22/1/2013: RPPI, Ireland: December 2012

In the previous post I took a quick look at the Residential Property Price Index (RPPI) annual series. Here are monthly frequency observations.

All properties:

• December 2012 All Properties RPPI stood at 65.8, the same level the index was at back in between March and April 2012 and again in September 2012. In Other words, the index de facto is running flat.
• Put differently, the index has now fully erased the miraculous gain of November 2012 and returned prices back to September levels.
• Monthly rate of change in the index was negative at -0.454% and the index is running well below 65.77 12mo MA.
• Year on year the index fell 4.5% in December 2012, after posting a 5.71% decline in November. Thus December represents the slowest y/y rate of decline in the series since May 2008. Which is good-ish sort of news.
• For Nama valuations, latest data suggests a fall in values of 33.26% net of burden sharing cushion.
• 12mo MA monthly rate of change is at -0.378% which is shallower than December 2012 m/m decline of 0.454%
• Putting things into a bit more longer term perspective, simple average of RPPI for the period from January 2008 through present is 90.02, which stands contrasted with 2012 average of 65.73 and 2011 year average of 75.37.
• On shorter term comparatives: H1 2012 average reading was 65.92 against marginally lower H2 2012 average of 65.53. 
• Relative to monthly peak, RPPI stood at -49.58% or comfortably rounded off to 50%. This reading for December 2012 was statistically indistinguishable from the 'nominal' monthly low of -50.34% set back in June 2012.
• Thus, monthly volatility aside, there is no increase in prices. As I noted in November data analysis, we are bouncing along the bottom, which may or may not be a 'true' bottom or a 'false' bottom. This conclusion is further supported by the factors that are likely to impact prices going forward that I outlined in September 2012 data analysis (link here).

House prices sub-index:

• House prices subindex declined marginally from 69.1 in November to 68.7 in December, thus erasing completely any gains delivered from September 2012. 
• House price dynamics are virtually identical to those of the overall RPPI as outlined above.
• 2012 year monthly average index reading was 68.57, slightly behind 68.7 recorded in December. However, 6mo average through H1 2012 was 68.7 and this has fallen to 68.43 average for H2 2012. 
• Y/y index fell 4.18% in December, marking the shallowest rate of decline in the series since May 2008.
• Frankly, all of the changes are within the range of being statistically insignificant, so the theme of 'flat line market' continues unabated.

Apartments show the same dynamics as Houses, so let's avoid repetition and note that

• Houses prices are down 47.95% on peak, while Apartments prices are down 62.15% on peak.

The index has been criticised, for the n-th time by the realtors for failing to reflect the 'great demand' from the cash buyers. Alas, my view is that cash buyers are not, repeat, not a normal market, but rather an aberration that is bound to be short-lived. In this sense, if we want a gauge of real market activity, then the CSO data provides a far better picture than testosterone-fuelled hype of few whales with cash stashed from CPOs of the old days bidding each other out to land a 'family home suitable for conversion into student bedsits'.


Dublin, last.

• Property prices in Dublin slid from 60 in November to 59.2 in December, marking 1.33% decline m/m and 2.47% drop y/y. 
• Relative to peak, Dublin market is down 55.99%. Which is above the absolute low of 57.40 achieved in August.
• On dynamics side, 12mo average is running at 58.32, worse than December reading, but well below 2011 average of 67.86. H2 2012 average is at 58.57 and virtually identical to H2 2012 average of 58.07. In other words, medium-term dynamics are flat. Flatlining is the theme here again.

22/1/2013: Irish Property Prices: 2012

Per CSO's Residential Property Prices Index released today, property prices in Ireland registered a fall of 4.5% in the year to December 2012.

The spin of 'good news' is seemingly abating in the wake of the figures. While I will cover detailed trends in the next post, here is a snapshot of annual series. Do, please, let me know if you see much of 'return to growth' in house prices:

To summarise the above and extend to the begging of the CSO series:

-- Overall RPP Index fell in 2012 to the annual level of 65.7 down from 75.4 in 2011 and down 49.5% on peak. In 2011 relative to peak RPP Index stood at a 42.0% discount. Y/y rate of fall in the annual index in 2012 was 12.86%, statistically identical to 13.10% drop in 2011. Surely, this is not a 'bottom has been reached' set of figures, no?

-- Houses nationally sub-index fell in 2012 to 68.6 against 2011 level of 78.4 (posting y/y decline of 12.5% in 2012, marginally and virtually dental to 13.0% fall in 2011). Again, please, tell me that decline of 13% followed by 12.5% is some sort of 'bottoming out'. Annual series for national house prices is now at 47.7% below peak having fallen 40.2% relative to peak in 2008-2011.

