Explaining Demand

The Irish Property Bubble (2006) The Republic of Property
1

Let’s look at the demand function. Demand depends on the price of related goods (generally not relevant in the case of property), income levels, taste/fashion, size of the market, etc. To me, the huge increase in demand for housing over the last 10/12 years can be attributed to “the Big Three”!

  1. Size of the Market

  2. Income levels

  3. Financing of Demand
    with 4. Taste, also an important fillup for demand, but probably less so.

  4. Size of the market
    Who can buy houses? As a general rule of thumb, only people who work full time jobs. How many people have full time jobs? In 1995, it was 1.3m - now, it’s 1.95m or so. That’s an increase of about 50%. Holding everything else constant (incomes, taste, etc.), that’s 50% more people looking to buy property. Before they emigrated, now they’re staying here and attracting people here too!

  5. Income levels
    Gross national disposable income per capita (now there’s a mouthful) is the closest we have to income per head in the country. It increased by — wait for it — 160% between 1995 and 2005. So, again if absolutely nothing else happened and people were as keen to spend their income on property in 2005 as in 1995 (no more so and no less so), prices would have to increase 160% for demand and supply to equilibrate.

Now, if you’ve got 50% more people looking for the same stock of housing, and they have on average 160% more income, that’s almost 300% greater demand.

And that’s just two factors.

  1. Financing of demand
    A whole host of innovations have been introduced to finance markets that enable (for better and for worse) latent demand (our hopes and wishes) to become effective demand (with the money to back it up). Terms on mortgages, interest rates and macroeconomic stability, ratio of mortgage to house price, greater competition in banking (leading to less fussy lenders)…

And let’s not forget participation of women. In 1998, only 47% of women aged 45-54 worked. By 2005, it was almost 64%. This reflects the much greater trend towards two-person applications, compared to the predominance of one-person applications twenty years ago. And it doesn’t take an economist to see how two salaries, rather than one, would affect house prices.

And while we’re here, let’s throw in some taste issues:
4. Taste & Fashion
Home-ownership ratio - 75% in Ireland, 55% in France, less than 45% in Germany. This determines how much each household is prepared to spend on property. Ireland (and Spain) love the old property and are prepared to forego other goods to get it.

Average household size - for the same population, income, etc etc., a country would need more houses if the average household size was smaller (at an extreme a 4-person household economy would need half as many houses as a 2-person household). Ireland’s household size is falling - which means we need more houses even for the same population/market size. But it’s still got some way to go. It’s almost 3 in Ireland. The EU average is much closer to 2, about 2.2 or so. If we go down that far, there’s plenty more demand growth still to come!

Then you throw in all your government interventions, Section 23, mortgage relief, etc etc., and the huge increase in prices doesn’t seem so mysterious. That’s not to say there’s no froth - I’m pretty sure there is - but there was a hell of a lot of fundamentals driving what we’ve seen.

Again, I refer people to Figure 4.38 of competitiveness.ie/ncc/repor … 04_02.html, which shows just how under-housed Ireland remains, despite all that’s happened. And when you think about the misallocation of much of our housing (so much is happening in Donegal, so little in Dublin), we’ve still some way to go before we can talk about oversupply.

Where there is concern is:

  • levels and growth rates of household debt
  • overreliance of the economy on construction
  • the pace at which we are catching up with the rest of Europe
2

Great stuff, Scorpio, it’s all there.

You’ve neatly encapsulated what I’ve been trying to say for about the last year but has always come out garbled and full of mixed messages.

I’d probably move Financing of Demand up to Number 1 tho’! :wink:

EDIT: I’ve split the post because it’s not really about askaboutmoney and it’s such a good post from Scorpio, I reckon it’s needs a bit of space!!!

3

Another major concern is demand from investors in a substantial part of demand, based on data from Sherry Fitzgerald make up 38% of the demand this year for new homes.
Assuming a high portion are attracted by capital appreciation since rental yields are now extremely low and by any measure prices are overvalued*, the continued involvement from most investors remains in doubt.

*Central bank models varied between 14% and 73% overvaluation

Central Bank Financial Stabilty report 2006
centralbank.ie/data/FinStaRe … 202006.pdf

4

Yes, that’s an important point. The above analysis only refers to the market for property as a good, rather than the market for it as an asset.

