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.
NAMA Wine Lake 
Can’t fault the analysis, NWL. If anything conservative on the commercial end because of the impending tsunami of sales, lack of liquidity and waning interest from foreign funds at these levels. In any event the bottom line is a circa E2 billion plus hit for 2012 to the NAMA balance sheet.
P.S. Best to you for the New Year.
@WSTT, and a happy new year to you as well.
The accounting methods used by banks don’t require them to take full losses on asset value declines. If the loan is being serviced for example then banks tend not to book any impairment loss at all. So even if there is rent which covers the interest repayments then NAMA may use discretion in what impairment it books if any.
So I think NAMA will book an impairment loss in 2012, but nowhere near €2bn, somewhere around €500m would be my guess, though NAMA is making an operating profit at around this level on existing loans, so I would guess the Agency will break even.
But the closer NAMA gets to being wound up, the more accurate its valuation of loans will need be, so indeed unless things pick up, there might be a nice multi-billion loss realised later this decade.
Agree with most of this, but household fragmentation might be a little overstated. In a recession it typically lessens due to emigration of household formation aged individuals and wider economic conditions (children more likely to stay at home, parents less likely to separate, and young adults to share property to keep down costs). Fragmentation is often a choice, not a compulsion, and until the wider economy recovers household fragmentation is likely to weaken from the rate during the Celtic Tiger years (and the rate in the Census 06-11, which still caught the tail-end of the boom). Natural increase is good, but kids aged 0-5 won’t be buying anything for 20+ years. There’s a geography to all this as well – fragmentation is more likely to have an effect in urban areas, many rural areas have witnessed population/household decline (and these are the places with the greatest oversupply).
re. Commercial property, I would expect to see that trail down because the oversupply of retail units and offices will continue to drag things down (office oversupply is over 20% in Dublin). Whilst there has been a big focus on housing, the untold story is the oversupply in the commercial sector which almost certainly outstrips the residential oversupply nationwide, but for which we have very little data. It’s a big hole in the nation’s data generation and statistics.
Interestingly I wrote a similar piece a month or so ago (http://irelandafternama.wordpress.com/2011/11/21/six-reasons-why-the-property-market-is-going-to-be-very-slow-to-recover/). IT were going to publish a version of it in their property section then replaced it at the last minute with a puff-piece talking up the market. I expect a rake of such puff-pieces from the industry over the coming year trying to persuade us that the bottom is nigh, there is a shortage of stock, and we need to start building pronto. Until supply and demand are in harmony, starting to build again will be a folly..
@Rob, thanks for that, very interesting to get those views from someone who counts a directorship of the National Institute for Regional and Spatial Analysis (http://www.nuim.ie/nirsa/people/admin/kitchin.shtml) amongst his professional credentials.
Might you willing to go out on a limb and give a view in a personal or professional capacity as to changes to prices and rents over the next 12 months?
I’m not a property economist and I’ve not got into the game of predicting the bottom of the market, but I think 60% below peak prices seems likely, if not slightly higher given present trends and we’ve already reached that for apartments in Dublin. I’m not sure if 2012 will be the bottom, however (though I think the bottom will happen in different parts of the country at different times depending on local alignment of supply and demand).
Sometime in the new year we’ll be launching a new interactive mapping module on house prices. We’ve been working with Ronan Lyons (Oxford Uni) and Daft.ie using a database that includes over 980,000 rental observations and over 600,000 sales observations from 2006 through to the present day. Importantly, the data will be published at sub-county scale, plotted into over 1,000 geographical units made of aggregates of EDs and EAs, and relates to a variety of different types of property (det, sem-det, apt, 2, 3, 4 bed, etc). Whilst the data is asking prices, it does provide for the first time a detailed view of prices and rents at a fine micro-geography for the country. I’ll let you know when it goes live.
The biggests influence of pricing in next two years will be the dumping of Irish property by non NAMA banks and institutions.They have enough amunition to blow all of the above numbers out of the water,if and when they decide to cut their losses and run you will find the bottom and it ain’t going to be pretty.
@NWL, From the very beginning it has been obvious to me that NAMA will record a loss of approximately 50% on the acquired price of their assets. The fact that the banks accounting methods allows it to hide the losses that are building up like Damien, the devil’s child, in the belly of the beast is inexcusable and demonstrates that, in spite of flooding the regulator’s office with staff, we have not progressed very far in attaining transparency.
