On what basis is Irish residential property 26% undervalued?

The special report published this morning by the Central Bank of Ireland may well have perked up your spirits if you’re a homeowner inIreland. The Bank has calculated that residential property inIreland is between 12-26% undervalued – in other words you might think your home is worth €148,000 but the Bank thinks it should be worth up to €200,000. The Bank has even produced a graph – shown above – which shows the degree of undervaluation based on four different models.

But on what basis does the Bank arrive at its conclusions? Despite studying the 13-page report, I’m afraid the best you’re going to get, is the Bank has used four models to examine actual prices versus expected prices. The expected prices are derived from observations of property prices over the long-term and their relationship to various factors such as average income, population, housing stock and the availability of credit. It seems that on an “affordability” basis, the biggest undervaluation of 26% occurs.

How did they get to 26%? I have not a clue. You can’t tell what actual prices have been used. The CSO’s index is probably the most reliable in recent times but it only goes back to the mid 2000s but as noted in the Bank’s paper there is a range in actual house prices of between 43-70% recorded at Myhome, DAFT, the CSO and the Allsop Space auctions. So which actual house price has been used?

And how are the models constructed? Again, not a clue is offered by the paper, though there shouldn’t be any reason to doubt that the Bank staff have diligently carried out their calculations. On the other hand it’s worth noting that The Economist reported in November 2011 “despite their collapse, Irish home prices are still slightly above “fair” value—partly because they were incredibly overvalued at their peak, and partly because incomes and rents have fallen sharply.” – The Economist was using rents and income to come to its conclusions – you’d expect income used by The Economist and affordability as used by the Bank to throw up similar results though.

The Bank is being asked for its calculations as it is noted that the report states “Detailed econometric results are available, upon request, from the authors”

There will be cynics who will suspect any projections issued by the Central Bank of Ireland on property prices. There are some who will claim that the Bank made itself a hostage to fortune in March 2011 when it used baseline and adverse scenarios for future property prices to assist with estimating the capital requirements of banks. And cynics might suggest it is in the Bank’s own interest to undershoot the adverse estimate in order to avoid additional calls on taxpayers’ funds to prop up the banks.

Speaking of cynicism towards house prices forecasts, yesterday the Sunday Independent – “Ireland’s most profitable newspaper group” according to the Independent but a group which made a loss of €41m in 2011, is balance sheet-insolvent and has seen its share price dive by 66% in the past year according to everyone else – claimed that house prices in Dublin had “finally hit the floor” based on the monthly release of the CSO’s index during the week. If that is true, then Dublin house prices have “finally hit the floor” seven times since prices started declining from peak in 2007, and on each occasion after a rise, prices subsequently fell. For a media company starved of property advertising revenue, with negotiations with banks over €400m of debt looming and with circulation falling, you’d wonder if IN&M is reporting fact or merely composing a prayer.

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Latest central bank statistics show tentative signs of growth of private sector deposits at covered banks

On Friday last, the Central Bank of Ireland (CBI) has released its monthly snapshot of the state of Irish banks focussing on deposits and lending. The data covers the period up to 30th March 2012 and shows that during the month of March 2012, deposits by ordinary households and businesses actually increased at the so-called “covered” or State-supported banks – essentially the two pillar banks, Bank of Ireland and AIB, and also Permanent TSB. The increase of €1.2bn from €102.7bn in February 2012 to €103.9bn in March 2012 was the biggest monthly increase since Mar/Apr 2011 when deposits received a fillip from the March 2011 bank stress tests. Deposits are now back at June 2011 levels which is indeed very positive but are still down €21bn from October 2010, the month before the IMF/EU bailout. Private sector deposits fell at covered banks in the past 12 months by €2.4bn from €106.3bn to €103.9bn, but most of that fall took place in May/June 2011 when the intensifying Greek crisis undermined confidence across the PIIGS countres. After four months of modest rises and with a €1.2bn increase in March 2012, I think it is fair to say there are tentative signs of growth, but it would be a gross exaggeration to claim “deposits were flowing” into Irish banks.

