Take a long look at the chart below. Digest it. Maybe look again if you have to. This happened in the most sophisticated economy in the world.
This is what happened to the price of development land in Japan. Prices roared upwards and then collapsed, ending up below where they started at the beginning at the boom. This is likely to happen here; development land is likely to settle back to 1996 prices. We haven’t seen the half of it yet. When we hear some property lads talking about green shoots, this chart should be enough to tell them to snap out of it.
But we can’t seem to snap out of it. We are still caught in the trap. We seem to believe that the price of houses and land will miraculously rise again some time soon. This will not happen. It can’t and shouldn’t. In fact, houses prices are likely to fall another 50 per cent from here before we see anything like the bottom.
International comparisons bear out these forecasts. Until now, many Irish people have clung to the myth of what I call ‘Dunnes Stores economics’. You know it: it is the school that suggests ‘‘the difference is we’re Irish’’. Well, the bad news is that being Irish makes no difference at all. It offers no protection. What happened to the Japanese will happen here and, in terms of the recovery, the sooner the better.
I came home last week having been making a documentary since late February in the US, China, Iceland and Australia. In all these countries, property prices have fallen, but in no country did they ever get as high as they did in Ireland.
In the US, I went on a repossession bus tour, where houses were being sold at between 50 per cent and 30 per cent of their peak value. In Iceland, we saw failed banks sell off their portfolios at even bigger discounts. The original loans in hard currency will never be paid back. Last Wednesday, I was in Perth in Western Australia, where property prices are falling.
Even taking into account the fall in Irish property prices in the past few months, property in Perth is still twice as cheap as it is in Dublin – and Australia is not even in a recession yet.
The paper on the plane home, specifically the Irish Times’ property section, made for depressing reading. Not because prices had fallen, but because they hadn’t fallen half enough. We are still fooling ourselves. Irish property prices are still criminally high. Can people not understand that it is over?
Irish property, like Japanese property in the 1980s and 1990s, will take decades to recover – and will only do so after years of consecutive falls. How much more evidence do we need to conclude that the spin we were sold of the immutable triumvirate of banks, credit and property was a sick joke?
The question of how low property will go is not just a matter for people who are selling or buying, of how much equity we have or how much we owe. Given the establishment of the National Asset Management Agency (Nama),the price of property affects everyone, even those who never got involved.
This is why, according to the Japanese example, if Nama is going to buy property assets, it needs to buy them at a 70 per cent discount from their peak market value, to make sure that it is not bailing out banks. Anything less than a 70 per cent discount and the taxpayer will be subsidising bank shareholders. This is hardly fair.
So how low are prices likely to go? The best way to answer this crucial question is to start with the premise that the age of property speculation is over. There can be no more ‘hope value’. There can be no more belief in the notion that there will be a big capital gain in buying a property, any more than there will be capital gain in buying a sofa.
The value of the asset will have some relation to the yield the asset returns. In houses, the yield is the rent. In the US, a house was traditionally valued at some multiple of the rent it generated. Typically, the value of a house was calculated at 12 to 14 times its annual rent. This relationship has held in the US for over 100 years. There is no reason to believe that this shouldn’t be the way to value Irish houses.
This is a normal price/earning ratio that we would use in the stock markets to assess value. What the US valuation model is saying is that, over time, property should trade on a price/earnings (P/E) ratio of 14 times.
So, let’s see where Irish houses will end up. Take a typical house in a commuter town. On daft.ie there are hundreds of them. For example, in Newbridge, Co Kildare, you can buy a new three-bed house for €335,000.This is a steal, according to the ad. A bank will finance this for €9 95 per month.
According to the same website, the average rent for a three-bed in Newbridge is between €950 and €1,000 a month. This house, if it can be rented, will yield €11,400 a year. This implies that, applying the US valuation to the asset, the house should be valued at €159,600.However, in Ireland, we are expecting the house to sell at €335,000.
The Irish house, at a ‘bargain’ price of €335,000, is still more than 53 per cent overvalued. It will have to fall by half again to make the sums ad up.
The real fair value means that, in a world where house price speculation is over, Irish house prices will have to fall on average by 50 per cent from where they are today to be worth buying. Madly, even after a year of house price contraction, the P/E for the average Irish house stands at over 29 times – twice the historical average for property.
So, let’s snap out of it. Why can’t we just mark down prices to where they should get to, take the bankruptcies and move on? Why should we be any different in coming to terms with the new reality?
