## Saturday, April 26, 2014

### 26/4/2014: It's a long... long... long... road to house prices recovery...

It is a virtually impossible task forecasting long-term price movements in property markets for small economies, like Ireland. The reason is that there are simply too many moving parts all with huge volatility built into the numbers. Take for example normally stable time series such as population. In the case of Ireland, wild swings in terms of net migration over the recent years saw 2006-2008 annual average net immigration of 80,300 per annum switching into a net annual emigration of 31,633 per annum in 2010-2012. While total change in 2007-2013 population in Ireland was 108,000, net migration swing was 111,930. You get the point: what we think the potential demand might be is not an exact science and in the case of Ireland it is not really much of any science whatsoever.

So setting aside actual economic models, what can we say about future property prices trends?

We can do a couple of simple dynamic exercises. Suppose that we are getting back to pre-crisis ‘normal’. This can mean pre-2001 rates of growth in prices or it can mean Celtic Garfield rates of growth. Many would say ‘The Bubble days are over’. So they may be. But suppose they are not. Suppose the rates of growth that prevailed over 2004-2007 are to return. The logical question is: if the boom were to come back, how long will it take property prices to recover? This is obviously a wildly optimistic scenario. But let’s entertain it, shall we?

Below I provide a table of estimated years by which current (end of 2013) prices indices for Irish residential property are likely to recover their real (inflation-adjusted) peak values consistent with pre-crisis years. In other words, the table shows years by which we can expect the crisis effects to be finally erased.

Take 3 scenarios:

Scenario 1: assume that from now on, average annual growth rates for property prices run at their 2004-2007 averages and that inflation averages 1.5 percent per annum (CPI). Adjust the pre-crisis peak for inflation that accumulated between 2007 and present.

Scenario 2: assumes the same as Scenario 1, but adjusts inflation expectation forward to 2 percent instead of 1.5 percent.

Scenario 3: assumes the same as Scenario 1, except we also take into assume average rates the average for 2004-2007 and 2012-2013 to reflect the popular argument that 2012-2013 years growth rates reflect ‘recovery’ in the markets, aka a departure from the crisis.

The last line in the table shows the average duration of the period of recovery – averaged across 3 scenarios. This means that the average is ‘geared’ or ‘leans’ more heavily toward Scenarios 1 and 2 which are by far much more optimistic than Scenario 3.

Do note that all three scenarios are wildly out of line with what we should expect in the long run from the property prices – appreciation at inflation + 0.2-0.5 percentage points margin.

Click on the table to enlarge

Key takeaway:

You might think we are in a recovery, but be warned – even under very unrealistically optimistic price growth projections – the effects of this crisis are likely to prevail well beyond 2025 in Dublin and beyond 2030 nationwide. Now, enjoy the property supplements and financial ‘analysts’ op-eds telling you that everything is going on swimmingly in the markets…

Unknown said...

Some consider an purchase of a house as an inflation hedge. If you take out the inflation adjustment, what does it do to the projections?

TrueEconomics said...

In order for it to be an 'inflation hedge' you need to consider real prices - which is exactly what this post is doing.

Unknown said...

If that were the case, the 2 % inflation scenario should present a recovery in prices faster than the 1.5% scenario. But the model shows it to be longer....I'm confused.

Unknown said...

Inflation hedge? How? High inflation means higher interest rates dragging down demand and dampening prices. OTOH low inflation and interest rates usually mean cheaper lending, reduced payments and rising prices.....same holds for the economy as well....also given the poor liquidity of property, as an inflation hedge it kind of sucks....

TrueEconomics said...

Because these are real values! Higher inflation, lower value, c.p.

Fungus the Photo! said...

With the banking weapon, there are leads and lags. The same tactics at one point in the Kondratieff cycle will in one, win out for wealth gain, way ahead of all other assets classes, but in another will damn you to bankruptcy! Yet bankruptcy frees us from debt! Thus prolonging the Depression stage far longer than required. Banking at one time causes future growth to arrive NOW. But then, it is to be paid off once the asset prices are all falling...

Now, we are in a precision elongation of the transition stage to Depression. We have both deflation and speculation. Some disinflation also. Deflation is a result of productivity increases and greater demand supporting increases in scale. China.... For the Anglo-Saxon world, thoroughly penetrated by Venetian ideals and practices, all banks are no longer lending long and borrowing short. They are given permission (money) to participate in increasing any assets still in fundamental demand.

Price does not equal value in these times. Any scholarly look at bullion prices shows that prices are being held back, yet demand has never been higher. Food equates to fuel. This is the worst speculation, as it means that all persons expenditure increases as the middle classes realize they have been involved in some way in the FIRE sector which is still being smashed to realistic levels. Those who can make use of borders to avoid taxation or spending cuts and become more mobile.

Only those who can successfully use force, like a state, can survive the losses of value in money, coming down the track. Got a public service pension anyone?