The CBI doesn’t provide an analysis of deposits at the covered banks – about the only analysis it doesn’t provide – but in terms of all banks operating in Ireland including foreign and IFSC banks, Irish household deposits increased by €0.8bn in March, which brings such deposits to €92.1bn, the same as the June 2011 level. Total deposits from all sources in all Irish banks fell €15bn in March, mostly as a result of a decline in €10bn in deposits by euro area (non-Irish) depositors.

It should be said that the CBI has adjusted the Rest of World deposit figures for All Irish banks and the following increases to the figures have been identified – January 2012 (+716m), December 2011 (+727m), November 2011 (+701m), October 2011 (+675m), September 2011 (+693m), August 2011 (+576m), July 2011 (+192m). The CBI was asked a month ago about these adjustments but there was no response. Perhaps the next time someone has an opportunity to speak with Governor Honohan, they might ask why his Bank is altering past figures and do they think people won’t notice.

It should also be said that the Central Bank’s statistics do not include overseas deposits at Irish banks – for example, Bank of Ireland has a joint venture with the Post Office in the UK which attracts more than €10bn of deposits. And the figures may include what the Dept of Finance calls “consolidation differences”. Having said that, these are the most accurate figures on deposits in Irish banks in Ireland. The Department of Finance publishes its own deposit figures each month and has this morning published its figures for March 2012 which echo the growth suggested by CBI, and show that retail deposits at the covered banks grew by €2.1bn in March 2012 to €149bn and the Department says that “half the increase” came from deposits in Ireland.

Here is the full set of deposit statistics for the different categories of bank operating in Ireland.

First up is the consolidated picture for all banks operating in Ireland including those 450-banks based in the IFSC which do not service the domestic economy.

Next up are the 20 banks which do service the domestic economy and include local subsidiaries of foreign banks like Danske, KBC and Rabobank. There is a list of all banks operating in Ireland here together with a note of the 20 that service the domestic economy.

And lastly the six State-guaranteed or “covered” financial institutions (AIB, Anglo, Bank of Ireland, EBS, Irish Life and Permanent and INBS – Anglo and INBS have now been merged to form the Irish Banking Resolution Corporation, IBRC)

(1) Monetary Financial Institutions (MFIs) refers to credit institutions, as defined in Community Law, money market funds, and other resident financial institutions whose business is to receive deposits and/or close substitutes for deposits from entities other than MFIs, and, for their own account (at least in economic terms), to grant credits and/or to make investments in securities. Since January 2009, credit institutions include Credit Unions as regulated by the Registrar of Credit Unions. Under ESA 95, the Eurosystem (including the Central Bank of Ireland) and other non-euro area national central banks are included in the MFI institutional sector. In the tables presented here, however, central banks are not included in the loans and deposits series with respect to MFI counterparties.

(2) NR Euro are Non-Resident European depositors

(3) NR Row are Non-Resident Rest of World depositors (ie outside Europe)

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Upwards Only Rent Review crusader unveils final banner

Owner of the Korky’s chain of shoe shops, John Corcoran has unveiled the latest in a series of banners above his shop on Grafton Street in central Dublin. John has campaigned for several years to have Upward Only Rent Review clauses in pre-February 2010 commercial leases abolished; he himself is understood to be in an ongoing court battle with his own landlord Canada Life over the rent on his Grafton Street store. The previous banner – unfurled in August 2011 and pictured here – accused the coalition government of being liars after the sudden abandonment of reforms to UORR leases promised in both Labour and Fine Gael’s election manifestos for the 2011 general election.

The latest banner reads “No to Upward Only Rent, No to Political Liars, No to the Fiscal Compact”. John’s objection to the fiscal compact appears to be based on the view that further austerity will turn the retail landscape of Ireland into a “wasteland”. There’s even a video to announce the launch here, with a raucous music accompaniment.

This will be the last Korky’s banner. John explains in the video that Dublin City Council had taken him to court over previous banners and last week, he gave a pledge to the judge that this latest banner would come down on 31st May 2012 after the referendum for the Fiscal Compact.

Both Sinn Fein and Fianna Fail have tabled bills to abolish UORR clauses but both seem destined to gather dust given the emphatic decision by the Government on 6th December 2011 which claimed that changing UORR clauses in pre-February 2010 leases would not be possible for constitutional and cost reasons.

John has apparently set up his own organisation Irish Commercial Tenants Association Limited which was registered with the Company Registrations Office three weeks ago and has his own blog here.

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