Homes continue to decline in price after May 2012 blip – CSO Irish residential property index for June published

This morning has seen the publication of the Central Statistics Office (CSO) residential property price indices for Ireland for June 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)
• 12 months ago (June 2011)
• the start of this year (end December 2011)
• last month (May 2012)
• this month (June 2012)

The CSO’s indices are Ireland’s premier indices for mortgage-based residential property transactions. The CSO analyses mortgage transactions at nine financial institutions : Ulster Bank, Allied Irish Banks, Bank of Ireland, ICS Building Society (part of the Bank of Ireland group), 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: we learned from Minister Noonan recently that it should just be a “matter of weeks” before the CSO provides up-to-date information on the total market, including cash-transactions. This will be excellent news because there is increasing concern that although the CSO captures most 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 earlier this year 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 them says that almost three quarters of its auction transactions were in cash. The CSO still hopes 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 this discourse, said recently “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 outside Dublin have fallen significantly further than the CSO index suggests. We are now expecting the Property Regulatory Services Authority will introduce the new House Price Database in September 2012

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, in Dublin in April 2007 at €431,016 and outside Dublin in January 2007 at €267,987. If, and it is a big “if”, you were to take PTSB/ESRI prices as sound and comparable to prices captured by the CSO series, then these would be the average prices today:

Nationally, €155,916 (last month €157,601, peak €313,998)

In Dublin, €185,225 (last month €187,147, peak €431,016)

Outside Dublin, €141,900 (last month €143,356, 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? After the indices rose in May 2012 for the first time since 2007, the declines have resumed with both Dublin and national, house and apartment prices declining. After all the talk of Dublin houses stabilizing, there was a decline of 0.8% during June 2012, and the average value of a Dublin home falling by €1,500 during the month.

Are prices still falling? Yes, by 0.9% nationally after the blip in May 2012 when prices nationally rose by 0.2% following a decline of 1.1% in April 2012, it was flat in March 2012 which followed a 2.2% decline in February 2012, 1.9% monthly decline in January 2012, 1.7% decline in December 2011, 1.5% decline in November  2011, 2.2% decline in October 2011, 1.5% decline in September 2011 and 1.6% decline in August 2011.

How far off the peak are we? Nationally 50.3% (52.7% in real terms as inflation has increased by 5.0% between February 2007 and June 2012). Interestingly, as revealed here, Northern Ireland is some 46.3% from peak in nominal terms and 54.0% 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 31.0% from November, 2009.  The latest results from the CSO bring the index to 804 (24.4%) meaning that NAMA will need see a blended average increase of 24.4% 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 late 2012 following the passing of legislation this – read the latest on the House Price Register here. There are four other residential price surveys, based on advertised asking prices or agent valuations (see below, details here) – Phil Hogan’s 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.

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