It is becoming starker by the day that Ireland is dragging its feet in dealing with its property and debt bubble. I should say here that I don’t have a problem with the principle of kicking the can down the road or increasing debt to help those in debt; think about it, if a household or business encounters a financial shock, for example, a redundancy or bad debt, then advancing a new loan to that family or business to tide it over the shock can be a perfectly sensible solution. So if a family member is unexpectedly unemployed for six months, then rather than repossessing that family’s home, advancing a new loan to cover that family’s commitments for six months which would then be repaid when employment is restored might be a solution that works for the bank and the family. Similarly if a bank has a shock with bad loans secured on property then taking those loans and warehousing them for a period of time to allow some recovery in property prices might be also be perfectly sensible. The alternatives can be brutal, repossessing the family’s home and selling it as a distressed property or selling a distressed loan into a market at the wrong time can cause needless damage to the household or the business. There comes a time though when forbearance and special measures are counterproductive; if the unemployment persists for two years rather than six months or if the adverse market for distressed loans continues for years. At that point these special measures are just distorting markets, and preventing the efficient functioning of those markets, and because of the importance of property and banking to an economy, the efficient performance of the economy is put in jeopardy.
And looking at the University of Ulster quarterly house price index for the second quarter of 2011, you are reminded at how distorting the policies in the Republic in respect of debt and property have been. The report for Q2, 2011 (available here with an accompanying press release here) which is produced in association with Bank of Ireland and the Northern Ireland Housing Executive, shows that prices are still declining in Northern Ireland and are now down 45% from peak in 2007. That in itself is surprising because in the Republic, our latest house price index from the CSO for July 2011 shows that we are just 42.5% down from peak in September 2007. Remembering Northern Ireland doesn’t have the same housing oversupply issues, it has different planning authorities, banks regulated by the Bank of England rather than the Eurosystem, the pound sterling rather than the euro, governed by its local assembly with oversight from Westminster; and remembering also that Northern Ireland has an unemployment rate of just 7.7% rather than 14.4% in the Republic and has an economy which is growing albeit at a modest rate. But one of the biggest differences is inflation. Amazingly the Republic’s Consumer Price Index has remained flat since September 2007 and at 103.9 is exactly the same as July 2011. But in the UK there has been 13.3% inflation since October 2007. In real terms therefore, residential property prices in Northern Ireland have fallen 51.5% compared with just 42.5% in the Republic.
Why the difference? There might be different suggestions but mine is that the bankruptcy regime in Northern Ireland sees 300 times the number of personal bankruptcies of the Republic and if you add in Individual Voluntary Arrangements the number rises to 600 times. And secondly the residential property repossession rate in the UK is six times that in the Republic even though their arrears levels are less than one third of ours. So losses on property and debt are being crystallised sooner than later. Now there is some can kicking in Northern Ireland also, as it has adopted the UK-wide code on mortgage arrears and has seen inflation stoked by the UK’s decision to print GBP 200bn in quantitative easing for its economy, but special measures have not had anything like the same effect as in the Republic – the comparison of the 52% real decline in prices in Northern Ireland versus just 43% in the Republic demonstrates that.
It is also worth noting from the Universityof Ulsterreport that in the year to May 2011, there were 2,700 mortgages advanced for house purchase. There were 4,968 mortgages advanced in the Republic for the first six months of 2011. The report suggests that there has been a greater use of cash for transactions in Northern Ireland. And finally an average property in Northern Ireland costs GBP 137,814 (€156,418) which compares with a derived estimate of €180,699 in the Republic.
As stated at the top, kicking the can down the road and using debt to solve a debt problem can have their places, but it seems that on the third anniversary of our disastrous bank guarantee, the distortion is continuing yet there is little immediate prospect of a recovery which would justify the special measures. Most commentators believe house prices will continue to decline, unemployment is not expected to fall substantially for a number of years, we still have a massive overhang of property, mortgage arrears continue to rise.
Personal bankruptcy reform and bringing property which is presently warehoused in NAMA or the banks, onto the market will help crystallise losses so that property can find its price level and families can restart their lives.
NAMA Wine Lake 
Also bear in mind that Northern Ireland house prices are obviously denominated in Sterling, which collapsed by over 20% relative to the Euro over the last few years. So take that into consideration when estimating the fall in Northerrn Ireland house prices in Euro terms and comparing it with the move in Republic house prices in Euro terms. The currency move is relevant as it was a deliberate devaluation by the UK in order to prop up its house prices and economy.
As far as I can see it is in the good of the householder to force the issue now. For in a few years they will be in a worse position, holding a mortgage paper that hasn’t been fulfilled. But the bank will be in a better situation.
Just a question. How is it that it’s allowed constitutionally -or within Europe-, where the government has a major conflict of interest sitting as it does between the citizen debtor and the banks it is now the majority backer.
What would be interesting to see is the level of activity in the housing market in the UK & NI versus ourselves. In my opinion the current statistics on house prices are based on low level activity in the market. I.e. If there was a functioning housing market price comparisions would be clearer and then a more realistic comparison could be made. There is a glut of property for sale with no activity. There is also a glut which has not yet reached the market but will shortly have to hit it. However non-availability of funds is the barrier which is preventing activity. Sooner or later something needs to break or the bubble will inflate further.
@44Brendan, believe the UK overall is on track for 8-900,000 transactions this year.
http://www.bbc.co.uk/news/business-14629958
Given the population differences (62m cf 4,6m) you’d expect about 70,000 transactions here. We don’t have a lot of information but mortgage data would indicate about 10,000 transactions (4,968 for H1, 2011) Cash transactions will increase that, but I think it’s safe to say the UK overall has a higher level of transactions. Don’t have figures for NI alone, but the report linked to above indicates transaction levels are also above those in the Republic.
I’ve never seen anyone do this before and am somewhat confused. What’s the point of looking at asset price inflation (or deflation) in terms of consumer price inflation? If we had done this during the boom years it would have downplayed the extent of the bubble.
With GDP I understand why we look at things in real terms, as we are trying to accurately measure a level of output with regard to a relevant price level. But is measuring a change in prices in terms of a change in other prices not somewhat ridiculous? If that’s the case then Ireland’s fall in prices this year have been 2-3% worse than recorded because of things as arbitrary as increased commodity prices and mortgage interest payments!!! There may be room for looking at real house prices but I’m not sure that comparing peak to trough price falls in different countries is one of them.
@Patrick
“I’ve never seen anyone do this before and am somewhat confused.”
Why don’t you google “house price inflation real nominal” and you will see a wide range of reports that examine real and nominal house price inflation.
The point of the calculation was to show that in Ireland where inflation has stayed basically flat in the last four years, prices have only dropped 42.5% in both real and nominal terms. But that in a neighbouring jurisdiction that reputedly didn’t suffer many of our housing and debt mistakes, prices are down 45% in nominal terms and a whopping 58.3% in real terms.
“But is measuring a change in prices in terms of a change in other prices not somewhat ridiculous?”
I hope not, otherwise research on affordability and standard of living would suffer!
I understand that real house prices are used in economic analysis, but I’ve never seen it used in peak to trough comparissons. Just doesn’t sit well with me. By implication China has been driving our house prices down this year through increasing imported inflation.Of course this has squeezed consumer incomes and probably driven house prices down further in nominal terms, so are we not in danger of double counting here? And should we start looking at equity price movements in real terms when looking at international peak to trough movements?
(I apologize if the tone of my last post was antagonistic, hadn’t had my morning caffeine dose!)
@Patrick, sorry you’ve lost me
“By implication China has been driving our house prices down this year through increasing imported inflation.”???
“Of course this has squeezed consumer incomes and probably driven house prices down further in nominal terms, so are we not in danger of double counting here”???