Maybe Dunnes Stores was right all along. Maybe that’s the reason. Maybe ‘‘the difference is we’re Irish’’.
“And the truth shall set you free” It takes a while for the penny to drop but it is slowly happening, I believe the consumer is aware of the game, thanks to articles like this, people I know refuse to buy because they know it is an uncertain/volatile time and a changing market – most will give it a year before they will even consider buying a place. With massive job insecurity, rising unemployment etc, many are holding back, and considering their options – that is what I counsel. Obviously those with a vested interest are doing their level best… Read more »
David is a voice in the wilderness, pointing out the real value of houses……and the real cost… When you look at things this way reading the Sunday papers is an eyeopener …. the business sections are where the action is. On the front pages, its all wishy washy; whether about aspiring models wanting to make a difference or concerned social parners making difficult choices in the national interest…. In the business section the reporters are not that coy; the grasping, threats, thievery, shafting and jockying for position are all part of the game and are reported on. 1: http://www.tribune.ie/business/news/article/2009/may/10/irish-subprime-loans-selling-for-30-cent-in-the-eu/ Sub… Read more »
Bravo, bravo, David, now you are talking. The country is in total denial with the Euro election and locals showing how these fools can’t stop talking the way they have been thinking for the last 30 years. There is a long way to the bottom, and NAMA is the biggest con going. The banks must be nationalised now. Spell it out, and keep repeating it. Thank you for looking at the rest of the world and telling us like it is.
G 1 ……..’and prayer to shivering prayer until you draw the marrow from the bone ‘…..Ouch !
This crisis demonstrates that cultural learning/conditioning counts for more than numeracy and rationality in determining the ways to escape and recover. We will be revealed in our deficiencies clearly to the entire world for exactly what we are, deluded and maniacal, with huge elements of hystericia bordering on collective fantasy. Away with the fairies, on moonshine and mushrooms, and isn’t the craic great, it’ll be all right when we are all singing the Patriot’s Song.
I think it is also important to note that rent rates are also contracting. So that we are actually chasing moving target with that P/E ratio…
http://manyeyes.alphaworks.ibm.com/manyeyes//manyeyes/visualizations/rate-of-change-in-rents-by-county-ir
You have articulated what everyone knows in their gut but is afraid to admit. Things are going to get a hell of a lot worse before they get better. I am a prospective buyer ,one of the people you said that needs to be spending their savings to boost the economy. I fear buying now more than I ever did. What I want is transparency where actual sales prices are public knowledge. I want value ,not indentured slavery to a bank. I want to live near where I grew up , not in some godforsaken hellhole and in the middle… Read more »
subscribe.
I moved from Holland to Ireland with my family in 1990 when we noticed that Ireland is getting better economically (1990 worldcup) and also for family reasons. (wife is Irish) In Holland we owned a house 20 miles from the capital in a small town worth £50.000 in 1990. Then we packed up and sold our house to start a new life in Ireland. We then decided to buy a similar property in Ireland for £54.000 also in 1990. The property is in similar size town and same distance from the capital and also at the coast. However, the property… Read more »
The question is do you think that the three-bed you are on about will continue to yield the 950-1000 in rental income. Personally I do not see it, for that 12000ish euros works out at 30% of average income or thereabouts.
‘Stock of properties available for rent on Daft has more than doubled from 10,817 in April 2008 to 22,161 in April 2009’ and there could be over 250k vacant residential properties in Ireland ! “According to the same website, the average rent for a three-bed in Newbridge is between €950 and €1,000 a month. This house, if it can be rented, will yield €11,400 a year. This implies that, applying the US valuation to the asset, the house should be valued at €159,600.However, in Ireland, we are expecting the house to sell at €335,000.” With an oversupply of property for… Read more »
David, it’s time to call a spade a spade and point the finger and declare the truth over and over and over and over and over. Property in Ireland is been used to destroy our community. Those that are carrying out this destruction are those that buy property to speculate to make money. Keep at it David, the property bubble must not be re-inflated. House price must return to a reasonable market equilibrium price as explained in your article. It is now a matter of our future as a society for our children. NAMA must not buy assets with our… Read more »
Another example of a house price crash is the house price crash in Finland in the late 80’s, early 90’s. In 1989 their housing bubble burst and house prices collapsed. It took around 12 years for the prices to return to were. This is a good example as it is a country that is very similar to Ireland in many ways except they took charge of the situation and pulled through it over a number of years. House prices now are still very reasonable today but the approach to housing is different than here. Many people got burned very badly… Read more »
{ The Irish house, at a ‘bargain’ price of €335,000, is still more than 53 per cent overvalued. It will have to fall by half again to make the sums ad up.} David – I don’t know if you ever heard the phrase -“price is a perception of value”. Basically it means that you saturate the target population with advertising, in order to stiffen the demand curve and make buyers less reluctant to squabble over price. Cultural mores and fashion concepts also, are influential. In Ireland over the last ten years the demand curve for residential property was very stiff.… Read more »
Thats fine and true, but how can an average Joe admit to being ripped of somewhere close to a multiple of 2? More easily than a not-so-average-Joe, I suspect. Who though, is going to direct them to default, as they likely should, and likely will, eventually. And that is not the worst thing about all of this. The worst is having what was perceived to a intermediate dwelling in a “plan” to upgrade to a better property where one is actually happy to live forever. Instead, many are paying too much for semi- detached and terraced housing, in areas which… Read more »
Folks, this article is more dense than previous. It will take some time to deconstruct it.
