There are two surveys out this week that, on first glance, paint a contradictory picture of prices of residential property in the State. This morning saw the publication of the long-running EBS/DKM survey on affordability (with press release here) which concluded that we are today spending a smaller proportion of our net income on new property purchases than any time previously (at least since 1988). And earlier in the week, we had the latest Demographia International Housing Affordability Survey for Q3, 2010 which ranked Ireland (Dublin) as “seriously unaffordable”. So what are we, more affordable than ever or seriously unaffordable?
The DKM study examines the percentage of net income (that is income after tax and statutory deductions) that is needed to fund a new property purchase. They concluded that the amount now needed by an average First Time Buyer (FTB) couple each month to fund a 90% mortgage paying 3.87% interest over 25 years buying a property for €159,500 “has more than halved to monthly repayments of €639 or 12.6% of a couple’s net income” 12.6% average monthly income at €639 infers net €60,857 annual income. This is for a FTB couple. Although there may be some tax variations between couples, a net annual income of €60,857 (that is after tax, PRSI and Universal Social Charge) would infer gross annual income of €82,000. (using the PwC tax calculator for 2011). DKM don’t show the “affordability” over the past few decades but they do confirm that at the peak of the property boom in late 2006 the equivalent monthly % needed to fund a new purchase was 26.4% and DKM claims that the present % is lower than any time in the past 25 years including previous lows of 13.8% in Q1, 1995 and 13.4% in Q2, 1988.
The Demographia survey examines the median house price divided by gross annual median household income. Anything below 3.0 indicates affordability, 3-4 indicates moderate unaffordability, 4-5 serious unaffordability and above 5 severely unaffordable. Ireland (Dublin) was at 4.8, that is the average house price divided by the annual gross salary was 4.8. Where does the magic number 3.0 come from as the borderline between affordability and unaffordability? From pre-1990s experience of what folk back then paid. Is that a decent measure today of affordability? That’s a difficult question. The report states “Ireland: Housing in Ireland was moderately unaffordable with a Median Multiple of 4.0. Housing was generally affordable in Ireland as late as the middle 1990s. Dublin was the least affordable market with a Median Multiple of 4.8 and along with Cork (4.1) was seriously unaffordable. Three of Ireland’s five markets were moderately unaffordable, Waterford (3.2), Galway (3.6) and Limerick (4.0). Ireland had no severely unaffordable markets and had no affordable markets.”
So what are we, affordable or unaffordable? Both it seems. Demographia believe that a return to long term multiples of three times gross median income is “correct” whereas DKM examine proportions of income over a period of time for new purchases and conclude we are today at a low-point.
Of course, none of this really helps purchasers in a market where prices are still apparently declining according to the latest Permanent TSB/ERSRI house price series with declines accelerating in Q4, 2010. Affordability might be less a consideration than availability of credit or views on prices in the short term or wider economic considerations such as weak growth, increased taxation, reduced state spending and interest rate.