As an asset, the yields on www.daft.ie/report are very low now so people entering the market for the past year who aren’t ‘consuming’ their houses are doing so for capital appreciation reasons only. With asking prices static, they may high-tail it out!

5

Excellent posts, I too like GB believe the “investor” element is very important. To be honest becasue we have a very liberal housing market we don’t have great nor accurate figres for this sector.

I also bellieve the reason for this is that the Vested Interests & that includes the Irish Police Force An Garda have flourished as landlord/investors under these circumstances while tenants-human-population are dammed for eternity to be tenants!

I remember on an old board it was pointed out back in the Bad old days of the 80s, the Garda Credit Union + Overtime + Special bank loans put this civil servant class in a very good position above the rest financially, or could securley loands & mortgages more easily than the general population at large.

6

I find it difficult to believe that we have a shortage of accommodation in Ireland when rents have fallen for several years now even in the face of record migration and strong incomes growth. I think its worth considering that Irish homes differ from their continental equivalents in one very important aspect; the number of bedrooms per household. If we had figures for the number of bedrooms per head of population across Europe I would not be surprised if Ireland topped the league. I think that we may indeed have a substantial oversupply of ‘raw accommodation’.

7

Didn’t Daft mention that inventory has doubled recently??? :blush:

I don’t think it’s a case of “may”!!!

8

According to whose stats?? I totally disagree! Rents have almost never been higher! There are two-beds in Ashtown going for €1400 a month -they’d have been €1100 3 short years ago. That’s just an anecdote but for the whole market scenario, check out page 3 of daft.ie/report/DaftReport-Q32006.pdf, in particular the graph at the bottom. With so much focus on the prices side of things, this has kind of slipped through the net, but rents are rocketing up at a ferocious rate…

(You’ll also notice that rents started to pick up about mid-2004 not long after a certain 10 countries got free access into a certain small open economy that was booming!)

9

I wonder about how many of these ‘specuvestors’ are financially literate at this level. An economic principle is that the price of an asset is a function of it’s current and future income. Since 2001 rents have stagnated or fallen yet the price of these assets the amateur specuvestor has been buying has of course gone through the roof. Logically this doesn’t make sense. I’m inclined to think that a huge portion of these guys stumble into property on the basis that ‘Jimmy up the road is a cute hoor and has 5 BTLs’ or ‘my mate tommy swears by the property and has become a millionaire many times over’.

Someone said on an earlier post that Eircom showed the stubbornness of a lot of irish amateur investors when faced with having bought a pup. They may not be that quick to sell.

10

It’s a strange thing alright, whereby rents used to be no where comparable to a mortgage payment we’ve got to a situation where they are diectly comparable.

There was a slowdown a while back but 2006 seems to have been a good year for responsible landlords!!!

11

There may be something in that, but I would just like to nip in the bud - or at least explore the sources for - this rents-are-falling thing! Rents were artificially high in 2001, the tax reliefs changed, rents started to fall back to their natural price, then inward migration reinforced the resurrection of rents by outward shifts of the demand curve.

12

Rents might be rising in Dublin in recent months (and IMO this is directly a result of investors pulling their properties off the rental market and trying to sell them, which accounts for much of the recent increases in inventory) but they are stagnant at best in Galway and have been for 4 years.

13

The Daft national rental Index stood at 111.7 in July 2002 this month it stands at 111.4 but rising I’ll give you that. Given the spectacular run up in inventory I would guess that many speculators are seeking to lock in capital gains now putting pressure on the rental market. In the US reports suggest that many frustrated vendors place their properties on the rental market if they fail to sell. I still think that we have more homes than we need as will become more starkly evident when we stop building 80,000 pa and the guest workers head for greener pastures.

14

Absolutely outstanding post Scorpio. As close to a definitive summary of the reasons for increased demand that I can imagine.

A couple of thoughts on your first 2 points.

The increase in the absolute numbers of potential homebuyers is self-evidently correct. There are simply more people on the island, and thus there is more demand for housing.

But haven’t we built a new home for each (most?) of these “new” people? We have approx. 400,000 more people here than at the last census, and we’ve built around 400,000 new units in that time.

Supply in this crude sense seems to have matched demand.

That leaves us with the exisitng stock and the exisiting population: why have all their houses suddenly increased in value several times over?

