest.”

Making sure we’re fixing, not getting another fix

The litmus test for any measure is whether it creates a healthier property market in the medium-term, not in the short-term. As is the case with any textbook bubble, there is a real danger that property prices will overshoot on the way down. On its own, that might not sound too bad if you don’t own property right now. However, overshooting means that prices have to recover at some point and the way people form their expectations about house prices, extrapolating from the past, means that overshooting dramatically increases the likelihood of another bubble down the line.

But just because there is the danger of overshooting does not mean any measure will do. The two key ingredients in the property market are confidence and finance. Neither is in abundant supply at the moment, but making borrowing unsustainably cheap – by bullying banks about the variable interest rates and then offering tax deductions on those rates – is not the way to get around this. The solution lies in the rather more boring rebuilding confidence and finance.

Offering borrowers certainty is one solid way of rebuilding confidence. General macroeconomic confidence aside, this should be certainty about how much they can borrow (a legal maximum loan-to-value would do the trick), and what their tax burden will be. On the latter, the worst possible idea is to introduce a €100 flat charge and then “see where it ends up” in five years’ time. A far better idea is to announce early in 2012 what the property tax burden will be from 2017 into the future and how the country is going to get there.

But borrowers are just one half of the equation. Lenders also matter (particularly if the taxpayer owns the bulk of them). Pleading in one ear with the banks to lend more is pointless if you’re shouting at them in the other ear to stop lending (which the Government is doing with the stress tests which require them to deleverage, i.e. lend less). It’s even more pointless if you’re also giving them a clatter across the top of the head for trying to get their mortgage interest rates back to sustainable levels (probably about 6%).

A time of crisis is, as I’ve said before, a time of opportunity. With so many in negative equity (i.e. no capital gains ever likely), never has there been a better time to introduce full capital gains tax for residential property and level the playing field between productive investment and property investment. Similarly, a silly if affordable €100 charge per household is probably the best setting in which to introduce a fair and efficient annual property tax. The huge parliamentary majority enjoyed by the current government means they have the power to wean Ireland off its addiction, generating greater tax revenues in the process, once and for all.

In truth, while there are those who couldn’t and still can’t believe that rents are stabilising after a fall of between 25% and 30% from the peak, this is not a surprise to anyone who’s been paying attention to the number of properties available to rent. Indeed, as far back as January 2010, the signs pointed to stabilising rents. Whereas the total stock sitting on the sales market has been doggedly at close to 60,000 for three years now, the total number of properties available to rent at any one time has fallen from a peak 24,000 in mid-2009 to less than 16,000 on November 1 last.

A Tale of Two Irelands

The national average hides variations across different segments, however. The stability in rents is being driven by trends in urban areas. Rents in Cork city, home to Ireland’s pharma hub, are up over 6% in year on year terms. Rents in Dublin are up less dramatically, by 0.8% year-on-year, but the size of Dublin’s lettings market means that probably had an equal impact on dragging up the national average. Rents in Wexford are still falling, down 8% annually, with rents in Leitrim, Longford and Kerry also down by more than 5%. As Philip O’Sullivan says in his commentary to the report, it’s a tale of two Irelands.

And unsurprisingly, stock available to rent in the cities is what has driven the fall-off in stock nationwide. Of the fall nationally of 8,000 units, 60% has been due to a fall in the stock available in Dublin, which is down by a half in the last 18 months alone. A further 16% of the fall is due to what’s happened in the four other cities. In contrast, the stock available to rent in Connacht and Ulster on November 1 was 3,200, compared to 3,700 in mid-2009.

But geography is just one way of breaking down the market. Another is by bedroom number. Given how different areas seem to have balanced each other out, the same might be true of different bedroom numbers. Whereas oversupply and the legacy of boom-time construction has flooded many provincial markets, both sales and lettings, Department of Environment figures indicate that this is not an issue for family homes in Ireland’s major cities, in particular.

The correction in rents in 2008 and 2009 seems to have been one of incomes and emigration. The whole market needed to adjust and that has by and large happened. Since early 2010, trends are more likely to have been driven by supply and demand: where is the legacy of over-construction affecting the supply of rentals? And where is there at least some prospect of employment?

A Tale of Four-Bedroom Ireland

Thus it would be nice to see how rents have changed by bedroom-and-region segment, not just since the peak but comparing the fall from the peak to early-2010 with the fall from the peak to now. Showing everything in one graph turned out to be more of a challenge than I’d anticipated. I’ve done what I can in the chart below, which will hopefully be more readable following a couple of introductory notes.

