2/3/2012: RPPI for January 2012 - Things are Getting Worse, Faster

Residential Property Price Index for January released yesterday shows continuation of a dramatic downward trend in property prices that continues to confound the rents data signals over a number of months now.

Top level data first, followed by Nama valuations-linked analysis in the subsequent post.

1) Overall RPPI has fallen to 67.6 in January 2012, down 1.89% mom (the steepest decline since October 2011) and 17.36% yoy (the largest annual drop since January 2010). 3mo MA now stands at 68.87 and 12mo average rate of change is -1.58% monthly.

2) Index for house prices nationally fell to 70.4 in January from 71.7 in December 2011, implying a monthly decline of 1.81% - steepest since November 2011. Annual rate of decline is now 17.08% - the fastest rate of decline since December 2009. Annual rate of decline has been now rising every month since July 2011, same as for all properties RPPI.
3) Apartments prices index fell to 51.2 from 53.5 in December 2011, implying a 4.30% decline mom and 20.87% drop year on year. This marks the sharpest rate of monthly decline in prices since August 2011 and the sharpest drop year on year since March 2010.

4) Dublin properties index now reads 58.3 compared to December 2011 reading of 60.7. Mom prices are down 3.96% - sharpest on the record and yoy prices are down 21.11% - sharpest since February 2010.

Overall, relative to peak:

• All properties index is down 48.20%
• House prices index is down 46.67%
• Apartments prices are down 56.82%
• Dublin property prices index is down 56.65%

 Acceleration in declines in index readings is present for:

• All properties index since November 2011 for monthly changes and since July 2011 for yoy changes
• House prices index since December 2011 for monthly changes and for yoy changes since July 2011
• Apartments prices index since November 2011 for monthly and yoy changes
• Dublin property prices index since October 2011 for monthly changes and since July 2011 for yoy changes

In other words, things are getting worse faster.

18/2/2012: Mortgage Arrears Q4 2011

The Central bank of Ireland has published Q4 2011 stats for mortgages arrears. And it's a trend-breaking one. Not quite touching my forecast from Q3 2011 data for 114,000 mortgages at risk (see definition below), but jaw-dropping 108,603 and counting mortgages that were written off since Q34 2010 when more detailed records were first published - closer to 102,200.

Now, let me run through the core details of the data.

The number of outstanding mortgages accounts has fallen from 786,745 in Q4 2010 to 768,917 in Q4 2011 - a drop of 2.19% or 17,247. In previous quarter, yoy decline in mortgages numbers was 1.94% or 15,325. The outstanding balance of mortgages has dropped from €116,683.25 mln in Q4 2010 to €113,477.28 mln in Q4 2011, so yoy Q4 2011 decrease in mortgages balances was 2.75%, against 2.55% decrease yoy in Q3 2011.

Of all mortgages, 17,825 mortgages were in arrears 91-180 days in Q4 2011, an increase of 7.39% qoq and 35.35% yoy. In Q3 2011, qoq increase in same type of mortgages was 5.6% and yoy increase was 33.62%. So the rate of mortgages in arrears 91-180 days category is accelerating in qoq and yoy terms. Mortgages in arrears 91-180 days have accounted for €3,273.8 mln in Q4 2011, which is 7.02% ahead of Q3 2011 and 34.37% ahead of Q4 2010. This means than we are now seeing smaller mortgages (in absolute size) on average entering into arrears. Amounts of arrears in this category rose 10.04% qoq and 13.61% yoy in Q4 2011 to €89.15 mln. This represents another acceleration from Q3 deterioration.

Mortgages in arrears over 180 days (usually seen as mortgages that are extremely highly unlikely to ever rise from the ashes) now stand at 53,086 up 14.5% qoq and 69.4% yoy. Yep, that right, in Q4 2010 there were just 31,338 mortgages in this category. Compare these dynamics to Q3 2011 when same category of mortgages in arrears rose 15.8% qoq and 65.32% yoy. So the dynamics are slightly shallower on qoq but are sharper yoy. Balance of all mortgages in arrears over 180 days now stands at €10,667.02mln - up 14.56% qoq and 72.34% yoy. The dynamics are very much the same as with the number of mortgages - qoq slightly slower growth, yoy accelerating growth.

So total number of mortgages over 90 days in arrears is now 70,911, up 12.61% qoq and 59.32% yoy. In Q3 2011 the quarterly rate of increase in these mortgages was 12.92% and yoy increase was 55.59%. Balance of all mortgages over 90 days in arrears is now €13,490.8mln - up 12.7% qoq and 61.62% yoy, compared to Q3 2011 increase of 14.14% qoq and 58.69% increase yoy. Total amount of arrears registered is €1,117.12mln which is 12.7% ahead of Q3 2011 and 61.62% higher than Q4 2010.

 The above means that a massive 12.29% of all mortgages accounts in Ireland are now in arrears 90 days or over by total volume of mortgages in arrears and 9.22% by the number of mortgages accounts in arrears.

Now, take all mortgages in arrears 90 days or over, add to them those mortgages that were restructured, but are currently not in arrears and the mortgages currently in the process of repossessions. Call this 'mortgages at risk of default, in default or defaulted' or for short, mortgages at risk. Chart below illustrates the stats:

 In Q4 2011 total number of mortgages 'at risk' stood at 108,603 - a number that represents 14.12% of all mortgages in the country. This represents an increase of 8.35% qoq (in q3 2011 qoq rate of increase was 4.44%) and 35.25% yoy.

