ESRI Economist: Dublin to drive up national house prices

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Prediction is of more value coming from the ESRI rather than from an economist who is a mouthpiece of a bank or EA?

What would he have said this day last week before the July figure came in? Getting a bit carried away by one data point, IMHO.

ESRI have been consistently wrong in their forecasts over the years. What was stated might transpire but should come with a disclaimer.

It seems a safe-ish bet now that 2013 will see net property price rises in Dublin given that there has been an 8% increase in the 12 months to July.

But is the ESRI (or this individual economist from the ESRI) not asking for trouble given that there will be no MIR to boost in Q4? Indeed, the fact that Q4 2013 will be compared to Q4 2012 might even eat into some of the gains made in the first half of this year. The 8% y-o-y rise in the latest figures includes all of the period where the MIR boost was seen (even if it was less dramatic than some of us had expected).

My bet would be that they would be fortunate to sustain an 8% net gain for the year. I’d say 5% is a reasonable forecast from here (for Dublin), rather than the 5% David Duffy now expects.

BOI\TSB(and others maybe) now lend 3.5 times your salary. Up to last month, it was 4 times. That’s another hit for buyers. You’ll need major cash to fund a house purchase and that is what is happening now in the last 3 months of Dublin house prices rises with cash buyers leading the charge as the mortgage lending figures have not jumped at all in the last year.

Dublin property prises have undoubtedly risen since the start of 2012.

That’s not really the issue for me.
The issue is how sustainable these rises are.
We all know there is only one factor allowing prices to rise - an extreme tightness in supply.

Japan didn’t just go south in one fell swoop, it had many, many ‘false dawns’ along the way.

I talk to a lot of bankers on a regular basis.
Most of whom (coincidentally ?) are working on the defaults/recovery sections of their respective companies. Some are in senior positions dictating bank policy and strategy regarding defaults and arrears.

***All ***are completely shell-shocked as to the scale of the arrears problem and the extent of the unavoidable repossessions that have to come.
Every time I meet them the problems have worsened.
No matter how much they estimated the original and updated losses to be, the reality keeps turning out to be a lot more costly.
So far none have said the situation has improved.
The pace of growth in arrears may have slowed, but the growth continues.

What frightens them just as much as the arrears are the amount of people literally hanging on by the skin of their teeth.
The banks know how tight things are because they see all their accounts and credit card details.
The people who have not strategically defaulted, the people who have cut back on every luxury (and many necessities) in order to continue making payments - the people who can’t cut any more.
The difference is the type of people in this category.
People who were previously bulletproof in terms of guaranteed earnings - doctors, solicitors, accountants, guards, teachers. When these professions cannot make full repayments, you know the problem has escalated considerably.
Ironically, I’m the optimistic one in this case, as I don’t believe it will progress that far.

I think, just to sum up, is that I’m seeing a disconnect.
On one side you have the buyers who are in a little panic over prices rising for the first time in 5 years and many of whom believe the worst is over and a bottom has been reached.

On the other hand I’m talking to the very people dealing with the problem.
They are the ones telling me it’s far from over.
The medicine pill has yet to be swallowed and it’s a great big one which is going to cause a lot of discomfort.

One last anecdote, I buy property for a couple of investors.
This side of my business has grown nicely in the past 12-18 months.
Only one individual has changed their mind in that time and decided not to buy - he is the one who works for a ‘pillar’ bank !

I’ve been told similar stuff by a director in UB. Repos will, however, in his opinion, not begin to ‘affect’ the market until Summer '14. I still can’t see ‘enough’ repos by the state banks to significantly ‘affect’ the mkt.

Nah. The hysteria is starting to come back and there’s already people getting that wild-eyed look when talking about yields and what-not. This will run into 2014 at this stage.

I think you’ve hit the nail on the head Mr.A while also falling for some of the hype. How sustainable is the key. Exactly who is making the purchases? Can we identify any particular groups? If so, how large is it/are they?

To you second point, supply is only tight or loose when compared to demand, and demand is the desire and ability to purchase. With tight lending and unfavourable demographics, demand in the medium term will remain tight.

Still, I’m very interested in the profile of the relatively small number of buyers currently bidding up the market.

Blue Horseshoe

Interesting to watch yields picking up across debt markets – could conceivably be another pressure on lower prices if it’s sustained.
E.G you’re getting close to 4% now on US 30YR debt, that’s got zero default risk, it’s easy to leverage and can be tax efficient in certain structures - starts to make an office block on harcourt street at 5% yield look a little bit rich!!

Do you have any further information on this? Did they adjust the NDI thresholds too?

Still no more than 35% to service the mortgage afaik. They stress test 2% on their present VAR rates.

Thanks for that info MrAnderson…definitely something tpo think about there as a would-be-buyer ready to pull my hair out at what I’m seeing.

But do the bankers really see repossessions happening, or is it just all talk on their part again? You seem to believe it’s just talk

Looking back on Duffy’s previous research, the biggest thing that jumps out at you is the lack of conclusions, and the inability to form an opinion based on the research done.

What has changed now that he steps forward into the limelight with this?

It could not be the research done. As always, it is pretty inconclusive. Is it his career? - It has to be said, his saying such a thing will be very favourably smiled on by those who have the power in this country. - Does he just feel it’s time in his career to step up into the kind of shoes previously filled by John Fitzgerald? Or is it plain and simply that he is just looking for greater job security and greater esteem within establishment networks?

The only conclusive thing that can really be said about Duffys pronouncements, is that it will induce a sizable proportion of country based sellers and EA’s to try and up their prices. Self-fulfilling prophecy. Maybe this is what Duffy has come to realise.

Surely over the long term property tends to increase in price with wage inflation, which tends to be higher than consumer price inflation.

Those 30yr 4% bonds are indexed to neither.

What are the rates on 30yr TIPS or similar?

Does it depend what is meant by “office block on harcourt street at 5% yield”? The yield in this case could be the IRR calculated based on the full set of cashflows for the investment.

Risk is certainly higher for the property investment, and you need to have some available cash at various points to cover the subsequent cash outflows (maintenance etc.,).

On another point: why do you say that property tracks wage inflation rather than consumer price inflation, and why are you so sure that consumer price inflation is lower than wage inflation? Is it based on an assumption (reasonable) that inflation figures reported by governments will try to overstate wage inflation while understating cpi inflation for political reasons? My understanding was that in general housing inflation has historically tracked overall cpi inflation (and is a component of cpi anyway) at least in real (rather than politically adjusted) terms.

Property prices are largely driven by how much buyers can pay, which is a function of wages, interest rates and lending criteria.

UK historical prices are easier to find and perhaps reflect better the sort of economy that Ireland has now.

From 1972 to 2012, average UK house prices increased 27x.
UK average nominal earnings increased 18x.
UK consumer prices increased 12x.
UK retail prices increased 11x.

IMO the increase of prices beyond wages reflect lower interest rates (7.4%->4%), longer mortgage terms (20->30 yrs) and land use restrictions. Or an enormous bubble - take your pick.

I don’t think Ireland suffers from the same land use restrictions - there’s loads of land to build on within 15km of Dublin city centre, for instance, so I’d expect Irish prices in general to mooch along broadly in line with wages in the long term.