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Archive for January 22nd, 2013

AffordabilityDemographia

One of the four “hard” factors used in valuing residential property is the relationship between salaries and home prices, which together gives an indication of how affordable property is. The other three are rents from which you can derive yields – simplistically annual rent divided by the value of the home – and build costs and demand:supply. All of the “hard” methods can be sidelined by “soft” factors like confidence, and perception about future prices or future salaries or other aspects of the property market or wider economy.

Today, the 9th Annual Demographia International Housing Affordability Survey is published, and although it concludes that prices in most Irish cities are still “moderately unaffordable”, the unsurprising trend indicates housing is getting more affordable. The report summarises “Ireland: Ireland house prices have now nearly returned to normal affordability, following the housing bubble. Dublin was the least affordable markets with a Median Multiple of 3.6. Waterford (2.5) was rated as affordable, the most affordable rating in Ireland in the history of the Demographia International Housing Affordability Survey. Ireland is the only nation without a metropolitan market that is severely unaffordable or seriously unaffordable”

The report defines “affordable” in the following terms

“For metropolitan areas to rate as ‘affordable’ and ensure that housing bubbles are not triggered, housing prices should not exceed three times gross annual household earnings. To allow this to occur, new starter housing of an acceptable quality to the purchasers, with associated commercial and industrial development, must be allowed to be provided on the urban fringes at 2.5 times the gross annual median household income of that urban market.”

For the five Irish cities examined, Waterford was assessed to be “affordable” and Dublin, Cork, Galway and Limerick were assessed to be “moderately unaffordable”.

Last year, the Central Bank indicated that Irish house prices were seriously undervalued by reference to incomes.

In the short term it looks as if net incomes will generally be squeezed with the PRSI increase and extension to certain income, the new property tax, the cut in child benefit and certain other social welfare payments, and the increase in private health fees. On the other hand, IBEC claims 40% of its private sector members will be increasing pay in 2013, and Dunnes Stores has recently announced 3% pay increases.

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“December’s decrease in both the Dublin and national indices produced by the CSO is unfortunate news.  For Dublin, it is absurd and totally out of line with what is happening on the ground.  The declines are due to how the index is constructed.  It is based on mortgage drawdowns and totally ignores cash buyers who account for 45% of all sales nationally and an even higher percentage in Dublin.  Obviously this has to skew the results.” Aoife Brennan, Head of Research at Lisney

Well, the release of the December Irish residential property indices by the Central Statistics Office this morning has certainly thrown the cat amongst the pigeons. After an impressive monthly increase of 2.7% in Dublin in November 2012 which formed the basis for a good many “recovery” headlines, we have a 1.7% decline in December 2012. Lisney, one of the country’s main estate agents and part of the Cushman Wakefield global family, issued a statement in which it described the results for Dublin as “absurd”. The CSO indices exclude cash sales which Lisney convincingly claims represents 45% nationally and even more in Dublin, and Lisney claims this has to skew the results.

But I wonder.

If an estate agent sells no 1 Acacia Avenue for €250,000 to a mortgage buyer and no 2 to cash buyer for €220,000, what will no 3 Acacia Avenue which is identical sell for? If it’s a mortgage buyer, then the bank or building society will require a valuation, and given the estate agent knows the two sale values of nos 1 and 2, how will they value no 3 for the mortgage provider? And of course with the new Property Price Register, estate agents no longer have a monopoly of all market prices, cash and mortgage -we can all hazard a guess, though it will still generally be estate agents who are familiar with the details of property sold. But the point is that cash shouldn’t skew the market very much because mortgage companies must adjust their own valuations in light of all transactions – cash and mortgage.

It might be that December 2012 was just a blip, and the CSO does indeed warn against reading too much into any one month’s figures. All Dublin estate agents appear to be suggesting a firming up of prices in Dublin – they may be dismissed by some as scoundrels who have skin in the game and need stable or rising prices to drive transactions. But maybe we should see what the CSO index and the Daft.ie index tell us over a number of months.

Lisney seems to be in no doubt and is emphatic about the outlook for Dublin “Despite what the CSO indices are showing, we believe that the improved level of activity in 2012 has fed through into rising prices, particularly in the prime city areas.  In 2013, we are of the view that prices in Dublin and other city areas will increase further and it will be the cash buyers who drive this.”

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This morning has seen the publication of the Central Statistics Office (CSO) residential property price indices for Ireland for December 2012. Here’s the summary showing the indices

  • at their peak (various months in 2007 depending on type of property and location)
  • the NAMA valuation date (November 2009)
  • 12 months ago (December 2011)
  • the start of this year (also end December 2011)
  • last month (November 2012)
  • this month ( December 2012)

CSODec12

The CSO’s indices are Ireland’s premier indices for mortgage-based residential property transactions. The CSO analyses mortgage transactions at nine financial institutions : Ulster Bank, Allied Irish Banks, Bank of Ireland, ICS Building Society (part of the Bank of Ireland group), the Educational Building Society, Permanent TSB, Belgian-owned KBC, Danish-owned National Irish Bank and Irish Nationwide Building Society. The indices are hedonic in the sense it firstly groups transactions on a like-for-like basis (location, property type, floor area, number of bedrooms, new or old and first-time buyer or not) and then assigns weightings to each group dependent on their value to the total value of all transactions. The indices are averages of three-month rolling transactions.

Cash transactions: With the launch of the property price register at the end of September 2012, the continuing relevance of a mortgage-only index from the CSO may be short-lived. Already DAFT.ie has begun the work to produce hedonic indices based on all the transactions made available by the Property Services Regulatory Authority, transactions dating back to January 2010. Daft.ie now produces an index based upon the Property Price Register, and as that Register gets more data, you can expect the Daft.ie to overtake the CSO’s own index.

As for the key questions:

How much does property now cost in Ireland? The CSO deliberately doesn’t produce average prices. The former PTSB/ESRI index did, and claimed the average price of a property nationally hit the peak in February 2007 at €313,998, in Dublin in April 2007 at €431,016 and outside Dublin in January 2007 at €267,987. If, and it is a big “if”, you were to take PTSB/ESRI prices as sound and comparable to prices captured by the CSO series, then these would be the average prices today:

Nationally, €159,291 (last month €160,017, peak €313,998)

In Dublin, €190,035 (last month €192,603, peak €431,016)

Outside Dublin, €144,401 (last month €144,401, peak €267,987)

I don’t think the CSO would be happy with this approach but it seems to me that the PTSB/ESRI series, as represented by its historical indices, closely correlates with the performance of the CSO indices.

What’s surprising about the latest release? The results undermine recent sentiment and the decline in Dublin house prices of 1.7% in the month certainly contradicts statements from estate agents. Dublin apartments however rose by 3.7% in the month of December 2012, and prices outside Dublin remained exactly flat.

Are prices still falling? Difficult to say. We had a decline in December 2012 but that follows six months of stability and increases. There was an increase of 1.1% in November, a decline of  0.6% in October and increases of 0.9% in September 2012 following a 0.5% increase in August 2012 and 0.2% in July and a decline of 1.1% in June, an increase of 0.2% in  May following a decline of 1.1% in April 2012, it was flat in March 2012 which followed a 2.2% decline in February 2012, 1.9% monthly decline in January 2012, 1.7% decline in December 2011, 1.5% decline in November  2011, 2.2% decline in October 2011, 1.5% decline in September 2011 and 1.6% decline in August 2011.

How far off the peak are we? Nationally 49.6% (50.4% in real terms as we have had inflation of just 5.4% between February 2007 and September 2012). Interestingly, as revealed here, Northern Ireland is some 55% from peak in nominal terms and 62% off peak in real terms. Are forbearance measures by mortgage lenders, a draconian bankruptcy regime and NAMA’s (in)actions distorting the market? Or are cash transactions which are not captured by the CSO index so significant today that if they were captured, the decline in the Republic would be even greater?

