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.