• From left to right, the chart is broken down into three ways. The first is broad region, Dublin, other cities, and rest-of-country, as indicated. Within each region, the colours then show the different bedroom numbers, from blue (1-bed) to orange (4-bed).
• The reason that there are each colour appears a number of times in each broad regions is because they are broken down into sub-markets: six in Dublin (city centre, north city, south city, north county, south county and west), each of the four other cities (Cork, Galway, Limerick and Waterford), and six main regions in the rest of the country (commuter counties, Midlands, the south-east, Munster, Connacht, and the three Ulster counties).
• There are two figures given for each bedroom-market combination. The lighter diamond is the fall from the peak to early 2010. The darker square is the fall from the peak to now (the third quarter of 2011). What I’m particularly interested in is segments where the square is above the diamond, i.e. where rents have risen over the past 18 months.

Fall in rents (to 2010-q1 and 2011-q3) across different segments of the market

It’s clear that in many segments of the market, rents have continued to fall since early 2010 (the squares are below the diamonds). For example, outside the cities, one-bed rents have fallen by an average of 6% in that period, while two-bed rents have fallen by 5%. And in Dublin, rents for one-beds have continued to fall. However, there are also clear differences. Whereas two-bed rents are clearly falling outside the cities, they look to be very much stable in Dublin.

If you look at the orange squares (4-beds), they have certainly stopped falling in the urban markets and in almost cases risen by non-negligible amounts over the past 18 months. (Only the final two “Other Cities” 4-bed segments, Limerick and Waterford, as well as West Dublin have had stable 4-bed rents since early 2010.) And there is evidence of greater demand than supply of family homes to rent, with people making do with either less space (see the three-bed segments in Dublin, green squares) or greater commutes (Dublin commuter county four-bed rents have risen).

Anything to be said for building new homes?

While it might be too early to talk about shortages in the property market, there does not appear to be any over-supply of family homes in Ireland’s main cities. Thus, it’s frustrating to read about attitudes like Wicklow County Council’s to plots of residential land near urban centres: the ‘all hope is lost, we’ll never need new homes again’ attitude. The sooner we stop thinking of one national property market and instead of different markets around the country, the sooner it will be possible for local authorities and others to ensure an adequate supply of competitively priced housing across the country.

The latest news

The quarter-on-quarter fall in house prices in the third quarter of the year was 3.5%. This is once again in the 3-5% range, i.e. house price falls were of a similar scale to the previous 12 quarters. For the third quarter in a row, the fall in Dublin was greater than the fall outside Ireland’s five main cities. Indeed, there are only two quarters (the final two of 2010) where the average asking price in Dublin fell by less. As a result, asking prices are now 51% below the peak on average in Dublin, compared to 45% elsewhere in the country.

Asking prices actually rose in Galway (city and county) and in a more substantial way in Monaghan and Carlow in the third quarter of the year. It’s unclear what’s driving this. One could argue it could be just an artefact of the quieter summer months. However, this didn’t happen in 2008, 2009 or 2010, so I think what’ s more likely to have happened is that sellers (and/or their estate agents) are trying to factor in bidders’ discounts below the advertised price. Given the subsequent experience of other counties where asking prices have been stable for three or even six months, I would expect prices to fall in those areas in the next quarter.

The key supply-side metric, stock sitting on the market, remains stubbornly high. This is particularly the case in Munster and Connacht-Ulster, where time to sell is typically 9-15 months. In per capita terms, stock sitting on the market is relatively low in Dublin, where the typical time to sell is just four months, and is still high but steadily falling (slowly) in Leinster.

Calling the bottom

Three month ago, when the last Daft.ie House Price Report was released, I put its figures into a longer-term context. In particular, I compared current asking prices with long-term series for two standard metrics for calculating the value of housing – income multiples and rent ratios. Both of those metrics suggested that the average house price in Ireland “should” be about €150,000. As of three months ago, it was €201,000 and it is now €194,000.

How does that compare with the fire-sale prices we are seeing? Last week, I took a look at the latest fire-sale prices in Ireland. The finding was that the typical fall in price from the peak is of the order of 70%. A 70% fall in the typical value of a home would equate with an average house price of €115,000.

I think the fire-sale prices differ from equilibrium prices in two key respects: firstly, they are almost exclusively cash-only prices (i.e. no mortgage credit). And secondly, they are overwhelmingly investors, not owner-occupiers. As longer-standing readers of the blog may remember, part of my academic research is investigating just how investors and owner-occupiers differ in their real estate decisions. But theory would suggest that owner occupiers will pay more, like for like, than an investor will. So 70% marks the watermark for the Irish economy as it currently stands, an economy without credit.

But what if Ireland does actually return to being an economy with credit? When might the market bottom out in such a circumstance? It’s worth noting just how steady the average quarter-on-quarter fall in asking prices has been since 2008, at basically 4% with only minor variations either side. What would happen if this trend continued? If asking prices continue to fall 4% every quarter, by the first quarter of 2013, the average asking price nationwide will be €150,000, or 60% below the peak, in line with the expectations from using income or yield metrics of what house prices should be.

