Thursday, April 29, 2010

Economics 29/04/2010: House prices peak to peak cycle

Back in October last year I did an estimate, based on the IMF model, of the peak-to-peak duration of the current housing slump. Now's time to do some updating on this matter.

Assumptions:
  • Peak to trough correction in real prices of -40-43%;
  • Growth rates - resuming in 2011: 2011-2013 +3.6% - in excess of the long-term growth rate estimate for Ireland in the current GFSR (2.6%), slowing to 3% in 2014-2016, then to 2.7% in 2017-2019 and 2.6% thereafter.
Using peak of Q2 2007 to assumed trough in Q3 2010, we have the full cycle duration of between 95 and 87 quarters, taking us back to 2007 peak by either 2029 or 2031.

If bottom hits at -48%, we get return to 2007 peak by 2034, with 107 quarters from peak to peak cycle.

Now, think Nama will run out in 2015? or 2020?

If Nama sets shut-off date in 2015, it is likely to get between 61 and 70 cents on the euro for each value underlying the loan. Assuming loans LTV of 70% and default rate of 30% on loans transferred to Nama (extremely conservative assumptions, but these allow a cushion on some interest collected), the value of Nama realized book will be 26 cents on the euro and 30 cents on the euro, or less than 50% of the post-discounted price paid!

If Nama shuts down in 2020, the above two figures will be 30 cents and 34 cents on the euro paid or just around 50% of the post-discounted price paid!

Now, that's what I would call overpaying for the loans.
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4 comments:

  1. UnknownApril 30, 2010

    I actually think that these numbers are over estimating long term real price growth in housing markets. The demographics surrounding household formation and age in Ireland suggest that it could be much longer for prices to come back to the 2007 peak. In certain sub-markets (like apartments built in suburban Mullingar, for example) prices may never recover and a re likely to be a never ending drag on the housing market.

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  2. AnonymousApril 30, 2010

    Someone please tell the BBC to shush and not be telling everyone the blindingly obvious

    http://news.bbc.co.uk/2/hi/technology/10092298.stm

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  3. TrueEconomicsApril 30, 2010

    James - yes, the numbers are too optimistic - I have selected expected growth rates to be this high to correct for potential cash flows in Nama case. In reality, you can safely shave off 40-70bps off the entire set of assumptions...

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  4. DavidMay 01, 2010

    Apologies but I'm having trouble following the logic in the latter half.

    Loss per euro invested should be purely due to the default rate as the loan value in 2015 is equal to the price paid by nama in 2010. (loan value of 70 cents per underlying euro in 2015 = LTV paid in 2010 of 70%).

    Assuming a default rate of 30% I receive

    (100 - 30) * .7 = 49 cents per euro not 30 cents

    I have made a mistake somewhere but I would be interested in knowing it!

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