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Archive for December 31st, 2011

There are three caveats that should accompany any forecast of property prices (1) none of us has a crystal ball and there are so many variables in how property prices change that, at best, you are getting an informed opinion and (2) when forecasting a “market”, you are not forecasting individual transactions, and property is not like milk – there will obviously be regional differences but even on the same street there will be individual properties and buyers and sellers, landlords and tenants, so a general price change might not affect a particular property and (3) to quote Upton Sinclair “it is difficult to get a man to understand something, when his salary depends upon his not understanding it” or to put it another way, you should always bear in mind the motivations of those providing forecasts, and given this is an anonymously-authored blog, that makes assessment difficult.

So the chicken entrails have been examined and the tea-leaves scryed, and here are the results

Although none of us has a crystal ball, we can set out the factors taken into consideration when giving predictions.

(1) Residential Supply.

According to the Preliminary Census Results for 2011, there were 294,202 vacant homes in the State in April 2011. Some of these will be holiday homes and we will find out in early 2012 when the Central Statistics Office publishes its full Census 2011 results what the true level of vacant housing is in the State. We aren’t building very much at all. According to the December 2011 monthly finance bulletin from the Department of Finance, there were 8,692 home completions in the first 10 months of 2011. “Completions” are measured by reference to connection to utilities and it is understood the true level of new construction is less than is suggested by these “completions”. Obsolescence is not routinely measured inIreland but international evidence suggests that 0.5% of property falls into such a state of disrepair each year as to be no longer habitable.Ireland has a relatively new housing stock which would suggest obsolescence is less here. But 0.5% would mean that 10,000 homes became uninhabitable each year.

(2) Residential Demand

Because of household fragmentation, we’re likely to need about 17,000 new homes in 2012 just to accommodate new household formation from the existing population. Ireland still has strong natural population growth – defined as births minus deaths – and based on recent trends there will be 80,000 new souls born in the State this year and 25,000 will shift off the mortal coil, giving a net natural increase of 55,000. For a country for which emigration has been such a painful and significant feature, it is surprising thatIreland does not accurately measure migration. Anecdote and the CSO’s surveys suggest there is net annual outward migration of about 40,000. So you might expect there to be a net population increase of 15,000 – natural increase minus net outward migration – in 2012 and at an average of 2.65 per household, that would indicate demand for 6,000 homes for this increase.

(3) Building costs

I must admit to being amazed at how often you hear “you couldn’t build such-and-such house for that asking price” when the seller might be using peak building costs PLUS peak land prices. And even if you do use current building costs, development land is notoriously difficult to value right now because of the lack of transactions. But what will happen to building costs in 2012? The trend is downwards according to the Society of Chartered Surveyors in Ireland annual rebuilding cost survey; Minister for Jobs, Enterprise and Innovation Richard Bruton has announced changes to the operation of Joint Labour Committees and the thrust of recent announcements has been that rates will be more reflective of economic conditions – in other words, rates will be reduced. Of course building costs don’t just affect new build, extensions/renovations/improvements should also be cheaper. Our building costs appear to still be almost double those in Northern Ireland.

(4) Interest rates

The betting is that ECB interest rates will be reduced in 2012 but since they’re at 1.0% and with a general feeling that the ECB won’t cut below 1%, there may be limited adjustment in Frankfurt. The ECB rates directly influence tracker mortgage rates which account for over half of Ireland’s mortgages (there are approximately 780,000 residential mortgage accounts in Ireland, about 400,000 are trackers, 270,000 standard variable and 110,000 fixed). Just before Christmas, the ECB made €490bn of three-year lending available to EuroZone banks and you might expect this would ease funding costs for banks. Deposit rates in Irelandremain high – 4% for term deposits is still available. Interbank lending remains muted. So overall, don’t expect rates to change very much in 2012.