Average house price (and how long to reach it), by different measures

The graph above shows the average level of house prices at various different points in time/scenarios and also (on the right-hand axis) how long it would take in quarters of 4% falls to get from current asking prices to that level.

Worrying about the next bubble

If, however, credit hasn’t returned by the start of 2013, if the Government hasn’t changed tack and the banks are still trying to “deleverage” (i.e. ignore new lending and run down old lending), then prices will continue to fall. They may continue to fall for probably another two years. On-going 4% falls each quarter would mean prices were 70% below the peak, or €115,000 on average, by end-2014.

The risk, of course, is that credit doesn’t return until that point is reached. Were that to happen, instead of the bottom of the market looking like it should, i.e. prices stabilise and then increase in line with inflation, prices instead would be 33% undervalued (according to the two metrics I’ve used above). This overshooting on the way down is a real danger because it risks creating a bubble on the way back up. After all, we all know what happened the last time house prices increased at double-digit rates!

Another bubble is probably farthest from the minds of most, including the Government, at the moment. However, it’s precisely when that’s the case that we must put in place the protections we need, such as site value taxation, maximum loan-to-value and even a ban on variable rate mortgages. I’ve heard that a number of US retail banks have had their interest in setting up in Ireland stymied by the Financial Regulator, probably out of fear of deposit flight.

But if the Government is effectively shutting Ireland off to new banks, then it is even more imperative that our existing banks serve the function for which they were saved using our money. The next round of stress tests for Irish banks, in early 2012, offer the perfect opportunity to set aside capital specifically for new lending. Banks are petrified that new lending equals new write-offs down the line – as long as they base it on conservatives multiples of rental income, there is little risk that will be the case.

House prices bottoming out sooner and without the melodrama of overshooting and another bubble, or prolonging the bust for another two years and risking a new bubble? The choice is with the Government.

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.

Estimated average percentage fall in property prices from the peak, by fire-sale auction

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).

Average annual yield on residential property (%), by region and auction

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.

This tallies with numbers I presented two years ago, which suggested that if the Live Register hit 500,000 and if house prices fell by 50%, we could have 50,000-60,000 households suffering both negative equity and unemployment. My own estimate was that total negative equity would be about €23bn, part of which would be owed by households with no income.

Last week, economists’ musings were overtaken by a pseudonymous letter in the Irish Times, by someone from Kerry claiming to be starving his children to pay his mortgage. Unsurprisingly, his letter has provoked a strong response, not least by charities and government services, offering him advice and assistance. To the best of my knowledge he remains unfound but the impact of his letter and Morgan’s musings continues and can be seen on today’s front-pages. All three broadsheets lead with mortgage debt arrears and forgiveness.

Arm yourself with the facts

Given the emotional charge to this debate, I thought I would take a step back and look at the facts. Here are ten facts about Ireland’s mortgage debt:

1. As of June this year, Ireland has 777,000 residential mortgages worth €115bn. Of these, 40,000 (or just over 1 in 20) are in arrears of greater than six months. This figure has doubled in 18 months, as it was 19,000 in late 2009.
2. These 40,000 mortgages in arrears of more than six months are worth €8bn in total, but the arrears on them is worth less than €1bn. Court proceedings have been issued on 3,000 mortgages, a smaller number now than two years ago.
3. There have been a total of 500 repossessions in the last twelve months. The majority (two thirds) of these have been “voluntary surrenders”, i.e. abandoned properties. There were 56 Court-ordered repossessions in the second half of 2010 and 103 in the first half of 2011.
4. During 2010 in the UK, there were 36,300 repossessions, according to the Council of Mortgage Lenders. If the same rate of repossessions had applied in Ireland over the last 12 months, we would have seen 2,300 repossessions – i.e. about fifteen times the rate of Court-ordered repossessions that we have seen in the last 12 months.
5. Irish banks gave out 673,000 mortgages between the start of 2005 and the end of 2008, the period most likely to contain the bulk of those in arrears. About 225,000 of these were either people switching lender or top-up mortgages. Of the remaining 450,000, 88,000 were investment mortgages, 145,000 were mover-purchaser, while 125,000 were first-time buyer mortgages.
6. Ireland’s banks have given out 35,000 mortgages in the last eighteen months. At the same time, the number of mortgages has fallen by almost 16,000. This means that over 50,000 people have paid off their mortgage since the end of 2009, compared to the 20,000 who have slipped into arrears of six months of more during the same period.
7. Between 2005 and 2008, one in six first-time buyers had a deposit of more than 30%, while one in five borrowed at 100%. Looking at the market as a whole, just under 40% of all mortgages taken out were at less than 70% loan-to-value.
8. Someone who borrowed a mortgage of €300,000 in early 2006 and who has not missed a payment will, by the end of this year, have typically paid off about 13% of their principal, meaning their loan outstanding is about €260,000. A deposit of more than 30% means the home would have been valued at €450,000 or more. Such a home would now command an asking price of about €225,000. By the end of 2015, the principal outstanding would be about €220,000.
9. Two million people were employed in Ireland in late 2006. 1.77 million were employed in early 2011, which means that about seven of every eight people who were at work in the boom are still at work.
10. The 1.43 million households in the State in the 2006 Census were estimated to be worth €526bn collectively in early 2007. This had fallen to €289bn by mid-2011. Housing stock built since 2006 is worth approximately €42bn. To calculate net housing wealth in Ireland, mortgage liabilities of €115bn must be subtracted from the €330bn of residential housing assets, giving a figure of about €215bn. In other words, Ireland’s current “loan-to-value” is about 35%.

My own two cents

Dramatic public clamour is often a recipe for bad policymaking. To butcher a phrase, “beware of Trojan horses bearing starving children.” 40,000 mortgages in arrears of six months or more is a serious problem but it does not mean even that 40,000 households are in arrears (some investors had many mortgages), let alone that 40,000 families are starving their children to cling to their home. Hopefully the facts above show that there is enough variety in Ireland’s mortgage debt to rule out any “get less indebted quick” blanket debt forgiveness schemes. Any write-downs of  debt that do occur should be on a case-by-case basis and with significant strings attached (like not owning all your own home by the end).

Number of Irish mortgages (000s) in various categories

The vast bulk of people in Ireland are still paying off their mortgage and are still in employment. For those who are struggling and who believe that business-as-usual means they will not be able to pay off the mortgage as it stands, abandoning the property (and presumably emigrating) has proven an attractive option. However, there are less dramatic options.

Central Bank figures show that lenders have restructured 10% of all mortgages. They have also put money aside – taxpayer money, the €5bn that Morgan Kelly was talking about and more – to provide for mortgage write-downs where families are struggling. Not only that, a recent High Court decision makes it much more difficult for lenders to repossess properties. The fact that there are fewer Court proceedings for repossession now than two years ago indicates that banks are not interested in pushing people on to the street, anyway. In short, no-one should be sacrificing their children’s health for their own financial wealth.

Is that all there is to it, then? We’ve reach equilibrium in the rental market and – once we find out the “right” yield, or relationship between rents and house prices – we’ll know where equilibrium in the sales market is too?

It’s unlikely to be that simple. For one thing, rents in the three main cities are actually up year-on-year, and are offset by rents elsewhere being about 3% lower year-on-year. Rents in Cork are actually almost 5% higher now than a year ago.

What up with the People’s Republic?

Some might suggest that perhaps the spike in Cork rents is because of the flooding at the end of March and start of April. The damage to homes may have brought about a shortage of rental accommodation, as some homes are rebuilt and restored. It’s an interesting suggestion, showing the susceptibility of the rental market to random shocks.

But at least this time around, it’s definitely not the case. The number of properties available to rent in Cork increased from an average of just over 600 in the first quarter of the year to over 1,000 in the last three months. In fact, all across the five major cities, there has been a substantial increase in the number of properties sitting on the market, typically by one third, in a few short months.

So we may be seeing the rental price interact with the supply on the market. Suppose developers or others have urban properties they have been trying to sell, without success. Nine months of a stable rental market convince them to try their chances renting the properties instead.

Year on year change in number of properties on the rental market, by region

This sounds plausible and leads to an obvious follow-on question: does the increase in supply mean that rents are due to head south in coming months, as the impact of the fresh supply is felt? Perhaps not. The graph above shows the annual change in the number of properties sitting on various rental markets from the start of 2010 until August 1st this year. What’s of note is that the rush of properties this summer season is actually smaller than the rush last year.

In June and July 2010, there was an average of 2,750 properties available to rent at any one time across Ireland’s four cities outside Dublin (Cork, Galway, Limerick and Waterford). In June and July this year, it was below 2,650. Not a huge fall certainly, but definitely not a fresh rush on to the market. All in all, the trend in the stock on the market is downwards.

What is the current return on real estate?

If rents do actually stabilise, at least in the cities, one thing we will be able to do is figure out what the “long-term economic value” of any given property is (NAMA take note!). This is because ultimately a property is an asset, one that gives you income (if you’re an investor) or saves you outgoings (if you’re an owner-occupier).

The second graph, below, shows the annual rental income for the average property in three regions of the country, from 2006 (i.e. 2006 rental income compared to 2006 prices) until the second quarter of this year. Particularly since late 2009, when rents have levelled off (and as house prices have continued falling), the yield has improved considerably and now in Dublin is not too far off the NAMA benchmark yield of 6%.

Average gross yield on residential property, by region

For the yield in the “rest-of-country” outside the cities to correct to an average of 6% from its current level of 4.5%, a swing of one third is needed. That means either static house prices, if and only if rents were to increase by 33%, or if rents stabilise then prices need to fall another 33%.

The average asking price in the rest-of-country is currently €180,000 and a 33% fall would push that down to €120,000. This would be a fall of just over 60% from the peak, something that seems a reasonable estimate peak to trough fall (particularly with Dublin asking prices already down 50% but not yet stabilised and with firesale prices at 65-70% below the peak).

While 6% is a nice round “target”, it’s at the end of the day an arbitrarily chosen round number. What actually determines the yield on a particular property – in particular why yields on smaller properties (one- and two-beds) are higher than those on larger properties (4/5 beds) – is to my knowledge unknown. (And the topic of some of my research at Oxford and my presentation at the ISNE 2011 Conference later this week!)

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.

Peak and current asking prices, compared to auction prices, by region

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!

• Asking prices fell by an average of 5% across the country in the second three months of the year, the largest quarterly fall in a year and a half.
• The 50% fall from the peak threshold has been passed, in some parts of the country – Dublin prices were on average 51% lower in June 2011 than at the peak four years ago.
• The €200,000 threshold has been passed – the national average asking prices in June was €196,000, compared to €366,000 at the peak. Looking at Dept of the Environment data, this suggests that house prices are at levels last seen in the first half of 2001.

Given that we’re in the territory of 50%+ falls, and given that prices are back below €200,000 on average, it is an appropriate time to ask: how far further will house prices fall? This is important question for two competing reasons. Firstly, falling accommodation costs are good for Ireland’s competitiveness, and good for those who have not yet bought. However, falling property prices mean greater negative equity, which drags down economic growth for us all by affecting household spending.

In this post, I’d like to look at three different ways of calculating what an “equilibrium price” for the average house in Ireland might be: firstly, adjusting the house price for inflation, secondly by comparing house prices to household income, and thirdly by comparing house prices to rents. By doing that, we can not only say something about how far house prices will fall, but also how long it might take, given the typical quarterly fall in house prices over the past few years.

“Real house prices”: stripping out inflation

The most basic metric of house prices is to compare the average house price to the general price level. Why should this work? Well, the experience of other countries tells us that we should not expect house prices to increase significantly faster than the general rate of inflation. For example, real house prices in the USA – i.e. adjusting for inflation – over the past fifty years have increased at a rate of just 0.4% per year. A longer running series – for the Heerengracht in Amsterdam – suggests that over almost four centuries, house prices adjusted for inflation increased by just 0.1% per annum, albeit with significant booms and busts.

Unsurprisingly, when Irish property prices are adjusted for inflation, we find much the same relationship here until the boom. The average house price in the middle of 1995 was (in today’s euro) €115,000, exactly what it was in the middle of 1978. And that represents the high watermark of pre-bubble prices: the average between 1975 and 1995 was €105,000. The graph below shows how real house prices have fared since 1995 and where they stand now: even at €200,000, they would still be overvalued by almost 50% if this rule held true.

House prices in Ireland, adjusted for inflation, 1975-2011

Sustainable growth: adding in income

But while attractive in terms of its simplicity, that’s not an economically sensible approach. Household incomes have changed significantly over the past generation and ultimately a mortgage lender cares about your long-term income prospects, not the past average price. Real household income increased from €30,000 (in current terms) in the 1990-1995 period to about €50,000 by 2007, as there were more full-time jobs per household and each job earned more in real terms.

Suppose 1995 marks the start of potential over-valuation of Irish property, as the graph above suggests. Figures on incomes only go back to 1988, but for the 1988-1995 period, the typical house price-to-income ratio was a pretty steady 3.6. Applying that ratio to household income since then, we can calculate a measure for “equilibrium house prices” that reflects the fact that the number of people working can change as can the real wage they earn. This is shown in the second graph below, and the equilibrium price suggested by this measure rose from €120,000 in 1995 to €175,000 at the peak and now stands at €150,000, about 25% below the current price.

House prices in Ireland adjusted for inflation and incomes, 1975-2011

Fundamental value: comparing house prices to rents

I’ve talked on a number of occasions about what I regard as the single most important relationship in the property market, the one between rents and house prices. When rents are stable, then house prices should adjust in such a way that the annual rental income (explicit if you’re a landlord, implicit if you’re an owner-occupier and thus saving by not paying an equivalent rent) represents what would be regarded a “very healthy savings rate” on a deposit account: something like 6%.

This is an important extra step over the incomes approach as rising incomes will be reflected in rising rents, while changes in the financing environment will be reflected in what a “health savings rate” looks like: that may have been 12% in the early 1990s but now might be 6%, now that Ireland is in the low interest environment of the Eurozone.

Figures on rents are even harder to get than figures in household income and I’ve only been able to get numbers back to 1996. Nonetheless, over the period 1996-2002, the average yield was about three quarters of a percentage point above the average mortgage interest rate, which was 6%. By coincidence, 6% is the ballpark long-run rate of interest that I think will prevail in Ireland over the coming generation. Thus, we can use that 6.75% yield – and figures on rents up to this year – to calculate an alternative equilibrium house price from 1996 on.

House prices in Ireland adjusted for inflation, incomes and rents, 1975-2011

This is shown in the third graph above. While it varies more than the income metric, we can see that it starts and ends very close to the income metric. In particular, it also suggests that the typical house price in Ireland now should be of the order of €150,000, or a fall of 60% from the peak. There are no certainties in this world: these numbers change if you change your beliefs about what income ratio or yield should apply, or if you have a different outlook about income or about rents. But the fact that both metrics suggest that house prices in real terms should currently be about 50% above their pre-1995 level, adjusting for inflation, is noteworthy – particular given that prices are still about double their pre-1995 level.

Are we nearly there yet?

So the graph above suggests that Ireland’s property market adjustment is about three quarters complete. How much longer will all this uncertainty and falling prices take? Clearly, that’s not just unknown, it’s unknowable right now. All prospective sellers and buyers could in theory read this post today and go off and make sure their ask or offer at 60% below the peak tomorrow. Would that solve things? Probably not without an easing of credit conditions, as would-be buyers find it very difficult to get credit at the moment.

It’s also very unlikely that all sellers and buyers will do this. It’s much more likely that what has happened over the past four years – quarter on quarter falls of about 4% – will continue. If that happened, the average house price would reach €150,000 in early 2013.

One of the important features of the housing market, though, is that Dublin and its surrounding counties have seen significantly larger falls from the peak than the Western seaboard, up to 55% in Dublin city centre. Not only that, the Dublin market also looks healthiest when looking at current time-to-sell and the stock sitting on the market. If 4% quarter on quarter falls continue, Dublin city centre would reach the bottoming out level of 60% below the peak in the first quarter of 2012, while those areas that have seen 50% falls so far would reach that in the final quarter of 2012.

Elsewhere, prices are about 40% below the peak and have been falling at about 3% per quarter. If that were to continue, these areas would reach the house prices suggested in the graph above in the third quarter of 2014.

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PS. This hopefully gives some meat to the bones of the predictions accredited to me in NAMA Wine Lake’s convenient table of property market calls.

“Property Market 2.0” emerged in the 1980s and 1990s, as competition among banks and building societies brought mortgages to the masses. Barely had this transformation time to take hold, though, then Ireland was a member of the Eurozone, with inappropriately low interest rates and a practically infinite supply of credit from global credit markets. Along with lax regulation of the banking and building sectors, the result was perhaps the biggest national property market boom and bust of the modern era.

Learning from the (recent) past

What will “Property Market 3.0” look like? As yet, nobody knows. It is safe to guess that, at least in its early days, it will be haunted by what has just happened. The worry is that initial prudence will eventually decay away, as institutional memory fades. The nightmare scenario is that at some point in the future, the 2020s or the 2060s, the lessons we’ve learnt are thrown away with a simple “Well, that could never happen now/This time it’s different/Insert self-deception here”.

So what can we do? An idea I’ve explored at length elsewhere is the importance of information. Having an official real-time database of transactions prices doesn’t just help people like me churn out research papers. It gives normal people the information with which to make informed decisions about whether to buy or rent and for how much. And in doing that, it actually reduces the chances of a bubble as bad as the one we’re recovering from now happening again. The national house price register looks like it is now government policy, so today, I’d like to focus on a couple of other ideas.

First cut is the deepest: a property tax

The first is the one most people will dread about hearing: a property tax. It’s again something I’ve talked about a number of times before, so I’ll make the case briefly:

• Aside from overly generous tax-free allowances, the lack of an annual property tax is the only way in which Ireland’s taxation system looks “out of kilter”. A property tax contributes about 10% of core tax revenues for the typical developed country, usually funding local government services. In Ireland, however, even stamp duty – which did nothing other than hinder labour mobility and make property more expensive – is now largely gone. To help end Ireland’s reliance on EU and IMF funds, we need a property tax.
• Specifically, Ireland should look to introduce a land value tax, where the owner of a property has to pay a percentage of the value of the land underneath the property in tax each year. This is the fairest way of taxing, as it passes on the cost to society of under-using potentially useful plots of land to those who are under-using them. It’s also a tax that doesn’t affect your incentive to improve your home. Taxing a fraction of your home’s current market value means that if you improve your home, say by making it more energy efficient, you then have to pay for that every year in taxes, which is silly. Lastly, by penalising the hoarding of land, a land value tax is another tool to stave off future property bubbles.