David is ” couching” his ideas, I think.
David, This article should be printed off by every citizen in Ireland (especially those under 35) and pasted to the head of any FF canvasser who comes knocking on doors looking for votes in the coming weeks (Oh sorry . . .Aren’t FFers just running up the garden pathway . . . dropping their propaganda . . . before legging it again?) The reality is that the level of denial coming from vested interests is truly shocking! But sometimes I wonder if it’s denial as one thing I’ve noticed over the past 6-8 weeks is that there are a number… Read more »
David,
“Why can’t we just mark down prices to where they should get to, take the bankruptcies and move on? ”
For the same reason the minimum wage is not halved and dole payments cut – loss of order. People need time to adjust their expectations.
For an insight in to how the other half thinks – see TED talk from Jonathon Haidt.
http://www.ted.com/talks/view/id/341
Robert, great Idea. But will an article like this only be accepted by those who have “seen the light”? BTW: the dodgy practices that you mentioned are applied all over the world. Think Spain, South America, Florida and Bulgaria, etc. So not only in Ireland. Some in the Irish media in past number of years has warned about the “dangers” of buying property abroad. These warnings are only to ensure that people spend their money at home. Even our own government had big warnings that Irish people with property abroad will be tackled. I wonder, Is this to ensure the… Read more »
Bloggers………….BEWARE……………
new POnzi bubble re-inflation line on lisbon ……………. higgins on vincent browne……….
“….if we dont vote lisbon we wont get in the slipstream of the upturn in Europes economy….”
Oh look, another POnzi property bubble banking stroke been pulled over the taxpayer courtesy of AIB.
http://www.rte.ie/business/2009/0511/aib.html
A search of David’s piece and the responses above didn’t return a single occurrence of the word “location”. It is impossible to understand the value of any property without taking account of its location. Thus it is not valid to generalize and say that property prices still have 30% to 50% to fall. Some houses will just not be sold because the occupants have long term local commitments and have no need to sell. These must be excluded from the calculated fall. Others belong to speculators who can no longer afford the mortgage. These will be sold at auction by… Read more »
Isn’t it Great what’s happening here right now I am very excited and see it is time to leave this spot on the web as I feel my work is done here , as today after watching this site grow the last few years I can see it is lacking the edge it had two years ago, now today so many people want to jump on the band wagon but it’s too late guys ! In twenty years time I’ll be sixty and I dream of sitting in the sunshine of Florence with my Lady and reading the book on… Read more »
We ran it from Dominica actually Wills – beautiful island, paradise on earth. It was Internet gaming, with a valid license, no more a ponzi scheme than the American Social Security system. All the players knew the risks, they were clearly stated, most of them got off on that. A few bad losers complained (without basis) to the Feds. If a gaming enterprise doesn’t pay the winners from the wagers of the losers then where does it pay them from? The judge in Boston ruled in our favour but the SEC held up things so long in appeal that we… Read more »
So we have 1….. house in Newbridge renting @950 per month or 11400 per year ,which the owner and evereybody thinks is worth 159,600 yo yo’s. 2…..We have same house in Newbridge which the Banks claim they own and say its worth 335,000 yo yo’s and they will let you buy it for 995 per mth. 3…..decisions, decisions what to do ?……..(a) rent a 159,600 house and leave all the worries to the Landlord or (b) buy at 335,000 @ 995 less 25% discount of interest thanks to Brian, lets say net 747 (like the jet ha ha ) add… Read more »
@David McWilliams and also @G G, you have captured much of what I have to say on this matter, so apologies in advance if my ramblin’s are repetition. David asks the question “why don’t we just revalue…” etc and the answer is of course its not up to ‘us’. In the very same town David mentions, there is a development of 30 or so 2 and 3 bed flats, not houses, flats. Its on a corner of a fairly busy junction on the way in to town. Its got a lovely poster of a cosmopolitan type sipping on a latte… Read more »
The Lisbon Treaty :
http://www.youtube.com/watch?v=8iTrkuUJu-s
Is this where we are going to ?
