THE most comprehensive report on the Irish property market is out and it evidences the total destruction of wealth of a certain generation. According to the wonderfully detailed work done by Ronan Lyons at Daft.ie, asking prices countrywide fell by just over 4pc in the second three months of the year — a slightly larger fall than in the first quarter.
The average asking price nationally in the second quarter of 2010 was just over €224,000 — 36pc below its 2007 peak. The acceleration in price falls will come as little surprise, but the question now is how can a generation whose balance sheet has been so totally vaporised ever start spending again?
Back in 2007, I wrote a book called ‘The Generation Game’, which focused on how the generation between the ages of 30 and 40, who had got into the housing market via huge mortgages, would be financially eviscerated. This group was termed “the juggling generation” because they were trying to juggle being good parents and good workers, while still paying these huge mortgages.
The book focused on a generational gap between these commuter-workers and the older generation, many of whom had become accidental millionaires as a result of an unexpected windfall from the housing market.
Obviously, negative equity would swing against the jugglers in the predicted bust, much as positive equity had enriched the accidental millionaires in the boom. In the book and the related documentary, the housing boom was painted broadly as a massive transfer of wealth from one generation to another.
The figures from daft.ie show just how extreme the negative equity trap now is. Prices in Meath, for example, have fallen by 38.4pc from peak to trough.
The figure for Louth is over 40pc; Kildare’s is 36pc and Wicklow’s 36pc. These were the counties that were growing fastest during the boom.
The question is, where next for the property market?
Are we at the bottom or is there yet more negative news in the pipeline?
During the evolution of a housing crash, there comes a time when the fall in prices tells us less than other indicators, such as the time it takes to sell, the total stock of houses in the market or the amount of houses coming on to the market.
The time it takes to sell gives an indication of how realistic the asking prices actually are. All around the country, estate agents’ windows are full of houses — but if they are not selling, then the price asked is of limited value in determining the next phase of the market.
So, for example, the average time to sell is four months in Dublin, whereas it is up to a year in Connacht and 10 months in Munster.
The suggestion here is that prices in Dublin — having fallen by 50pc in the city centre since the peak — are not at the bottom yet but might be getting close.
In contrast, the rest of the country has a long way to fall.
The other concern, given what we know about unemployment and negative equity, is how many of the sales are forced sales, rather than voluntary sales? How much of the new stock reflects bankruptcy, rather than people thinking: “Okay, now I might put the house on the market because I think there is more activity”?
In terms of where prices go, it is now crucial to understand the change in mass psychology.
A property crash normally ushers in a period where people choose to rent over buying, particularly with so much choice out there and with so much uncertainty about job prospects.
Furthermore, to assess whether a house is good value or not, the prospective buyer has to do some basic maths to see why he should buy. And whether we like it or not, for a housing market like Ireland’s to clear, investors need to come back into the game.
Let’s look at it from the perspective of the investor, by looking at the return to buying houses now through the prism of yield. What percentage yield does an investor have to get to make it worthwhile investing in bricks and mortar for rent?
LET’S do the sums. With government bonds yielding more than 5pc, it’s fair to suggest that an investor would need to get a yield of at least 7pc from housing. So taking the average house price at €220,000 and the average rent at €863 per month, we see that the investor gets — with these prices and these rents — a gross yield of just over 4pc. This is before he takes into account his funding costs. Why would he bother getting into the market just yet?
In order to make a 7pc yield at the present average rent, the average price of houses would have to fall to €135,620. This suggests a huge further drop in average house prices here.
This is quite stark reading, particularly when you consider that house prices overshoot, both on the upside and on the downside.
So even without the overshooting process, the investor would be crazy to get into the market at these prices. So too, therefore, would the renter be mad to buy the house that he is in at these prices.
Prices would have to fall by another 30pc for the renter in the commuter belt to choose buying over renting.
This is the central inconsistency which exacerbates the generation trap in Ireland. For the housing market to clear, prices have to fall much further; the basic maths can’t be fudged. But when this happens, the negative-equity trap will tighten on the recent home-buying generation, whose only crime is that they were born in the wrong decade.
So for Ireland to recover, there will have to be a ‘lost generation’ who will be largely shut out of whatever economic future this country experiences.
This generation trap is the poisonous legacy of the Ahern-Cowen years.
