This morning’s house price statistics from the Central Statistics Office show that house prices nationally are continuing to decline, and in fact have declined by each of the last 52 months – months, not weeks, though in June and July 2010 the index did remain flat. In not one month since September 2007 have prices nationally risen. And there is a body of opinion which says that Irelandhas so many supports and distortions in place in the property market that what we are seeing is a torturously long-drawn out adjustment to prices. Whilst none of us has a crystal ball, I would say the consensus is that house prices will continue to fall for some time, maybe a year, maybe two to three. According to the DAFT.ie 2012 Consumere Attitudes Survey , most people think prices have a ways to fall with more than 90% thinking that prices in five years time will be lower than today.
So faced with the old dilemma of rent versus buy, we show here today two properties in Dublin. The first property, a 620 sq ft home in excellent condition is for sale and its asking price of €199,000 is close to the average price for a Dublin home indicated by the CSO indices, that is €194,918 in December 2011, using the Permanent TSB/ESRI peak prices and applying the % decline from peak recorded by the CSO. If you had bought this property in December 2011, then according to the CSO the average price of a Dublin house fell by 4.1% which equates to €8,159 in the case of a €199,000 home and assuming you are paying 3.5% net annual interest on a 100% mortgage, you would have seen your wealth decrease by a total of €8,739.
The second property is for rent at €7,000 per month. This is the highest asking price in south Dublin city. You get a five bedroom furnished top spec home at one of Dublin’s best addresses.
Whilst the experience of one month isn’t necessarily probative of subsequent months price changes, it does show in a snapshot the disparity between renting and buying, and suggests renting provides better value for money. You should also bear in mind that individual properties and individual transactions may not be reflective of the market in general.
NAMA Wine Lake 
Stocks versus Flows = Apples versus Oranges
@Seamus, cost of occupation = apples (buying) = apples (renting), it’s a one-month snapshot and each transaction is unique and may not be representative of the marketplace.
You’re the economist Coffey; it’s your job to get confused between the two.
The rest of us size up apples and oranges all the time.
Yep Seamus, if you bought a house this does crystalise the poor choice you made. like it or not
@ Richard,
I would think that if something is crystalised it will have a direct effect on my pocket, i.e. will involve actual money transfers. Otherwise it’s just a valuation effect, which although important, is not a consideration here.
If I own an asset that falls in value I am not necessarily worse off than someone who rents that asset. In any month it is the cost of owning versus the cost of renting that must be compared.
A comparison like this would be appropriate if the owner actually sold the asset at the end of the month and thereby crystalised the profit/(loss). Buying a house for residential purposes should be a long-term decision.
@Seamus
“If I own an asset that falls in value I am not necessarily worse off than someone who rents that asset. In any month it is the cost of owning versus the cost of renting that must be compared.”
That may be true if you already own the asset but less so if you were thinking of acquiring the asset or renting. I think that was the context for NWL’s comparison.
@Seamus
It makes a huge difference if you’re “buying” with leverage.
Anyone who’s not a cash buyer is simply renting the money – so the comparison is renting the asset now and purchasing later or renting the money now and selling the asset later.
If the renter buys from the seller at a future point in time the question is how much has the renter paid in rent versus how much has the seller paid in interest – with capital appreciation/depreciation magnifying the leverage of the profit/loss for seller.
Seamus,
“I would think that if something is crystalised it will have a direct effect on my pocket, i.e. will involve actual money transfers. Otherwise it’s just a valuation effect, which although important, is not a consideration here.”
The psychological effect of home asset drop is “crystallized” and directly acts on your pocket. It slams it shut.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1397607
@ Brian,
If someone is worried what the equivalent price of a house they are considering buying now will be in a month’s time they should not be buying.
@ WGU
You are exactly right, but if someone is buying a home with more than half an eye on selling it, it is closer to an investment than a residence and the purchase decision is different. If this was a one-month decision as shown here the arithmetic provided will hugely favour the renter. But over 10/15 years we cannot be as clear cut. Over a longer period it is the monthly flows of interest/rent that matter more not stock measures of the price.