The Lisbon Treaty Re-visited :
http://www.youtube.com/watch?v=aJKhpzJpRkU&feature=related
Feel the difference
Spot on article. A little story to illustrate why I believe David is an optimist and to illustrate what I believe is the highly rigged aspect of our property business in Ireland. I even explain why I suspect its rigged. For my sins I found myself chairing (in an unpaid capacity) a management company for an apartment complex a few years ago. The complex is a nice well development is an established and well serviced area. So, it’ll always be attractive because it is part of a buzzing community. The challenge is to ensure the place is well kept and… Read more »
Here is an article on the decision on service charges …http://www.irishtimes.com/newspaper/ireland/2009/0429/1224245599156.html
Aside from the absurdities highlighted, what it does not highlight is that a) the PRTB is the sole owner such issues and b) how underresourced/ innefficient the PRTB actually is.
David is a voice in the wilderness, pointing out the real value of houses……and the real cost… When you look at things this way reading the Sunday papers is an eyeopener …. the business sections are where the action is. On the front pages, its all wishy washy; whether about aspiring models wanting to make a difference or concerned social parners making difficult choices in the national interest…. In the business section the reporters are not that coy; the grasping, threats, thievery, shafting and jockying for position are all part of the game and are reported on. 1: http://www.tribune.ie/business/news/article/2009/may/10/irish-subprime-loans-selling-for-30-cent-in-the-eu/ Sub… Read more »
Hi David, > This is why, according to the Japanese example, if Nama is going to buy property assets, it needs to buy them at a 70 per cent discount from their peak market value, to make sure that it is not bailing out banks. Anything less than a 70 per cent discount and the taxpayer will be subsidising bank shareholders. But that 70 percent figure is just a guesstiumate level. The true level may be 60.134% or 64.38354% or 71.56%. Thats the problem with Nama. Its like trying to hit a treble 20 on a dart board from 5… Read more »
correction:
< and the rent is 1,333 a month
should have been:
< and the mortgage is 1,333 a month
Folks, apart from the continued drip-feed of bad news from AIB in todays IT again, two interesting articles:
First, with opinion from Michael Smurfit and Charlie McCreavy:
http://www.irishtimes.com/newspaper/finance/2009/0512/1224246324496.html
Then, this well argued piece from Brian Lucey on NAMA versus temp Nationalisation:
http://www.irishtimes.com/newspaper/opinion/2009/0512/1224246322209.html
That’s what was wrong with the re-capitalisation of the banks over 6 months ago: it was stipulated that 30% or so of that money (our money) was to be used to help first-time buyers. What else could that do exept fuel demand for houses and prop up prices across the board. The market should have been allowed to bottom out first. Think about it, the banks did not trust first-time buyers just before re-capitalisation but then began to trust them again after being given a chunk of their tax money. How can we entrust the present government/bankers with our taxes?… Read more »
The Fianna Fail party was hellbent on pushing its agenda over the last few years regardless of the warning signs. They deluded themselves that they were in charge of a runaway train and kept pouring fuel into the engine. Its now off the rails they’ll kill us all trying to retrack it. They didn’t listen, they aren’t listening and they won’t listen so let’s sent a message to them in the European elections, the local elections and the dail elections in Dublin south and central – don’t give a single vote to anyone in Fianna Fail or any other party… Read more »
What really drove the P/E ratio crazy here in Ireland was the rapid fall in deposit interest rates and capital gains tax – when deposit rates were around 7% and capital gains tax was around 40%, investing in property was a long term thing. The 7% yield from deposits was more attractive than the hassle of managing rented property in poor times only yielding a similar amount. The price being 12 to 14 times the rent was based around those realities. The rapid fall in interest rates changed all that – Ireland full of depositors, who were either too ignorant… Read more »
Is it not the case, if a country can not control i rates or money supply it puts even more emphasis on prudent banking practices. All monies raised to buy properties originate back to banks. Banks over leveraged = lent out too much monies. Too much monies used to but properties = excessive demand for properties. Econ 101 = when demand goes up prices go up. Thus we get a bubble unless the bank keeps lending tagged to the leverage ratios in place for the protection against bubble inflation in the first place. I’ve put below link to BASLE accords… Read more »
