Thursday, July 29, 2010

Economics 29/7/10: PTSB house prices

PTSB/ESRI house price index is in for Q2 2010. The core result: house prices were down, again, by 1.7% qoq in Q2 2010 - a lower rate of change on Q1 2010 contraction of 4.8% qoq. Thus, prices are now off-peak by 35% to an average of €201,364.

Dublin prices are down 3.5% qoq in Q2 2010 and are off 44% relative to peak. This gap between nation average and Dublin, assuming (as seems to be reasonable) that capital prices appreciation prior to the current crisis were significantly affected by underlying demand, should be erased over the next 12 months plus. Which means we can expect at some point that Dublin will lead the recovery across the country, while other regions continue to contract toward the 45-50% nationwide average off-peak pricing.

NCB stockbrokers gave a good comparison to fundamentals-determined prices. Per their analysis,
  • Rental yield model implies house prices equilibrium at between €118,000 and €157,000, or a mid-range house price of €137,500;
  • Earnings multiples model implies €170,000;
  • Present value model (although not detailed as to the assumptions built in) implies the range of €158,000 to €236,000 for an mid-range of €197,000
You can see where these valuations are heading, don't you? Take a full range of estimates mid-range point of €177,000 - that would be a decline of 43% off the peak prices. Take the simple average price of all mid-range points to get 46% decline.

Now, recall - these are equilibrium prices. In normal price adjustments, there is a relatively pronounced undershooting in prices - in other words, we can expect prices to fall below equilibrium levels before reverting toward longer term values over time.

The depth of this undershooting and its duration depend on some external factors, such as the ease of getting mortgages approvals, mortgage conditions etc - none of which are currently helping the housing markets. So there is a very strong possibility for prices to hit the floor at around -55-60% off the peak.

Lastly, there is a question to be asked as to the validity of PTSB's data - the country largest mortgages holder might no longer be the country largest mortgages issuer. And the sample size globally has shrunk substantially. In other words, if a desperate homeowner in the distant province sells a house for, say, €120,000 while a dozen of his neighbors are not braving the market, does this really tell us anything about the market clearing price? Not really. Imagine what the said homeowner would have got for his dwelling if 12 more identical dwellings in the neighborhood had a 'For Sale' sign.

So a grain of salt is due - the size of an orange...


Anonymous said...

Interesting article.

"ghost estates are to be leased out for social housing."

How will this government plan affect the rental market (and property values based in rental model)?

TrueEconomics said...


It is difficult to say. But take two opposite scenarios.

The least likely one: the state 'leases' urban-based ghost estates in earnest - filling them with social housing tenants. Adjoining properties and apartments owners will see their values plummet. Rental yields in co-shared apartment blocks will go down. If net supply of properties to the rental market does not change with the state leasing ghost properties, then you might see a modest uplift in other areas, where no such ghost estates exist, as renters from private sector are being pushed out of the ghost estates neighborhoods. The real problem, however, will be for owners-occupiers in the vicinity of these state-rented properties. They will be facing lower values and declining quality of life. Insurance premia might also go up.

More likely scenario - the state talks about leasing estates, but does little to get this programme ramped up.

Why is this most likely scenario? Because the Government just announced 2010-2016 plan for 'revitalizing' more of the derelict quasi-urban locations. Will they build new social housing (there is no demand for ordinary housing in these areas) and then rent some more? Unlikely, especially given current constraints.

In this scenario, the outcome is likely to be tough for those properties located in stage 1 'regeneration' zones, as the supply of similar housing is likely to increase in the area.

Either way, unless the Government engages in a massive manipulation of the market (and I can't see how they can afford to to do this), rental yields and prices will continue heading in the direction they have been heading, i.e. down.

If Government were, in theory, to support housing market, they would de-zone ghost estates to park lands (in cities) and/or agricultural/forestry (in rural locations) and put bulldozers through them.

Our main problem is that while supply of available properties in the market remains steady, demand is falling due to lower incomes (inducing larger family size), lack of mortgage finance, and emigration. Until demand meets supply, at the very least in expectation over 1-2 years forward, there will be no change in prices direction.

Anonymous said...

Was there an estimate made for falling prices based on the introduction of property tax and water rates.
A 1000 euro property tax would cost 30000 euros without compounding its future value on a 30 year mortgage ; presumably house prices can expect to fall 30,ooo euro or thereabouts in the example above.

Maybe you have a more scientific method of calculating the effect of a property tax.?


Fungus the Photo! said...

There is but yours seems suitable given the difficulties in this market! Land taxes are needed to take the volatility out of land values and possible credit bubbles of the far future! 2000 pa might be more appropriate, or 2% pa, on land only. All land! Productivity on farms will increase considerably.

There are any number of research papers on taxing land. Trouble is, doing it now will further reduce land values, heehee!

NAMA will spin out the long slower fall in values until banks are recapitalized, out of their customer base. 30 years or so?

Unknown said...

An equilibrium model of house prices based upon fundamentals is problematic for real estate markets due to (amongst other things) liquidity, transaction times, and psychology. The strong auto regressive elements in house price estimation suggest that the equilibrium price may actually be lower. Additionally, the increase in property related 'value' taxation will likely cause a decrease in house prices as well....I think someone said that as a way to cool the market a few years back.....:)