@ Jake
I’m not saying these effects don’t exist I just said they are “not a consideration here”.
@Seamus Coffey
If we crudely segment the housing market into it’s component parts and the buyers therein:
Apartments – single, 21-28, no kids, alternative to rent.
Terraced – in a relationship, 28-34, 1 kid, partner was a FTB.
3 bed semi – Married, 34-40, 2 kids, stamp duty was a bitch.
4/5 bed detached – Still married, 40+, 3 kids, bury me in the garden.
Then factor in location – near a:
University, hospital, town centre, shopping centre, good school, employment, golf/tennis club, etc.
What you’ll find is someone is supposed to get the apartment near employment/town, then graduate to a terraced near a shopping centre, then a 3 bed semi close to a good school and, for some lucky few, the glorious detached near the golf/tennis club.
The first two moves are doable as long as the transaction taxes are low – but each time the seller wants to have the money, used to purchase the asset, maintain it’s purchasing power and hopefully have it increase a bit. The mortgage interest paid is/was subsidised by mortgage interest relief thereby making buying more attractive than renting.
But the initial money must maintain or increase it’s purchasing power to allow the next moves to happen.
Moving to the 3-bed means/meant higher transactional fees (soon to be higher property taxes) – which make the rent-v-buy argument moot without capital appreciation – so to make the money maintain it’s future purchasing power then location near good schools becomes essential – thus ensuring the asset becomes subject to the laws of supply and demand.
This facilitates the final move to the glorious detached – even more subject to supply and demand pressures, thus ensuring it’s ability to be left tin the will!
I present to you the ladder!
And all along the way everyone is very concious of how bricks and mortar is supposed to be a store of wealth – so I would have to disagree with your assertion that the stock measure of price doesn’t matter.
This will at least kill off and end the absolute nonsense of NAMA,further interfering/distorting the market via its ill conceived still born put option.
As an amateur in these matters the only way I can explain it (to myself) is that the banking system effectively made property the national currency. We were encouraged to exchange Euros for it at very disadvantageous rates of exchange, and now property is going through a process of devaluation.
The government attempted to guarantee the value of property as the alternative currency it had become by guaranteeing the banks. It’s an exercise that’s doomed to failure since the only way to square the equation would be devalue the Euro to the same extent as property. And that ain’t ever going to happen.
Surely there has to be a fall-off in rental accommodation demand? When analysts say that people are putting off buying property until prices hit the floor and that this will increase rental demand I start wondering where all these new renters are living at the moment. The vast majority of people ready but as yet unwilling to buy are already renting and for each generation of new home leavers/ students etc arriving on the market there’s another, slightly older generation of the same group leaving the market for pastures new.
@Seamus
It seems to me that with each new piece of housing data that comes through your stance re negative equity and its effects on the economy in general become less credible.
I mean the comment..
“A comparison like this would be appropriate if the owner actually sold the asset at the end of the month and thereby crystalised the profit/(loss). Buying a house for residential purposes should be a long-term decision..”
smacks of those in comfortable Govt jobs where the economic cycle has little or no effect and a job for life is in theory be a given. Put yourself in the shoes of someone in Cork who has no job or has lost their buisness and is €150k in the hole on the value of their house versus their mortgage and have the possibility of taking up a job in Dublin – but simply can’t because of the negative equity noose around their neck and all the while their living standards continue to deplete with no chance in the short, medium or long term of the situation improving – now ask yourself if the negative equity position matters and then multiply this situation by 150k households and the problem is now a social one and glib comments such as yours above look rather shallow.
@Yields or Bust, please be careful with remarks that can be interpreted as personally aggressive. Sadly with writing, we can’t always demonstrate good intentions or humour – and there doesn’t appear to be a feature on WordPress to allow emoticons – so please be careful to avoid terms which could be taken personally.
Y or B,
I agree that negative equity is a problem where the person wants to sell and can’t recall ever saying to the contrary. However, the plural of anecdote is not data and really all you have given is a hypothetical scenario.
I recommend that this person negotiate with their bank to switch the mortgage to interest-only as has already been done for almost 25,000 mortgage accounts. This would put them in a position of maybe being able to cover the interest by renting the house.
If the bank is informed of this change they may take a different view of the restructuring but telling them is really down to the borrower. If the house is rented then maybe that job in Dublin can be taken. Even if there was no negative equity involved it is likely that renting would also be the best option, given that a sale could take 6-12 months.
The point at which a ‘home’ becomes ‘bricks that trapped you’ is different for everybody, and for some will never exist.
Right now it exist too soon for too many people.
Actually, personally I think that the houses will bottom out in about six months.
Once all those public sector retirees get their six figure lump sums, you will find that with prices as low as they are, you really can’t teach old dogs new tricks. Expect cheap holiday homes to start being snapped up sometime in August, a month or two after people on holidays have been driving around looking at them all summer. After this, with rising rents and (literal) decay of excess housing stock, and with a few Priory Halls being condemned, and as people begin to default on their mortgages, I imagine rental properties will start getting shifted.
Six months. You heard it here first.
@NWL, I agree completely; a house is of course an investment as well (as Seamus says) as a home. If values are at any time lower than purchase price PLUS still fairly high costs and taxes, wealth has at that time of course been destroyed whether or not the loss is realised.
We need to get away from the notion that unrealised losses are somehow less relevant than many other considerations (in this case, than cash rent paid). It’s a highly dangerous approach in a market that still has so much downside potential. I see far too many friends and family in Dublin sitting on (growing, if we are right that the market is falling) capital losses because they would ‘lose too much money’ on a sale. Instead of taking the loss the tendency is to rent and hope for recovery ‘at some point in future… which will surely come’. I wish them well but fear that prices will in the long run fall relative to today. (Some of course cannot afford the cash cost of selling out of negative equity, in which case they have may have no option but to sell and risk greater losses in future).
Interested in your comment that the property market in Ireland is propped up by so many distortions and supports. It’s a very interesting remark given the contribution of poor government to the current situation. Personally I see more supports within the commercial-property sector (NAMA). Where do we see them on the residential side?
– extremely low level of forced sales/evictions/State ownership of banks
– very weak tenant protection laws and almost no rent controls (I would see each of these as rent and hence market-value stabilisation tools, as are seen in eg France and Germany, NB their long-standing absence here)
– continuing mortgage interest relief but this is present in many other markets and of course we are seeing signs of various property related taxes as a part of the Programme
– …??? What else am I missing?
@nwl
The point I’m simply making is that here and elsewhere Seamus Coffey has consistiently stated that the numbers suggest there are about c14% of mortgages in distress/arrears and therefore the c86% remaining mortgaged households must as a result be fine. Many of the families in the 86% are far from fine.In fact many thousands are very close to jacking the whole lot in (but can’t) because working for the bank, and virtually no other, for the next 20+ years isn’t overstating the true nature of the economic prospects for many thousands of families who form a huge cohort of the 86% that SC in his analysis suggests are dandy. For an economist who airs his views in the public manner in which he does this is a misrepresentation of the facts as virtually every domestic related economic indicator is telling us over the past 4 years (including todays). In simple terms mortgage loans are far too high relative to the current and expected incomes (and house values) for thousands of families and the problem gets worse from here. Suggesting otherwise or at very least not making the case for those just above water (for now) is a poor analysis of the data ( particularly for someone who has demonstrated ability in other areas) and the situation on the ground and I make no apology for it.
@ YoB,
I don’t require using the words “fine” or “dandy”. I can recall writing pieces like this on several occasions.
“Between loans that are in arrears, loans that have avoided arrears because of restructuring and loans in short-term arrears it is clear that over 20c of mortgage accounts are showing some level of distress. This corresponds to around 135,000 households.
There are 175,000 mortgage accounts in some difficulty but there is also around 600,000 mortgages which are not in any arrears and have not being restructured. Capital repayments are being made on most of these.”
There will always be people at the margin between the categories and the continuing increase in mortgage arrears reflect this. I have frequently commented on these increases in arrears, and the likelihood that they will continue to rise.
