The property pornographers have been giddy this week over news that property prices have been rising. Reported sightings of a new breed of foreign property speculator in fancy Dublin restaurants, clinking flutes of champers over mega deals, have sent property hype merchants into a dizzy tizzy.

Will house prices now begin the long ascent to the lofty heights of 2006/7? Will bricks and mortar dramatically inflate some people’s wealth again? And for the average person in negative equity, will future price rises claw back some of the “wealth” that has been destroyed?

These are serious questions. Where are property prices likely to go in the future? With all the glossy sales pitches and significant powerful interests – from the banks to the taxman – willing property prices to rise again, it’s not surprising that a number of myths have emerged about how and where property prices can go.

One of the myths is that property prices will somehow revert to where they were a few years back, as if property price have some sort of natural buoyancy that causes them to rise over time.

History tells us that property prices can fall for long periods. Take the extreme example of Mountjoy Square in Dublin. When the elegant townhouses were built in the late 18th Century they cost £8,000 a piece. By the 1850s you could buy the same house in Mountjoy Square for £500. That’s a massive fall of over 90pc. We also know that Japanese property prices have not recovered to their 1990 peak – some 23 years later.

Granted, the Japanese and the Mountjoy example are extreme, but what happened in Ireland was also extreme.

If we take a bit of altitude and examine long-run price trends in cities where we have the data, such as Boston and Amsterdam, going back for over 200 and 300 years, we see that house prices rise only in tandem with inflation and income. All around the world, the few periods where house prices deviate from underlying inflation and income is when there is a speculative mania fuelled by excessive credit. Sound familiar?

So the first thing we can say is that there is no reason to believe that Irish house prices will rise above the rate of inflation.

This conclusion has huge implications for people in negative equity. Given that house prices have fallen some 50-odd per cent from their peak, and if we accept inflation will continue to be modest in the years ahead, it could take several decades for average prices to go back to 2006 levels.

This is sobering for all of us because of the way in which too much debt and deleveraging negatively affects consumer spending and thus, economy activity.

There are only two ways to eliminate the debt overhang caused by so much borrowing. The first way is where asset prices rise rapidly so that the owner can sell, pay back the debt and make a profit. This demands lots of frothy inflation in the economy. However, this isn’t going to happen as long as we are in a monetary union with Germany.

The second way is through a programme of debt deals where chunks of debt are “parked” to allow the debtor to breathe. But here too, monetary union has tied our hands. As long as we are in monetary union with Germany, the ECB will not allow such debt relief.

In contrast, if we had our own currency and a traditional central bank, we could do this unilaterally, but that option has been eliminated.

Unless there emerges a politician or political party that contemplates a new currency for Ireland, there will be no serious effort to alleviate the debts associated with the property bubble.

So where might this leave property prices? And how are we to value property, which is still – despite everything that has happened – the asset of choice for Irish people and Irish investors?

Probably the best way to value a house (for investment), if you accept that the capital gain approach can’t work over the long run, is via what income the house can give the investor. A quick back-of-the-envelope calculation would be to divide the rental income you get each year by the price of the house in order to calculate the annual yield per year for the investor.

Let’s take an average three-bedroom house and get the information on rents and prices from Daft.ie.

So taking south Dublin first, we see that according to Daft.ie, the average three-bedroom house rents for €1,656 a month, that’s €19,875 per year. The average house price is €265,000 so the yield in south Dublin is 7.5pc.

In Cork the average month’s rent is €865, giving €10,380 in rent per year and with an average house price of €148,000 the yield in Cork is 7pc. In Galway a similar calculations of rents of €824 per month and an average of €132,000 for a three-bedroomed house would give a yield of 7.5pc.

If we look at the commuter belt, taking an average three-bed in Kildare which rents for €760 per month – €9,120 per year – and costs €123,000, this gives the investor a yield of 7.4pc.

At the peak of the boom the average yield on all the above cases was 3.7pc. So we see that for the investor Irish housing is becoming better value but it is doing so only very slowly.

With such an overhang of stock and such huge amounts of debt yet to be dealt with, we should be surprised if yields go higher, meaning prices keep softening.

However, there will be many people who are sitting on large pools of savings that are yielding almost nothing in the bank who may be tempted to look at the property market again. All told, it appears fanciful that prices will rebound above the rate of income or growth, yet the ridiculous glossy promotion of property across the country continues apace.

This type of financial pornography should come with an explicit health warning that the type of monetary arousal promised in the glossy property supplement centrefolds can severely impair your financial judgment.

Subscribe to receive my news and articles direct to your inbox

0 0 votes
Article Rating
160
0
Would love your thoughts, please comment.x
()
x