Prices 45% of the way back down to real 2000 valuations

The Irish Property Bubble The Republic of Property
#1

There is a commonly held view on this forum that house prices only entered bubble territory from, roughly speaking, 2000 onwards, and that price increases up to then, though they appeared dramatic at the time, were justified by increases in disposable income and employment.

If we take the Dec 2000 avg price per the PTSB/ERSI index of €174,071:
esri.ie/irish_economy/perman … tables.pdf

…and adjust for inflation (and assuming 2.5% YTD inflation for 2008) we arrive at an inflation adjusted price in mid-2008 money of €231,570.

Taking the May 2008 price per the PTSB/ESRI index of €275,176, we find that prices have ALREADY come down by 45% of the difference between the inflation adjusted 2000 value and the highest value per the PTSB/ESRI which was €311,078 (Jan '07).

Of course, there are quite a few caveats and flaws in the argument, for example:

(1) When bubbles burst, prices generally overshoot in the downward direction. Accordingly, prices may well reduce to lower than that 2000 adjusted value.

(2) The property price bubble may have started before 2000.

(3) The oversupply issue (the biggie)

(4) If the Irish economy ends up in serious trouble, e.g., Finland early '90’s scenario involving banking bailouts and the like, prices may significantly overshoot in the downward direction, even more so if the issues are badly handled.

(5) The PTSB/ESRI data may be incorrect.

Any thoughts?

#2

agreed!

#3

Also a biggie.

(6) Irish banks have to revert to pre-boom lending standards, due to a combination of panic, capital losses, securitisation drying up, higher interest rates, rising cost of living (energy, food, taxation), the need to widen the spread between savings and borrowings in order to rebuild capital. Also decreased competition in the market as some players exit due to a combination of downsizing and going broke.

(7) Government capital controls in response to money haemorrhaging from the the country.

#4

Expecting prices to return to the 2000 level is still wildly too optimistic.
It is just perhaps possible that they will settle back at around 1996, but far more likely to be 1989, the level needed to soak up the glut of city apartments in Dublin, with units finally being snapped up in the 30,000 to 45,000 euro bracket, which is about right.

#5

Now that’s what I call a ‘ballsy’ prediction. :wink:

#6

Are you sure you are not BertieBasher in disguise Inis? I feel you both subscribe to the same newsletter. I’d be more inclined to agreed with 2pack but it’s hard to see at the moment how much damage we have done to ourselves internationally so an easing :wink: towards 2000 prices is possible over a few years in real terms.

#7

That is pretty ballsy. I’d consider myself to be pretty bearish but daaaaaaaaamn.

I don’t think it’ll be as bad as that. If it was then it’d suit me but that just seems like so much that its hard to believe.

#8

This is the biggest one of all, as its effects are both long and deep.
Not only would it take a colossal amount of liquidity out of the market, but could do so indefinitely.
Imagine what prices would have to fall to, if all anyone could get was 3.5x their salary. Its a distinct possibility.

#9

This is what “Getting back to normal” really means.

#10

Where there is a lot of room for settling of prices I think it is way too optimistic to think it will go back to 1996 or even 1989 prices. Wages, Inflation and the glut of VI’s around at the moment will prevent this

#11

what inflation rates did you use?

#12

I wouldn’t feel uncomfortable entertaining such a scenario. I feel some areas will reach these levels or sellers will simply not sell in denial of these lows. Banks might though. Its all to play for. The low will be disproportionately low as was the high disproportionately high.

However don’t be lured into thinking it will be a bargain basement bonanza because if prices are that low then it is likely the economy will be flat lining. Removing the majority from rekindling old speculative habits with a handful cleaning up.

The dust must settle, so expect it to be dusty for awhile!

#13

Hmmm, strikes me as a case of the Buffer Overflow error in reverse!

Banks will return to traditional lending criteria, and will do so for an extended period of time. Nominal wages (in the private sector at least) will be stagnant at best. Unemployment will rise significantly. We already know from Revenue figures that the vast bulk of workers earn less than 34K a year. We have 300K empty units, true a lot of them in inappropriate locations, but still, huge oversupply particularly of apartments.

The only possible conclusion is that prices will fall a long, long way yet and some units will be pretty much worthless. I don’t see anything wrong with a valuation on a one-bed half-decent flat of 1.5-2X the wage of a single ordinary worker…€45-50K. 3-bed semi for an ordinary couple in the endless concrete of the burbs back to 3.5X first income + 1X second if yer lucky: about €130K. A decent house in a decent area, two public sector or professional earners, about €200K. They aren’t actually worth more than that.

#14

I mostly agree with you Sidewinder, but I do think that the multiples will be more generous than that by about 1x across the board. But really we are talking about degree of total collapse (relative to peak). I think 2000 is too optimistic.

#15

Y’know I was thinking the exact same thing as I was writing my post but I couldn’t remember the term. Who was it that coined that term (was it yourself)? Would they be so good as to add it to the glossary with a link to their original post.

It is a fact that as much as I always felt the bubble to be unsustainable it strains my believe that the burst will be as great as that. Now of course time will tell and since I’m alright-jack the further it falls the more it’ll suit me (always assuming I don’t lose my job of course :confused:). But 1989 seems like an awfully long time ago now. I find 2000-level prices to be more “believable”.

Even 2000 seems like a longish fall. Lord knows I don’t dare breath the idea of a return to 2000 prices outside of a very small circle of friends for fear of a lynching. Its like the bear-prediction that dare not speak its name. But to propose a return to 1989 prices…well - lets just say that its a hell of a ballsy prediction and if it comes true I for one shall praise your foresight and stand you a pint.

#16

Figures from panelist on Q&A last week -

1.7m taxpayers
average income 38,500
70% of taxpayers earn 38,500 or less

#17

I concur entirely with

with one proviso. There is a much smaller overhang in the BIG cities and in the pale. Outide the big cities and the Pale we have over 20% empty now while inside those areas its more like 12% averaged. 2 parallel but separate biggies.

The oversupply is stupendous in rural areas and smaller regional centres and is the biggest biggie of them all.

It may not be as great a factor as reversion to normal lending in teh urban centres .

Finally there is the greater preponderance of Apartments in the urban areas together with these entirely disreputable Irish management company issues . Country people are freeholders or have largely been ‘taken in charge’ by the local authority :slight_smile:

I feel that apartment complexes will have to be reconstituted for collective management purposes under a new management regime , possibly with a special tax break for owner occupiers and specuvestors both to ease the transition .

I have not thought it through but the current system is a farce and will lead to severe uncertainty . We cannot have 500 apartments ‘off market’ simply because a developer held onto one apartment …no matter how shoddy and small they are.

#18

CPI as per CSO website

cso.ie/statistics/conpriceindex.htm

#19

For those who believe that prices will go down to 1989, where are is there anywhere online which shows average valuations for 1989? The PTSB index only started in 1996.

To adjust 1989 prices into today’s money we multiply by a factor of 1.9 or so. Call it double.

To try some back-of-the-envelope calculations, a 4 bed semi in a good area in SCD would have cost around IR£80k back then, if memory serves correctly. Convert to euros and adjust for inflation, call it €200k in inflation adjusted money. These type of houses would have been €1m at peak. So that would require an 80% drop from peak.

#20

So your back-of-the-envelope inflation adjustment valuation, and my back-of-the-envelope “true value” based on income multiples, both exactly tally at precisely the same value.

I suppose it’s just a coincidence though :angry: