Ronan Lyons | Personal Website
Ronan Lyons | Personal Website

house prices

Will Irish house prices fall?

A couple of weeks ago, Philip Lane, the Governor of the Ireland’s Central Bank, suggested while appearing before an Oireachtas committee that Irish house prices could fall in coming years. The comments generated a lot of interest, given his role. In particular, he said that a combination of factors could combine to not only halt price rises but even bring down sale and rental prices. These factors, he suggested, were increased housing supply, including of student accommodation, higher interest rates, and potentially higher unemployment due to Brexit.

How much weight should we put on the Governor’s comments? Some thought the Governor even mentioning price falls means that he sees this as likely. Others, however, see in his remarks the typical economist’s way of seeing the world: many possible outcomes – one of which is falling prices – so why deny that?

To get a sense of just how much weight to put on the potential of housing prices – either sale or rental – falling in the coming years, it is important to understand the forces that push them up and down. In brief, there are five forces that affect average house prices, three of which also affect rents. The first three factors affect both sale and rental prices and are what you might term fundamentals, as they reflect the real economy. The first is household income. This captures both average income per worker and also the number of workers per household (i.e. unemployment).

When the Governor spoke of Brexit being a force for lower house prices, he was referring to this channel: that due to the British economy cutting itself off from its closest trading partners, the Irish economy – as its single closest trading partner – would be affected enough that incomes would fall and unemployment would rise.

The second factor, again a fundamental one affecting both sale and rental prices, is demographics. This is best measured as the number of persons per household. In Ireland, there has been a steady fall in the average household size over the past half-century, although one that has paused in recent years, due to a lack of housing.

But in big picture terms, it is hard to see how Ireland will do any other than slowly follow all its peers towards a smaller average household size. If over coming decades Ireland’s average household size falls from 2.75 people to something like 2.25 people, this creates a need to produce over 10,000 new homes – mostly urban apartments – each year.

The third and final fundamental is housing supply. This is best thought of in euro terms, rather than in number of dwellings, as a rural cottage and an urban apartment may have very different values.

But for simplicity, let’s think of housing supply as the number of dwellings. Construction is simply the addition to the stock of dwellings. Although it is important to remember that at least some construction merely offsets the obsolescence of other, older properties. In Ireland, a country with roughly 2 million dwellings, at least 10,000 – and perhaps as many as 15,000 – homes are likely to fall into disrepair each year.

Adding obsolescence on top of the various sources of demand, the country needs at least 40,000 and closer to 50,000 new homes a year. Granted, this is certainly less than the 80,000 or so new homes built at the peak of the Celtic Tiger. But it is more than twice the number of new homes started in 2017.

So for an over-supply to contribute to price falls, rather than a shortage contributing to price rises as has been the case since 2012, the building of new homes would need to more than double in the coming two years. And this itself is assuming that none of the backlog in unmet demand since 2012, either sale or rental, needs to be met for prices to fall.

Various commentators believe such an increase in housing construction is simply not possible, given capacity constraints in the sector. Where would all the new construction workers live, for example?

The final factor mentioned by the Governor is interest rates. And this brings up the difference between sale and rental segments. Unlike rental homes, owner-occupied homes are assets as well as consumer goods. Given the favourable tax treatment of the family home, it can be very profitable to concentrate your wealth into housing.

This potential for capital gain – or indeed capital loss – looms large in the minds of would-be buyers and sellers. In surveys over the last 15 years, those active in the Irish housing market have expected everything from 10% gains a year for the next five years to 10% falls per year.

This are huge numbers compared to the equivalent changes in interest rates over the same time. Mortgage interest rates have barely budged since 2008 and have been between 3% and 5%. This is not to say that mortgage rates are irrelevant. Far from it.

But mortgage rates are only one part of the ‘user cost’ of housing and have to be offset by potential capital gains. Since the 1980s, Ireland – and Dublin in particular – has been building far too few homes relative to the underlying need. This has created an expectation of capital gains that may prove tough to shift, even with the bubble and crash we’ve witnessed.

The fifth and final factor affecting housing prices is the one Professor Lane did not mention: credit conditions. This was the one that was most responsible for the bubble and subsequent crash in property prices in Ireland 1995-2012. Think of it as the typical deposit required by the first-time buyer.

The typical deposit fell from over 25% in 2000 to just 5% in 2006. But since the introduction of the Central Bank’s mortgage rules in 2015, this property price lever has largely been removed from the equation. Banks may have a greater appetite for lending now than in 2013 but the rules prevent them from repeating the mistakes of the past.

The Governor is right to highlight that property prices are not a one-way bet. However, looking into the detail of the Irish housing system, it is tough to argue – given the tight control the Central Bank itself has over credit conditions and the large gap between supply and demand, that prices will fall soon.

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An edited version of this post was originally published in my column in the Sunday Independent.

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.

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.

First results from the property price register – the IMF effect and rising prices?

As I mentioned in my earlier post today, Ireland has –at long long last – a public property price register. I also mentioned that it is a tricky business to extract any meaningful signals about the market as a whole from a database that has no structured information about location (other than county), never mind the property’s attributes, such as size, type, number of bedrooms, bathrooms, etc.

“Tricky” is not the same as “impossible”, though, so in this post, I’ve assembled a few facts and figures about the market, based on the 50,000 market-price transactions that have taken place since January 1 2010.