I always wondered about this. It’s common knowedge for years that property has a P/E valuation ration, yet the fire kept burning higher. Salaries are been adjusted downwards ( with the exception of public servants who believe they should be immune to pay cuts or paying for their own pensions), rents are going down, cars are cheaper and we have have general deflation. I think the problem lies with lack of understanding with the down part of the cycle in Ireland. People seen when house prices were going up they increased by such and such a precentage per annum, so… Read more »
Folks, BurrenRocks gave us a link yesterday (Monday) that lead me to this: http://www.youtube.com/watch?v=RYQjsbn4KCM It is Alex Tabarrok trying to shed some light on how the communication of ideas can change the world. Although I have some issues with the globalisation of business and money and Articles 113-118 of the Lisbon Treaty because of that, I really like his globalisation of Education (non-business, non-profit) idea: “He who receives an idea from me, receives instruction himself without lessening mine; he who lights his candle at mine, receives light without darkening mine.” Thomas Jefferson said that in 1813……….. why are we still… Read more »
Folks, David said: “Take a long look at the chart below. Digest it. Maybe look again if you have to.” I did, and it is frightening. David also said: “We haven’t seen the half of it yet”. Irish people kmow what this means, though others might not. I said that it might take me a while to de-construct this article because DMcW is couching his words in it. I think I was right. Beware! Most people who have been here for a while are already wary; newcomers need to be careful and read between DMcW’s lines. Watch “The News”, but… Read more »
Folks, I really, really wish that this man was working with me, RIGHT now, to fix what is wrong in this country, instead of defraying his REAL impact until later (after a general election, which will take nearly a year). We need him NOW! A local/European/Bi-election will NOT do it for us! He refers, in this clip himself, to the immediacy of the problem. What GL can “bring-to-the-table” is needed NOW, in GOVT, and not just a year from now, when FF is overthrown. We need him now, but he has signed up with FG which can do nothing now,… Read more »
“I think the property thing is stopping all progress,….” while the acual upfront cost of NAMA, bank guarantee etc is mindboggling, its hidden costs are just as bad…. Its dominating every agenda, eating up leadership time and stopping implementing or exploring solutions to other more manageable problems. Everyone has a certain amount of “bandwidth”, i.e. a rate at which they can be fed information,problems etc which they can process and act on productively. Some like Obama have broadband and can process data at great speeds. Some like Cowen are like an old dial up line, theres a lot of noise… Read more »
I wonder does obesity come under band width ? Certainly Obama has none of that . He could almost disapear if he turned sideways .We need a fine tune to our own national melody .
When it all goes belly-up and it’s as cheap as chips in little old Ireland at least we won’t have to worry about the multi-nationals heading off to developing countries. Silver lining… kind of.
curran_c – Personnaly, I am not too worried about the pub culture though as I am not a drinker. It’s the old crack and the general buzz of trad sessions is desippearing too. Ah .. I must be getting old.
[…] about a 40% fall from peak to trough. (If that sounds drastic, probably best not to read David McWilliams’ latest comparison of Ireland and Japan.) For rents, I’ve gone for 33% peak-to-trough fall (again, there are those who argue it could […]
I think the original article over simplifies the pricing of housing in its statement that the long term price of housing is based simply on the rental yield of the property, in the absence of speculation. If over the 100 years quoted, rental yields were in the region of 7-8%, then surely long term interest rates were always below the rental yield. This means that any investor (even without speculation) would still benefit from a highly geared investment in property. They don’t need to put up full capital value of the property. They may simply risk the deposit, borrow the… Read more »
Ahhh well so, McBod ….and there was the whole of western civilisation panicking….you’re a fair man with a percentage equation..the christian brothers would be awful proud of you. But aren’t you kind of missing the point here. That’s last years maths, that’s when the sums stacked. That’s when bank managers where using their calculator batteries to power their flat screen remotes . Those calculations at this juncture my friend, are akin to calculating the velocity of the Titanic as it succumbs to the gentle pressure of compacted ice. it doesn’t matter dood…its soooo over. 20% you say versus Dave’s 50%… Read more »