As chart above shows, there is deterioration in mortgages performance even amidst those mortgages that have been restructured.  Total number of restructured mortgages in Q4 2011 was 74,378, which represents an increase of 6.66% qoq and 25.58% yoy. In Q3 2011 there was a qoq decrease of 0.15%. Of the restructured mortgages, 36,797 were not in arrears in Q4 2011 - an increase of 1.16% qoq and 4.52% yoy. However, while number of restructured mortgages not in arrears rose by 421 in Q4 2011 (qoq), the number of total restructured mortgages rose by 4,644. Which means that some 4,223 restructured mortgages went into new arrears in Q4 2011. Overall, percentage of mortgages that are restructured but are not in arrears has dropped from 59.44% in Q4 2010 to 49.47% in Q4 2011. Restructuring of mortgages now works for less than 50% of restructured mortgages - and that is only within 2 years of the beginning of the entire data on these!

Now, do keep in mind that restructuring was quite severe in many cases. See bottom of CBofI release on this here. And it doesn't seem to work all too well for just over 50% of those entering new temporary arrangements. So what will happen to these families when the 'temporary' arrangements expire?

2/2/2012: Sunday Times 29/01/2012 - irish property bust

This is an edited version of my Sunday Times article from January 29, 2012.

In a recent Annual Demographia International Housing Affordability Survey of 325 major metropolitan areas in Australia, Canada, Hong Kong, Ireland, United Kingdom and the United States, Dublin was ranked 10th in the world in terms of house prices affordability. The core conjecture put forward in the survey is that Dublin market is characterized by the ratio of the median house price divided by gross [before tax] annual median household income of around 3.4, a ratio consistent in international methodology with moderately unaffordable housing environments.

Keep in mind, the above multiple, assuming the median household income reflects current unemployment rates and labour force changes, puts median price of a house in Dublin today at around €175,000 – quite a bit off the €195,000 average price implied by the latest CSO statistics. But never mind the numbers, there are even bigger problems with the survey conclusions.

While international rankings do serve some purpose, on the ground they mean absolutely nothing, contributing only a momentary feel-good sensation for the embattled real estate agents. In the real world, the very concept of ‘affordability’ in the Irish property market is an irrelevant archaism of the era passed when flipping ever more expensive real estate was called wealth creation.

What matters today and in years ahead are the household expectations about the future disposable after-tax incomes in terms of the security and actual levels of earnings, stability of policies relating to household taxation, plus the demographic dynamics. None of these offer much hope for the medium-term (3-5 years) future when it comes to property prices.

Household earnings are continuing to decline in real terms (adjusting for inflation) in line with the economy. The CSO-reported average weekly earnings fell 1.2% year on year in Q3 2011 once consumer inflation is take out. But the average earnings changes conceal two other trends in the workforce that have material impact on the demand for property.

Firstly, reported earnings are artificially inflated because the workforce on average is becoming older. Here’s how this works. Younger workers and employees with shorter job tenure also tend to be lower-paid, and are cheaper to lay off. Thus, the rise in unemployment, alongside with the declines in overall workforce participation, act to increase average earnings reported. This explains why, for example, average weekly earnings in construction sector rose 2.5% in Q3 2011 year on year, while employment in the same sector fell 4.1% over the same period. This means that fewer potential first-time buyers of property are having jobs, and at the same time as the existent workers are not enjoying real increases in earnings that would allow them to trade up in the property markets.

Secondly, the real world, rising costs across the consumer expenditure basket, further reducing purchasing power of households, is compounded by the composition of these costs. One of the largest categories in household consumption basket for those in the market to purchase a home is mortgage interest. This cost is divorced, in the case of Ireland, from the demand and supply forces in the property markets and is influenced instead by the credit market conditions. In other words, the 14.1% increase in mortgage interest costs in the 12 months through December 2011, once weighted by the relative importance of this line of expenditure in total consumption is likely to translate into a 2-3% deterioration in the total after-tax disposable income of the average household that represents potential purchaser of residential property.

And then there are effects of tax policies on disposable income. One simple fact illustrates the change in households’ ability to finance purchases of property in recent years: between 2007 and 2011 the overall burden of state taxation has shifted dramatically onto the shoulders of ordinary households. In 2007, approximately 46% of total tax collected in the state came directly out of the household incomes and expenditures. In 2011 the same number was 58%.

The above factors reference the current levels of income, cost of living and tax changes and have a direct impact on demand for property in terms of real affordability. In addition, however, the uncertain nature of future economic and fiscal environments in Ireland represents additional set of forces that keep the property market on the downward trajectory. For example, in Q3 2011 there were a total of 116,900 fewer people in employment in Ireland compared to Q3 2009. However, of these, 113,700 came from under 34 years of age cohort. Unemployment rate for this category of workers, comprising majority of would-be house buyers, is now 20.4% and still rising, not falling. Given the long-term nature of much of our current unemployment, no one in the country expects employment and income growth to bring these workers back into the property markets for at least 3 years or longer. Without them coming back, only those who are trading down into the later age of retirement are currently selling, plus those who find themselves in a financial distress.

Tax uncertainty further compounds the problem of risks relating to unemployment and future expected incomes. Government projections that in 2013-2015 fiscal adjustments will involve raising taxes by €3.1 billion against achieving current spending savings of €4.9 billion are rightly seen as largely incredulous, given the poor record in cutting current spending to-date. Thus, in addition to already draconian pre-announced tax hikes, Irish households rationally expect at least a significant share of so-called current expenditure ‘cuts’ to be passed onto households via indirect taxation and cost of living increases.

In short, there is absolutely no catalysts in the foreseeable future for property markets reversing their precipitous trajectory. No matter what ‘affordability’ ranking Irish property markets achieve, the demand for property is not going to grow.

This, of course, brings us to the projections for the near-term future. The latest CSO data for the Residential Property Price Index released this week shows that nationwide, property prices were down 16.7% in December 2011 compared against December 2010. Linked to the peak prices as recorded by the now defunct PTSB-ESRI Index, the latest CSO figures imply that nationally, residential property prices have fallen from the peak of €313,998 in February 2007 to ca €166,000 today (down 47% on peak). In Dublin, peak-level average prices of €431,016 – recorded back in April 2007 – are now down to close to €195,000 (almost 55% off peak).

Using monthly trends for the last 4 years, and adjusting for quarterly changes in average earnings and unemployment, we can expect the residential property price index to fall 11-12% across all properties in 2012. Houses nationwide are forecast to fall in price some 12-14% - broadly in line with last year’s declines, while apartments are expected to fall 11-12% year on year in 2012, slightly moderating the 16.4% annual fall in 2011.

More crucially, even once the bottom is reached, which, assuming no further material deterioration in the economy, can happen in H2 2012 to H1 2013, the recovery will be L-shaped with at least 2-3 years of property prices bouncing along the flat trendline at the bottom of the price correction. After that, return toward longer-term equilibrium will require another 1-2 years. Assuming no new recessions or crises between now and then, by 2015-2016 we will be back at the levels of prices recorded in 2010-2011. Between now and then, there will be plenty more reports about improving affordability of housing in Ireland and articles about the proverbial foreign investors kicking tyres around South Dublin realtors’ offices.

Chart: Residential Property Price Index, end of December figures, January 2005=100

Source: CSO and author own forecast

Box-out:

Ireland’s latest shenanigans in the theatre of absurd is the fabled ‘return to the bond markets’ with this week’s swap of the 2 year 4.0% coupon Government bond for a 4.5% coupon 3-year bond. The NTMA move means we will be paying more for the privilege to somewhat reduce the overall massive debt pile maturing in 2014, just when the current Troika ‘bailout’ runs out. So in effect, this week’s swap is a de fact admission by the state that Ireland has a snowball’s chance in hell raising the funding required to roll over even existent debt in 2014 through the markets. Which, of course, is an improvement on the constant droning from our political leaders about Ireland ‘not needing a second bailout’. Of course, as far as our ‘return to the markets’ goes – no new debt has been issued, no new cost of financing the state deficits has been established in this swap. The whole event is a bit of a clock made out of jelly – little on substance, massive on PR, and laughable from the functionality perspective.

24/1/2012: Residential property prices - 2011 highlights

Latest Residential Property Price Index (RPPI) from CSO posts another monthly decline in the price series and marks deep drops in the property prices in 2011. Here are top of the line figures - end of year readings:

And updated Nama valuations referencing:

So to summarize (note - there will be more detailed analysis of this data coming up in later posts):

• All properties index is now 31.1% below January 2005 levels
• Houses are now down 28.3% below January 2005 levels
• Apartments are now down 46.5% below January 2005 levels
• Dublin all properties are now down 39.3% below January 2005 levels
• Rates of decline (monthly) are greater than 1.5% (12mo average) for 3 months in a row for all properties and for houses.

8/1/2012: Irish property prices - History, Equilibrium & Directions to Nowhere Fast

A quick footnote to Brian Lucey's post on house prices:

I often hear people referring to 'historical averages' as price equilibrium indicators. Hmmm... historical and histrionic - here's a snapshot from The Economist data plot:

That pretty much does the trick for anyone still saying we have crossed some sort of the long term equilibrium level... 

20/12/2011: Residential property prices for November

Today's data focus for Ireland is on residential property price index for November.

Prior to today's release, in the 12 months through October 2011, residential property prices were down 15.1% year on year - steeper decline than in July-September 2011 (12.5%, 13.9% and 14.3% respectively). In 12 months through October 2010 the rate of prices decline was 11.1%, shallower than in the 12 months through last October. So price drops were accelerating before November data release. In fact, mom prices dropped 2.2% in October, against 1.5% mom decline in September.

The latest data, therefore, was expected to come in with some moderation in the rate of decline. And in that, there was no surprise - mom change for November is at -1.54%, ahead of September, but behind October reading. 


November index of all residential properties prices is now at 70.1, down from october 71.2. 3mo MA is down to 71.37 from October reading of 72.63. We have to go back to November 2007 to see the first time that the overall index did not decline (it stayed flat in that month) and back to September 2007 to see the last monthly increase in the index. 12 mo MA of monthly changes is now at -1.41% mom and year-to-date monthly average change is -1.49%.


Nama is continuing taking a hit on its valuations. Referencing back to November 30, 2009 Nama valuations cut-off date, November 2011 prices are down 25.35%, which, adjusting for LTEV uplift applied by Nama implies that Nama valuations on its residential properties portfolio are 32.13% under water. Correcting the above for 'burden sharing' cushion applied by Nama legislation, Nama is nursing a loss of 28.9% on its residential properties-related holdings.

As chart above shows, overall residential property prices are now 46.28% down on the peak and year on year the prices are down 15.64%.

Houses prices index has fallen from 74.3 in october to 72.9 in November - down 1.88% mom, In October, monthly rate of decline was -2.24%, but November decline is second sharpest in the last 5 months. Year on year, house prices are down 15.72%, while in october the same rate of decline was 14.89%. Relative to peak, house prices nationwide are 44.78%.

Apartments fared better this time around, with index reading improving from 52.2 in October to 53.6 in November, a monthly rise of 2.68%. The index is also more volatile than that for all residential prices and house prices. Last time we saw a rise in house prices mom was in August 2010, and last time we saw monthly increase in apartments prices was in December and January 2010.

Apartments prices are now -16.89% down yoy and this marks an improvement on -19.82% decline yoy through October. Relative to peak, apartments prices are down 56.74%.

