Archive for July 29th, 2010

Today sees the publication of the second Permanent TSB/ESRI QUARTERLY House Price Index. The index for Quarter Two (Q2) of 2010 tells us that the price of residential property has fallen nationally by 1.7% during the quarter. An average property now costs €201,364 nationally compared with €204,830 at the end of March 2010.

In % terms the indication is that the pace of price falls is decreasing overall as the drop in Q1 was 4.8%. However prices in Dublin are falling at a higher-than-national rate of 3.5% in the quarter though that is less than the 10.3% fall in Q1, 2010.

The National House Price index stood at 89.5 at the end of June 2010 with the average cost of a home being €201,364 (compared with €204,830 at the end of Q1). The last time it was at this level was in September, 2002. The following shows the national average house price since June 1999 at the end of each quarter (Mar, Jun, Sep, Dec).

The Dublin House Price index stood at 80.1 at the end of June 2010 with the average cost of a home in the capital being €242,000 (compared with €250,872 at the end of Q1). The last time it was at this level was in April, 2002. The following shows the index since June 1999 at the end of each quarter (Mar, Jun, Sep, Dec).

The Outside Dublin House Price index stood at 94.8 at the end of June 2010 with the average cost of a home being €181,200 (compared with €183,309 at the end of Q1). The last time it was at this level was in January, 2003. The following shows the index since June 1999 at the end of each quarter (Mar, Jun, Sep, Dec).

So the key questions : are prices still falling? We don’t know the breakdown of the quarterly fall by month but it is certainly the case that prices have continued to fall on a quarterly basis since March 2010 and the rate of fall between Jan-Mar 2010 (quarter) was 4.8% compared with a fall between Apr-June 2010 (quarter) of 1.7%, so the pace of falls is decreasing.

How far off the peak are we? The national peak according to ESRI was in January/February 2007 when the index for both months stood at 139.5. Today’s figure of 89.5 for June 2010 indicates that prices have dropped by 35.8% from the peak. In Dublin, prices are 43.8% off the peak while Outside Dublin prices are 32.4% off the peak.

How much further will prices drop? Who knows, but here are the latest predictions and projections for residential property in the State – the spreadsheet with the sources for the data is here.

What does the index mean for NAMA? NAMA has chosen a valuation date of 30th November 2009 to value the Current Market Value of property. The NAMA Long-term Economic Value Regulations state that evidence produced after 10th January 2010 by the ESRI is not to be considered when evaluating future conditions in which the long term value of the property will be calculated. So on the face of it, given the fact that residential property has fallen by 9.8% from 30th November 2009 to 30th June 2010 and assuming NAMA pays 11% over the Current Market Value for the Long Term Economic Value of the loans  then this would indicate a recovery of 23% is required so that NAMA can break even and of course that ignores any further falls after 30th June 2010.

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The first entry on this blog in January 2010 dealt with a projection of the State’s population. This was partly to work out the need for housing and place that need in the context of the then-recent revelations about the 300,000 vacant houses. And since that first entry, the subject has been revisited on several occasions eg here and here. This week Eurostat released its population estimates for all EU states and shows that Ireland had a net population increase of 6,000 in 2009.

Here is the history of our population from 1987 to the present, sourced from the CSO.

The CSO analyses change by reference to April each year. The Eurostat figures are by reference to the calendar year end 31st December. The Eurostat figures show the population increase in Ireland in calendar year 2010 to be 6,000. That is the smallest 12-month increase in population since 1990 when the population actually fell by 3,700. From the point of view of housing demand, and given that we have roughly 2.75 people per home in the State, the figures indicate that 2,180 additional homes will be needed. With estimates of vacant housing in the 35-350,000 range and with 6-15,000 new homes being built in the State, the projection of house prices, by reference to supply and demand, is that should the 2009 population characteristics continue, then prices will need come down substantially.

Another theme referred to frequently here is the fact that from the point of view of NAMA,  the Long Term Economic Value (LEV) Regulation forbids NAMA from using any analysis produced after10th January, 2010 when assessing LEV. Up to 10th January, 2010, the CSO were happily projecting on two migration scenarios – one that there would be nil net migration (net migration = immigration minus emigration) or that there would be highly positive net migration over the period to 2026. The CSO didn’t bother to even consider negative net migration. Of course the CSO produced their projections in 2008 before the full scale of the banking crisis became clear. However the DoEHLG adopted the projections and these projections have become the basis for the State’s Regional Planning Guidelines. They also determine future demand for housing and therefore are significant in determining the LEV of property. Which means that we risk overpaying for NAMA loans and NAMA making a loss.

Of course the Eurostat figures are for 2009. Might net migration reverse? Not according to the ESRI who (very late in the day) are forecasting large scale negative net migration upto 2015. My own view has been that the strong positive net migration between 1994 – 2008 (450,000) could reverse, particularly for EU-Accession States. For the next 10 years in Europe, will Ireland overperform or underperform the average with consequent impact on migration? Difficult to say, small open English-speaking economy with low corporate taxation and decent workforce versus the hungry central Europeans making up ground for 40 years of communism? Who knows, but the fact that the CSO didn’t even consider negative net migration was in my view reprehensible and may have the consequence of NAMA substantially overpaying for residential assets in the State.

And lastly why might the CSO figures show a population fall? The CSO population estimate for April 2009 was 4,459,300 and the Eurostat estimate is that the population at December 2009 was 4,456,000. What happened between January and April 2010? Difficult to say but anecdotal evidence would suggest emigration has continued at a high level – will natural growth between Jan-April 2010 less net migration be over 3,000? I would say the betting is against that.

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Unlike our own Permanent TSB/ESRI which takes a full 30 days after the period end to issue its (quarterly) House Price Index, the UK seems to have better data collection and analysis systems for reporting on house prices. The Nationwide Building Society has today published its July report. That Nationwide Building Society report is one of the referenced sources of information set out in the NAMA Long Term Economic Value Regulation and is a source for the key market data information shown at the top of this page.

The latest report from the Nationwide shows that prices in the UK fell by 0.5% in the month of July, the first decline in prices in since December 2009. The Nationwide attributes the fall to an increase in supply (the abolition of HIPs in June – the UK’s rough equivalent of the BER and sellers being tempted back into the market by a strong recovery in prices which has been evident since the start of 2009) and a decrease in demand (tight credit conditions and swingeing cuts to the public service and uncertainty about the economic future). The average price of a property in the UK today is GBP 169,347 (EUR 203,165 at GBP 1 = EUR 1.1997).

As for NAMA and its Valuation Date of 30th November, 2009 today’s report means that UK residential prices are up 4.04% since last November. The Minister for Finance has recently said that one third of NAMA’s assets are in the UK, though the Minister didn’t provide a split between residential and commercial.

What are the prospects for the future of UK residential? The recent EU bank stress test benchmark scenario has residential increasing by 2% for the full year 2010 which would indicate a 3-4% fall from prices today. Some commentators point to some future buoyancy in the market, particularly the London market, as a result of the Olympics. Others have forecast falls of 20% from current levels. Last week the UK’s GDP growth for the second quarter was reported to be 1.1%  which was seen as very positive. Although there are no suggestions of UK interest rate rises from the present 0.5% Bank of England rate, inflation is running at 3% which is above the BoE target. Interest rate rises might dent prices.

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