Under NAMA’s current strategy and management, there are factors working together that will ensure that by the time the second trimester arrives the “bump” in NAMA’s belly will be obvious to all.
The agency is selling all its prime “performing” (i.e. income producing) loans. It is crystal clear to any close observer that sales expediency is the priority, and not price maximisation. This in itself is a failure, or indeed even a measure of the ignorance, of NAMA’s management expertise. As these prime assets are sold the non-income producing development assets increase as a proportion of the agency’s remaining portfolio. Because this rubbish is held and not sold, it is causing stagnation in the market as it does not allow any liquidity whatsoever in to help create a floor. The result is decreasing activity and a further deepening of the downward spiral in values. It is a self fulfilling debacle.
As NAMA increases its staff from 100 to 200 and then to Michael Geoghegan’s 400 and it’s income falls away, the lines on it’s graph will cross and its strategy will be seen for the failure that it is.
We are only in the first trimester in this disaster.. the realisation that a devil’s child is to be born is not generally perceived yet. The bank’s accounting mechanism still makes a nice cover for the bump, but it will only cover it for a limited period of time. Unless someone aborts this strategy soon and replaces it with some common sense, the arrival of this demonic antichrist is inevitable.
@NWL, thanks firstly for a great piece. Don’t you think that the relationship between build/replacement-cost and asking prices (as distinct from your point (3) above, related more to movements in build costs per se) should perhaps have a higher weighting in the analysis?
A non-economist’s perspective: house prices will in the long run tend to approximate towards build costs. In, for example, Dublin sale prices still greatly exceed build cost. Is this sustainable?
In the shorter or medium term, supply and demand factors will trump most other considerations, but as large (positive) gaps develop between the ‘market value’ of bricks, mortar and land, and what they actually cost to replace, the market is IMO set for a (downwards) correction.
Like tulips, housing, although it’s obviously much more difficult to value from this perspective, could be said to have a certain ‘intrinsic’ value that should I often think be borne in mind to a far greater extent in these analyses.
@Coltrane, there are all sorts of “hard methods” of valuing property, rental yields, build costs (which remember includes land and builder’s profit), affordability (how much of your after-tax income goes to pay for property), average wages, demand:supply. Truth be told, perception is as important as the “hard methods” so even if property was completely unaffordable, as during the boom, people borrowed, lied and did what was necessary to get on the ladder. And even if property was being sold for less than its apparent build cost, it mightn’t attract a buyer because of perception,
And all the factors are fluid, so build prices might reduce if there are changes to labour agreements, for example or cheaper methods of construction are used.
@NWL, thank you and all absolutely agreed. Funnily enough I tend to think that in Ireland perception is still a price-increasing dynamic or at least will prevent property prices from falling to where they otherwise might! Despite the trauma of the last few years, we still see it as basically a store of wealth – somehow.
Although simplistic, I consider a check of asking price versus build cost a useful input. Perhaps more instructive than % fall since peak.
If I buy this house now for eur4,000/m2 and it burns down tomorrow I’ll end up with a cheque from the insurer for perhaps eur2,000 plus a scorched garden. OK, I might be able to sell the re-built house for what I paid or some other price that bears no relation to build cost, but….
can you guys write in english please,1. what tiger some drunk fool somewhere in ireland celtic tiger never existed, let everyone accept that and we have a starting point for recovery ok!!!!!!!!!!!!!!!!!!!!!!! .2 print plain english house prices will fall 15,20%,or more??? . not all people have the time to go through all this trival print.house prices are about 25% overvalued at this time.now one simple question for you experts, buy now at asking price less20% or wait another year and see how much more they will fall ???3 until houses are sold at cost price plus a fair profit this nightmare will continue 4 how can nam, afford to buy properties and sell at a loss or am i missing something??? 5 finally until all people of ireland wake out of their lovely dream lower prices and get the country back on its feet
[…] recommend you read the three caveats here that I suggest should accompany any property price projection from any source. It’s worth […]
Excellent commentary and analysis. Sound arguments supported by solid proof in most cases. I would have to agree that house prices will only fall in value this coming year. Only agricultural land appears not to be loosing value at the moment.
Very much enjoyed the read. Excellent.