“A lot done, a lot more to do.”
Yeah, right.
subscribe.
Egg Timer comes to mind .
2 examples. Finland: http://bit.ly/fiHouse & Japan: http://bit.ly/jpHouse
It took Finland 10 years to get back to where they were and Ireland is in a much worse situation than they were. Dublin prices are more likely the ones to recover in 10 years but I can see prices outside the capital not returning for much longer.
Hitting the bottom doesn’t really mean we’re going to bounce straight back up.
As a card dealer in a Las Vegas Casino said to me in 2005, “you seem like a nice guy, cash in your winnings kid, and take your nice girl for dinner, this place wasn’t built on people like you winning”. I took his advice. The same can be said for the Irish economy, only those guys in the boardroom, controlling the security cameras, those on both sides of the deal made the money, the majority out of life necessity or ‘big plan’ theory bought in to a rotten game. The majority now pay the price in terms of negative… Read more »
Thanks David – your clarity shines through the great murky mess that Fianna Fail has made of our beloved country. I invested in Buffalo NY where I can buy a double rental unit for <30k with gross return of 20%; OK, after maintenance, vacancies, etc, I am down to 10%-12% yield but who would even consider buying here? You 4% would disappear in insurance, repairs, wear & tear and vacancies. People might have justified that negative return when there were crazy capital gains to be had – but now we know that was all a lie driven by greedy banks,… Read more »
“You 4% would disappear in insurance, repairs, wear & tear and vacancies.”
And tax!!! Ooops… It’s going to be some fun around here when Revenue decide to investigate people with more than one property. Most people I spoke to who ‘bought in Bulgaria’ or similar, didn’t even know they were supposed to pay tax on their rents.
If we had our own currency and we did devalue it, our imports and exports will remain defined in US$ or € Euro. The real value of property which could be bought and sold, would, in time, also be defined by its value in major external currencies. The only real effect of devaluing our currency is to reduce our wages and the value of saving or mortgage balances. So, instead of a currency that we could devalue as needed, can we not invent a system that ties wages and mortgages to a standard Pay Unit. Eg;- The minimum rate of… Read more »
In the binge era, when David McWilliams made an announcement concerning the nature of the property market being a bubble, (or indeed if Hobbs, Lee or Gurdgiev said anything about property), there was always a saturation level response from the ‘official experts’. It was always along the line of ‘this place/time is different’. Strangely, enough those people who used to take part in this co-ordinated response to improve the perception of the real estate bubble, have all been rather scarce in recent years. (with the exception of honest Tom in the CIF). This means that you will not benefit from… Read more »
Need some advice people. I am thinking of buying a house for 160000 (needs a lot of work, approx 15000), other houses in the area are priced betwen 190000 and 200000 (better spec). It is close to my job (saves 100 euro a month petrol), my mortgage will be 600 euro a year (5 year fixed ) minus goverment mortgage assistance. The property was above 300000K at the height of the boom, sick of renting, am I mad to go for it, could the price fall much more for this property?, don’t mind taking a hit once its not another… Read more »
‘Pushing through Soverign Austerity Programmes’ – it is on this basis only that Kown was voted one of the top ten leaders of the world by Newsweek (& Elitist Club du Monde).Selective considerations ignore his dismal past performances and the forthcoming crash that will follow in due course.
I was going to quiz the figures, but I just realised David has adjusted those gross yield figures so that they assume stamp duty at 9% has been paid.
I’m reading a book called “Dying of money” by Jens O Parsson published in 1974. On page 78, there is a quote, “In inflation, the first faculty that becomes anesthetized is the ability to weigh up real gain against real cost, and consequently the fringe activities blossom and become positively parasitic.” Its a little bit clunky but sums up the gospel David is preaching quite well.
Price of a house in Ireland three methods to calculate. ———————————————————– Method 1 , Houses as an investment If a Dublin-3-Bed-Simi was an investment the income would be rent, the current rents are about 1,050 per month. To give an investor 1,050 a month at 8% the house would have to valued at 160,000.00. This is the normally accepted international return. ———————————————————– Method 2 , History of Price falls. (Morgan Kelly, UCD) Mr Kelly says that on average in a bust house prices lose 70% of what they gained in the boom resulting in a drop in house prices of… Read more »
David-your maths are a bit suspect or not clear. You quote a return of 4% GROSS on rent of 863 for a property worth 220k. That does not add up!! Are you working off 10 or 11 months rent??
