Archive for March 26th, 2012

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 in 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 thatIrelandhas 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.

So faced with the old dilemma of rent versus buy, we show here today two properties in Dublin. The first property is a basic-looking one bedroom apartment in Kilmainham with an asking price of €150,000. If you had bought this property in January 2012, then according to the CSO the average price of a Dublin apartment fell by 6.3% which equates to €9,450 in the case of a €150,000 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 €9,898.


The second property is for rent at €8,000 per month. This is the highest asking price in Dublin city. You get a 9,500 sq ft (including roof terraces) six bedroom top spec home on four acres in Portrane.

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. The aim of this little diversion is to indicate the scale of price declines. You should also bear in mind that individual properties and individual transactions may not be reflective of the market in general.


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This morning has seen the publication of the CSO residential property price indices for Ireland for February 2012. Here’s the summary showing the indices at their peak (various months in 2007 depending on type of property and location), the NAMA valuation date (November 2009), annual, the last 12 months (February 2011), year to date 2012 (December 2011) and last month (January 2012)

The CSO’s indices areIreland’s premier indices for mortgage-based residential property transactions. The CSO analyses mortgage transactions at eight financial institutions : Allied Irish Banks, Bank of Ireland, ICS Building Society (part of the Bank ofIrelandgroup), the Educational Building Society, Permanent TSB, Belgian-owned KBC, Danish-owned National Irish Bank and Irish Nationwide Building Society. The indices are hedonic in the sense it firstly groups transactions on a like-for-like basis (location, property type, floor area, number of bedrooms, new or old and first-time buyer or not) and then assigns weightings to each group dependent on their value to the total value of all transactions. The indices are averages of three-month rolling transactions.

Cash transactions: there is increasing concern that although the CSO captures data from the mortgage market, it omits cash transactions. The latest figures from the Revenue Commissioners are for 2009 which show that just 6% of transactions (by volume) were in cash. In February 2012 , estate agents DNG claimed that cash made up one third of the market. At the start of January 2012, Sherry FitzGerald said that 29% of its registered buyers were cash buyers, and mortgage expert Karl Deeter said on here that “what Mark Fitzgerald [of Sherry FitzGerald] said at the AIB meeting in December (we were at the same table) is that 30% of purchases were cash – I’d take that as being completions unless this is a case of crossed wires”. In addition, the Sunday Independent reported the former acting CEO of the Irish Auctioneers and Valuers Institute saying that “I would say a quarter of deals at present are being done in cash”. The Allsop Space auctions won’t be representative of the general market but the latest analysis from it says that almost three quarters of its auction transactions were in cash. The CSO expects to have monthly data from the Revenue Commissioners from mid-2012 and it expects that it may subsequently be able to show the market size with its monthly release of the residential index. The perception is that cash transactions will be at keener prices than mortgage transactions because the buyer can move quickly and doesn’t need credit. If that perception is correct then the CSO may be understating – and potentially, understating substantially – the decline in prices. NAMA, which is not an honest broker, in these discussions said two weeks ago “the index indicates a decrease of 48% overall but we believe the market has decreased by 57% or 58% on average. The index simply has to catch up because the transactions on the market reflect that.” NAMA in particular seems to believe that prices outsideDublin have fallen significantly further than the CSO index suggests.

As for the key questions:

How much does property now cost in Ireland? The CSO deliberately doesn’t produce average prices. The former PTSB/ESRI index did, and claimed the average price of a property nationally hit the peak in February 2007 at €313,998, inDublin in April 2007 at €431,016 and outsideDublin in January 2007 at €267,987. If, and it is a big “if”, you were to take PTSB/ESRI figures as sound and comparable to the CSO series, then these would be the average prices today:

Nationally, €159,044 (last month €162,653, peak €313,998)

In Dublin, €184,584 (last month €186,827, peak €431,016)

Outside Dublin, €146,893 (last month €151,471, peak €267,987)

I don’t think the CSO would be happy with this approach but it seems to me that the PTSB/ESRI series as represented by its historical indices closely correlates with the performance of the CSO indices.

What’s surprising about the latest release? Apartment prices inDublin were down a staggering 6.3% in one month, nationally apartment prices were down 5.5%. Non-Dublin prices were down 3% whilstDublin was down just 1.2% which is a reversal of previous trends. AIB announced at the end of 2011 that it was limiting its LTV on one-bedroom apartments inDublin to 75% which might be a fair reflection of the outlook for prices.

Are prices still falling? Yes, and the 2.2% monthly decline nationally is greater than the 1.9% monthly decline in January 2012 which was also up from the 1.7% decline in December 2011 and 1.5% decline in November  2011 but in the same range as the 2.2% decline in October 2011, the 1.5% decline in September 2011 and the 1.6% decline in August 2011.

How far off the peak are we? Nationally 49.3% (51.3% in real terms as inflation has increased by 4.1% between February 2007 and February 2012). Interestingly, as revealed here,Northern Ireland is some 45.2% from peak in nominal terms and 52.6% off peak in real terms. Are forbearance measures by mortgage lenders, a draconian bankruptcy regime and NAMA’s (in)actions distorting the market? Or are cash transactions which are not captured by the CSO index so significant today that if they were captured, the decline in the Republic would be even greater?

How much further will prices drop? Indeed, will prices continue to drop at all? Who knows, I would say the general consensus is that prices will continue to drop. This is what I believe to be a comprehensive list of forecasts and projections for Irish residential property [house price projections in Ireland are contentious for obvious reasons and the following is understood to be a comprehensive list of projections but please drop me a line if you think there are any omissions].

