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.
ah bless, god be with the days…
http://www.independent.ie/unsorted/property/shortfall-of-new-homes-in-capital-may-be-24000-399328.html
substitute 2019 for 1999….
There is a problem in using Gross Salary. Public servants, for example, are subject to a 6.5% pension levy which applies to all income, not just pensionable income, so is really a pay cut. These sorts of distortions make comparisons over time difficult, and complicate the international comparisons too.
A significant further “soft” factor must surely be the uneven distribution of significant (relative to total purchase price) cash deposits across the house buying population. While we have little of the old money / russian/arab oil money that skews the demand curve in London, there colloquially is still a significant hangover of cash rich buyers from the boom years, eg. those who sold and rented or who were more conservative in the hoarding of the gains of property specultation. It would seem logical that these cash buyers are placing a floor particularly underneath the upper end of the residential market, such that it is reasonable to suggest that prices in that area of the market are not a true reflection of the hard factors that should determine proper functioning of the market.
Havn’t seen any research specifically relating to cash buyers – know of any?
Reaching the “fundamentals”(insert “affordable”)has now been quoted by Ronan Lyons on a previous Frontline programme and has been taken up by Irish independent.But of course no one has defined what the fundamentals are or on what they are based.We could also say as I have espoused in the past that the “fundamentals” of Property prices obtained from 1959 to 1996 when the average 3 bed semi was approx. 2.5 times the average industrial wage (i.e. the purchasing power required to buy a house like in Waterford)).Today that would equate to €32,000 x 2.5 = €80,000.This,it is argued is the “fundamental” (affordable)price a 3 bed semi should be and a long way off the current €150,000 odd, price the CSO statistics are producing.So it would appear (to me at least) that a fall of about 50% from current prices will leave prices at the “fundamental”.Of course as many commentators are now also saying(in which I am in agreement with) the overall state of the economy will dictate the pace and extent of the property crash over the next 3 years.With around €11bn. to be taken out of the economy at around €3bn.per annum,what resources will be left to pay mortgages or indeed take out new ones even if they were available.
We ain’t seen nothing yet.
I agree with seniorpropertyobserver that the price:income ratio is not stable over time and has less predictive value now compared to the past 30 years—-’this time is different’ and access to credit (retail and wholesale) are relevant factors but impossible to model.
Rent yields appear more enlightening especially when compared to Government borrowing costs. The best housing econometric work is at the IMF now. Government policy will take years to adjust. I fear the seniorpropertyobserver’s pessimism is well-founded.
Forbearance may be an appropriate social choice today but it delays the unavoidable re-allocation of wealth and resources. Just examine the PTSB and KBC mortgage portfolios—deadmen walking.