Maximum loan-to-value

One idea we should actively consider is a set-in-stone maximum loan-to-value ratio (or minimum deposit). The need for any sort of deposit at all reflects a market failure, where a lender has incomplete information about the ability of the borrower to repay in the future. Until recently, conventional wisdom was that higher LTVs (smaller deposits) reflected more efficient markets. Now, however, it’s clear it was a cover for greater leverage. The fundamental need for a deposit exists at all points in the market cycle… especially at that very time market participants are pushing the regulator to ease it. So, if we want long-term sustainability, we should bring in a minimum deposit.

Think about this another way. People form their expectations about future house prices by looking at what’s happened the past few years. As a result, the principal cause of a housing bubble is what economists call a series of “positive shocks to demand”: something happens – say, lower income taxes, an influx of foreign workers, or a good year for attracting FDI – that pushes up house prices for a couple of years in a row. Now, suppose as this is happening, in response to pressure from banks, the politicians or the public, the regulator eases bank lending practices, enabling an extra 1% of the population to buy homes. Because only a small fraction (about 5%) of homes is traded each year, the new buyers represent a sizeable rush of new demand on to the market. The push for slacker lending conditions risks turning an increase in house prices into a bubble.

The stylised bubble impact of relaxing the minimum deposit required

A stylised example of this is shown in the graph above: two “demand shocks” push house price inflation from its natural rate of 2% a year up to 4%. The difference between the two colours is that in case 1 (orange), the regulator responds by relaxing deposit requirements. The bubble is where people’s expected house price inflation exceeds the fundamentals: on the graph, it’s that part of the dashed line above and to the right of the solid line. Black is where this is no easing of deposit restrictions, and the bubble element is small (3%). Orange is the case where deposit restrictions are eased and an extra 1% of the population buy homes over the course of three years. With this one difference, there is now a significant house price “bubble” of almost 15%.

I don’t have a set figure in mind for this proposal – I could see arguments for anything between 80% and 92%. But one should be set and the sooner the better. This is because setting the deposit required in stone will give an amazing shot of certainty into an uncertain market. If the maximum loan-to-value is 90%, a young family looking to buy will know that to borrow €200,000, they will need to save at least €20,000 before they can go to the bank.

Ban variable rate mortgages

My final suggestion is more controversial. It’s that we should ban variable rate mortgages. Much as it may surprise Irish readers, used to variable rate mortgages because Ireland had no idea what its inflation rate would be from one year to the next, many countries in the world have mortgages where the interest rate is fixed for the lifetime of the mortgage. In the US, the very concept of an “adjustable rate mortgage” was an early-2000s financial innovation that is now viewed in the same light as sub-prime mortgages and CDOs.

Having variable rate mortgages exposes the borrower, obviously, to the risk of higher interest rates and thus to the risk of cashflow problems. A fixed rate mortgage has the substantial benefit of providing certainty of expenditure to the borrower. It also focuses the lender’s mind at the outset about its own costs of borrowing. And there is also a wider economic justification. Ireland no longer sets its own interest rate. As a result, when the country needs stimulus, the rate can be too high, prolonging recession. Banning variable-rate mortgages closes down one channel through which interest rates set in Frankfurt can bring about recession in Ireland, as households would no longer face cashflow constraints when ECB rates rise.

Again, by bringing in this change in the middle of the “post-storm eerie calm”, the Government can help the market find its new floor. If I know that not only do I have to save up a 10% deposit but also that I must allow for a 7% interest rate on my mortgage, my house purchase and monthly budgets are suddenly an awful lot clearer. Conversely, trying to do this after a new equilibrium has emerged in the property market would be very tricky, as it would almost certainly push house prices down further.

Crisi-tunity

The economic crisis and the huge amount of uncertainty in the property market at the moment presents the Government with an unprecedented opportunity to mould Property Market 3.0. To give people information on which they can base their actions, we need a national house price register. To promote the best use of land, we need a land value tax. To prevent one of the most common causes of bubbles, we need an immutable minimum deposit requirement. And to eliminate uncertainty and reduce ECB-induced recessions, we should take the bold step of banning variable rate mortgages.