What does this morning’s news mean for NAMA? The CSO index is used to calculate the NWL Index shown at the top of this page which aims to provide a composite reflection of price movements in NAMA’s key markets since 30th November 2009, the NAMA valuation date. Residential prices are now down 29.6% from November, 2009.  The latest results from the CSO bring the index to 826 (21.1%) meaning that NAMA will need see a blended average increase of 21.1% in its various property markets to break even at a gross profit level.

The CSO index is a monthly residential property price index. Ireland does not yet have a publicly available register of actual sale prices, but one is expected in mid-2012 following the passing of legislation last year – read the latest on the House Price Register here. There are three other residential price surveys, based on advertised asking prices or agent valuations – for the latest see here. Lastly the Department of the Environment, Community and Local Government produces an index based on mortgage transactions, six months after the period end and not hedonically analysed – it is next to useless.

UPDATE: 26th March, 2012. The CSO now gathers data from Ulster Bank in addition to the banks identified above. This means that the indices should be even more accurate as far as mortgage-based transactions go.

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“Deputy Gerry Adams asked the Minister for Finance if he will confirm if the National Asset Management Agency’s target of repaying 25% of its debts by the end of 2013 has become a term of the bailout agreement with the troika; and if he will make a statement on the matter.  [13536/12]

Minister for Finance (Deputy Michael Noonan): The NAMA Board initially set itself the target of repaying €7.5bn of its debt by end 2013. By agreement, the May 2011 Memorandum of Understanding with the European Central Bank, European Commission and International Monetary Fund included a target for the disposal of assets equating to approximately €7.5bn in cash by end 2013. As a consequence this target is now a commitment under the agreement with the Troika. The Troika seek progress reports on the asset disposal target at the quarterly meetings with NAMA.” Dail question and answer on 13th March 2012

“Deputy Pearse Doherty asked the Minister for Finance if he will confirm that the only commitment with respect to the National Asset Management Agency plans given to the Troika in May 2011 is via a letter of Intent signed by him and governor of the Central Bank of Ireland, Patrick Honohan which states we will ensure that the costs of NAMA operations are reduced and that NAMA constructively contributes to the restoration of the Irish property market in the course of meeting the asset disposal targets established and monitored by the NAMA Board, including disposal of 25 percent of assets by end 2013; and if he will confirm that no commitment has been given to the Troika to repay NAMA’s debt.  [16005/12]

Minister for Finance (Deputy Michael Noonan): I can confirm that the troika commitments regarding NAMA are included in the May 2011 Programme documents which concern NAMA’s governance, operational costs and asset disposal targets. These commitments are included in the May 2011 Memorandum of Economic and Financial Policies and not in the Letter of Intent. As regards NAMA’s debt, I would say that NAMA has purchased loans at a significant discount from the participating institutions. Its primary aim now is to repay those loans through the sale of loans or assets underpinning these loans.” Dail question and answer on 22nd March 2012

Whilst it is true that NAMA has a self-imposed target of paying down 25% of its debt (€7.5bn approximately of the €30bn in NAMA senior bonds used to acquire loans from the banks, in addition NAMA paid about €2bn of subordinated bonds but these will only be payable if NAMA makes an overall profit in 2020), it is now clear that NAMA is not mandated by any term in the bailout agreement with the Troika to repay this debt by the end of 2013.
Pacta sunt servanda” – the “pacta” that set out the terms of NAMA’s bonds are the “Offering Circular” for the bonds and the “Guarantee” issued by Minister for Finance, the late Brian Lenihan when NAMA first started to acquire loans and of course the NAMA Act and the scheme of these documents provides for the repayment of these bonds by NAMA by 2020. That’s the agreement. Anything else is just an internal NAMA decision which can be reversed without affecting the terms of the bailout agreement with the Troika.

What this means: NAMA has a cash mountain of over €4bn. According to the NAMA CEO, the Agency is paying 2% in interest annually on its bonds – it’s supposed to be the six-monthe Euribor rate which is 1% presently but the NAMA CEO Brendan McDonagh recently said NAMA was paying 2% which presumably includes some hedging costs. NAMA has a primary objective laid out in the NAMA Act of maximising its returns. So NAMA has a choice of using its cash to redeem bonds which cost it 1-2% per annum or using its cash for ventures set out in the NAMA Act. If those “ventures” are likely to yield less than 1-2% per annum, then NAMA will be in breach of its mandate under the NAMA Act by pursuing those ventures; if the ventures yield more than 1-2% then NAMA will be in breach of its mandate under the NAMA Act if it DOESN’T pursue those ventures. Remember the NAMA Act forces NAMA to maximise its income.

So, in an economy where we are fighting tooth and nail to retain €1bn from a €3bn state sell-off of assets including the ESB, Bord Gais and Aer Lingus, to be used for an economic stimulus in two years time, we are allowing NAMA to sit on over €4bn of cash RIGHT NOW, which costs this State 1-2% per annum, and which could be deployed in ventures set out in the NAMA Act as long as NAMA is operating to maximise its income, which means getting more than 1-2% per annum.

If the well-rewarded folks leading this country and leading NAMA are unable to devise ways in which this cash mountain can be deployed in an economic stimulus which pays NAMA more than 1-2% per annum and which delivers much-needed infrastructure to this country which must be paid for by 2020 when NAMA has to redeem its bonds, then perhaps we should all bow our heads and allow our sovereignty to shuffle off to the EU.

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