This post reviews Ireland’s relatively sparse wage data for signs of a real devaluation (or not), before discussing some of the problems in waiting for official data. To light a candle, rather than curse the darkness, the post includes a short poll for readers to complete, on employment and earnings. A successful take-up of the poll would be a real contribution to the debate on earnings in Ireland. Read more
A review of the IMF’s April 2009 World Economic Outlook, and an analysis of the fastest growing – and contracting – economies of 2009. The 2009 economic growth in Africa and Asia is welcome, and growth (albeit weaker) in China and India indicates the beginnings of self-sustaining domestic demand in those economies. Read more
Yesterday, the latest daft.ie report was released. More details here, but the overall gist is that asking prices fell 4.2% in the first few months of the year. Coupled with the falls in 2007 and 2008, this means that asking prices are now down 18% in two years. On the face of it, this may not have much to do the Budget being released today, which has to deal with more pressing issues of the public finances, unemployment and the banking crisis. However, to say that Ireland’s stock of wealth tied up in residential property should have no role in plugging Ireland’s E25bn public finances gap is myopic in the extreme, particularly given Irish wealth-holding tendencies. Even if we rule out a property tax, we should at least know how much we’re throwing away in potential tax revenues, and this blog post hopes to establish approximately this potential is.
No harm, first, to recap the fiscal crisis Ireland faces, outlined in the chart below. In 2007, the Irish government expected that in 2009, tax receipts would be in the region of €56bn. By last week, the expected revenues for the year had slid down to €34bn. This €22bn gaping hole is staggering, as it represents a collapse of 40% in revenues. Any organisation with a 40% collapse in revenues has to re-examine its entire business model and Ireland is no different. Fixing the €20bn-plus gap between income and expenditure will require taking more money in and spending less. My contribution on the debate about spending less is for another day – you can probably get some inkling of what I think here – but on raising more, we have to look again at property. Property taxes in Ireland are based on transactions – we now know, and probably deep down knew all along, that the huge amounts the government was taking in over the past few years were totally unsustainable.
If we don’t tax property transactions, how will we tax property? And what contribution to plugging our €20bn gap can property make? Recent articles by the Sunday Independent and the Irish News of the World have discussed the scale of how much has been wiped off Ireland’s property market, while the combined report by stockbrokers Davy, Goodbody and NCB mentioned the potential revenues that could be earned by introducing a property tax in Ireland. So just how big is Ireland’s property market? The answer is about €460bn, as is shown in the graph below. The graph uses 2006 Census data on the number of households in each county, Dept of the Environment figures on new houses built in each county since 2006 and daft.ie quarterly average house prices by county.
The graph also shows that the total value of Ireland’s residential property is about E100bn less than what it would be were no crash to have occurred. A similar amount has also been wiped off Ireland’s stock exchange, which is plotted on the same scale to allow comparison but whose remaining value is €30bn, compared to the €460bn still in Ireland’s homes.
Supposing the housing crash continues so that Ireland’s 1.6 million homes are worth perhaps E400bn by the time they bottom out. While well below the €600bn or so that it “could” have been, this still represents a huge potential stock of wealth that is largely untaxed. Simple maths says that a property tax that averages 1% could raise €4bn per annum. Assuming that the government will be aiming for a three-year correction to 2012 that lifts tax receipts by €10bn a year, while it cuts spending by €10bn a year over the same period, a property tax could solve 40% of Ireland’s tax woes. The average household’s annual tax bill would be less than €3,000 – or about €50 a week.
How would a property tax work? There are of course some significant issues that Ireland would have to iron out first, before a property tax could come in. For example:
Nonetheless, there are significant advantages to a property tax:
Given that we’re talking billions – perhaps even twice as much as the joint report by the main stockbrokers suggested – this should definitely be explored in more detail over the coming months.
Watching Monday’s Questions & Answers, I became increasingly baffled as to how poorly understood the gap between public sector and private sector pay in Ireland actually is. I conducted a mini-straw poll, through the various media of living room chat, email and Twitter. That poll made me realise that while I had been labouring under the presumption that despite all the stats we have on wages across sectors, those stats were having no impact, others were labouring under the presumption that the debate had to be kept at a general level because we had no statistics on the topic.
The guts of a decade ago, I undertook some research for Prof. Frances Ruane on the original benchmarking deal. What we found at the time was that there was no gap emerging between public and private sector wages, or if the gap was there at all, it was in favour of public servants. For those interested in more on that 2001 perspective, I’ve embedded a version from Scribd at the very bottom of the post.
Given the way this week is going, with public sector unions somewhere between agog and apoplectic at the idea of having their wages reduced, and given that no-one in public discourse (if Q&A is representative) is quoting these figures, I thought it might be no harm to see if I could do up what we in the business call “a one-slider” that might make them understand the decision a little better.
First, a general comment about public sector pay cuts. This can’t possibly be that much of a surprise to anyone in the public sector. After all, this is what they signed up to in 2001, with benchmarking. Benchmarking may have been an incredibly expensive way to do it – costing the economy €1bn+ every year and counting – but it did establish a principle in public sector wages in Ireland. That principle is that trends in public sector wages must mirror those in the private sector. It’s incredibly cheeky of those happy to have the principle applied in the good times to argue that they shouldn’t have to ‘bear the brunt’ of having the same principle applied in the bad times.
Now for the one-slider!
And in true consultant style, three key points from the above graph:
With the Live Register now rocketing towards 400,000 and private sector wages now stagnant, bonuses disappearing, total earnings in the private sector are falling. Therefore, according to the principle of benchmarking, so must public sector wages. As they are paid €50,000 on average, compared to average wages of less than €38,000 in the private sector, this won’t be the biggest economic calamity to befall Ireland this year. Now, can we please incorporate this knowledge into our social dialogue?
[scribd id=11635058 key=key-2809dv8hrkl94xxmtc5r]
* Public sector includes public administration and education, but excludes health. No data there for some reason. Private sector includes all sector apart from agriculture (again no data). Some other methodological notes: I have had to assume Q4 figures for 2008 equal to Q3 in some instances or just take the average for the first three quarters, as Q4 data are not yet out. Construction figures only start in 2004, while manufacturing/industrial wages end in 2007, so I have had to use rates of change for the remaining sectors in those time periods, but the level of wages is determined by the full sample of private non-agricultural wages.
Following on from my recent post about Web2.0, hubdub and guessing Irish unemployment, I think it’s only right that I turn this future prediction market technology on myself. Well, on the Daft Report at any rate.
At this link, you’ll find a market on how much lower rents in Ireland will be in January 2009, compared to a year earlier. All you have to do is place some of your hubdub dollars (don’t worry, the whole thing is free, it’s just to measure how sure of the outcome you are) on the year-on-year rate of change, as per Daft’s very own National Rent Index.
Those who get it right will get naught but some more Hubdub dollars, but hopefully that will suffice. Well, that and the knowledge of being right, and perhaps some real dollars, in the form of a cheaper rent, if you’re a tenant bargaining with your landlord – assuming of course rents fall. (As I write this, the Hubdub market currently gives a 5% chance to rents falling less than 6% or rising, so some of that 5% includes the theoretical, at this stage, outcome that rents will go up.)
There is of course a serious side to all this (careful, blogosphere, here comes the science bit). If the market matures enough, it will be interesting to see how correct it is, compared to the actual outcome. Consistently accurate markets, across a whole range of these hubdub thingies, would say something to economists and policymakers, for example in Ireland, in light of the social partnership talks about public sector pay cuts (e.g. have public sector workers already cut their expenditure in anticipation of a cut?)
Most importantly, though, have fun! We need all the fun from markets we can get these days.
Daft has been getting lots of exposure in the Irish Times recently, as the batch of year-end reports and prognoses for 2009 flood in. In particular, the Irish Times has begun whetting the appetite for the 2008 Year in Review Daft Rental Report. Their recent article, ‘A renter’s market‘, reviews current trends in the rental market, citing the November Daft Report, which found a fall of almost 8% in rents in 2008 up to that point. It also pointed out the single most noteworthy feature of Ireland’s rental market at the moment, the overhang in rental stock around the country, which suggests that the smart money is on the next report to show a continuing fall in rents in pretty much every part of the country.
Below is a pithy analysis in the article from a man with a growing national reputation, Stephen Kinsella:
“What’s happened is that people bought [properties] to flip,” says Dr Stephen Kinsella, of the Kemmy Business School in UL. “They weren’t selling so they put them on the rental market. So what’s been happening over the last number of months is that the supply of available high-quality, brand new housing, especially apartment housing, has gone through the roof.” On the other side of the rental equation, demand has flagged due to the exodus of migrant workers from Ireland. The ESRI expects that net outward migration will reach 50,000 in the year to April 2009, which would free up even more rental properties. “You don’t need a PhD in economics to know when the supply of something goes up, the price of it is going to go down,” says Dr Kinsella.
Earlier IT coverage of the Daft Report focussed on the ongoing debate about the true level of house price falls. On Wednesday January 14, it reported the main findings from the Year in Review report for the sales market, alongside findings from the IAVI report out the same day. In an article entitled ‘Prices of houses in Dublin fall by 16.5%‘, the paper reported:
The latest Daft.ie house report, also published yesterday, shows that asking prices for houses fell almost 15 per cent over 2008.The decline in prices, according to the property website, accelerated in the latter months of 2008 with asking prices falling 5.8 per cent in the last quarter alone. According to Daft.ie, the national average asking price fell €58,000 in 12 months to €295,000, the same level as in January 2006.
Somewhat confusingly, though, the very next day, it published an article that was not so keen on the Daft Report. (One could of course be all conspiratorial about these things, bearing in mind that the Irish Times owns daft’s rival myhome.ie, Ireland’s second largest property portal, with approximately one third of the visitors, traffic and listings of daft.ie!) Michael Grehan, MD of Sherry Fitzgerald, sought to set the record straight on the true state of the property market, in an article entitled ‘Reports do not reveal true price drop‘:
Michael Grehan, managing director of Sherry FitzGerald, says that a report this week by property website Daft.ie, which showed a 15 per cent fall in house prices last year, doesn’t tell the full story, since the research is based on asking prices rather than those actually achieved. Grehan argues that while Sherry FitzGerald’s own property indices shows an average price correction of 30 per cent, since the peak, he knows of properties that appear to have taken cuts of 40, 50 and even 60 per cent, in at least one case. The size of the drop has been confirmed by other agents who have seen prices fall through the floor as buyers bargain aggressively. “The lack of publicly available information on actual sales prices puts buyers at a disadvantage as there is often a big difference between an initial asking price and the eventual selling price,” says Grehan.
Of course, he’s dead right. The Daft Report is based on asking prices, which is why, for example, the index is called the Asking Price Index. Also, it’s nice to see what those on thepropertypin.com would call a VI (vested interest) arguing strenuously that house price falls have been up to three times as large as those reported in the statistics. What makes it all a little bit more confusing, however, is that Sherry Fitzgerald conducted their own analysis of the Irish property market in 2008 and published their findings a week earlier. And what did they conclude? According to a January 7 report in the Irish Times entitled ‘More price cuts as season starts‘:
The average price of a second-hand property in Ireland fell by 7.1 per cent during the final quarter of 2008, according to a report by the agency [Sherry Fitzgerald] earlier this week. “This brings the level of price deflation for 2008 to 18.1 per cent – the highest level of price deflation ever recorded in the Irish market,” says the company’s chief economist, Marian Finnegan.
Confused? I know I am!I think it’s probably fair to say, though, that most people would be surprised if the 3% gap between the 2008 fall in Daft’s asking prices and the 2008 fall in SF’s index of prices truly reflected how much buyers are undercutting listed prices – which I think was Mr. Grehan’s point.
The moral of the story? Probably nothing more insightful than: know your stats, what they’re telling you and what they’re not, and always keep a healthy sceptical outlook on everything you read.
This is an unabridged version of my commentary on the latest daft.ie report (2008 in review), which is available at daft.ie/report.
When we look back at 2008 in a few years time, I think it’s fair to say we will regard it as the annus horribilis for Ireland’s property market. In late 2006, we issued a report which was the first to spot a slowdown in the property market. At the time, it was our view – unpopular though it was – that rising interest rates and high levels of supply would lead to a levelling off in house prices. This turns out to only have been the start of the story.
Ireland has become a bit of Britney Spears economy. Bursting onto the world stage at the end of the 1990s, Ireland was heralded as an economic phenomenon and rapidly became a global superstar and poster-child for economic development. But recently it looks like it’s all just falling apart. Nowhere is this more evident than in Ireland’s housing market – until recently the engine of Ireland’s economic growth. House prices have fallen significantly from their 2007 peak, with trends in Ireland’s property market driven by the ongoing effects of overproduction of housing, combined with extraordinary international economic developments.
As the daft.ie review of Ireland’s property market in 2008 shows, asking prices for Irish property fell on average 15% during the last year. That makes 2008, in many ways, the opposite of 2006. While asking prices were static throughout 2007, the 12 months of 2008 have seen the typical home lose just over €50,000 in value, almost the exact amount gained in 2006. Ireland’s average asking price of €295,000 in December 2008 is almost exactly the same as that in January 2006. Even the property market’s quarterly trends were like 2006 in reverse.
The early part of the year was marked by uncertainty about growth in developed economies, as ongoing financial turmoil took its toll on share prices and the dollar. There was still a widespread belief, however, that emerging markets would take up the slack and that we were experiencing a blip rather than a derailment. Asking prices therefore eased back just 1.4% in the first three months of the year. As summer came along, though, it seemed that we were entering a new economic era, one of $200 oil and inflation. As this sank in, confidence took a further hit. Asking prices fell twice as fast between April and June as they had done in the first quarter, with the outer commuter counties of West Leinster, more dependent on petrol prices than elsewhere, particularly badly hit.
As autumn descended, the full extent of the financial crisis was revealed. Long-standing banks and investment houses were wiped out or nationalised on a weekly, if not daily, basis. House prices fell almost 4% in the three months between July and September as a result. There was still a feeling, however, that the financial and real economies, or Wall Street and Main Street as they were dubbed, worked in somewhat separate spheres. As the year came to a close, however, the full impact of the financial crisis on the real economy was becoming apparent, with job losses in retail, catering and manufacturing. The largest fall in asking prices, almost 6%, has come about in the final months of the year (just as the largest rise occurred in the first part of 2006).
South County Dublin has been in many ways the flagship of Ireland’s property market. Average asking prices in the area rose from €530,000 in early 2006 to over €680,000 by mid-2007. They have fallen steadily since then and in late 2008 fell over €50,000 to stand very close to their early 2006 levels. Elsewhere around Dublin, the fall from the peak has been in the region of €70,000 to €80,000. Outside the capital, falls in asking prices of between €40,000 and €50,000 from peak values in mid-2007 are more typical.
A range of global economic developments has made it necessary for countries around the world to revise down their growth estimates over the coming years. Russia, which earlier in the year had been expecting growth in 2009 of perhaps 7%, is now fighting talk that it is already in recession. The US may experience its first two-year recession for some time, while the IMF believes that the world as a whole will be in recession next year, according to its definition of global growth of less than 3%.
Ireland was delicately poised atop recent global economic trends. Its two major currency exposures are to the dollar and to sterling, so recent depreciations of both are having a major impact for Ireland’s exporters.
In the midst of all these external developments, Ireland’s domestic sector – so heavily reliant on construction for employment, wages, tax revenues, and general sentiment – has contracted sharply. The government budget shortfall for the year totalled €8bn, with likely implications for public sector pay and employment in 2009 and 2010. It is likely that net migration will change from large inflows in 2007 to outflows in 2009, particularly as unemployment looks likely to reach double digits at some point in the next few months.
What do all of these local and global trends mean for homeowners and prospective first-time buyers? To see where the property market will go next – and when it is likely to recover – it is necessary to look to the past as well as to the future. Over the past few years, Ireland has built perhaps twice as many houses as it needed, due in large part to tax incentives. Between 2005 and 2007, a quarter of a million new homes were built in a country that only had 1.4 million households in 2005. Worse still, due to the nature of the tax incentives, many of these properties were built in areas that did not need them. It stands to reason that if you build twice as many houses as you need for three years, you’ll need to build half as many as you need for six years to get back to equilibrium.
So should we write off Ireland’s property market until 2015? Not necessarily. It’s likely that prospects will vary from region to region. As outlined above, areas like South County Dublin are certainly feeling the pinch now, falling almost €150,000 on average from peak values. In such areas, prices are determined less by wages and interest rates, and more by expected future value and confidence. Therefore, whenever sentiment eventually reverts to a more optimistic outlook, those areas are likely to rebound faster. With the government seemingly tied into a pro-cyclical trap and not able to implement an economic stimulus package, due to large increases in public expenditure in the good times, it is of course an entirely different question whether lower interest rates will be enough to kick-start sentiment in Ireland.
In other regions, the long-term prognosis is very different. For properties close to centres of employment, four elements – employment, wages, interest rates and access to finance – will be crucial. Other areas, suffering from a glut of properties, may need a longer or a larger adjustment. Ballpark figures, based on the 2006 Census and daft.ie listings, suggest that as much as 10% of properties are for sale in counties like Roscommon, Cavan and Leitrim, compared to less than 5% elsewhere. It won’t be impossible to sell properties in these counties in coming years, but sellers must be realistic about the value of their property in a flooded market.
As I mentioned at the start, Ireland has been in many senses the Britney Spears of the world economy over the past ten years. Bursting on to the scene in the late 1990s, we earned worldwide recognition for how much we achieved so fast from such humble beginnings. With all this fame, it was perhaps to be expected that we lost our way in the early years of this decade. Recently, things have got a lot worse. With bank bailouts, budget debacles, job losses and public sector cuts, we’ve been through it all. Nonetheless, like Britney, while a lot of damage has been done, with good management, we can look ahead and spot elements of a brighter future – just look at the cost of petrol, mortgages, food or clothing now compared to a year ago. Ultimately, with the resolve to put right what needs to be fixed, and with a far better starting point than we had in the mid-1980s, we have to be confident about our prospects for the future.