Archive for October 18th, 2010

Given the duration and severity of our property crash it is a surprise to some observers that the only hedonic* property price series based on actual transaction prices shows that the average price of a home nationally is down just 35% from peak (peak in early 2007 versus the last Permanent TSB/ESRI index (“the PTSB index”) for Q2, 2010). The PTSB index is one of two indices that track actual sales prices (as distinct from asking prices) but the other series produced by the Department of the Environment Housing and Local Government is next to useless as it doesn’t even attempt to track movements in like-for-like housing (it’s not hedonic which means that when compiling averages it sees no distinction between a €58m house on Shrewsbury Road and a €40,000 studio flat in Ballymun – this is the text on the DoEHLG website “Average house prices are derived from data supplied by the mortgage lending agencies on all loans approved by them. In comparing house prices figures from one period to another, account should be taken of the fact that changes in the mix of dwellings will affect the average figures.”)

So the only reliable index tells us that prices have dropped by 43.8% from peak in Dublin and 32.4% from peak outside Dublin to the end of Q2, 2010. Contrast this with statements from estate agents in recent times.

(1) John Moran, Managing Director of Jones Lang Lasalle in October 2010 – reported in the Irish Independent “”If you think we’re at the bottom of the property market in Ireland, we don’t believe that for a moment,” he said, adding that his agency believed house prices had actually fallen by 60% and not the 30% suggested by some indexes.”

(2) Marian Finnegan, Chief Economist, Sherry Fitzgerald in October 2010 – from Sherry Fitzgerald’s quarterly overview “From the peak of the market in 2006, Dublin house prices have fallen in real terms by 50.7%, while the national market has corrected by 45.9%.” (According to PTSB the peak was reached in Feb/Mar 2007 but if you take the peak to be December 2006 when the CPI was 100 (base Dec 2006), it is now 101.8 so in nominal terms the falls are 51.6% in Dublin and 46.7% nationally.

(3) At the start of 2010, the IAVI were saying that prices in Dublin were down by upto 50% from peak (with 3-bed semi-detached down by the lowest 35.3%). Since January 2010, the picture has not improved.

(4) Ronan O’Driscoll, Head of Residential at Savills reported by the Independent in July 2010  “Now there is a feeling that the worst of the upheaval has passed and they are fed up waiting. Buyers see that prices have fallen by anything from 35pc to 50pc and they think this is starting to look like reasonable value.”

So why is there an apparent divide between the PTSB results and the pronouncements of estate agents? Estate agents might be selective in their estimations of course and you wouldn’t want to discount the possibility that they’re trying to tempt buyers into the market by promoting the bargains. On the other hand the most recent statement from John Moran, a serious professional at JLL seems confident and by predicting further falls wouldn’t seem to be advertising for business – in fact you could argue the reverse that it might deter buyers that are waiting for the bottom.

According to the Irish Life and Permanent interim report and accounts for the six months ending June 2010, a mere €0.1bn (page 16) was advanced in new mortgage lending in the first half (that is, six months) of 2010 – “New Irish residential mortgages issued by the group of €0.1bln in the first six months of 2010 showed a reduction of 74% on the €0.5bln issued in the same period in 2009”

According to the Irish Banking Federation, 9,171 transaction mortgages (as opposed to non-transaction mortgages, top-ups and equity release) were approved in the first half of 2010 with an average value per mortgage of €206,000. If ILP wrote €100m of new business (there doesn’t appear to be any information which quantifies new business except the €0.1bn comment on page 16) and if ILP is typical with a €206,000 average mortgage then that would indicate the company advanced 485 mortgages in the first six month period of 2010 – that’s a simple average of 243 mortgages per quarter. It would also represent 5.3% of mortgage transactions in the State.

The average of 243 properties will be located throughout the country – Dublin and non-Dublin in the summary report published by PTSB. The average of 243 properties will cover all properties from the basic studio apartment to the detached mansion. I do not know to what degree the PTSB analyses its property transactions but I don’t see how it could manage with less 11 categories (studio flat, 1-bed, 2-bed, 3-bed flats, 2-bed terraced, 3-bed terraced, 3-bed semi detached, 4-bed semi detached, 3-bed detached, 4-bed detached, 5-bed detached). I have no idea of the regional breakdown of property transaction but say that one third is Dublin and two thirds non-Dublin, that might mean that the index is analyzing 8 transactions in Dublin for a particular type of property. Isn’t that too small a sample to give accurate information?

And consider that overall PTSB now seems to account for 5% of the mortgage market. And remember that the mortgage market is a subset of the total market (in Ireland there are 790,000 dwellings subject to a mortgage out of a total housing stock of nearly 2m dwellings – some dwellings will never have been sold by the developer, others will have their mortgages paid off completely so you can’t say that ½ of all transactions are non-mortgage, but it is likely to be a significant number). So is it the case that the State’s only hedonic index is no longer reliable. Estate agents seem convinced that prices have dropped by 50%-plus, substantially above the statistics provided by PTSB.

Now before preparing the above entry I did contact PTSB to see if they would reveal the detail behind their statistics and they wouldn’t, citing commercial confidentiality. At the very least we should be provided with the margin of error which would appear to be very wide if the sample analysed represents 5% of the mortgage market (and less than 5% of the total market including non-mortgage transactions).

As we don’t yet have a House Price Database, what can buyers do to establish if they are paying a price reflective of current prices? It’s very difficult but one thing they might consider doing is forcing the seller to reveal (and evidence perhaps with a copy of a conveyance) the price they paid for the property. The buyer might then refer to the PTSB tables of prices since 1996 and calculate any fall from peak but using 150% of the fall shown by PTSB (why 150%? because PTSB is saying prices are down 35% whereas estate agents are saying prices are down 150% of 35% or 50% approx).

*hedonic – simplistically means that when analyzing all the sales of property an attempt is made to categorise the sales eg all studio apartments are extracted for a region and the average price obtained and that is compared in the next period with the average of all studio apartments for the same region.


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