Im afraid to ask this but what will be the value of 1 beds in Dublin then? I recall One beds in Kilmainham selling for 50k in mid 1990s.
I figure I know how he comes up with the 4% but the truth is that the average rent, I believe, is WAY below this figure as far as I can tell. Try something like €675 or below. Talking to landlords in many different property types this holds up. Great article anyway. David is my financial compass.All the best Steve
I wonder how NAMA selling off property might affect the house prices. Perhaps speed up the decline by pumping property into the market?
One classic sign of a market bottom in an asset class is when it is universally viewed as being almost insane to invest in it. The end of the previous equities bull market, for example (towards the end of the 1960s), was a time when equities were simply known to be a bad investment. Period. It was the time to buy, but the problem was that every fibre of your being told you not to. As I see it, there are a number of possible roads from where we are: Firstly, as a result of the massive stimulus, we could… Read more »
The book ‘The Pinch’ also talks generally about the Boomer generation shafting Gen-X
For anyone in severe negative equity and can’t pay their mortgage I have the following advice. Stop paying your mortgage completely, don’t pay any other bills, save as much money as you can and buy a plane ticket to Australia. Then when you’re in Australia declare yourself bankrupt. Get permanent residency in Australia by blagging your way into a job and getting them to sponsor you. Then laugh at the thought that you’ll never have to face another miserable Irish winter ever again as you soak up the rays on Manly Beach.
Sorry but need some advice also, Unlike Paul, unfortunately I’m in the opposite situation… My fiancee and I at the time made the stupid decision to buy a townhouse in a city in the southeast of Ireland with 100% 35 year mortgage of 280,000 euro. Depressing I know! We were fixed for 2 years and luckily I had asked to go on tracker rate after that and we are now on 2.1%. Needless to say I got a mortgage over seven times my salary!!I was working in a very successful multi-national company until we moved to Australia in January 2009… Read more »
Hi Lass , I do not wish to give you advice rather instead to contribute to your debate on your ‘new opportunity’.I like to think positive in all cases it’s best policy.Were it my case I would commence building my new home immediately and seek finance to do so.I assume you will build it cheaper than a ‘non-builder’and thus make a paper gain anyway . Timing action / decision making now is more important than the ‘pure logic’ of procedure .In this case build before you sell the existing house with or without ‘the dog’ in situ. My policy is… Read more »
Anyone see this about our GOM1 “Unloved at home, ‘fiscal taskmaster’ Cowen wins praise from foreign press” Obviously his little media foray Paddy’s Day some Newsweek reporter caught Cowen on screen pumping out his rote lines about fiscal austerity, foolishly took the bait and said, hey, ‘This guy must be doin a good job, they’re not on the streets over there and apparently queuing up to take his medicine!’. Then he wrote the Newsweek story below: LOL, can we believe anything that’s written in Newsweek anymore since its been sold by the Washington Post? http://bit.ly/9A085K Sidney Harmon who hasn’t a… Read more »
Davo Full Moon –
next tuesday is the full moon and ‘the Pull’has already commenced since yesterday .We are now watching the eclipse of the ‘aliens of davo’ gather together on a cyberspace to reveal their good news via newsweek about our ‘great leader’ King Kown 2nd renown for ‘rail talk’ and housing his best plonks to cork off on his arrivals at anyplace near you.
In true spirit of all great apes he will perform at the arts festivals all this week his nostril dance with eye catching mouth openings.
David refers to Ronan Lyons work over at Daft.ie, so I think that in order to clear up some of the above questions about rental income, how things are in different parts of the country etc.Ronans latest report is linked below.Good work Ronan.
http://www.daft.ie/report/Daft-Rental-Report-Q2-2010.pdf
Closer to home Fingers said yesterday that he felt “some remorse” for what happened over at Nationwide.