The IMF effect

The key use of the property price register, when talking about analysing the market as a whole, is the information it contains on the volume of transactions. The picture that emerges is a tale of two halves. The first half is the what happened in 2011 compared to 2010, the IMF effect as the economy in general and property market in particular adjusted to life in bail-out Ireland.

The impact on volumes was clear. The number of transactions in the first half of 2011, at just over 7,000, was 20% lower than the same period in 2010, when it was just over 8,800. Dublin in particular was hard hit by the uncertainty, with the number of transactions down 31%, from 3,100 to 2,100.

The first half of 2012 has been a period of regaining lost ground, with the total for the six months to June 2012 of 8,740 very close to the 8,800 two years previously. Dublin has been driving the higher volume of transactions, with over half of the extra 1,700 transactions occurring in the capital, but in general the increases in 2012 just offset the losses of 2011.

An overview of the volume of transactions by broad region is shown in the graph below.

Trading volume, by regional property market, 2010-2012

A first look at prices

Using a property price register to say anything at all about what has happened prices in the market as a whole is a game fraught with dangers. The most solid statistic is the median (or typical) price, i.e. the one with as many transactions cheaper than it as more expensive. It is quite different to the mean (or average) price, which will be skewed if one property sells for €100m, compared to €10m.

The picture that emerges is one probably far removed from the expectations of conspiratorial types who believed that everyone from the CSO to myself was involved in over-stating (or fabricating) a recovery in the property market. If anything, recent reports have understated the extent to which prices have stabilised. The first graph below shows the median price per region per quarter. The stability since the start of the year is notable, particularly when contrasted with free-falling prices in 2011. Also notable – with the exception of Q2 2012 – is the much smaller rate of decline in prices in Dublin than in other regions of the country. Since 2010, prices are down 20% in Dublin but 30% elsewhere.

House prices by region, 2010Q1-2012Q3 (2010=100)

The second graph below condenses this change in conditions since the start of the year. It shows the percentage change in median price between Q3 and Q1, for 2010, 2011 and 2012. Conditions worsened in 2011, with the national median price falling 7% between Q1 and Q3 2011, compared to 6% 12 months previously. By contrast, median prices have risen by 2% between Q1 and Q3 2012. Do not adjust your sets: yes, I wrote “prices have risen”!

Change in prices, Q3 over Q1, by region (2010-2012)

What next?

Suspicious types should be asking themselves why I chose the rate of change between Q1 and Q3, rather than the more obvious Q2 to Q3. Using Q2 instead would suggest a 14% increase in Dublin prices in just three months. Would anyone believe me if I said that?

That highlights the limitations to using the property price register for any sort of price analysis, even the (hopefully) careful median price analysis I’ve done above. The reason why a median price might shift 14% in just three months relates to the limitations of the data: we know nothing about the attributes of the properties in question. So maybe 3-beds formed a bigger chunk of the Q2 market while there were more 4-beds in Q3. Or perhaps conditions improved in South Dublin, and it formed a much bigger chunk in Q3 than in Q2. Ultimately we just don’t know.

It seems such a shame that having all this transaction price information out there, we can’t undertake any meaningful analysis of trends in prices… yet. I’m working with the tech guys at Daft and we’re hoping to match up addresses of property listings and property transactions. That way, we would know lots more about the properties sold, such as exact location, property type, and number of bedrooms and bathrooms. While this would inevitably be just a proportion of all transactions, and a small fraction of all listings, it would still allow the calculation of a substantive mix-adjusted price index of transactions, which would be a companion to the already existing asking price index.

Wish us luck!

Ireland’s property market – past, present and future

Over the past month, I’ve given a couple of talks on the Irish economy and the Irish property market in particular. While not exactly following the model of the “Single Transferable Speech” adopted by some, there was understandably – given the similar topics – a good deal of overlap between talks given to the public at the Central Dublin Library and an-EU sponsored conference on the Irish Economy in NUI Galway.

Both talks build on not only some of the academic research I’ve been doing recently but also material that only exists thanks to this blog and the feedback from readers, such as this post “Are we nearly there yet?“, comparing house prices now to their long-run level and to incomes and rents in Ireland since the 1970s.

A video of my talk in Galway is up on Vimeo here, while the slides are available both on Slideshare and on Scribd: both are embedded below also. All five sessions from the Galway conference are up on the Digital Revolutionaries Vimeo page. John McHale’s presentation contained a really neat graph with revisions to Ireland’s growth expectations by various bodies over the past 18 months, while Aidan Kane’s talk contains lots of fascinating information on Ireland’s historical debt issues, going waaaay back into the 1600s!

Ronan Lyons – The Irish property market from Digital Revolutionaries on Vimeo.

Falling house prices or not, Ireland needs a property tax

This post reviews the findings in the latest Daft.ie House Price Report, for Q2 2010, finding news for both optimists and pessimists in average prices and the level of transactions. The report’s commentary is by Jim Power, who discusses the need for a property tax. The remainder of the post reviews the arguments in favour of a property tax in Ireland and recommends the introduction of a land value tax. Read more

House prices in Cork: Rebel County by name, rebel county by nature!

This post continues the regional review of house prices with an analysis of four-bedroom homes in the different suburbs of Cork. It finds that Cork bucks the trend seen generally in the country and in Dublin and Galway cities that more expensive areas have fallen hardest. The largest falls in Cork have been in Glanmire. It then explores some of the likely explanations for these different regional trends. Read more