In this post, I take a look at the maths behind buying or renting. Amazingly, even in heady market of 2006, it was cheaper to buy than rent. With rates back down at very low rates, and generous mortgage interest relief, it is once again cheaper to buy than rent – and looks set to stay that way, unless there are significant changes to the tax system. Read more
A review of the latest trends in Ireland’s residential lettings market, from the Q1 2009 Daft.ie Rental Report, including a map of the changes in rents by county. Read more
Ireland’s property market is currently in rewind. Homes now are at March 2005 values – or July 2004, if asking prices are 10% above closing prices. Figures from daft.ie, the Census and the Dept of the Environment allow an estimate of both the number of homes now worth less than when they were bought – about 725,000, or 40% of homes – and how many of those are in negative equity -about 340,000, or 20% of homes. Read more
The US leads the way for many types of statistics – and in particular for their timeliness. The housing market is no different, with a plethora of measures such as prices and volume of transactions out every month.
In Ireland, though, we have to labour under a dearth of timely statistics on a range of economic indicators – including the housing market. Naturally, the Daft Report tries to make its contribution, publishing one week after quarter’s end so that people have the latest asking price and stock/flow information. One that I’m increasingly asked for is the number of months of supply currently sitting on the property market, a measure that’s well established in the US. It’s probably time we tried to put some numbers on it.
To do that, we need to answer two questions. The first is: what is a normal volume of transactions for the Irish property market? The second is: how many are on the market now?
On the first, the natural way to go about it would be to use the recent level of transactions. The only problem with that, though, is that the number of transactions has fluctuated wildly over the past four years, making that a somewhat erratic measure. To counteract that, the Department of the Environment have a long-run series on loan approvals, which for all intents and purposes tells us how many people are buying property every year. The numbers still vary hugely over the past two decades, in line with the vicissitudes of Ireland’s property market. In 1990, there were just 35,000 transactions – less than 3,000 a month – while in 2005, there were over three times as many transactions, 120,000 in total.
Taking the 2005 figure – or indeed anything since about 2000 – leaves open the accusation that one is deliberately underestimating the problem by overestimating the “typical” month. Then again, anything pre-1999 – and certainly anything close to 1993 – is probably not too appropriate either. To overcome this, one can view the last 15 years of Ireland’s property market as two stylized periods: a (relatively) healthy property market in the 1990s, where monthly transactions averaged 4,400, and a hyperactive property market, 2000-2007, where monthly transactions averaged 7,800.
Using the 2000-2007 figure gives us a lower bound, while using the 1993-2000 gives an upper bound. Given that Ireland is the guts of 700,000 residents bigger now than in 1993 (even allowing for outward migration), it probably makes sense to use the average of the two figures (about 6,000 transactions a month) as some sort of post-2007 reasonable estimate of what one could expect would pass through the market in a healthy post-crunch Ireland.
To answer the second question, how many properties are currently on the market, I’ve taken the daft.ie series of stock of property for sale. An adjustment has been made, given the way new developments are listed on the site, to make sure that vacant new builds are better captured than the raw figures may suggest.
After all those preparations, where are we? The chart below shows the best estimate (orange) of the number of months property sitting on the market from early 2007 to April 2009 – alongside upper (red) and lower (green) bounds, based on whether one believes that the 2000-2007 level of transactions is ‘normal’ or in fact when everything dies down we’ll see a return to much lower 1993-1999 levels of transactions instead.
In a normal property market, one might expect to see three or four months supply sitting on the market – that’s about how long it takes for a property to go through the cycle of litsing, viewing, agreement, closure. The graph above – if you accept the middle ground presented – is that there has been a over a year’s supply of property sitting on the market since this time last year, compared to about 5 months at the start of 2007.
Good news? These days, good news is really just absence of new bad news! The good news is that while there is about three times as much property on the market as normal, this has levelled off – and indeed fallen slightly – in the last six months.
This week’s daft.ie report revealed some intriguing findings in relation to the current state and trajectory of Ireland’s property market. As was discussed yesterday, for example, while east peaked earlier than west, north has fallen further than south since the peak. One of the conclusions of both these findings is that Dublin and its commuter counties have experienced falling prices first and deepest.
This goes somewhat counter to conventional wisdom, although conventional wisdom hasn’t done too well in the last couple of years it must be said! Conventional wisdom would suggest that whatever about the Section 23 wastelands and ‘ghost estates’ of Ireland’s mid-West and elsewhere, the capital – as focal point for Ireland’s public and internationally trading sectors and their upstream and downstream employers – would be alright, at least in relative terms. In an Ireland where prices fell 20% in the crash, Dublin might be 15% or so while “somewhere else” would be worst hit.