O.K. Mickey Fingers i’ll make it easy for you “give back the effin million you took in an unearned bonus and then go and sin no more, Or to put it another way lets put a price on that remorse.;-(
The Times carried a story yesterday about how Brian Linehan manages to speak out of both sides of his mouth. I hope this story finally nails down the fact that Brian Linehan is just another FF gombeen not fit for any office. http://www.irishtimes.com/newspaper/frontpage/2010/0819/1224277151530.html
Bad news for Carrick on Shannon with the announcement from MBNA that they were making people redundant in their Credit Card section. Well now, what with the floods, emmigration, ghost estates, unemployment, and so on, surely to God this part of Ireland must represent all the failures of the past decade or so. I know it’s a dubious honour but does anybody think that County Leitrim represents FF’s vision for Ireland, and where it was always going to end.?
Hi – can David or one of the other people who have commneted on this article clarify something for me. Average rent is quoted as being 863pm and with average house price at 220k, this equates to gross yield of 4.7% but is referred to as being gross yield of “just over 4%”. David then states that “in order to make 7% yield at present average rent the average house price would have to fall to 135620. 863pm = 10356pa, 10356/7% = 147942. The article has its merits but why are calculations presented in such a way so as to… Read more »
insiders
was listening to newstalk and this name came up in discussion. googled it
http://findarticles.com/p/news-articles/mail-on-sunday-london-england-the/mi_8003/is_2009_June_21/cowen-adviser-works-firm-billions/ai_n38242679/pg_2/
I can think of an example of someone who purchased a one bedroom apartment in dublin 1 last year , for € 180 000 . These units are now achieving a rent now of €950 per month. That would give you a gross yield of 15% and they are let within a week . It would be a typical investor property , which means that the fundamentals for buy to let properties have changed in central Dublin. The falling rents are a problem , but then management fees are falling as well and demand is strong. By the way, these… Read more »
David talks about a lost generation, overwhelmed with debt. Govt policy seems to be to let things drift, or at least do nothing radical to address the problem. The implication is that these people are expendable and that the govt feel they have enough support from the ‘winners’ or ‘survivors’ (job/ property holders) to carry on doing nothing. I wonder if they have. Crotty refers to the extinction of a million during the Famine barely raising a murmur. So this should be rather easier to justify – after all nobody’s starving.
@Tumbrel Cart The debt spiral argument is not really very complicated, and goes something like this: Over the past XX years (XX being 10, 20, or 40, but most especially the past 10), various governments have used low interest rates, and other methods, to encourage borrowing and spending. While the borrowing and spending is going on, the economies boom, but when it stops, the economy goes into reverse. Every time it goes into reverse, the governments uses yet other tools to encourage another spell of borrowing and spending, and so have another boom. The result has been XX years of… Read more »
As one of the “Lost Generation” I cant help but feel that all bad news becomes a self fulfilling prophecy in the end. Unfortunately, David has been shown to be bang on. Can I ask all what measures this generation can take to avoid being lost in the history books. I’m currently working (and practicing some of that good advice accompanying this article) very hard to get somewhere.
Articles like this make me feel like I should just muddle through as trying to rise above the chaff is pointless.
One extra little thought. If you want a really nice, clear, view of how the US, UK, Irish, Spanish, and one or two other economies, have been working, you could read: ‘Anatomy of Greed’ by Brian Cruver. It’s about his time at Enron, but you’ll quickly see that if you replace ‘Enron’ with ‘The Irish Economy’ (or UK, or US etc) it is a beautiful, snug, fit. They made a film of it, “The Crooked E: The Unshredded Truth About Enron”.
You might think I’m a doom and gloom merchant. The news is broadly bad now. But it will end, and if history is anything to go by, it will end when the night is at it’s darkest. When you can almost touch the all pervading feeling of tired hopelessness, it is ending. The dawn will be spectacular, it will be like spring after a really hard winter. Just remember, whatever is happening now, it will end. Absolutely certainly. I’m looking forward to it, but in the mean time, I’m starting a new company. It’s not as if no one has… Read more »
Or maybe it won’t, We shall see.
David.
If the real market equilibrium price returns to the market, despite the oligopolies attempt to make sure this does not occur, but if it does occur and the free market forces and invisible hand work through the rigging, we will be visited upon by massive interest rate increases to keep the yoke of the debt money system alive and well on the outsiders / have nots.
