Monday, July 6, 2009

Economics 07/07/2009: data - s***t is still hitting the fan in housing markets

Latest data is out today (hat tip to RL). And I am bringing you these ahead of the media pack... (Gotta get myself a pat on the back, since no one else will)

Things are not looking good, folks. Here are charts - you know I love charts, and I blame Britten's Simple Symphony for that withdrawal from words - that explain the trends:
Note the black arrow behind the red one on the right? Well, that shows how much faster rents are falling now relative to asking prices... Now, do the thinking here - if rents are falling faster than prices, what will happen to yields on rental property? Aha, collapse is the word you've been searching. And this has two interesting implications:
  1. There will be renewed pressure on asking prices; and
  2. The only reason rents are falling is (given that first time buyers are now opting almost exclusively to rent) because the foreigners are leaving the country... in droves... and that means that the oversupply of rental properties is not going to fall - it is only going to rise over the next few months (especially if the rest of the world starts picking up, while Cowen/Lenihan/Coughlan continue to tax this economy deeper and deeper into a recession).
The stuff I said about rates of decline are evident above and below:
So here are my forecasts for both markets
A Frolicsome Finale, indeed, is not in sight, unlike in Britten...


MK1 said...

Hi Constantin,

The latest data from Daft just confirms the state of the correction that is taking place. In terms of the differential between rent and asking prices, they are more or less in step, accounted for by some stickiness.

The pertintent data is exact house prices, but there again, there is less liduidity in house purchases (ie: it is not on the same scale as a rental decision) so prices can be skewed above or below actual 'market value'.

Whats clear from the Daft data is the supply. Demand would seem to be levelled out at 5,000. Supply though has plateued at 60,000. I would hazard a guess that there is 'pent up' supply as well as some stalled demand.

We are living through the correct and there is still a long long way to go. All we can do is survive the ride!


Martin said...

Hi Constantin
What affect do you see NAMA having on the property market?

TrueEconomics said...

Hi Martin. Good question that no one has tackled yet. My thinking on this is that NAMA has/will have adverse short and long term impact on housing markets for the following reasons:
1) NAMA acts to reduce disposable income and increase incentives to engage in precautionary savings. This depresses current and future demand for property;
2) NAMA will increase long term costs of financing property investment as banks will be facing unpriceable future risk of repayment on NAMA losses;
3) NAMA will further reduce price transparency in Irish housing markets and investment, increasing information asymetries between lenders, borrowers, sellers and developers;
4) NAMA will increase long run price of land, thereby increasing cost of property artificially above underlying fundamentals;
5) NAMA will act to maintain supply overhang in the market, with resultant imbalance between urban markets (less in distress in the long run) and rural/remote markets (where fundamentals simply do not justify current levels of supply). The end game here will be lack of mobility for householders in outter-suburban areas and long-term higher unemployment in the country;
6) Via amplified moral hazard problem, NAMA will distort long run rates of return to property investment and sap some productive investment away from other sectors of the economy. This is because if NAMA does what it is set up to do, rescue of development loans will be a perceived possibility set for future investors. This will retain long run speculative nature of Irish property investments, implying that risk diversification motive should drive Irish investors abroad. That will be at the expense of other productive investments.

So here you are - a non-exhaustive, but already scary list of what will go wrong with NAMA in place.