While easy to mock, there is something in this from a long-term perspective. I have argued before on this blog – in December and again in February – that the ‘overhang’ of property looks a lot worse, even with just approximate calculations, in the mid-West than in the capital or indeed any of Ireland’s five cities. With stock falling slightly in the last six months, no harm revisiting the ‘overhang per county’ chart again, with stock levels taken from today.
Again, the message is pretty clear – Cavan, Donegal, Leitrim and Roscommon have significant property ‘overhang’ compared to the likes of Monaghan, Kilkenny and Dublin and its commuter counties. The conclusion that I would draw is as follows: as it is home to the vast majority of Ireland’s top earners, to the extent that Dublin’s property market priced in expected future GDP and wage growth – i.e. confidence – it is to be expected that prices will fall most there, as confidence collapses from a high in late 2006 to a low in 2009. (The implication is that prices would be more likely to turn around faster, were confidence to somehow rematerialize.)
Taking a longer term perspective, though, unless prices adjust faster in places like Donegal, they face the prospect of longer peak-to-trough. Indeed already, some on theproperty.com are fretting about the future of places like Roscommon. On a thread entitled “Rents getting very cheap in the west“, mikewest’s message makes glum reading for property holders in Roscommon:
The house prices down here are still utterly crazy because something the developers never noticed is that there is shag all work in Co. Roscommon and if you dont have work then nobody wants to live there. People talk about the ghost estates in Longford and Leitrim but they don’t hold a candle to Roscommon. Every village and town has empty or virtually empty estates and / or apartment blocks…
There is another teeny tiny problem in the west. There are one or two houses too many in some towns right now so asking prices for rents are really more aspirational than actual but not quite as aspirational as asking prices for houses.
On Monday the latest daft.ie report came out, showing that asking prices had fallen just over 4% in the first three months of the year. Yesterday, I changed focus on the blog a little, as it was Budget day, and tried instead to put some numbers on what a potential property tax could raise.
Today, I hope to give a little more detail on the findings from the report itself, in particular regional trends, and then give an international perspective also – or at least start to give one, which I think is always instructive. Below is a graph showing the quarter-on-quarter change in asking prices for the last two quarters, i.e. Q4 2008 and Q1 2009, in each county. The most obvious finding – probably not a surprise to anyone – is that asking prices fell in almost all counties in both quarters. A second clear finding is that there does not appear to have been one or two counties more affected in the last six months than elsewhere (although one could make the argument that Munster has got off relatively unscathed since September).
What also jumps out is that the two quarters saw very different patterns. In the final three months of 2008, a few counties – such as Galway, Westmeath and to a lesser extent Donegal and Leitrim – saw the largest downward adjustments in asking prices. Two counties, Mayo and Tipperary actually saw no fall in their asking prices. This quarter, Mayo and Tipperary actually had slightly larger falls than average – perhaps a sign that sellers there had been holding for the start of the year before acceding to the realities of the market. On the flip side, sellers in Galway and Westmeath believed in Q1 that their large adjustments in late 2008 did not need to be followed up with more adjustments straight away.
Sligo has been the worst hit county in terms of falling house prices, with a fall in the region of 10%in three months alone. (Dublin city centre and Waterford city actually saw bigger falls but they are lessened by other parts of their counties.) Aside from that, it seems that Dublin generally and the counties around it were among those with larger adjustments since the start of the year.
This leads on to perhaps a more interesting question – how have counties fared since their property prices peaked? To do that, I’ve set up another Manyeyes dataset (which anyone can access) with the percentage gap between house prices in a given quarter and the peak, for each county. Where a county is sandy coloured, that means it has peaked. The deeper the blue, the bigger the fall. (One little trick with these figures is that for a county’s earlier “blues”, prices are still going up. By the second row, that’s no longer an issue.)
A couple of findings emerge, based interestingly on alternate axes of the country:
Speaking of writing the history books, perhaps it’s no harm to have a quick look to our left and our right and see how other property markets are faring. Below is a chart of about 20 countries (with two different measures in there for the US, the first is the OFHEO measure, while US* is the Case-Shiller national index). I’ve based this on data posted on the Economist’s website, but have surreptitiously replaced the 2007/2008 ESRI data, about which there is a lot of scepticism currently, with daft.ie data. The bars show the annual rate of change in house prices, including a 1997-2008 average, and figures for 2007 and 2008. (As per the Economist website, some of the Q4 08 figures are actually Q3 08 while a couple, including Ireland, are Q1 09.)