“And should we start looking at equity price movements in real terms when looking at international peak to trough movements?” Now here I understand what you are saying. But there’s no need to start. We already do! It seems common enough to examine equity returns in both nominal and real terms, particularly as an investment is oftentimes in a local currency. Comparing real and nominal rates of change in value of any asset seems common enough. And to be clear, what I am saying above is that not only is it surprising that Northern Ireland’s nominal price of property has fallen more than in the Republic, but by reference to real values has fallen even more. Sorry you don’t see the relevance, but with respect I think that’s your issue.
Fair enough. My point about China was supposed to be ridiculous. The energy products sub-component of the CPI has risen at an average of 12% so far this year, adding on average 0.9% on to the headline rate of inflation. This increase has been largely driven by factors outside of Ireland, one of which is demand in China In looking at house prices in real terms you are simply adding this effect on to the fall in house prices. As for squeezing consumer incomes, when you have an increase in prices without a corresponding increase in wages then incomes are being effectively squeezed.
@Patrick, inflation has many causes. Indeed external effects like China’s demand for raw materials pushing up prices for everyone else is one. Quantitative easing like the GBP 200bn operation in the UK is another. Domestic demand, interest rates, population growth – there’s a very long list of factors causing inflation. But the important point is that typically incomes tend to mirror inflation, and over the long term as living standards increase, arguably incomes grow at a faster pace than inflation. Of course there are sometimes instances when incomes don’t keep pace with inflation.
In Northern Ireland’s case, it’s difficult to tease apart the factors for inflation. Quantitative easing, the weakening of sterling which will push up the cost of imports are two. All I am saying is that stripping out inflation, house prices have dropped by a headline grabbing rate, particularly when set against the Republic which has well-documented problems with housing and debt.
I’ve been looking further into this and you were right, I was quite wrong! Real values are the way to go, in the bursting of the UK 1970’s housing bubble nominal values barely budged. However, I’m not so sure that the CPI level for the whole UK is representative of what’s going on in Northern Ireland, as NI is such a small region within the union. Price levels in London are probably quite different to those in Belfast. I’ve been looking through inflation reports but haven’t seen a regional breakdown of inflation.
Inflation in the UK seems to be largely explained through the VAT increase, and food and energy prices. All cost push. When we look at the market sector (ex-oil) value added deflator, it is barely above 1%, and has come up from below 0%. The UK seems more suseptible to commodity price hikes, perhaps because its energy market is more deregulated. As for QE, with such meagre money growth in the UK it is hard to see how it has been inflationary.
These sources of inflation could apply to NI, but core inflation may have been negative in NI over the period. Need more data damnit! Would you know anywhere to look?
@ Namawinelake
Just called up the NI statistics office and apparently there is no measure. Given that UK CPI is an average of the entire UK, it is only possible to calculate cahnges in real UK house prices from peak to trough, which have been like what, -15%? Throw on top inflation and we’re close to -30%.
This may seem pedantic, but national averages should be used with national averages, regional with regional. There could be problems combining a national average measure of inflation with a regional average measure of house prices.
@Patrick,
I disagree with you.
The nominal decline in Northern Ireland residential property prices of 45% seems soundly derived from the University of Ulster report. But you have an issue with the real decline.
Are you seriously suggesting that there would be material differences in the rate of change to the costs that comprise the CPI between different regions? In the absence of regional statistics for the UK, of course you might be correct, but I’d suggest commonsense would indicate there would be a close correlation between price changes in different regions eg if a price change is due to a change in exchange rates then the price change would naturally affect all regions, some suppliers eg energy companies will have national oversight, social welfare rates will be the same or similar and certainly changes will be similar, Bank of England interest rates apply to all regions, taxation changes apply to all regions. Quantitative easing should affect the whole of the UK. Of course there will be local isues with demand, population, supply and myriad other factors, but overall I’d expect there to be a reasonable correlation.
So I would contend that applying the UK national inflation rate to part of the UK should be basically sound. It won’t be perfect of course but then again the calculation of CPI in the UK and Ireland has differences. But I would still expect the point being made above, that Northern Ireland has suffered a far greater real decline in residential property prices than in the Republic, to be valid.