My view has always been that it is mortgage arrears rather than negative equity is the most serious problem we face. Nobody can deny the existence of both but the emphasis on each can differ.
The recent BOI data reveal that one-third of their accounts that are in 90-day+ arrears are not in negative equity. Much like the overall loan book 7% of mortgages issued in the 1990s are in 90-day+ arrears.
They also show that 85% of mortgages with loan-to-value in excess of 180% and 90% of all mortgages in negative equity are not in 90-day+ arrears.
BOI have said that 98% of the 11,233 mortgage accounts which have been restructured “are paying interest only or greater on their balances”.
These numbers will change but that is where they are now. You might like the emphasis put elsewhere. I think it should be on the mortgages that are in trouble.
@Seamus
Firstly I respect your views.
Secondly I for one do not take the view that negative equity is a less serious issue than arrears. I believe they are comparable. For me the arrears issue is simply a cashflow problem which may or may not be solved at some time in the future. If the cashflow issue is not capable of being solved then the two parties will have to meet somewhere in the middle because I think we’re all adult enough to know that evicting people with 150k properties sitting idle is a fools errand for the banks and something they have indicated by their inaction (on the CB numbers) they simply do not want to do in any meaningful way.
Negative equity in contrast is a moving target with a proper value on the property required to make sense of the true scale of the problem. This valuation question causes problems and we know from the very recent past that assuming any of the valuation models or methods adopted by the banks as a guide is a very dangerous and questionable game. Even in the boom times they were never accurate. Never. Therefore the true extent of the problem is in my view massively underestimated (and therefore accepting the BOI numbers in terms of their estimate of LTVs is fanciful) and this matters for a number of reasons but one important one being the changing nature of employment. Those with skills and in negative equity are simply prevented in most instances utilising those skills in a potentially more economically viable manner because of the nature and scale of the negative equity problem. This is a disastorous blow for the family envolved at virtually every level and is little recognised.
In many thousands of households the mis pricing of the property by the lending bank is preventing and will prevent the natural migration of workers from one geography to another to improve their economic well being. The consequences of this problem is all to visable to see with growth in the larger towns and cities to the detriement of the regions likely. Large cohorts of families will become and are becoming economically stranded – can’t afford to sell, can’t afford to commute, can’t afford to rent a new accomodation closer to the jobs action whilst repaying for an existing property located miles away and can barely afford the current mortgage. No amount of jobs announcements in Dublin or Cork improves the lot for someone in Tullamore in dire negative equity for instance with children, requiring a job and with the necessary skills. This family is firmly economically stuck and there are thousands of them and yet on the numbers they may appear as compliant to the mortgage terms (including restructured terms).
Unfortunately this problem gets worse for reasons that others and I have argued here and elsewhere and thats because property values in Ireland will eventually see a peak to through fall of about 75% to 80%. Falls of that scale simply compound the problem which has been underestimated by the CB in the PCAR document, BOI with its PTT falls of 55% the other day ( we’re already there) and this evening Irish Permanent with a similar PTT estimate. Without some recognition that mobility in the workforce for thousands is no longer possible until 2040 per the CB PCAR document (their estimate when property recovers to its 2007 level) the chances of sustainable recovery diminsh further.
” No amount of jobs announcements in Dublin or Cork improves the lot for someone in Tullamore in dire negative equity for instance with children, requiring a job and with the necessary skills. This family is firmly economically stuck and there are thousands of them and yet on the numbers they may appear as compliant to the mortgage terms (including restructured terms).
Unfortunately this problem gets worse for reasons that others and I have argued here and elsewhere and thats because property values in Ireland will eventually see a peak to through fall of about 75% to 80%. Falls of that scale simply compound the problem which has been underestimated by the CB in the PCAR document, BOI with its PTT falls of 55% the other day ( we’re already there) and this evening Irish Permanent with a similar PTT estimate. Without some recognition that mobility in the workforce for thousands is no longer possible until 2040 per the CB PCAR document (their estimate when property recovers to its 2007 level) the chances of sustainable recovery diminsh further”
I think this sums up a huge yet unquantifiable problem in this country.