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?