This one will probably have to remain a value judgement, and can therefore never be conclusively resolved.
The reasons you cite could also be used to argue that there shouldn’t be large regional differences underlying national house price averages across the UK, but there clearly are. Just because there are similar pressures nationwide doesn’t disallow the possibility of region specific pressures being significant.
With such a material difference in asset price fluctuations, yes I would say it is reasonable to consider that there could be a significant discrepancy in consumer price indices, such that a calculation of real house prices in NI should be taken with a pinch of salt. We get large regional differences in inflation within the euro area despite a single monetary policy and exchange rate. The U.S. has had problems with this for donkeys years, with states like Oklahoma dragging behind while California and NY plow ahead.
But again without the data this is value judgement territory, we’ll never conclusively prove it either way.
@NWL There appears to be an error in your Table above. CPI in the UK is not the same as CPI in Ireland. It is in fact what we call HICP. The UK RPI is the same as the Irish CPI rate. UK RPI has consistently run well above UK CPI. You have compared Irish CPI against UK HICP
@Niall, agreed there are differences.. I think what the UK used call RPI-X is most akin to our CPI but I’m not sure the UK produces RPI-X anymore. But as you say UK RPI has been consistently above CPI, then that would just increase the real decline in Northern Ireland and highlight further the relatively small decline in the Republic.
@ NWL They still are keeping RPI X, but I still feel RPI is the most similar to Irish CPI. There are some serious differentials in the weightings given inside their RPI our CPI. (RPI X has run at approx the same level as RPI for the last two years.)
I recalculated the figures and would estimate that you have underestimated the UK rate by 2.4%, which as you say only highlights the comparatively small decline on this side of the border.
Personally I would feel the Northern market was driven to its final excesses by the external factor of Southern buyers. Forced sales by these speculators has driven the market down more rapidly. The introduction of fees at third level is going to hit the Belfast rental market quite badly, for example this 4 bed close to Queens for sale for less than £100,000 stg.
http://www.propertynews.com/Property/Belfast/GOCGOC4303/10-Cadogan-Street/157210811/
@ NWL
I’m going to have to hammer this home. NI has a population of approx. 1.7 mn, out of the UK’s 62 mn, and is probably an even smaller proportion in terms of GDP. If there are different growth rates, vastly different rates of house price movements, and vastly different regional factors between the 1.7 mn that make up NI, and the 60 mn that make up the rest of the UK then I would say that different levels of inflation are to be expected. The peace dividend during boom may have caused UK interest rates to be far too low for the needs of the NI economy.
In fact if inflation is the same I’d say that is quite worrying, as it suggests that the adjustment process is not taking place in NI, and that market forces are not working properly.
@Patrick, by all means feel free to attempt to hammer home your point. I just disagree with you for the reasons above, that is, same currency, same taxation, same quantitative easing, same social welfare, same government in Westminster even if there’s a local assembly, national phone operators, national energy companies, national food/clothes/furniture stores. No disagreement that there won’t be some regional differences, and the same might apply within Northern Ireland twixt Derry and Belfast for example, but overall I would contend that there are more forces to tend towards homogeneity.
And remember the point of the blopost was to show that real house price changes were even more pronounced than nominal changes. So even if inflation was lower than 13% in Northern Ireland, it would need be negative to gainsay that point.
Agreeing to disagree, how very civil! Thanks, quite enjoyed the back and forth, and thank christ I’ve lost the odious notion that nominal falls in house prices are all that matter!
Hi NWL, this might seem like a stupid question and I’m sure I’m missing something obvious but when I do out the calculation I arrive at today’s real peak reduction in price (for Northern Ireland) being only 51.3%? Could you show me the calculations if I am wrong? Kind Regards Mark
@Mark, you’re right! A house worth 100 in 2007 would be worth 113.3 when adjusted for inflation 2007-2011 but is in fact only worth 55. So the absolute drop is 58.3 but in percentage terms is 58.3/113.3 or 51.5%. Corrected now. many thanks!