“We were building 2 million homes a year when only 1.4 were being absorbed.”

So said President Barack Obama yesterday bemoaning recent history in the US whilst predicting that the over-supply of housing there will be a drag on the economy for some time to come. The latest estimates from the US Census show that US vacant housing rates are similar to Ireland’s (14% for the USA compared with 18% for Ireland – Ireland has an estimated 350,000 vacant properties out of a total of 1.98m properties, in fact strip out obsolescence from Ireland’s 350,000 “empties” and we get even closer to the US position).

The US has suffered an economic downturn and even today unemployment is close to 10% . Property values have dropped by over 50% in some US states – Nevada for example has fallen 56% from peak and an estimated 70% of mortgages there are in negative equity, the state having experienced a huge bubble at the start of the decade which saw property rise by 15% per annum between 2002-2006. For an in-depth look at Nevada, take a look here.

So how is the US confronting its problems? Nevada, a state with a population of 3m compared with our own 4.5m, had 180,000 repossessions last year compared with less than 500 here. And the sub-500 here were mostly extreme subprime cases. And indeed that low number of repossessions here is set to fall further with the Financial Regulator’s proposed new guidelines for dealing with mortgage arrears. The US also has a healthy personal bankruptcy regime – in Ireland we have about 10 bankruptcies a year – that’s 0.2 bankruptcies per 100,000 people compared with 290 per 100,000 in the US. Ireland of course has a draconian bankruptcy regime which sees bankruptcy lasting for 12 years. The US introduced a scheme to encourage home purchases which saw tax credits of USD $8,000 being granted to home buyers – the scheme was wrapped up in April 2010 but was seen to have given a boost to sales volumes.

And how are we dealing with the overhang? NAMA is presently creating stasis in the market as developers and buyers and sellers wait to see what NAMA will specifically do – developers and sellers are hoping it will act to prop up prices and buyers are being deterred for now by the possibility that NAMA will lead to increased supply and lower prices. Although we suffer from widespread negative equity and mortgage arrears we are putting in place more regulations which will make repossession harder. We are not reforming personal bankruptcy arrangements. We are making very slow progress with implementing a House Price Database which would bring transparency to values and volume levels and might stop the decline overshooting. We are not incentivising home purchases – indeed with talk of new property taxes and water charges we are possibly doing the reverse. In short we are doing a lot of things which will lead to the oversupply being a drag on our economy in a far more serious way than in the US.

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Rents down, supply up – new DAFT rental report for Q2, 2010

Yesterday David McWilliams used his regular column in the Independent to consider house prices in the context of rental yields and, armed with an advance copy of the latest DAFT.ie rental report which shows typical asking rents of €835 per month, concluded that a typical house should cost €136,000 instead of the present typical asking price of €220,000. David suggests that the risk-free investment rate presently is 5% (though the default insurance of 3% on Irish borrowing might mean it wasn’t totally risk-free!) and a property rental investor would need a higher return which David put at 7%. (David obtained his current average house price from the Q2 DAFT.ie sales report).

And today DAFT.ie has formally published its Q2 rental report which shows that rents fell by 0.9% in Q2 and that stock offered for rent rose slightly. DAFT notes that the annual rate of decline in rental asking prices is at its lowest level for 2 years at minus 7.7%. Some areas of the country have recorded increases in asking prices (Sligo, Galway City, Limerick City and Limerick County and in Dublin County north and south).

Where do rents go from here? As previously noted on here, figures from the collection of the Non Principal Private Residence tax (the second home tax) show that there is a very large base of landlords in Ireland who would appear incapable of acting in concert as a cartel. Anecdotally properties not subject to mortgages (more than 60% in the State – housing stock of 2m and 0.8m mortgages) are undercutting the market. Although interest rate rises and banks demanding investors start making capital repayments after the expiry of interest-only periods and the possibility banks will try to compulsorily move investors off tracker mortgages to more expensive standard variable rate mortgages will all bring increased pressure on landlords to raise prices, on at the other end of the tug-of-war are tenants facing rising unemployment, falling salaries and possible new taxes (PRSI extension, parking, VAT?) not to mention an environment of falling population and the self-evident oversupply of property. It will probably be the landlord cohort that, in general, loses ground until the economic recovery cascades down to the individuals pocket.

To what extent will state-provide social security, the Rent Assistance Scheme, place a bottom under rental prices? This is a subject examined on here before with a conclusion that rental asking prices in many instances were only marginally above the rental allowances. In June 2010 changes were announced which will reduce some rental supplement allowances by 36% but on average will only reduce payments by €20m from a €500m budget. The Clare Herald helpfully set out the changes by location and indeed the Department of Social Protection has at last made the rates available on its website. . It is possibly too early to see if these changes will reduce rents further.

A common criticism directed towards the DAFT.ie rental report is that it is based on asking rental prices. Actual rental prices are recorded by the Private Residential Tenancies Board who publish a comprehensive list of rented property in the State. However the PRTB claim that the Data Protection Act prevents them from revealing individual rents or indeed aggregated rents (eg by location or property type – they hold both items of data for each rental). Dermot Ahern, the Justice and Law Reform Minister seems to be in a transparent mood recently promising legislation in the next Dail session on a House Price Database and earlier this week supporting the recommendation of the Commercial Rent Review Group to create a database of commercial rents. Might the Minister consider the publication of actual residential rental prices?

Finally I leave you with an example of newspaper reporting from earlier this year when estate agents and journalists were calling the bottom and a recovery in rental prices and indeed property shortages in Dublin City centre. According to DAFT.ie, Dublin City Centre rents are down by 1.9% in Q2 alone, the fifth biggest drop in the State (after Waterford City at 2.8%, Laois at 2.4%, Clare at 2.2% and Waterford County at 2.1%).

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