(5) Credit availability

There were 12,000 new mortgages granted between Oct 2010- Sep 2011. That’s down about 90% from 2006. With banks “deleveraging”, in other words reducing lending to more closely match the level of deposits which continue to decline, and with little political oversight of bank mortgage lending, with loan to value rates remaining low at 50-75% typically though there are 92% LTVs available, don’t expect a wall of cash any time soon.Ireland still deters international investment and our prospects are not helped by the wider EuroZone crisis; whilst Barclays is said to have invested €40m-odd here over the last year, other international banks have absented themselves. NAMA is offering staple finance of up to 70% on certain high quality income-producing assets to pre-qualified purchasers.

(6) Incomes.

What will happen to gross and net household incomes in 2012? On the positive side, we know that some €250m of increments will be paid in the public sector in 2012. And we know from wage figures in 2011, that the CSO has reported some occupations are enjoying increased gross wages, for example, education establishments with more than 250 employees have seen average hourly wages increase from €35.56 in Q4, 2010 to €35.81 in Q3, 2011. Employees in the information and communications sectors appear to have had 10% increases in the past year. But in general according to the CSO, gross wages continue to come under pressure and this supports anecdote of companies seeking cuts to stave off redundancies.

(7) Unemployment/insolvency

According to most forecasts, unemployment is set to remain above 14% in 2012. That equates to about 300,000 unemployed and the Live Register seems set to remain about 450,000. Unemployment and fear of unemployment will deter major purchase decisions. Unemployment is likely to be accompanied by rent assistance and mortgage supplement benefits which are set to be reduced following the Budget 2012 announcements – we expect the detail in the next two weeks of what the new rates and conditions will be. The Government is set to introduce new personal insolvency legislation by March 2012 which is likely to be similar to that available inNorthern IrelandandBritain.

(8) NAMA.

Because NAMA doesn’t report individual transactions, we don’t know how active NAMA has been in the Irish residential market in 2011, and remember that NAMA has appointed receivers to less than 10% of the portfolio of loans under its control. So it will have been the developers themselves that will have been managing most sales inIrelandin 2011. But having said that, the belief on here is that NAMA’s approach towards Irish residential sales in 2011 has been characterised by reluctance. In 2012, NAMA is set to introduce a negative equity mortgage product with which some properties – initially 750 are expected – will be offered. NAMA is understood to control some 10,000 residential properties inIrelandwhich is just 0.5% of the total housing stock and just 10% of the estimated overhang of vacant property. So NAMA mightn’t be as significant as some believe. And frankly, I would be just as interested in the asset management activities of Bank of Scotland (Ireland), ACC, National Irish Bank and Ulster Bank – remember the earlier Allsop Space auctions this year were devoted to BoSI receiverships. NAMA does have a significant portfolio of Irish commercial property and you can expect a reasonable supply to be made available in 2012.

(9) Budget 2012 incentives

It seems to have gone generally unnoticed that Budget 2012 was probably as close to a “land run” as we’re likely to see in current economic times. In terms of commercial property, stamp duty was slashed from 6% to 2%, the commitment to change Upward Only Rent Review terms in commercial leases was formally abandoned, capital gains changes were made to encourage buying and holding commercial property, incentives were offered to first time buyers of residential property and section 23 allowances have also been preserved (despite stiff opposition to those allowances by Labour when in Opposition)

(10) The economy

Consensus estimates of GDP growth in 2012 seem to be hovering at 1% odd but the trend has been downwards as the EuroZone crisis rages out of control. Gross National Product is beginning to look less positive, and remember we have another few austerity budgets in prospect. Construction and retail look set for another poor year as households continue to rein in expenditure and the national capital programme is cut. The public sector is set for headcount cuts in most departments. On the brighter side, computing and communications may buck the trend. Foreign direct investment may be deterred by the wider EuroZone crisis and uncertainty about tax rates prompted byFrance’s insistence on pursuing the harmonisation of tax rates and bases for assessing tax; any change toNorthern Ireland’s corporate tax rate would appear to be some years off.

Residential property – why a 15 to 20% decline?