Replacing the ESRI data with the daft.ie had the effect of moving Ireland from the “Club of Moderates” such as Denmark and the Netherlands, to the “Bleeding Edge” group with Hong Kong, the UK and the US (at least one measure for the US at any rate). I will do my best to try and track down the original data for this series so that a change-from-peak measure can be contructed as again that may be more instructive than a year-on-year change, particularly in six months time.
In the meantime, though, I’ll leave this up here and ask for any insights, comments or queries, as per usual! Fire away…
With Davy Stockbrokers predicting a 70% fall in Irish construction activity from its peak over the coming ‘medium term’ (2009-2011 or so), I though it might be timely to review some headline statistics for Ireland’s property overhang.
Recently, I’ve been peddling the idea that between 2004 and 2007, we were building twice as many homes as we needed and building twice as many for 3/4 years implies building half as many as you need for 6/8 years to return to equilibrium. Does that stack up? Or, put another way, if we start in 2002 with Census statistics on the stock of housing, use Dept of Environment statistics for the period 2002-2008 and turn Davy’s figures into ballpark estimates for 2009-2013, how bleak will things look in five years time?
The answer, much to the chagrin of those who loathe two-armed economists, seems to be that it depends – in this instance on what part of the country you’re talking about, but also about what you think is the appropriate long-term need for new houses in this country. If we take 2001 figures (technically March 2002 figures) as our ‘departure from normality’ point, how far off course are we? Between 2002 and 2008, we churned out over half a million properties, off an existing base of just 1.3 million households. Back-of-the-envelope estimates, based on an overview of economists’ figures on this topic, suggests that we should have been building perhaps 300,000 households in that same period. (That’s using an equilibrium figure of 40,000 properties a year, rising temporarily after the accession of new EU member states.) So, enough with all the stats, what’s all this for, you wonder. Well, I was hoping to use all this to answer two key questions:
Where did we build our extra properties? By the end of 2008, we were about 5 years ahead of schedule – i.e. we’d built 12 years supply in just 7 years. To give a regional flavour, based on insights gleaned from the property overhang per county figures I calculated in December, I split Ireland into three regions – Dublin, Connacht/Ulster and the rest of the country. (The data allow for a full county-by-county analysis, however time constraints and poor formatting in the various external sources has prevented me from threatening another heatmap!) Over the period in question (2002-2008), more houses were built in Connacht/Ulster than there were in Dublin, which has almost twice the population! As a result, in terms of years of “pre-production”, if you will, while Dublin had under 2 years excess supply by end-2008, Connacht/Ulster had almost 8 years. Once more emphasis: builders managed to produce 15 years output in Connacht/Ulster in just 7 years.
How long will we have to sit around building nothing? It’s all very well for someone to come along after the fact and say “You shouldn’t have done that”. What’s more interesting is to shed some light on where the adjustment will come first and where it will be hardest. One option would be just to close up our construction sector for a few years until inventory shifts sufficiently and prices start to rise. Practically, of course output doesn’t and shouldn’t collapse to zero and, as per Davy’s figures, will be in the range of 10,000 to 25,000 over the coming 5 years.
Therefore, I’ve assumed output of 20k in 2009 (still slowing down), 10k in 2010 (bottom of the market) and then a simplistic 5k increase in output every year after that, rising to 25k in 2013. Let’s call this the ‘post-Section 23′ scenario. This is contrasted with a ’20:20 foresight’ scenario where steady-state output in construction remains 40,000, apart from a minor blip of 35,000 in 2009 due to global economic circumstances. In both scenarios, new houses are allocated according to a region based on its Census weight – crucially, and we can relax this later, even in our post-Section 23 world, output resumes in Connacht/Ulster, not at the distorted rates we saw but in proportion to its size. The result of all this is the chart below. The figures show the excess of properties as a percentage of the total property stock in each of the three regions.
The results are pretty clear:
Objections to the above might include one along the following lines: construction will not only contract 70% but also no-one will be building in Connacht/Ulster for years to come so even the rebalancing of output described above is not an accurate forecast. In that case, the overhang will just take the full 8 years from 2008. Section 23 and the property boom will have taken construction jobs from 2009-2015 and left them in 2002-2008 – a sort of integenerational outsourcing.
Another objection is that the optimistic (if 2012 is optimistic) scenario painted for Dublin hinges on that long-term need of 40,000 units a year (which translates into about 12,000 new units in Dublin annually, based on its Census weight). Significant and persistent net outward migration from Dublin from 2009 on – which incidentally is why I believe that Dublin Bus, so clearly an ‘inferior good’ in the economist’s sense of the word, is losing money when incomes fall – might mean that the demand for housing in the period 2009-2013 may fall to 20,000. Replacing 40,000 with 20,000, from 2009 on suggests that the average percentage overhang for the country stays stuck at 10% and Dublin – while still much lower – remains stuck at 3-4%.