In my view, the divergence between apartments prices and house prices, if sustained over time, will be signaling the overall collapse of the purchasing power by the first time buyers, as well as demand push toward lower cost commuting locations as cost of transport continues to climb up courtesy of the Government policies. It can also signal the reflection of improving rental yields for some, especially city centre-located - properties. It is worth noting that Dublin apartments drove the monthly change for nationwide figures reported above, with Dublin apartments price index increasing from 50.8 in October to 53.2 in November a strong gain of 4.7% mom and driving year on year decline to -16.1% in November against -21.2% in October.


Prices in Dublin (all properties) posted index reading of 62.2 in November, down 1.43% mom on October reading of 63.1. This was the shallowest monthly decline since July 2011 when the index posted no change mom. Yoy index is now down 17.62% in November from 17.52% in October. Relative to peak the index is down 53.75%.

Updating annual forecasts, I expect overall RPPI to post a reading of ca 71.27-71.30 or a decline of 41.7% relative to peak. For houses, I expect index to run at 74.5-75.1 for 2011, marking a decline of 39.7% relative to peak annual index, while for apartment the same forecasts are for 56.5-56.7 index reading and a decline relative to peak of 49.7%. Dublin prices are expected to end the year on an index reading of 63.5-64.0 - a decline of 47.9% on peak. Mid-points are illustrated below:

So, overall, no surprise - another month of declines, another month on the road toward the average price around 60% off the peak. One to watch here is the sub-index for apartments prices, especially in Dublin.


It's worth noting here that per NTMA (source: Nama, December 2011), commercial property yields have been rising strongly in recent months. See chart below. This can also correlate positively with the rental yields for Dublin apartments, especially for centrally located properties.

21/11/2011: Residential Property Prices: October

Sorry to break the bad news, folks, but the latest Residential Property Price Index (RPPI) for October is showing accelerating property prices declines on foot of already substantial rates of contraction registered during 2011 as a whole. the bust is getting bustier.

All properties index fell to 71.2 in october from 72.8 in September, posting a monthly decline of 2.20%. This is the sharpest rate of monthly contraction in prices since March 2009 and the third fastest rate of decline in the history of the series! 3moMA for RPPI is now at 72.63. Year on year prices are now down 15.14% - the highest yoy decline since February 2010. Relative to peak prices are down 45.44%. 12 mo MA is at -1.36% for mom rate of decline and year-to-date rate of prices declines average -1.49%.

When it comes to Nama, relative to its cut-off date of November 30, 2009, property prices are now down 24.17%. When fully set up, Nama called bottoming out of the markets for Q1 2010. Since then, prices are down 20.62%, so those highly paid geniuses employed by Nama to 'value' properties and 'assess' markets are really shining stars. Recall that Nama paid an uplift of LTEV on assets purchased of an average 10%, plus carries a burden-sharing discount / cushion. Factoring these two into the equation, Nama-assessed properties are now held at a loss of 27.79% on their Nama valuations, even with burden sharing cushion 'savings' factored in. Taken across Nama book value, these (for now paper) losses can be assessed at ca €8.3bn.

Let's drill deeper. House prices sub-index is now at 74.3 against 76.0 in September, a decline mom of -2.24% the largest monthly drop since June 2011. 3moMA now stands at 75.77 and year on year change in the sub-index is 14.89% - the steepest annual decline rate since February 2010. relative to peak house prices sub-index is now -43.71% off. 

Apartments prices sub-index fell from 53.2 in September to 52.2 in October, a mom drop of 1.88% shallower than September mom decline of 3.10%. 3moMA is now at 53.43 and year on year sub-index is down 19.81% - the steepest annual decline since April 2010. Relative to peak, apartments prices are now off 57.87%.

Recalling that Nama holds loads of assets written against apartments, Nama cut-off-date valuations, LTEVs and burden sharing cushion included, Nama valuations for apartments-related properties are now off 35.10%.

Chart above shows the price dynamics for Dublin properties. Dublin sub-index stands at 63.1 against September reading of 65.1, a mom decline of 3.07% - steepest since the catastrophic drop of 3.76% in August this year. 3mo MA is now at 64.9 and year on year prices in Dublin are down 17.52% - largest yearly decline since March 2010. Relative to peak, Dublin residential prices are down 53.09%.

Given the above, we can update projections for the core index and sub-indices for 2011 as a whole. These are shown below.

Depressing is the word that comes to mind. The picture is made even less palatable when we recall incessant blabber from our Government reps and stuff-brokers, as well as property 'experts' that inundated the earlier parts of the year with 'property prices will bottom out in H2 2011' noise.

18/11/2011: Mortgages Arrears for Q3 2011

Data for Irish Mortgages defaults for Q3 2011 was released today by the Central Bank and is already causing some commotions. That is because by the broader metric I deployed recently, including in last week's Sunday Times article (see here), we are now beyond 100K number when it comes to mortgages at risk.

let me un through the figures. Note that the CB has changed methodology for reporting back in Q3 2010, expanding reporting. So I estimated some of the sub-series back to Q3 2009 when the narrower reporting was first introduced. Thus, caution should be applied to taking Q3 2009-Q2 2010 data. Also, note that 2011 figure - corresponding to Q4 2011 - is a forecast based on mortgages arrears dynamics by each subcategory of mortgages.

• In Q3 2011 there were 773,420 mortgages outstanding in Ireland a decline of 3,901 on Q2 2011 (-0.5% qoq) and 15,325 yoy (-1.94%). This represents a drop of 2.7% or 21,189 mortgages on Q3 2009.
• The outstanding value of mortgages has declined €676,166 or 0.59% qoq to €114.41bn down from €115.09bn in Q2 2011 and €117.40bn in Q3 2010. Note that in Q2 2011 Irish household deposits were €87.00bn which implies that Mortgages to Deposits ratio in Ireland is at 131.5% well ahead of the LTDs mandated for the irish banks for all loans at 125.5%.

Of the above mortgages:

• In Q3 2011 there were 62,970 mortgages in arrears 91 days and over with the balance of €12.37bn. This represents an increase of 7,207 mortgages qoq (+12.92%) and 22,498 mortgages yoy (+55.59%). Compared to Q3 2009, the number of mortgages in this category is estimated to have risen by 36,699 mortgages or 139.7%. In terms of value of the mortgages in arrears, the value rose 14.13% qoq and 58.7% yoy. I mentioned in the previous articles on the subject that we can expect faster increases in mortgages in arrears values, rather than numbers as arrears primarily hit most those households that tended to borrow more in the years around the peak of the property markets.
• Repossessions also rose from 809 in Q2 2011 to 884 in Q3 2011 (+75 or 9.27% qoq). Repossessions are now up 69.7% yoy (+363) and are estimated to have risen 501% on Q3 2009 (+737).
• Restructured loans that are no in arrears are down from 39,395 in Q2 2011 (value of these loans was €6.66bn) to 36,376 (€5.93bn) - a decline of 3,019 mortgages qoq or 7.7%. Year on year these mortgages are up 9.7% or 3,212.

Based on the above we can define mortgages at risk and defaulted to include all mortgages that are currently in arrears, all mortgages that are restructured, but are not in arrears and mortgages that went through the repossessions. 

• In Q3 2011 total mortgages at risk or defaulted stood at 100,230 with the total value of €18.3bn, up 4,263 mortgages (+4.4%) qoq and 26,073 mortgages (+35.2%) on Q3 2010. Since Q3 2009 these mortgages rose in number some estimated 125.9%. In value, mortgages at risk or defaulted have risen €803mln qoq (+4.6%) and €10.5bn yoy (+134.7%).

As chart above summarizes, percentage of mortgages at risk relative to overall number of mortgages has risen in Q3 2011 to 12.96% from 12.35% in Q2 2011. The value of mortgages at risk has increased from 15.2% of all mortgages value to 15.99%.

It is worth noting that Q3 dynamics represent a marked slowdown on the rates of increases in mortgages at risk in previous quarters. This decrease is accounted for as follows:

• Total number of mortgages outstanding paydown slowed from -0.65% in Q2 2011 relative to Q1 2011 to -0.50% in Q3 2011 relative to Q2 2011. This means that the base decline was slower, pushing down the percentage change in the relative share of mortgages at risk.
• Number of mortgages in arrears rose +12.9% in Q2 2011 relative to Q1 2011 and this rate was +12.4% in Q3 2011 relative to Q2 2011 - hardly a marked slowdown here.
• Number of mortgages restructured but not in arrears rose +7.5% in Q2 2011 relative to Q1 2011 and declined -7.7% in Q3 2011 relative to Q2 2011 - this is the core driver of mortgages at risk growth slowdown. Unfortunately we do not know if this decline was driven by these mortgages exiting the restructuring arrangement by going into arrears, or returning back to performing mortgages (for how long can these be expected to remain there is another question), or going into new renegotiations for further restructuring.

25/10/2011: Residential property prices: September

According to CSO Residential Property Prices index, September 2007 saw the historical peak in prices for overall RPPI at 130.5. Today's data shows that the index now stands at 72.8, implying that property prices have fallen nationwide by 44.2% on average since 4 years ago. Miserable news.

Now, September RPPI for all properties has fallen 1.49% mom and 14.25% yoy, exceeding (in terms of fall) analysts expectations for 13.4% decline. 12mo MA of monthly declines now stands at 1.27% and year-to-date average monthly decline is at 1.41%.

Relative to Nama's cut-off valuation date of November 30, 2009, factoring in average LTEV uplift of 10%, Nama residential properties-linked assets portfolio is now on average 29.52% under water. Factoring 5% burden-sharing (subordinated bonds), the downside is now 26.2% which means that Nama will need a lift-up of 35% on current values to break even.

For Houses, nationwide, RPPI fell to 76 in September from 77 in August a decline of 1.3% mom and 13.93% yoy. The index is now down 42.4% on peak of 132 achieved in September 2007. Apartments sub-index is down to 53.2 in September from 54.9 in August, with mom contraction of 3.1% - the sharpest monthly decline since March. Yoy the sub-index is down 19.03% and relative to the peak of 123.9 (February 2007) the sub-index is down 57.06%.

Nama holds loads of apartments, so applying the earlier assumptions on LTEV, Nama apartments-linked sub-portfolio is under water 36.9%, implying, net of subordinated bonds, a 33.9% decline in valuations to November 2009 cut-off date. This suggests an average required uplift in apartments prices of 55.12% for break-even.

Dublin properties prices are now 51.6% off their peak, with sub-index for Dublin declining to 65.1 in September from 66.5 in August - a drop of 2.11% mom and 15.56% yoy.

Annual forecasts, updated to include September figures, are below

26/09/2011: Irish property prices hit Early Paleozoic layer

Another month, another "Splat, Zap, Squish!" from the Amazing Property Bust Land, Ireland. CSO's RPPI data out for August today is showing continued falls in property markets and accelerating on the July 'performance'. Here are the updated charts and numbers.

Headlines are not pretty, folks:

• RPPI down 13.87% annually in August against a fall of 12.47% in July index now stands at 73.9 down from 85.8 in August last year.
  
• In 12mo through August the decline was 10.8%.
• Mom prices are down 1.6% in August. 3mo MA is at 74.9 down from 76.0 in July.
• Relative to peak, prices are now down 43.4%
• Relative to Nama valuations cut-off date of Nov 30, 2009, prices are down 21.3%. Adding LTEV uplift applied by Nama to purchased loans, state-held residential portoflio is now down in values some 28.5%.
  

Headlines on property prices by type are even less pretty:

• RPPI for houses is at 77.0 in August, down 1.41% on 78.1 reading in July. 3moMA is now 77.9, down from 79.0 in July. Year on year prices are down 13.58% from index reading of 89.1 in August 2010. Relative to peak prices are down 41.7% (September 2007). This is the steepest rate of decline since March 2011.
  
• RPPI for apartments is at 54.9, down 4.7% on July reading of 57.6. August 2010 reading was 67.2, so we are now 18.3% down yoy. 3moMA is now at 57.3, down from 59.0 in July. Monthly rate of declines is now accelerating for the 3rd month in a row. August rate of decline is the steepest monthly decline in the history of the series. Relative to peak (February 2007), apartments prices are now down 55.69%.
  

Geographical distribution of price changes:

• Dublin residential property prices fell by 3.76% in August and were 14.85% lower than a year ago. Dublin house prices decreased by 3.4% in the month and were 14.7% lower compared to a year earlier. Dublin apartment prices fell by 6% in the month of August and were 17.4% lower when compared with the same month of 2010. 3mo MA for Dublin properties is now at 68.23, down from 69.7 in July. Relative to peak (February 2007) Dublin prices are down 50.56%. House prices in Dublin are 48% lower than at their highest level in early 2007. Apartments in Dublin are now 57% lower than they were in February 2007.
• The price of residential properties in the Rest of Ireland (ex-Dublin) fell 0.3% in August compared with an increase of 0.2% recorded in August 2010. Prices were 13.2% lower than in August 2010. The fall in the price of residential properties in the Rest of Ireland relative to peak is at 40%.

My forecast for the annual results is below. In summary - we've gone from the penthouse to the ground floor, through the parking levels and still going - services levels, sewer, imaginary metro tunnel.... next "Splat" is due at around middle Paleozoic layer... see you in October's Early Mammals exhibit...

29/08/2011: Residential Property Price Index: July 2011

Residential Property Price Index for Ireland for July 2011 was released earlier today by the CSO, showing continued deterioration in property prices across the board.

Per CSO: "In the year to July, residential property prices at a national level, fell by 12.5%. This
compares with an annual rate of decline of 12.9% in June and a decline of 12% recorded in the twelve months to July 2010." Chart below illustrates:
Residential property prices fell by 0.8% in the month of July. This compares with a
decline of 2.1% recorded in June and a decline of 1.3% in July of last year. To give a bit more granularity to the data:

• RPPRI now stands at 75.1, down from 75.7 in June, and 3mo MA is 76.03, against June 3mo MA of 77.07.
  
• Relative to peak property prices have no declined 42.45% against June to-peak decline of 42%.
  

Using 7 months of 2011 data, we can forecast expected declines in the index for 2011 as a whole:
Please note: this is a crude forecast. The result suggests that prices can decline to 75.3% of 2005 levels by the end of 2011 for all properties, with corresponding declines in House prices to 78.41%, Apartments to 57.47% and Dublin prices declining to 69.02%.

Let us make another set of important calculations. Recall that section 73 of the NAMA Act 2009 established the definition of the cut-off date for NAMA valuations. This date was later set at 30 November 2009. NAMA then applied an LTEV uplift on properties valued to that date. According to NAMA own business projections, the agency will require 10% increase in property values referenced to LTEV and November 30th 2009 cut-0ff-date to break even. In addition, NAMA claimed that its valuations are based on the consulting report they received from London Economics that timed property markets bottoming out to the latest Q1 2010.

Well, since the cut-off date, Irish residential property has now fallen a whooping 20.02% and relative to the end of Q1 2010, when NAMA expected the bottoming of the property cycle, the property values are down 16.28%. Ooops...

Back to the data:

• Index for House prices stood at 78.1 in July, down from 78.6 in June (-0.64% mom) and down 12.25% yoy
• House prices 3mo average index is now 79.03, down from 80.1 a month ago.
• House prices are down 40.83% to peak
• Apartments continued falling at precipitous rates, with Price Index for Apartments down to 57.6 in July from 59.4 in June. A decline of 3.03% mom and 15.67% yoy.
  
• Apartments prices 3mo MA is now at 59, down from 59.93 in June.
• Apartments prices are down 52.59% to the peak.
  

Having posted a bizarre increase from 70.5 in April to 70.8 in May, Dublin prices have fallen off the small cliff in June settling at the index reading of 69.1. July data shows Dublin prices flat at 69.1. This means that 3mo MA is now at 69.67, down from 70.13 in June. Relative to peak, prices in Dublin are down 48.62%. Year on year, July Dublin prices are down 11.86%, an improvement on annualized rate of decline of 12.64% in June, but worse than yoy change attained in May (-11.5%).

04/07/2011: Irish property prices - daft.ie report

My comment and rather back-of-the-envelope outlook for Irish property markets is available with daft.ie report - link here. Note that the prediction concerning rents-prices feedback is based on my earlier analysis published here - see the last chart.

Strangely, at least in one instance my opening paragraphs were identified by some commentators as being a 'political statement'. To all who know my work, this should sound like a mistake for two reasons:

1. I have never taken partisan political positions. While I do hold strong policy views, these are not aligned with any political party or movement. I have consistently provided advice to and public engagement with any political party or movement that asked for such. During the last election, as in the previous elections, I did not support any particular party, although I did support / help a number of individual candidates whose views span left and right of the political spectrum and with whose views I was not necessarily in full agreement.
   
2. The entire opinion piece is based on my understanding of economic facts. I have spoken on many occasions about the adverse effects of increased taxation on investment and household spending. I have been vocal about the mirage of 'foreign investors flocking to Ireland' stories being pulled out of thin air by our real estate journalists. Over a number of years, I have been critical of the state policy of promoting - via pricing systems and lack of regulatory independence - inflation in state-controlled services. Nothing political here.

25/06/2011: Daft.ie v CSO RPPI - property prices in Ireland

Courtesy of the CSO RPPI - published for the first time this year - Ireland now has two series of property prices data to compare - Daft.ie asking prices and rents, and CSO's RPPI. Since Daft.ie pre-dates CSO dataset and since Daft.ie is a private undertaking with no access to the resources of the state in paying for and collecting data, it might be of interest to see how the two series compare.

This is exactly the exercise I performed.

Let's take a look at the CSO RPPI (an index) and Daft.ie (prices):
So a strong relation in terms of asking prices and RPPI - some 97% of variation explained.

Similarly, a very strong relationship between RPPI and Daft.ie reported asking rents:
Note that there are serious lags in the asking prices and rents relative to what RPPI is measuring, but overall, Daft.ie seems to be doing as good of a job of capturing prices over the long term as CSO data.

It is worth noting that when I converted Daft.ie prices to an index comparable directly to CSO RPPI, the results remained the same. So well done to Daft.ie gang - they really managed to run (and continue running) a superb database.

Another interesting issue is the relationship between property prices and rents:
Really, self-explanatory.

22/06/11: Residential Property Index - May 2011

The CSO released their latest data for the new Residential Property Price Index (RPPI) for May 2011. Here are the highlights and updates, including forecast for 2011 (see last chart).

• Year on year May 2011 residential property prices nationally are down 12.16% with RPPI standing at 77.3 in May down from 78.2 in April. The 6mo average rate of decline is now at 1.2% per month and 12mo average rate of decline is now 1.07% monthly.
• Relative to peak prices across the nation are down 40.77%.
• 3mo MA RPPI is at 78.17 in may, down from 79.2 in April.
• RPPI is now down consecutively month on month since its peak in September 2007 with exception for August 2010 when it posted no change mom relative to July. Last time the index posted increase in yoy terms was January 2008.
  

So per chart above, the crunch is getting crunchier (note accelerated average rate of decline for 6mo relative to the average for 12mo), and mom changes are also posting acceleration downward from -1.01% in April to -1.15% in May.

Breaking down across two property types:

• RPPI for houses fell to 80.4 in May from 81.3 in April, down 1.11% mom. This marks consecutive monthly contraction since August 2010 when it rose statistically insignificant 0.11%. Relative to peak the series now down 39.1%. the 6mo average monthly rate of decline is 1.21% well ahead of 12mo average of 1.03%
• RPPI for apartments is down at 60 in may from 60.4 in April (-0.66%). Apartments prices index is down 51.57% on peak and 6mo average at -1.19% per month is signaling slower rate of decline compared to 12mo average of 1.41%

As a signal of stronger regional economy, Dublin presents a slightly divergent picture to May national level data:

• Dublin RPPI rose from 70.5 in April to 70.8 in May (+0.43%mom), marking the first monthly increase since April 2008. This increase is statistically insignificant, however. In addition, 6mo average decrease rate of 1.06% monthly is still ahead of 12mo average of 1.01%, suggesting the latest move is unlikely to be a trend-breaker to the upside.
• Dublin prices index is now 47.4% below the peak.

Now, using 5 months data for 2011 we can attempt a very crude forecast for the entire 2011, as shown in the figure below.
So far, all indications are - we are looking at another brutal year when it comes to property prices here. then, again, with zombie banks not lending and continuously hiking the cost of mortgages for existent clients, with Nama still hell-bent on derailing any sort of market bottoming-out dynamic, with all fundamentals signalling decreasing demand for property and reduced ability to pay for mortgages, it is hard to imagine the upside trend establishing in Irish property markets any time soon.

22/06/2011: DofF latest fiasco

A very revealing article in today's Irish Times - link here and a HT to Prof Brian Lucey - states that "The memo from a senior official in the department rejected the assertion from UCD economist Morgan Kelly of a possible 60 per cent fall in values over nine years. It also advised Mr Cowen, who was minister for finance at the time, that he should warn against overreacting to falling house prices. The document, drawn up by economist John McCarthy in July 2007 and sent to the former taoiseach pointed out that the housing values remained above 2006 levels."

This is another piece in a long string of evidence trickling down from the Merrion Street that points to the nature of advice and analysis conducted by the DofF. In Summer 2007 Irish property markets started showing signs of significant stress and by August we experienced the first slowdown in the rate of growth in stamp duty receipts. National average asking prices for homes, according to Daft.ie, posted seasonally unexpected decline of 0.34%mom in March, bouncing off the historic peak in February 2007. This was followed by another seasonally unexpected decline of 0.44% in April, rebound of 0.69% in May, a decline of 0.09% in June (again out of line with seasonal patterns) and a drop of 0.56% in July. The signs of some sort of sickness in the market were already visible, therefore, at the time the DofF note was issued.

Of course, DofF can be excused for not spotting the turning point in the property market - after all, virtually all data through July 2007 was at the very best inconclusive. But, the report leaves several issues worth addressing:

1. By August it was clear that the global financial markets were suffering significant pressures, which warranted some DofF attention, including on the side of the property markets;
2. What was DofF's business in advising the Minister to 'warn against overreacting to falling house prices'? Should, in an ethical society, the Minister for Finance make any calls whatsoever on private asset markets? Or should, in a functional economy, DofF job cover the need for preparing a policy response to the potentially dangerous situation developing in the major sector of the economy? In other words, was DofF doing its job advising the Minister on a PR exercise, and was it not doing its jobs in not preparing for the contingency of a property market collapse?

Of course, all of this remains academic compared to the brutish bullying stupidity of Mr Cowen's boss who famously barked in response to Prof Morgan Kelly’s articles in 2007 that: “Sitting on the sidelines, cribbing and moaning is a lost opportunity, I don’t know how people who engage in that don’t commit suicide.” (see full record here).


