If the average mortgage-bought property is down 49.9% from peak, and mortgages represent 70% of the market, then in order for the market overall to be down by an average of 60%, cash-bought property would need to have declined by 83.5%
It was the excellent Daily Business Post which first picked up on ratings agency Moody’s pronouncements yesterday on Irish property, mortgage arrears and the economy generally. Moody’s said that in light of the present peak to trough decline of 49.9% recorded by the Central Statistics Office between September 2007 and April 2012, that Moody’s believed prices would decline another 20% to give an overall decline of 60% from peak.
“Misinformed” says Mark Fitzgerald of DTZ Sherry Fitzgerald, Ireland’s largest estate agent continuing “the evidence of the market, which we experience every day, is that house prices in Ireland have already fallen by an average of 60 per cent and in some places by as much as 65 per cent” Hmmm, an estate agency dissing a report that prices are still not stable, which means there will be reluctance for buyers to take the plunge. And plunges are needed if there are to be property transactions, on which estate agents depend for their dinner.
Here’s why I think Mark Fitzgerald is “misinformed”
The CSO says prices are down by an average of 49.9%. The CSO analyses mortgage-based transactions only and specifically it covers eight of the mortgage lenders in the State including Bank of Ireland, AIB, PTSB and Ulster Bank. I think it is fair to say the CSO has a reasonable reputation for the accuracy of its statistics and certainly the CSO property index series showed a close correlation to its predecessor which was produced by the ESRI in conjunction with PTSB.
The problem with the CSO analysis – prominently disclosed by the CSO itself – is that it excludes cash transactions. We know back in 2009 that cash transactions accounted for just 6% of the market. We don’t have more up to date information from the Revenue Commissioners but estate agents have filled the gap and were suggesting earlier this year that cash now accounts for 25-35% of the market, I believe it was Sherry Fitzgerald itself which claimed the 30%.
So if the mortgage market accounts for 70% of the market and mortgage-bought property is down 49.9% from peak, then how much would cash-bought property need to have declined to give you an average of 60%? Answer 83.5%! Or 70% of 49.9% plus 30% of 83.5% gives you an average decline of 60%.
A 83.5% decline for cash-bought property? Maybe, but somehow that seems more “misinformed” than Moody’s could ever be. I mean why on earth would a mortgage buyer pay €50,100 for a house when a cash-buyer could get the same house for €16,500? Or more realistically using national averages, why would a mortgage buyer spend €150,000 on a house when a cash-buyer could get the same house for €50,000? Ignorance? Maybe, but surely a mortgage company’s valuer would know the prices being achieved and wouldn’t approve the €150,000 price if the cash price was €50,000?
NAMA Wine Lake 
Just an hour ago, I went to view a house on the market for €385,000. The estate agent expects offers around 20% below. She also said cash buyers (investors) make a calculation of 10 X annual rent and make that offer. This would put the price at around €230,000. A big gap. But you know what? If the market declines by another 20% from the realistic offers of 20% below asking price you get €230,000!
Lots of investors seem to also use the monthly rent x 11 x 15 to calculate the yield. But investors seem to look at different houses than someone buying to live in.
For example there is two houses in an estate I’m looking at buying in. One has a much larger back garden than the other. As an investor, you don’t really care much about that as the rent will be the same on both properties all other things being equal, but the house with the larger garden is likely to sell for more.
There is also a sort of bubble/dead cat bounce going on at the moment. Quite a few houses have sold lately. Not sure of the reason why, I just know that a number of houses that I was tracking on the market for 12months+ all went sale agreed over a few months. Perhaps lots of these are going sale agreed well under the asking prices, but we’ll never actually know with the property database coming online,
Oh NWL, the link to the CSO goes to the Sherry Fitz page, not the cso page.
@Stephen, many thanks! Link now corrected!
There may be a temporary revival in the Dublin residential market. I think part of the reason is that personal tax didn’t increase this year. In this sense both rating agency and estate agent might be right at this point in time.
Supply might be down, but this is probably down to potential sellers anchoring price expectations to peak prices. On the demand side, are we to believe that the current population of potential buyers are more intelligent/rational than buyers at the peak of the market. When analyzing asset bubbles it’s probably more psychology that economics. What is the purpose of an estate agent employing an economist? Do they have any economists that don’t have a media profile?
My own view is that prices (across the board) will fall further. There are three main reasons:
1) the budget deficit: there’s a gaping hole that needs to be filled. NWL suggests 5k per household, but a large proportion won’t be able to pay more; so the adjustment will be higher on households that can afford to pay.
2) The “awaiting foreclosure” housing stock
3) The euro crisis and growth.
I remember sending a few emails to the late Garrett telling him a few home truths which included that fact that Sherry Fitzgerald woiuld be toast if NAMA was not brought into being. He did dispute one or two other issues that I put to him such as him receiving “debt forgiveness” from AIB but he certainly did not dispute that Sherry Fitzgerald would be toast if not for NAMA he thought I was very well informed!
It almost looks like Morgan was the author of the Moody report.
@RB you may enjoy this,must be very optimistic on Ireland and bearish on the UK prospects!
http://www.irishtimes.com/newspaper/finance/2011/1105/1224307103660.html