The Central Bank of Irelandposited a baseline scenario of a 55% decline from peak in residential prices. Northern Ireland has seen a 44% decline. The recent trend has been monthly declines of over 1%. There will be more auctions and from mid 2012, a House Price Database to provide more transparency; in a buyers market, what buyer is going to pay a premium price when they become aware of bottom prices. A step-change in repossession levels is in prospect with new personal insolvency legislation.

Residential rents – why 0 to 5% increase?

Private rents are up 4% in the past 12 months according to the CSO, and indeed they had been flat for most of the previous 12 months. Although rent assistance levels are set to be reduced in coming weeks, landlords will be under pressure with the new property tax, the ending of fixed rate or interest only mortgages. The evidence of the past 12 months is that landlords are winning the tug of war with tenants.

Commercial property – why a 0% to 5% decline?

I would expect a fillip in Q4, 2011 as the reduction in stamp duty and the abandonment of the Upward Only Rent Reviews commitment take hold, because previous quarters’ declines were in part due to the anticipation of changes. That fillip may continue into Q1, 2012 but I would then expect the NAMA’s supply of commercial property, the absence of credit and poor general economic conditions to drag on prices.

Commercial rents – why a 0% to 5% decline?

Rents are down 15% in the past 12 months but with the abandonment of the Upward Only Rent Reviews commitment there is no longer a threat to landlords with pre-February 2010 leases, so I would expect the pace of decline to ease. The wider economy is anaemic and there are general oversupply issues which will tend to drag rental levels down, but not to the same extent as the past 12 months.

[Residential property is based on the CSO series, residential rent on the CSO’s inflation series, commercial property and rent from Jones Lang LaSalle’s Irish commercial property series.]

UPDATE: 9th January, 2012. Property powerhouse and NAMA valuation panel member, CB Richard Ellis has issued some predictions for Irish commercial property in 2012. Overall there is some optimism that there will be stability though CBRE  continues to be downbeat on the prospects for secondary property. CBRE says there will be no speculative development, and that any development will be in cases where the space is pre-let.

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It seems that Michael D and Enda wanted to clear their desks on 24th December so that they’d have a clean run in their holidays over the Christmas-New Year period, and both issued their videos with seasonal greetings last week. From many perspectives though, it is the New Year message from German chancellor, Angela Merkel which will be broadcast this evening which is more relevant to our future; the speech is directed in part at a German audience but undoubtedly is, in parts, directed at others including ourselves. There is no specific policy initiative but general tepid reassurances about the future of the euro but there are suggestions that the economic crisis will remain challenging, and possibly more challenging in the short term than. Here’s an unmodified still from the broadcast – Angela might have her glad rags on and might look a tad tipsy but the message is sober –  Europe needs intensify integration as a solution to economic challenges.

The next Eurogroup meeting is scheduled for 23rd January and the next EU summit is scheduled for 30th January 2012 where the planned focus will be on employment; but with €72bn of Italian debt and interest repayments due by end March 2012 and Italian 10-year bonds finishing yesterday at 7.11%, you might think there would be earlier summits. There is a big Italian bond auction scheduled for Friday 13th January 2012.

This evening on New Year’s Eve, many Germans will sit down and watch an old black-and-white 18-minute British comedy called “Dinner for One” in which an increasingly drunken butler will help the lady of the house celebrate New Year amongst the ghosts of departed friends. It’s a wryly funny reminder of mortality, and its tone is a little too reflective for this time of day, so here’s a bastardisation of the sketch with Angela and Nicolas Sarkozy’s heads superimposed on the characters. The video, produced by German state broadcaster ARD, is funny enough, though sadly it is in German – if an English transcript becomes available, it will be posted. The gist is that on the occasion of the 90th EU summit, the French and Germans remember departed leaders, Greece’s Papandreou and Spain’s Zapatero, there’s a dig at Britain’s Cameron, a gibe at France’s shaky credit rating and in the end Sarkozy helps Merkel up the stairs promising her his “Triple A” – a promise the ratings agencies might deliver in the next couple of months.

UPDATE: 1st January, 2012. The video of the broadcast is now available, here’s the ZDF broadcast via Youtube with some humorous subtitles to lift the tone.

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