Oh, and just in case you might think DofF has learned any lessons from the July 2007 note debacle? Think again. Per same Irish Times report: "According to fresh analysis conducted by department economist Ronan Hickey – and published yesterday – house prices had fallen by 40 per cent from their 2006 peak by the fourth quarter of 2010." (emphasis is mine)

Err, what a wonderful revelation that is. In fact, the DofF 'analysis' is so ground-breaking that it simply confirms the data released by CSO last month - see report on that here.

But don't blame Mr Hickey for this - blame Irish Times bizarre reporting style. Mr Hickey didn't carry any 'fresh analysis' that Irish Times claims he did. instead, Mr Hickey clearly and transparently quotes from a now discontinued time series data from ESRI and ptsb index that were publicly available for ages now.

You can see this in his own paper/presentation/post available here. Just go to page 10 to see this 'fresh analysis'. Again, Mr Hickey is not doing anything wrong here, it's just the excited Irish Times failing to read his paper reporting old news and new news.

What is, however, amazing about Mr Hickey's paper/presentation/post is that this very information and the same analysis is being provided for free on a number of blogs around the country. In many cases, blogs analysis is actually way better, more data-intensive and detailed. Yet, in age of austerity, the Gov see fit to spend thousands on wages of PR-spin economists working for DofF.

07/06/2011: Residential property prices

An impressively decent dataset from CSO on residential property prices has been released for the second monthly installment, so here are the charts and some high level analysis.

• Overall Residential Property Price Index (RPPI) for April was 78.2 or 0.8 points below March levels. Hence, mom the index has fallen 1.013% and is now 1 point below its 3mo MA. Year on year the index has fallen 12.233% and relative to peak of 130.5 reached in September 2007 it is now down 40.077%.
• Overall RPPI has recorded its 8th month of consecutive declines having risen statistically and economically insignificant 0.11%mom in August 2010. Year on year, April marked 38th consecutive month of declines.
  
• April index for houses fell 0.9 points to 81.3, down 1.095% mom, or 1 point below 3mo MA. Year on year index has fallen 12.013%. The peak for this sub-index was reached in September 2007 at 132.0.
• April index for apartments fell to 60.4, down 0.6 points - a mom decline of 0.984% and a yoy decline of 15.288%. April reading was 1.233 points below 3mo MA. This sub-index peaked at 123.9 in February 2007.
• Dublin properties sub-index has fallen 0.5 points in April to 70.5, a decline of 0.704%mom or 12.963% yoy. The sub-index now stands 0.77 points below 3mo MA and 47.584% below the peak of 134.5 in February 2007

Charts to illustrate:
To summarize - the deflation of house prices continues, although the monthly rate of decline has now fallen below both 6mo and 12mo average. This, however, might be due to seasonality, since April marks a relatively moderate month in terms of price movements in every year since 2008. house prices have now fallen 38.41% since their peak, while apartments prices have declined 51.25% from their peak.

It is worth noting - not as a criticism of the CSO, since it cannot do anything about the data - that the index is computed based on mortgages drawdowns, hence excluding any share of transactions that might take place on the 'gray market' (tax evading payments, swaps etc), as well as cash-only purchases and mortgages issued by lenders other than the 8 largest lending institutions from which the data is available.

Another issue, again - little that CSO can do for this - relates to hedonic adjustments undertaken in index computation. Hedonic characteristics used by CSO exclude a number of relevant parameters, such as number of bathrooms and the site size, as well as existence of garage and/or off-street parking. This, alongside with the tendency - due to planning permissions restrictions - to under-report actual floor area and number of bedrooms - means that the hedonic model might be relatively weak.

Finally, CSO employes a Laspeyers-type indexation method, which is "calculated by updating the previous month’s weights by the estimated monthly changes in their average prices". However, like all types of indices, Laspeyers indices suffer from some specific drawbacks. In particular, these indices are weaker in periods of adjustment in the markets. Here's a quick non-technical discussion:

Laspeyers index is designed to answer the question: "How much is the sales price today for the house that is of the same quality as in the base year (2005)?" Quality is compared using the hedonic model mentioned above, based on specific size of the house (floor area), its amenities (number of bedrooms, house type) and location (note - we do not know the granularity of such 'location' adjustment, which can be critical. For example, I live in Dublin 4, but not the "fashionable" part of it. This means that if location code used is D4 for my house, it will receive signficantly higher locational weight relative to true value of my location than a house in a "fashionable" D4 locale.

One key objection to Laspeyers index is that it is computed while assuming that the base year (2005) house remains unchanged over time. Hence, quality is assumed to be constant for referencing, implying the index over-states inflation and under-states deflation.

In addition, index does not capture the effects of substitution in housing. In other words, Laspeyers index does not reflect conversions of house features to substitute away from more expensive options, etc, or purchases shifting in favour of smaller properties.

Index also assumes that geographical distribution of house sales does not change over time - a feature that introduces significant biases into the index when locational markets are not uniform (when there are significant differences within the markets).

Finally, the index overstates price appreciation at the peak of the bubble, since at that point, less desirable properties were disproportionately represented in the market as buyers chased any home available for sale. This is known on the basis of the US data where at the top of the markets 'gentrification' of lower quality locations in many states has led to Laspeyers indices understating price inflation.

For thes reasons, Laspeyers indices are known as 'constant quality' indices.

Chain-linked indexation, employed by CSO, helps addressing some of these issues, but it does not eliminate them. Of course, that too has its drawbacks, namely the more substantial data requirement, plus the lack of index additivity (you can see this indirectly in the first chart above by the gravitational pull of the houses index on overall index.