How much further will prices drop? Indeed, will prices continue to drop at all? Who knows, I would say the general consensus is that prices will continue to drop. This is what I believe to be a comprehensive list of forecasts and projections for Irish residential property [house price projections in Ireland are contentious for obvious reasons and the following is understood to be a comprehensive list of projections but please drop me a line if you think there are any omissions – note January 2013 Fitch and S&P being inserted shortly].

What does this morning’s news mean for NAMA? The CSO index is used to calculate the NWL Index shown at the top of this page which aims to provide a composite reflection of price movements in NAMA’s key markets since 30th November 2009, the NAMA valuation date. Residential prices in Ireland are now down 30.4% from November, 2009.  The latest results from the CSO bring the index to 781 (28.0%) meaning that NAMA will need see a blended average increase of 28.0% in its various property markets to break even at a gross profit level.

The CSO index is a monthly residential property price index calculated from mortgage-based transactions. There are four other residential price surveys, based on advertised asking prices or agent valuations . In addition Phil Hogan’s Department of the Environment, Community and Local Government produces an index based on mortgage transactions, six months after the period end to which the transactions relate, and which is not hedonically analysed – it is next to useless, and as some might say is a reflection of Minister Hogan, the Department will continue to produce these indices at a “marginal cost”. The only other actual sale price index for all sales is from Daft.ie and is summarised here.

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“The details of all non-performing loans acquired by NAMA will be available for scrutiny on a Public Register, including the names of the creditors, the price paid by the taxpayer for the loans and the actions taken by NAMA to recover the loans. Persons that have defaulted on loans acquired by NAMA will be banned from ever purchasing any asset from NAMA” Fine Gael manifesto in General Election 2011

The Personal Insolvency Act 2012 was signed by President Higgins on 26th December 2012, and all we are now awaiting is the soporific justice minister to decide an Establishment Day and sign the commencement orders. But it looks as if it will be just a few short months before heavily indebted people will have new and more humane solutions to their plight.

Already on here, the contrast in treatment of NAMA developers who skip over to the UK for a one-year bankruptcy with bankruptcy under the new Irish regime, has been reported.

Now, we are going to have the spectacle of the name-and-shame mentality being deployed against those seeking personal insolvency orders under the new Act. Contrast that with the commitment in the Fine Gael manifesto to the “Public Register” of NAMA developers which would show the billions that the people of this country are shouldering as a result of the decision of the Government to bail out the banks and create NAMA. That commitment has been abandoned with the Government muttering something about data protection and rights to confidentiality.

Hypocrisy.

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On here, he will be best known for walking away with the lions-share of the sale proceeds from the Irish Glass Bottle site which was sold in 2006 for €412m, but it is the packaging business that has been making Dublin financier and businessman, Paul Coulson, wealthy in recent times. Just last week, Paul’s Luxembourg-based Ardagh group paid USD 1.7bn (€1.3bn) for US packaging company, Saint-Gobain, which means that Ardagh should now have an annual turnover of €5.4bn.

All impressive stuff for one of the winners, after the Irish banking and property collapse.

Yesterday, the British commercial property portal, CoStar reported a deal involving an Irish property company – Aldgate Developments. The company has secured rare-as-hens-teeth development finance for the speculative development of Aldgate Tower in the City of London. It’s “speculative” because tenants are not lined up for the planned 317,000 sq ft, 17-storey tower at 10 Whitechapel High Street.

Aldgate Developments is controlled by Oisin Quinn (39) and Paul Molloy (35) but the British property portal and magazine, Real Estate Capital reports that it is backed by “the Gleeson brothers and Paul Coulson” The “Gleeson brothers” have not been identified by the portal, and we are awaiting a response from Real Estate Capital as to their precise identities.

It is reported by both British portals that private equity firm Helios Capital and Geneva-based wealth-management group GWM are providing GBP 85.5m (€101m) for the GBP 200m (€237m) development.

UPDATE: 22nd January, 2012. Real Estate Capital has confirmed that the “Gleeson brothers” are Peter  Gleeson and  William Gleeson. Peter is a director at Jefferson Smurfit. See entry 183 in the Irish Times’ Rich List here for some more info

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