Thursday, October 25, 2012

25/10/2012: Signs of Life or a Dead-Cat Bounce : RPPI September 2012

With some delay an update on the latest data from the Residential Property Price Index for Ireland and some longer-range thoughts on property prices direction.

First top level data:

Headline RPPI has risen from 64.2 in August to 65.8 in September (+0.92% m/m). The index is still down 9.62% y/y.

  • This marks a third consecutive month of index increases (July +0.15%, August +0.46%) and over the last 3 months cumulative index gains were 1.54% (annualised rate of growth of 6.32%). This is one headline  you keep hearing. However, last 6 months cumulative change in the RPPI is still negative at -0.45% (annualized rate of growth of -0.91%).
  • What you don't hear about is that August rise was the first statistically significant increase in the index since February 2007 (in m/m terms) and the largest monthly rise since then (in February 2007 index rose 0.935% m/m). In general, irish statistical releases do not provide analysis of statistical significance of changes. Yet, the lack of statistical significance in previous monthly increases is precisely the reason why I am hesitant in calling the trend reversal (on dynamics - for fundamentals, see below).
  • Year on year September showing (-9.62%) is the best since October 2008 when y/y change was 9.53%. This too is a decent sign. However, it is statistically in-distinguishable from the crisis period average of -12.95%. Which is exactly the point of dynamics - while three months of slight increases is a good sign, it is still fragile to establish a trend reversal formally.
  • The index is now 49.58% off the peak, so overall prices have roughly returned to the level where they were... err... in March-April 2012. With all the hoopla of the 'stabilisation' and 'price increases' over the last 3 months, all we've regained in terms of prices is roughly-speaking 5 months worth of prices. Three steps forward, two steps back market is only as good as the pattern repeats, like, 10 times or so?

Dublin trends: RPPI for Dublin rose to 58.7 in September from 57.3 in August (+2.44% m/m) but is still down 9.83% y/y. The dynamics for Dublin prices imply 3mo cumulative rise in prices of 1.56% (+6.38% annualized) and 1.21% cumulated increase in 6 months (annualized +2.43%). It is clear that Dublin prices drive national trends and that in dynamic terms, Dublin prices are pretty much in the very same shape as national prices.
  • Just as with national prices, Dublin prices m/m increase in September was the first statistically significant rise for the entire period of the crisis. This is good. 
  • Dublin prices currently stand at the levels comparable to December 2011-January 2012, which is marginally better than the prices levels nationwide.
  • Of course, Dublin prices have fallen to 56.36% of their peak (at the trough level, the decline was 57.40%).
  • However, dublin price increase in m/m terms in September is the first monthly increase and can probably be explained by a number of one-off factors (see fundamentals discussion below).

Overall, my conclusion is that there is a welcome tentative sign of stabilization in the national house prices trend, but it is too early to call a reversal of the trend to rising prices.

The risk is still exceptionally heavily weighted to the continued decline in Irish property prices for a number of fundamental reasons:
  1. In my opinion, August-September figures, and likely the rest of the year figures are skewed by a number of one-off factors: eminent expiration of interest relief measures, comes January 2013, build up of demand during the rain-soaked summer when house-viewing was outright an occupation for the brave, a number of larger auctions coming through both brining in some supply to the market and generating a bit of a hype in the media.
  2. In 2013 we can expect serious pressure on the market rising from such longer term factors as:
  • Budget 2013 income and indirect tax changes that will reduce further purchasing power of Irish households;
  • Budget 2013 changes in relation to property taxation;
  • Continued increases in mortgage rates charged by the banks compounding after-tax income decreases to be delivered by the Budget;
  • Gradual acceleration of foreclosures during the second half of 2013 as Personal Insolvencies Bill  starts to bind;
  • Potential changes to pensions funding reliefs resulting in a last-minute rush to recap pensions in anticipation of future changes which wil act to reduce funds available for purchases;
  • Reductions in the deposit rates in the banks will lead to a gradual shifting of savings out of cash deposits into pensions and investment products (this factor can also provide some relief to the property markets, although this support is likely to be more fragile than property agents and mortgages brokers might suggest)
  • Yields can significantly decline if/when buy-to-let properties start flooding the markets (my expectation - late 2013-early 2014).
None of the above prices the risk of further economic deterioration. Yet, as today's Troika statement clearly suggests, we are likely to witness declines in real GNP this year and next - which will do nothing to support price appreciation in the property markets.

I am currently reworking my 2012-2013 forecasts for the property prices in Ireland, so stay tuned for the updates.

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