-- Apartments nationwide dropped from 57.8 in 2011 to 47.8 in 2012, with annual rate of decline in 2012 of 17.3% showing acceleration on 16.4% y/y drop in 2011. Again, the clear 'bottoming-out' of prices for Irish apartments is now in sight. These have fallen 52.7% relative to peak in 2011 and are now at 60.9% below peak.

-- Dublin property prices have posted a drop from 67.9 annual 2011 index reading to 58.3 in 2012 - a decline y/y of 14.14% which follows 2011 y/y drop of 13.9%.

To summarise, the 'bottoming-out' of Irish property prices in 2012 has resulted in prices declines across all four core categories (the few with a potentially sufficient numbers of sales to make any meaningful conjectures about). Not one category saw an annual increase in prices. And, to add an insult to the injury, y/y rates of decline in the prices in 2012 were worse than in 2011 in one case, marginally better in one case, and practically identical in two series. 

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.

26/9/2012: Nama valuations & August property prices

As promised - in the last post on today's data release for Irish Residential Property Price Index (RPPI) here's the summary of impact of latest price index movements on Nama valuations.

Note: the figures referenced are approximate and relate to averages of valuations, so these should be treated as a guide. Keep in mind that property prices reaching Nama valuations levels (adjusted for risk-sharing cushion and long-term economic value premium) still imply a loss on Nama books, in my view, due to costs associated with operations, plus the discounts on disposals of properties in volume and over time. Inflation adjustment further increases real loss.

Summary table:

In other words, we need 60%+ uplift on current price levels to achieve a break even on Nama average valuations.

26/9/2012: 2012 forecast for property prices in Ireland

In the previous post I covered main data for August Residential Property Price Index for Ireland. Now, annual forecasts based on data through August:

These imply a cumulated decline of ca3.2% on August 2012 through December 2012, a decline of 2.4-2.5% for Houses, a decline of 3.4-3.5% for Apartments, and a rise of 0-0.25% for Dublin. Obviously, these are not precise figures, so treat with caution.

I currently foresee decline of 51.5% for all properties in 2012 relative to the peak with range of forecasts of 55-61% decline through 2013 relative to peak for all properties index.

I have not updated these figures for some time now - over 6 months so there you go...

26/9/2012: Residential Property Price Index for Ireland, August 2012

Residential Property Price Index for Ireland (RPPI) for August 2012 is out today, triggering a torrent of usual commentary - some optimistic, some more bleak, depending on the focus of the analysis reported. Here are the facts:

Overall RPPI:

• Index for all properties nationwide has risen marginally to 65.2 in August against July reading of 64.9 and this represents second consecutive monthly rise. M/m index rose 0.46% in August after posting a 0.15% rise in July. 
• However, index reading remains below May when it stood at 65.5 and marks the third lowest reading in history of the series. 
• 3mo MA for the overall index is now 64.97 in August and that is below 3mo MA ever recorded in the history of the series.
• Y/y index fell 11.77% in August, which is an improvement on the fall of 13.58% in July and the shallowest annual rate of decline in any month since February 2011.
• Overall residential properties prices are now 50.04% below their peak which is an improvement on the absolute bottom level of -50.34% on the peak, albeit statistically-speaking there is no discernable difference.
• YTD average monthly change in the index is -0.68% and 12mo MA change is -1.03%. In other words, however you spin annual or monthly date, from September 2011 through August 2012 prices have fallen on average at a monthly rate of 1.03%.

Chart to illustrate:

Note, not a factual, but 'interpretative observation, we are seeing some attempts in the market to 'bottom out'. This does not mean that the market will bottom out here, but it does represent a first such instance of an attempt in the market.

Houses prices:

• Safe as houses stuff prices rose to 68 in August from 67.8 in July marking second consecutive month of increases (in July prices rose 0.296% m/m and in August the rise was 0.295% - both statistically indistinguishable from zero).
• However, as with overall residential prices, house prices through August failed to regain levels registered in May (68.2).
• Y/y house prices are down 11.69% in August - slowest rate of annual drop since March 2011.
• Relative to peak house prices are now down 48.48%
• YTD average monthly drop is at 0.66% and 12mo MA monthly drop is at 1.03% so the same analysis for dynamics stands as for the overall RPPI above.

Chart on this below (after Apartments analysis).

Apartments prices:

• Apartments prices firmed up to 46.9 in August from 45.8 in July and are still below the levels attained in June (47.6), implying the index is at the second lowest point in its history.
• M/m prices rose 2.40% posting the first rise since April 2012. Y/y apartments prices are down 14.57% - the slowest rate of annual decline since February 2011.
• Relative to peak, shoe boxes (err.. apartments) are now trading at a discount of 62.15%.
• 12moMA of monthly deflation is at -1.53% and YTD average monthly price drop is -1.59%. Good luck if you are taking any solace from the one month blip.

Dublin prices:

• Unlike the rest of the country (where I suspect prices changes are driven primarily by thin and selection-biased markets), Dublin property prices have continued steady decline dropping 0.52% m/m in August after 0.35% drop in July. 
• August thus marks the second consecutive month since prices posted shallow increases in March-May 2012.
• August also marks the month in which Dublin property prices have hit another record low at 57.3, with the previous record low attained in July (57.6) and in February 2012.
• Dublin prices are now 57.40% below their peak.

I will be blogging later tonight on my forecasts for 2012 prices and on impact of these prices changes on Nama balancesheet, so stay tuned.

24/7/2012: Residential Property Price Index for Ireland, June 2012

So that 'stabilization' in Irish property markets on foot of 0.2% rise in May in the Residential Property Price Index (RPPI) turned out to be just the statistical noise? Looks increasingly so to me. The latest data from CSO is bleak:


"In the year to June, residential property prices at a national level, fell by 14.4%. This compares with an annual rate of decline of 15.3% in May and a decline of 12.9% recorded in the twelve months to June 2011."

Overall residential property prices "fell by 1.1% in the month of June. This compares with
an increase of 0.2% recorded in May and a decline of 2.1% recorded in June of last
year."

Dublin - the 'bright spot of the previous months for the 'green jerseys' hopes on recovery in the property markets has recorded a fall of 1% m/m in June and a 16.4% decline y/y.


"House prices in Dublin are 56% lower than at their highest level in early 2007. Apartments in Dublin are 62% lower than they were in February 2007. Residential property prices in Dublin are 57% lower than at their highest level in February 2007. The fall in the price of residential properties in the Rest of Ireland is somewhat lower at 47%. Overall, the national index is 50% lower than its highest level in 2007."


Charts updates and forecasts later today, so stay tuned.

25/6/2012: RPPI May 2012: Residential property prices in Ireland

CSO's residential property price index (RPPI) is out for May. Headlines are:

• Overall Index moved from 65.4 in April to 65.5 in May, marking the first (+0.15%) m/m rise since September 2007 (previous best performance months saw zero falls in the index).
• However, statistically (based on data from January 2008), we need to see a raise of 0.32% (1/2 stdev) at least to make a reasonable judgement on upward gain.
• Overall RPPI is now at 3moMA of 65.67, down on 3mo MA of 65.87 in April and 67.5 in previous 3mos period through February.
• Year on year, RPPI slipped -15.27% compared to May 2011 and 3mo MA through May 2012 of 65.67 was significantly below 3mo MA through May 2011 (78.17).
• Relative to peak, RPPI is now down 49.81% in May 2012 - an improvement on -49.89% for April 2012, but, again, not statistically significant improvement.

Improvements in RPPI were driven by houses and Dublin houses in particular, with Dublin Apartments prices continuing to tank.

Looking at Houses and Apartments:

• Houses index rose from 68.1 in April to 68.2 in May, marking the first monthly rise (+0.15%) since August 2010 and the largest m/m rise since November 2007. Monthly rise also failed to be statistically significant (stdev=0.643) for the crisis period (since January 2008)
• 3moMA for houses index is now at 68.4, down on 68.67 in April 2012 and 81.3 in May 2011.
• House prices index is down 15.17% y/y compared to -16.24% in April 2012 and house prices nationwide are now down 48.3% relative to their peak.
• Apartments price index is now at 48.6 in May 2012 down 2.02% on 49.6 reading in April 2012 and down 19% year on year.
• Apartments prices m/m decline in May broke 2 previous months consecutive increases.
• Apartments prices are now down 60.77% to peak.
• Monthly decline in apartments prices was statistically significant (stdev=1.56).

Dublin prices drove the overall index this month:

• RPPI for Dublin stood at 58.4 in May, up on 58.3 in April 2012 (+0.17% m/m) marking the third consecutive m/m increase in the series. However, current rise was not statistically significant (stdev=1.18) and cumulative increases during the last 3 months (total of 1.39%) also fail to be statistically significant.
• Annually, prices are down 17.51% in May, which is worse than 17.3% y/y decline in April.
• Relative to peak, Dublin property prices are now down 56.58%.

So nothing new, folks - the market is looking for a catalyst - which is a fancy way of saying that it might go down or up, or stay flat.

26/3/2012: Residential Property in Ireland - things are still getting worse, faster

Residential Property Price Index for February is out today and, surprise, the property price deflation is accelerating.

Details:

• All properties headline index now stands at 66.1 down from 67.6 in January 2012 and 80.4 in February 2011. So mom contraction of 2.22% in February 2012 makes this the fastest rate of monthly decline since March 2009 and the third fastest rate of monthly decline in history. Relative to peak, residential property price index is now down 49.35%. 12mo MA of monthly declines is at 1.62% and January-February average is at 2.05%. Year on year index is down 17.79%. Which is what it says on the tin - third month of accelerating declines in prices in a row.
• House prices sub-index is now at 69.0 against January 2012 reading of 70.4 and February 2011 reading of 83.5. Monthly rate of decline in February was 1.99% - steeper than anything recorded since October 2011, marking third consecutive month of accelerating monthly drops. Year on year, the index is down 17.37%. Compared to peak valuations, house prices index is now 47.73% down. Year-to-date average monthly drop is 1.90% against 12 mo MA decline of 1.58%. Again, house prices are dropping at an accelerated rate now as well.
• Apartments sub-index has reversed two months of consecutive shallow gains in November -December 2011 and run a 4.30% contraction inJanuary 2012. February 2012 monthly drop was even larger at 5.47%. The sub-index now reads 48.4 against February 2011 reading of 63.5. Year on year February apartments prices index stood at -23.78%. 12mo MA decline is 2.06% and this has dramatically accelerated to January-February average of 4.88% monthly rate of price declines.
• Dublin properties prices sub-index was at 57.6 in February 2012, down 1.2% on January 2012 and down 20.33% on February 2011. This is the only major sub-index that posted de-acceleration in monthly contraction rates. 12mo MA contraction rate is 1.87% and January-February average is 2.58%, but January mom decline was 3.95% against 1.20% drop in February.

Charts to illustrate:

Note: no update to my forecasts.

Nama valuations:

8/3/2012: Economy on a flat-line: Sunday Times 4/3/2012

This is an unedited version of my article in Sunday Times March 4, 2012.

This week, the conflicting news from the world’s largest economy – the US, have shown once again the problems inherent in economic forecasting. Even a giant economy is capable of succumbing to volatility while searching to establish a new or confirm an old trend. The US economy is currently undergoing this process that, it is hoped, is pointing to the reversal in the growth trend to the upside in the near future. The crucial point, however, when it comes to our own economy, is that even in the US economy the time around re-testing of the previously set trend makes short-term data a highly imperfect indicator of the economic direction.

In contrast to the US economy, however, Irish data currently bears little indication that we are turning the proverbial corner on growth. It is, however, starting to show the volatility that can be consistent with some economic soul-searching in months ahead. Majority of Irish economic indicators have now been bouncing for 6 to 12 months along the relatively flat or only gently declining trend. Some commentators suggest that this is a sign of the upcoming turnaround in our economic fortunes. Others have pointed to the uniform downward revisions of the forecasts for Irish growth for 2012 by international and domestic economists as a sign that the flattening trend might break into a renewed slowdown. In reality, all of these conjectures are at the very best educated guesswork, for our economy is simply too volatile and the current times are too uncertain to provide grounds for a more ‘scientific’ approach to forecasting.

Which means that to discern the potential direction for the economy in months ahead, we are left with nothing better than look at the signals from the more transparent, real economy-linked activities such as monthly changes in prices, retail sales and house price indices, and longer-range trade flows statistics, unemployment and workforce participation data.

This week we saw the release of two of the above indicators: residential property price index and retail sales. The former registered another massive decline, with residential property prices falling 17.4% year on year in January 2012, after posting a 16.7% annual decline in December 2011 and 15.6% decline in November 2011. With Dublin once again leading the trend compared to the rest of the country, there appears to be absolutely no ‘soul-searching’ as house prices continue to drop. House prices, of course, provide a clear signal as to the direction of the domestic investment – and despite all the noises about the vast FDI inflows and foreign buyers ‘kicking tyres’ around empty buildings and sites – this direction is down.

More interesting are the volatile readings from the retail sales data.

The headline indices of retail sales volumes and values for January 2012, released this week were just short of horrific. Year on year, retail sales declined 0.34% in value terms and 0.76% in volume terms. Monthly declines were 3.7% across both value and volume. Relative to peak, overall retail sales are now down 25% in value terms and 21% in volume. January monthly declines in value and volume were the worst since January 2010. Stripping out motor trade, on the annual basis, core retail sales fell 1.94% in value terms and 2.74% in volume terms, although there was a month-on-month rise of 0.3% in value index. Monthly performance in volume of sales was the worst since February 2011.

Looking at the detailed decomposition of sales, out of twelve core Retail Businesses categories reported by CSO, ten have posted annual contractions in January in terms of value of sales. The two categories that posted increases were Fuel (up 5%) and Non-Specialised Stores (ex-Department Stores) (up 1.7%). The former posted a rise due to oil inflation, while the latter represents a small proportion of total retail sales – neither is likely to yield any positive impact on business environment in Ireland. In volume terms, increases in sales were recorded also in just two categories. Non-Specialised Stores sales rose 1.0%, while Pharmaceuticals Medical and Cosmetic Articles rose 1.5% year on year. Overall, only one out of 12 categories of sales posted increases in both value and volume of sales. All discretionary consumption items, including white goods and household maintenance items posted significant, above average declines in a further sign that households are continuing to tighten their belts, cutting out small-scale household investment and durables. The trend direction is broadly in line with November 2011-January 2012 3-months averages, but showing much sharper rates of contraction in demand in January.

The above confirm the broader downward trend in domestic demand that is relatively constant since Q1 2010 and is evident in value and volume indices as well as in total retail sales and core sales. More importantly, all indications are that the trend is likely to persist.

One of the core co-predictors – on average – of the retail sector activity is consumer confidence. Despite a significant jump in January 2012, ESRI consumer confidence indicator continues to bounce along the flat line, with current 6 months average at 56.5 virtually identical to the previous 6 months average and behind 2010-2011 average of 57.3. Based on the latest reading for consumer confidence, the forecast for the next 3 months forward for retail sales is not encouraging with volumes sales staying at the average levels of the previous 6 months and the value of sales being supported at the current levels solely by energy costs inflation.

Lastly, since 2010 I have been publishing an Index of Retail Sector Activity that acts as a strong predictor of the future (3 months ahead) retail sales and is based both on CSO data and ESRI consumer confidence measures, adjusted for income and earnings dynamics. The Index current reading for February-April is indicating that retail sales sector will remain in doldrums for the foreseeable future, posting volume and value activity at below last 6 months and 12 months trends.

Which means that the sector is likely to contribute negatively to unemployment and further undermining already fragile household income dynamics for some of the most at-risk families. During the first half of the crisis, most of jobs destruction in both absolute and relative terms took place in the construction sector, dominated by men. Thus, for example, in 2009 number of women in employment fell 4.2%, while total employment declined 8.1%. By 2010, numbers of women in employment were down 2.8% against 4.2% overall drop in employment. Last year, based on the latest available data, female employment was down 2% while total employment fell 2.5%. In other words, more and more jobs destruction is taking place amongst women, as further confirmed by the latest Live Register statistics also released this week, showing that in February 2012, number of female claimants rose by 3,479 year on year, while the number of male claimants dropped 8,356 over the same period.

The misfortunes of the retail sector are certainly at play in these. Per CSO, female employment in the Wholesale and Retail Trade sector has fallen at more than double the rate of overall retail sector employment declines in 2010 and 2011. Relative to the peak, total female employment is now down 10.2%, while female employment in retail sector is down 17.9%.

Traditionally, acceleration of jobs destruction amongst women is associated with increasing incidences of dual unemployment households. This is further likely to be reinforced by the increasing losses of female jobs in the retail sector, due to overlapping demographics and relative income distributions. Such development, in turn, will put even more pressure on both consumption and investment in the domestic economy.

CHART

Source: CSO and author own calculations

Box-out:

The forthcoming Referendum on the EU Fiscal Compact will undoubtedly open a floodgate of debates concerning the economic, social and political implications of the vote. Yet, it is the economic merits of the treaty that require most of the attention. A recent research paper by Alessandro Piergallini and Giorgio Rodano from the Centre for Economic and International Studies, University of Rome, makes a very strong argument that in the world of distortionary (or in other words progressive) taxation, passive fiscal policies (policies that target constitutionally or legislatively-mandated levels of public debt relative to GDP) are not feasible in the presence of the active monetary polices (policies that focus solely on inflation targeting). In other words, in the real world we live in, the very idea of Fiscal Compact might be incompatible with the idea of pure inflation targeting by the ECB. Which is, of course, rather intuitive. If a country or a currency block were to pre-commit itself to a fixed debt/GDP ratio, then inflation must be allowed to compensate for the fiscal imbalances created in the short run, since levying higher taxation will ultimately lead to economic distortions via household decisions on spending and labour supply. Given that ECB abhors inflation, the Fiscal Compact must either be associated with increasingly less distortionary (less progressive) taxation or with the ECB becoming less of an inflation hawk.

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.

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.