Another sobering thought is the fact that we are left in the dark as to what NAMA are going to do with empty housing estates and blocks of apartments aka ‘toxic assets’. A small percentage of these put on the market would plummet rental and home prices further. It all adds up to a dangerous over-supply of potential homes, whereas if they were offices it would be less detrimental for us. Dr. Constantin Gurdgiev of TCD suggested blowing these assets up with dynamite so we can start afresh. I think we, as sensible citizens should hire the A-TEAM to clean… Read more »
On my last visit I was surprised at how prices had not dropped as much as I had expected. That said I spend most of my time in D4 hanging out with the likes of Tull so I see higher than average asking prices. But I kept asking myself how are places selling if so many people are in negative equity, the banks are not lending and there is so much job insecurity. It just does not make sense but then again these asking prices were not reflective of reality. I figured prices in Dublin need to drop by at… Read more »
Property Utility Costs : the providers of these services need to be watched closely now .They also influence property prices too . Very serious happenings are currently on-going and I am not the only victim. On Wednesday 4th August while I was on-line in this site from my office and during the holiday season ( office closed)and after returning from vacation from France my telephone lines suddenly started disappearing .I decided to ring Eircom only to be told that they were cutting off my lines .For the record I owed the sum of €297.73 for a bill that was issued… Read more »
Good piece and worth the read by Krugman in yesterdays Times. Nice to see he has’nt lost his sense of humour, “austerians” indeed!!.
http://www.nytimes.com/2010/08/20/opinion/20krugman.html?_r=2&partner=rssnyt&emc=rss
RTE/PRAVDA gets called out
http://www.independent.ie/entertainment/tv-radio/close-it-down-and-sell-it-off-says-pop-mogul-2305069.html
On the initial page of http://www.itulip.com the moderator of the itulip website, Eric Janszen, interviews Elizabeth Warren. They discuss what Janszen called the FIRE economy [ Finance, Insurance (including pensions, derivatives, welfare ponzi schemes run by bankrupt governments), Real Estate ].
At the end, Warren basically makes the point that the entire system is spent (borrowed out). In economic terms this means the resources have been squandered on all sorts of selfish empty, ridiculous uplifting nonsense schemes. Mostly at the behest of modern sophisticated consumers in the pursuit of lifestyle trajectory.
An article concerning the “new poor” in the US. These are people who are heavily in debt, who do not have the means to service debt levels, and who are formerly part of the American Middle Class. http://www.spiegel.de/international/world/0,1518,712496,00.html It might also deserve commenting that the State of California is in a extremely tight budgetary predicament. In fact it has built up masive deficits, in addition to ridiculous commitments that have basically hamstrungs it’s ability to rescue itself. In many ways it is in a deplorable financial condition. Several municipalities in California have already threatend bankruptcy in addition. It should be… Read more »
Either you’re desperately stupid or just desperate. You’re hoping that the guy who has guaranteed his mates debts with your money, has created a framework for fraud via NAMA, has been caught out by Eurostat while attempting to pass off bailouts as investments… who has turned the country into a debt servicing machine on behalf of his cronies… And who by giving the banks all of the money now has ensured the creation of a new landlord class, but this time corporates not brits. as inevitably the banks seize all assets whose debts are not performing but which they can… Read more »
I was a little suspicious at first but listened nonetheless
http://www.youtube.com/watch?v=Z_rShZA_IjE&feature=player_embedded#!
Ireland – the latest from USA
‘Elevated Risk #2:
Ireland
Last week Irish government bond yields returned to a near extreme spread against German yields. The reason: Anglo Irish Bank, which is already nationalized, needs another EUR 20+ billion from the Irish government.
The market is again bidding up the credit default swaps on Irish banks and yields on Irish government debt. Recently the government had to pay-up for a short term debt offering, to the tune of 76 percent more than it did for a similar offering just three weeks prior – nearly double the yield!’
Germany – the latest from USA ‘Elevated Risk #5: Uneven Euro-Zone Economic Performance The German central bank this week raised its estimates for 2010 growth from 1.9 percent to 3 percent. I wonder how that sits with its austerity-laden neighbors to the south. As time passes expect the political fallout to build. Germany is in much better shape than other euro-zone members. Sure, it may seem like these threats have already been handled. The European Financial Stability Facility and the ECB’s involvement in the euro zone government bond markets have given a reason to conclude that the problems in Europe… Read more »
Where can we hide?
[…] According to David Mc Williams’s latest article” Collapsing house prices? We ain’t seen nothing yet” […]