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.
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Good man David, two great articles in a row.
Would you agree, that maybe the prices have recovered and are where they should’ve been all along.
New Bank Code Yesterday this act came into law and soon after many return home from summer vacation the process of repossession or forced sales will commence to be noticed by borrowers in negative equity and those with cash flow shortages .Only then and after that will property prices continue to plunge down . Satellite locations mainly in Dublin will be spared as a place of refuge for those endowed with blue monies and or reckless speculation . These safe locations are liken in history to place we have known before as Castles , Garrisons and round towers for monks.… Read more »
I don’t believe the average €1,656 a month three-bedroom house rent in south Dublin, these figures are being touted to make buy to let look like a viable prospect. I would say a truly “average” 3-bed semi-D in D16/14 is renting for €1,300 which would value those houses at €220,000’ish if you are looking a minimum 7% yield. That means that the values must still fall if they are to become good investments. One other factor that will come into play is tenant’s ability to pay rent. With tenants income being squeezed more and more, plus the possibility of social… Read more »
Hi,
You forgot to mention the third option in dealing with debt which is for the borrower to declare insolvency and let the chips fall where they may. Could be a useful negotiating strategy for gov. If the gov can bring the deficit down to 2% we will be able to get back into the markets for funding and the political dynamic may change. It would allow the gov to be more aggressive in it’s dealings with the troika and possible put options 1 and 2 on the table for discussion.
The problem with the yield figures is that they don’t take into account the rapidly rising incurred cost of ownership. You may have a gross yield of 7.5% but after property tax, water tax, broadcasting charge, insurance, services, and maintenance etc how much are you left with?
You are looking at this the wrong way. We need a major property price ramp as flush out the remaining insanity. The sooner and faster it happens the better.
5Fingers, What you are somewhat melodramatically referring to as ‘insanity’, I see as merely the route to ‘wealth’ of a lazy, dullard people, most of whom spend too much time down the pub to develop skills which might haul us out of the slump in which we find ourselves. People want a solution to their problems that doesn’t involve any work. They want to property rat-race back, where all you have to do is have ‘skin in the game’ and you make money without doing any productive work whatsoever. Without developing any skills, any innovations, any inventions, and clever new… Read more »
Last week I saw the pitiful RTE News headline piece cheerleading the house price increase. I stupidly sat through its fluffiness waiting for the hard data in regard to the NUMBER of properties sold in comparison to previous years. My mistake.
Does anyone the answer?
At least they admitted that 2/3s were cash transactions.
ps am I being mean or is RTE’s ‘Economics Respondent’ David “EH EH EH” Murphy a complete stuttering airhead?
David, you are just a banker hooker. There you go again with a winning strategy. Present a few facts, truths and opinions. Then give the only solution. A bank controlled money supply. Why not look at any other alternatives, for example a national bank or a treasure controlled money supply? Even if they are crap alternative to your favoured private bank owed central bank, are they not worth a look to a broad minded guy like yourself? Some questions for your fans to research before you reply to this OPINION. Who owns the Central bank of Ireland? Why was it… Read more »
@ Tony & cooldude
No Guys you are mistaken; the economic philosophy underlying the rampant deregulation of the past decades and the application of austerity as a cure for the crisis it caused is rooted in the Austrian school…not Keynes.
GOLD continues to fall ….and is predicted to remain falling for another two years to $900 before it will begins to rebound …and that means rebounding at the bottom first before any notice of a rise ….certainly Dantes Inferno
I see you have a lot of the gold heads here today, the destructive drug induced gamblers! I sometimes wonder do they not realise they are part the problem a bit like listening to the likes of George Sores without a steroid filled wallet, narcissists. I believe they are on the wrong site as rarely do they comment on, debate, or relate to the hosts chosen topic of the day. I am sure they could fit the topic of gold into the host thoughts on the price of a house or whether Ireland should be in or out of the… Read more »
A new world order is fast a approaching… Avoiding the normality bias as is certainly the case in the USA with its media avoiding the imminent demise of the dollar as the world’s reserve currency… What will replace it? Where would Ireland be best placed when this the inevitable happens?-in or out of the Euro? You would be surprised at the number of country not used the dollar and actively blatantly seeking other ways to do business in spite of the USAs hegemony. Gold maybe a factor in a new multi denominational reserve currencies avoiding an the all potent and… Read more »
Bills that cant be paid wont be paid. Why? Because of the lack of funds to pay. So the bulk of Irish households will not be buying investment property. They cant even pay what they owe now. But, if you posses the aforementioned “large pools of savings” you have every right to become a landlord if you choose. Many older folks feel that bricks and mortar are more suitable investments as they can physically get their hands on the investment, whereas a punt on Netflix or Facebook mightn’t have the same appeal. These are the same people who buy prize-bonds… Read more »
“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.” D McW As you have mentioned Amsterdam and Boston over a 300 year period there are many economist and like mined people that point to the real rise in house price over long periods. Most suggest that house price averages have only doubled when compared to earnings. I believe this make logical sense and in fact I believe that when other logical factors are taken in to account it maybe that house… Read more »
At this stage we should all know better and be informed about the property crash in Ireland. Apart from the GFC, this crash is also caused by banks, property pornographers and mainstream media. It is now up to the people themselves to make whatever they think is the best for themselves. People should now know that they shouldn’t trust the banks, the fantasy data and statistics produced by the ERSI, DAFT, etc about property. We should all go by our gut feeling now and if it ends up in tears again, we know that this time we can only blame… Read more »
http://www.politics.ie/forum/current-affairs/213930-hayes-i-dont-see-troika-bogey-man.html
Super post by ‘roc’ on politics.ie ; ‘roc’ used to post here once upon a time.
Interesting article David.
Anyone with significant savings in a bank is likely to be considering putting them into some kind of hard asset given the internationally agreed bail-in policy of dealing with bank bankruptcy.
As to the foreign investors; I think a lot of that money is coming from the financial sector. They are processing digital and paper profits into real assets. It’s a sort of laundering operation. It’s going on across the world. Greek islands are going cheap.
On the surface the tone of article conveys contempt for the home ownership culture and then goes on to disseminate amazing facts and figures about the property porn scene in considerable detail. It sounds two faced. Make your mind up kid because you sound totally lost in this new world This week the home ownership culture has been linked with bad politics and corruption. Finally. And a theory has been put forward that if the human race had always behaved like neo-con knuckle draggers and victorian darwinists then the race would have perished long ago. It’s been a bad week… Read more »
“Then we have the gold bugs and other assorted weirdos who collect stuff that is totally worthless, probably through poverty consciousness and a lack of belief in themselves as individuals. Talentless chinless wonders”. Remarking in a negative fashion on the physical structure of someone is considered to be abusive these days. Accusing a gold bug of being talentless is a contradiction as a talent is a body weight of gold or silver. It would appear you are definitively talentless but I have yet to be informed about your specific deformities. Of course one can always speculate as do you. http://simple.wikipedia.org/wiki/Talent_(weight)… Read more »
Touchy. Who said anything about physical deformity?
Are you well in the head?
Chinless is a metaphor for people with weak spirit
I didn’t say a thing about physical deformity and it never even entered my mind. Get help you prick
Tony love, Do you price your gold in dollars or some other fiat denomination? It is oblivious you do all over this blog. So you value gold with the money that is in control of the world economy which in turn controls gold’s value , by default. Money is a trust based tool, that the trust is broken is clear due the results many things – greed, mismanagement…- your method to fix it is primitive… gold, potatoes, tally sticks, can all by used as a money system that’s not near what you are advocating. You advocating anarchy, you made not… Read more »
[…] it ever occur to you that its a ploy to make people think they better start buying stuff again ? Property porn doesn’t float | David McWilliams Sign in or Register Now to […]
Nothing appeals to the inner idiot of the chattering classes in Ireland than the national quango for propaganda declaring that house prices are up in South East Dublin. (SW Dublin is still in a state of shock). It hits the spot. It is more soothing than a 50is blonde bimbo declaring on the shopping hour that this is the must have for anybody out there. It does wonders for the collective self concept, and rebuilding past delusions, to have foreign replacements for the local fast money cowboys showing up in Dublin, on the whiff of another property boom – when… Read more »
Paper-Pumpers Promote Gold-Jeff Neilson
http://bullionbullscanada.com/
House pricing , rental values, affordability, interest rates, government manipulations and more.