Some of the main headlines from today’s report are:

• Rents are higher in Dublin and in Cork city now than a year previously, the first time since early 2008 that rents have risen year-on-year
• Outside the main cities, the slow downward trend in rents continues but at a slower pace. The year-on-year fall in rents is down from 14% in late 2009 to 3% in early 2011.
• The total stock of properties available to rent rose slightly between February 1 and May 1, from 16,000 to 17,000. It had peaked at 24,000 in mid-2009. For comparison, the typical amount of transactions per month is about 12,000.

So, with rents on the rise in some parts of the country, is this good economic news or bad economic news? Perhaps falling victim to the economist’s curse of “on the one hand, on the other”, I’m going to argue that rising rents constitute a bad signal (for competitiveness) but a good sign (of underlying economic strength).

Rising rents: a bad signal

Higher rents have an obvious downside. They take more money out of the disposable income of households. Accommodation and food are effectively the first things to be paid, after your taxes. So if your rent goes up from €950 to €1,000 – as they typically have in Dublin city centre over the last year – that puts a squeeze on your non-housing expenditure.

This, as explained before, has an impact also on the salary you demand. This might not work directly all the time. Most people don’t think to march into their boss’s office after their monthly rent goes up €50 and ask for €1,000 extra in their annual salary. But it ultimately does work. The price of accommodation does have a role in setting wage demands and certainly affects a company’s assessment of the cost competitiveness of a country.

So, rising rents are bad news, in terms of the signals they send out about Ireland’s cost competitiveness. This rising trend needs to be taken in context: rent levels are similar to those seen twelve years ago in 1999, so that is most certainly good news from a competitiveness point of view.

Rising rents: a good sign

At the same, though, I would argue that rents are a good sign of the strength of the underlying economy. This is a point similar to the one Cormac Lucey makes in his commentary. The economy is still suffering a range of body blows, in relation to monetary policy, fiscal policy, credit and the exchange rate. And yet rents have levelled off and may be even rising in some areas. What does this tell us?

It’s a good reminder that for every seven people that were working at the height of the boom, six are still in their jobs. They more than likely suffered a fall in their salary in 2009 but eventually the time comes for salaries to increase again. This will be most prevalent in exporting sectors, whose fortunes are not tied to largely moribund consumer expenditure in Ireland. (I say largely moribund, as no economy where things like the iPad 2 and the new Samsung Galaxy Tab 10.1 are consistently sold out can be regarded as completely lifeless.)

How does all this show up in rents? Consider the (not made-up) story of a friend’s friend. He’s moving abroad with work and looking to rent out his apartment, which is a spacious two-bed apartment smack bang between Google’s EMEA headquarters and Facebook’s. When asked to guess how much he had rented it for, I said €1,300, maybe €1,400, as this would be well above the city centre average for two beds but still down from peak two-bed rents. In fact, he had asked for €1,600… and got €1,700!

Year on year change in rents, selected regions, 2007-2011

The chart above shows the year-on-year change in rents by four regions, from mid-2007 to April just gone. You can see the dramatic change from a booming rental market in summer 2007 to a market “in freefall” by late 2009 and, since then, a clear move towards stabilisation. In late 2010, the year-on-year trend in rents in Dublin city centre and in Cork city moved into positive territory and has stayed there since. Rents elsewhere are not stable but – at annual rates of decline of 2-3% – are probably close to stabilising.

There are two caveats worth noting:

• The first is rent allowance. This may be propping up rents in the lower end of the market, particularly one-bedroom properties. However, whatever about the exact price level, the balance in transactions looks real.
• The second is hidden supply. Is NAMA sitting on a stack of rental properties that are currently vacant? We don’t know. If its holdings are larger than we think, that could have an impact. Overall, though, the cities do not look overstocked with rental properties.

In summation, rising rents are bad news for renting households and – indirectly – for Ireland’s competitiveness. Rising rents are good news, though, about the underlying strength of the real economy. And, given the price of a home is ultimately determined by its rent, stable rents allow us to glimpse the real value of property. The sooner that national obsession is sated, the sooner we can get back to real economic issues.

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Postscript… “But these are only ‘asking rents’ not the true rents achieved,” some will say. A very fair point, as my story about the Facebook-Google apartment shows. Does this matter? It certainly matters if you want to get the exact percentage point change in rents achieved to two decimal places. Advertised rents are only a proxy for the actual rent agreed in private between a landlord and their new tenant. However, they are a pretty good proxy. As the huge changes in the index since 2007 show, advertised rents are a good indication of trends and changes in trends. If inflation in advertised rents goes from 8% to 9%, one might not be certain if much has really changed in the market. But if inflation goes from -20% to +5%, something has most certainly changed. Not convinced? Put yourself in the shoes of a landlord that has read eight reports in a row saying rents are falling. If you’re upping your rent, you must have some reason to think you’re not pricing yourself out of the market.