In sum, we are where we are. We’ve more than enough houses everywhere in the country and plenty of houses in places where we won’t need them for another 10 years or so. Therefore, it would be wise for the Government to take this crisi-tunity, as Homer Simpson would say, to harness both supply and demand sides of the market.
The third and final (for 2008 anyway) instalment in the visualizations of Ireland’s property market takes a different look again to my recent posts on trends in prices and stock. Building on the measure of affordability on page 10 of each daft.ie rental report and a suggestion made on thepropertypin.com, it measures the gap between the expected yield and the cost of borrowing.
The result is here on Manyeyes. Blue means the cost of borrowing is greater than the expected yield, while brown means the opposite. Below, two quarters are shown – 2008 q3 and an estimate for 2009 q2.
What is clear is if that one takes a measure of this gap as a measure of market disequilibrium, the market remains overpriced. (There are of course plenty of reasons why rents as a proportion of house prices may not be the only measure of a housing market in balance, particularly where rental markets are small or negligible, but bearing that in mind, let’s proceed…)
To look ahead and see if this mass of blue is likely to change any time soon, I made some assumptions about interest rates, asking prices and rents, based on what we know now. I assumed that interest rates fall to 1.5% in June 2009, and that house prices and rents both fall 5% quarter-on-quarter in the first six months of next year, as high levels of stock in both segments take their toll. I’ve also assumed landlords will still get 11 months of the 12 in rent and that the rate at which first-time buyers borrow remains about 1.1% above the ECB rate.
I’m sure there are plenty of ways people might disagree with particular aspects of those assumptions, but I think they make, if nothing, else a starting point for discussion. (Take them as a straw man if you don’t like them!) Anyway, if those assumptions were to be borne true over the coming six months, the first thing to note is that yields would be largely unaffected – i.e. not going in the direction they should be, up towards the equilibrium long-term average cost of borrowing somewhere north of 4%. (It should be pointed out at this stage that yields in certain market segments, e.g. West Dublin 1-beds, are already very close to 5%, so averages certainly hide some interesting sub-county variations. For more check out page 10 of the last Daft.ie report.)
However, a collapse in interest rate – albeit gradually – in a steady-as-she-goes ECB version of the Fed’s record peak to trough interest rate journey would have the not unexpected consequence of turning all those blue spots brown. Well, most of them anyway. Once again, the prognosis is not good for Leitrim and Cavan, two of the counties with among the worst stock overhang in the country, on a per capita basis. Even with interest rates collapsing to record lows, that would not be enough to make the rate of return on property greater than the cost of borrowing.
Is the cure the world is adopting a central banker’s version of the hair of the dog that bit you? Or are we entering a phase of the world economy where caution is so predominant that low interest rates are the appropriate response?
As those who’ve checked out/had to put up with my many word clouds on various different topics from Wicklow genealogy to Barack Obama will testify, I’m always looking for new ways to present data and information. For those with similar interests, a useful tool in that regard is Manyeyes, a free data visualization service offered by IBM. First thing you might do when you click through is have a wander around some of its featured visualizations, such as the OECD economic outlook or the World Cup Finals.
You needn’t stop there, though, as once you’ve registered, you can upload datasets yourself and visualize them. What’s particularly cool, in my opinion, is the ability to do maps with subnational data points, e.g. for the USA, China and, somewhat surprisingly until you remember IBM’s presence in the country, Ireland.
So I plugged in some county-level statistics from the Daft.ie database, in particular the year-on-year % change in asking prices by county from the first quarter of 2007 to the third quarter of 2008. The results are available for all to see on Manyeyes – I haven’t been able to put a live visualization up here, but you can get a sneak preview below and indeed the whole shebang just by clicking on the picture.
What, even clicking on the link is too much hassle? OK, here’s the lazyman’s version:
The easiest way to get the overview of the story – but with the minimum detail and surprise factor – is to go straight from 2007-q1 to 2008-q3. As you can see the map goes from totally brown to totally blue! But that naturally is hiding a lot of detail… So here are some other highlights on regional trends in Ireland’s property market:
There are just some initial observations on the figures – overall, Manyeyes is a pretty useful tool, I’d have to say. I’d be interested in hearing anyone else’s observations on regional differences in price trends. What have I missed? Or indeed, what should I be heat-mapping?