http://campaign.r20.constantcontact.com/render?llr=n7vdaxbab&v=0012h5dFDYJvhkPyWMtw9GVYJGxw9Uw8IIgToPYbHOfUINfJ19i8dTPEuFKkF48C6h-sWNPOrTmGGNi6ahorgJIwY_Ru05zM7kid8LX9RdHhGfxMW9veoYFDuIL6T3X-iXx
And notes on more manipulative statistics, why the derivative market days are numbered. Why the physical PM market supply is contracting, why soon there will be little left to buy just when you might want some!!
http://campaign.r20.constantcontact.com/render?llr=n7vdaxbab&v=001wqUa7FwuvM6LR4cSrrMSoggV8iZXCNN41UzpN92IR8W0pWH5xrwBI_qgsD3MjMDfFXDZat5WCPww_Q1h_-GQIqGfB8HklQGgKf8Qc44yg4trm4OSVKxz7BJ8HWX6Rrxz
Hi Tony Brogan
The credit expansion was driven by deregulated private finance. The myth put out by Greenspan was that the market would self-regulate; that is pure Austrian; and pure bull as we now know.
Found a link so here it is Especially for you Mr. dwalsh. Hope you read it.
———————————————————————
When Bad Government Policy Leads to Bad Results, the Government Manipulates the Data … Instead of Changing Policy
Washington Blog
http://www.washingtonsblog.com/2013/07/when-bad-government-policy-leads-to-bad-results-the-government-manipulates-the-data-instead-of-correcting-the-policy.html
“The Core Problem
Corruption at the top leads to lawlessness by the people.
But – while conservatives blame the government for our problems, and liberals blame big corporations – the core problem is the malignant, synergistic intertwining between the two.””
————————————————————————
http://www.bullionbullscanada.com/intl-commentary/26291-london-metals-fraud-revealed
Jeff Neilson—“As global power (and wealth) continues its inexorable march from West to East; the (bankrupt) United States of America, “world’s only Superpower”, will be isolated and left behind – as some rotting, Third World, Gangster Regime. All courtesy of the One Bank.”
‘Drive-by’ valuers spy on distressed homes
http://www.independent.ie/irish-news/driveby-valuers-spy-on-distressed-homes-29470835.html
The Celtic Dream has turned sour.
IMF advises Spain to cut wages by 10 percent
http://www.davidicke.com/headlines/88373-imf-advises-spain-to-cut-wages-by-10-percent
Hail the gold troll twat, caveat emptor to those who pretend but have not.
Idiot.
@ Tony Borgan, The follow is very sad event which demonstrates the importance of human nature and it’s affect on peoples in all walks of life not just sailor as you alluded to above but all peoples including people in the money business. “Donald Crowhurst The 36-year-old sailor set out from England in a plywood trimaran as a competitor in the 1968 Golden Globe round-the-world yacht race. Though he had little prior experience and his boat, the Teignmouth Electron, was frighteningly under-built, Crowhurst managed to convince a wealthy backer, race judges and the media that he was a serious contender.… Read more »
Hi Tony My point was and still is that the ideology underlying the rampant deregulation of recent decades is rooted in the Austrian School…not in Keynes. I think this is simply true. (note I wrote ‘rooted in’) The men who drove it were almost all devotees of Mises and Hayek and radical free market ideology – for instance Greenspan. Now you may argue that many aspects of Fed policy conflict directly with the pure Austrian School; and I agree with you. For instance QE; which is Keynesian. We have Keynesian stimulus for Wall St; and Austrian austerity for Main St.… Read more »