For years they happily traded (up, down, sideways) amonsgt themselves, some inherited, some poperty-invested, some rented, but generally it was all very simple. Income dictated whether it was Ballsbridge or Ballyfermott.

Why did this cosy situation change? Why did this existing population suddenly decide that instead of a Ballsbridge 3-bed being €180,000 and a Ballyfermott 3 bed being €50,000, that they’d both ask 8 times more and proceed from there? (And let’s allow for “normal” inflation here). Relatively speaking there are still the rich and poor - that’s not the point - it’s just they are both chargin/paying a proportionalty higher amount than before.

Why?

Again, this seems self-evidently true in an absolute sense.

But HPI has far, far outstripped wage inflation (or indeed national disposable income). House prices rising in line with incomes would be perfectly understandable, but I don’t think that’s what has happend.

Also, and I don’t mean this to sound facetious, where did the 18% of unememployed people live in 1983?

In 1983 wages were abysmal and unemplyment high, and yet people housed themselves. As far as I am aware, the proportion of renters in Ireland has been pretty constant (at c. 9%) over the last 20 or 30 years. And I don’t think social housing was any more accessible then than now. Moreover, I don’t think people lived as long with their parents as they do now.

There seemed to be no necessity for their incomes to raise 160% before they were able to house themselves.

15

Consider also multiple occupancy which has on effect on rent figures, for example, a single person rents a room for €100 per week, but two rent the same room for €150, as the landlord incurs higher maintenence costs. The last time my landlord experienced significant voids was in the immediate months prior to May 2004. A fair portion of employment growth since 2000 has also been in low wage sectors of the economy, that are often manned by immigrants, who have a limit on how much they will spend in rent, especially if they have to support family back home, or aim to build their savings.
So unlike house buying which is dictated by the amount one can borrow and/ or save, the levels of rent one can get are dictated by local wages and demand for workers in an area.
Landlords can only raise the rents under the following conditions, high employment and wage growth, supply conditions are also a factor, but my landlords experience of the 80’s and early 90’s was long voids and stagnant rents.

16

I mentioned in a post above that the US rental sector was seeing an increase in supply even in the face of a bursting housing bubble. Here’s the figures.

census.gov/hhes/www/housing/hvs/qtr306/q306tab1.html

17

IO think we need a custom PP graph.

That should include the following,

HP
HPI
Wages
Popualtion

Now what else… Duplex woudl like to assemble the data when peopel ahve decided and make up a few graphs?

We can have a graphs section on the pin, no problem! Someon needs to take on the job though.

18

Rents in Dublin are still quite low by international standards.(Major European and American cities)

19

Firstly great initial post Scorpio, I’m glad to see this site becoming more than just a forum for bitching about AAM (though they are Facists)

Even if that were true (maybe rent rises specific to Ashtown) it is only 5% annually, hardly a massive rise.

The reality is that rents have dropped slightly over the same (well nearly the same) period.

IMO there will be strong rental increases in central areas as people realise the benefits of not commuting but there will be a natural limit over which people will not be able to justify to themselves as the Rent is Dead Money mantra will still be pretty strong.

20

Off topic I know but when will people realise that Dublin is not a major European City.

EU GRP
1 London € 546.8
2 Paris € 465.7
3 Rhein-Ruhr € 330.9
4 Milan € 241.2
5 Randstad Holland € 216.3
6 Frankfurt-RheinMain € 152.1
7 Madrid € 145.8
8 Brussels-Antwerp € 138.5
9 Manchester € 128.2
10 Barcelona € 114.5
11 Hamburg € 111.1
12 Berlin € 109.8
13 Rome € 109.4
14 Munich € 101.0
15 Copenhagen € 81.2
16 Vienna € 80.2
17 Stockholm € 79.4
18 Dublin € 69.6
19 Lyon € 56.1
20 Lisbon € 54.8

We are 18th on the list of the EU 15, only Portugal, Greece and Luxembourg don’t have a city above us, Germany has 5!!

Dublin represents only 12% of the GRP of London, there simply is no comparrison.

Not to mention the poor Infrastructure, that Dublin has no world renowned anything and it not the most important city in any particular sphere.

Anyway I better go, Failite Ireland have a price on my head and they are closing in! :wink: