Being an engineer, playing with excel is a hobby close to my heart. I decided to do a bit of monkeying about and check how my savings compared against average house prices and how they might do if things had kept increasing at the rate of inflation (3.5%).
First off, average house prices were €310,409.00 in 2006. We have had a reported 9.9% (rounded to 10%) drop in 2007 with the potential for the same in 2008. That would leave us with average house prices of €251,431.29 in 2008. This is only 85% of nominal prices but 75% of actual prices when adjusted for inflation.
Furthermore, a “good case” scenario would be for property to bottom out at that point, staying level and beginning to rise in 2011 (using the five year cycle that seems to be the norm with other crashes). Of course, inflation is eating away at this all the time so staying level is really falling behind.
I also took a case scenario where prices never decreased since 2006 and kept increasing at the rate of inflation and compared it to the scenario of two years of drops, level for 3 years and then increases at the level of inflation.
I also looked at the average industrial wage which is fair since we are looking at the average house. In 2007, the average house was 8.7 times the average salary. If prices had increased at the rate of inflation, they would have been 10 times salary levels. Of course, many households will have two incomes…
Interesting findings: Even with 2 years of 10% drops, level for three years and then rises at the rate of inflation
-The income multiple is still 7.1 in 2011 assuming that wages increase at the rate of inflation. This still seems high to me. Is the assumption of only 2 years of decreases & 3 years plateauing too conservative?
-House prices would drop to approx 83% of 2006 nominal prices but 70% of actual prices.
-It would be 2016-2017 until prices even reached the nominal 2006 prices but they’d be well behind thanks to inflation. Basically, another property boom is required to restore equity to those in negative equity.
How can I improve the spreadsheet. Is the assumption of only 2 years of decreases & 3 years plateauing too simplistic? Should I be factoring in further decreases or a longer plateau?
I’ve hosted the file here for anybody who wants a browse of it.
Note: savings info got deleted just in case anybody is feeling nosy.
I think so. But we’re into opinion here. I expect the fall in 2008 to be higher than the fall in 2007 in percentage terms, and probably in real terms too. So > 10%.
That makes sense. They borrowed too much, and for the first couple of years they are paying back virtually nothing, a few grand a year perhaps. Most of it is interest.
Prices are likely to be falling faster than they are buying back equity. If it’s a person who bought in an apartment block that subsequently dropped by 100K then they are screwed completely in terms of negative equity.
At the end of 2008 some of these people are going to be in more negative equity than they are today, despite paying a mortgage all year.
Remember a 20% drop needs a 25% recovery just to get back to square 1. A 50% drop needs a 100% recovery. So, the Boom needed has to be bigger than the bust. But busts have a way of reducing the chances of a boom for a while as people lick their wounds.
I agree and see up to 15% in 2008 falling back to high single digits in '09 and 10 and maybe low single digits in 2011. Bottom in 2012 - no earlier. That’s some prediction - enough there to hang myself - probably…
I ran the same spreadsheet with your figures and we’re getting a bottom of average price at €203,179.18, 65% nominal drop from 2006, 55% actual drop and an income multiple of 5.5 by 2011. House prices would then rise to 2006 nominal prices in 2023/2024.
I’m as bearish as anybody here but that above is an absolute doomsday scenario. The scary thing though is that even after an almost 50% drop, we’d be still around 5.5 in terms of the income multiples and that’s assuming the average income rises in line with inflation. What happens if unemployment is widespread and the average income stalls or drops!
My reason for doing the sheet was to show that even with conservative estimates, the implications for what is happening are enormous.
With income multiples at 5.5, it is not the absolute doomsday scenario, though, is it? Why not work out what average earnings will be in 2012 (at the expected bottom) and how much the average price would have to fall to reach a 3.x multiplier (3.4 or something is the long-term average?).
If prices undershoot the bottom, then an even lower multiplier would be the result - now that really would be doomsday!
But real price drops of nearly 50% would be a doomsday scenario for many people. There’s negative equity and there’s finding a tall building to throw yourself from. The awful truth is that it isn’t a completely ludicrous notion.
I did work out what average earnings would be in 2012 and I assumed that it would increase in line with inflation which is probably optimistic.
Putting in some figures…To reach a 4x income multiple by 2012, we’d have to have drops of:
25% in 2008
15% in 2009 & 2010
10% in 2011
5% in 2012
Which would bring the average price down to a real average value of 40% 2006 values. I don’t think that’s really going to happen but what is feasible is that we get severe drops in the next few years and then a long plateauing which will bring down the income multiplier gradually.
Households having two incomes would really mess up my nice calculations. Does anyone know of an “average household income” for Ireland?
Well lets leave out Leitrim with its tax ‘efficient’ ghost towns. I understand the average Irish home is about 9x average income now.
the average Dublin home is about 11x the average Dublin income .
Each is grossly unsustainable of course, average house=4x average income is the long term Irish average but women were forced into the home most of that time so lets say the new long term average will be 5x-6x , feasibly 6x in my opinion.
I shall not countenance anything under 5x in fact , K !
A comparative international survey matched median incomes ( NOT AVERAGE INCOMES) and median home prices ( NOT AVERAGE HOME PRICES) , not quite the same but instructive to show where we are .
I’d find it difficult to put a definite floor under prices - we could be entering a prolonged recession where construction almost totally disappears for a decade (no demand for residental or commerical, and no tax revenue for infrastructure), while the other ‘feeder’ of the economy, the multinational / tax-haven sector comes under combined assault of non-competitiveness, natural churn and tighter european tax rules. If these two sectors slow massively, the internal services areas must scale back to match. Unlike most pinsters, i see the public sector getting slashed as well - the recent growth there was paid for by borrowed money, and when the borrowing stops, so will the revenues to support those new positions.
Given the resultant massive unemployment, stagnant or dropping real average wages (construction is one of the higher average earning sectors), dropping population and likely higher borrowing costs, combined with massive oversupply and firesales of bankrupt developments and privately owned houses, i seems rather optimistic to assume a pricing floor at higher than historic multiples of salary, or that those salary levels will match or exceed current levels.
Any long term price prediction i’d care to make would start with somewhere between 1998 to 2001 era prices adjusted for inflation (which is rather optimistic in many respects - taking the end of the real celtic tiger as a long term sustainable level), with the floor possibly undershooting that price by 20% or so.
In short, i’d expect the average person who bought since mid-2002 will see their house being worth less than they bought it for, in nominal terms, at the bottom, and it will take at least 5 years if not 10 to get there.
I have to say I agree with 2Pack. The days of the single-income household are gone. With that, we’ve also seen some huge falls in the cost of living over the last few years. The price of clothing and food has not kept up with inflation/wages and as a result, we’re able to afford bigger mortgages and increase our discretionary expenditure. I’d say we should have equilibrium at about 7x earnings for Dublin and about 6x earnings for outside the Pale (maybe 4x earnings for all that section 23 muck).
However this is a lifestyle choice, not a long term economic one.
Within a few years of buying a place, most couples plan on having a few kids, and by the time you add everything up, that second job is barely worth it (more so as the number of kids increase) - certainly the second salary cannot be treated as if it were the same amount added to a single salary.
Unfortunately all of those are about to go into reverse.
China will become more a consumer rather than exporter (thus competing for raw materials, rather than supplying cheap goods), many foods have increased massively in the last year (and will probably do so this year) and the days of pay rises above inflation are over (and inflation is effectively fixed). The primary means of affording bigger mortgages has been historically low interest rates, and they’re also over.
All the evidence (international and domestic) suggests that Irish families are and will continue to get smaller. Our birthrate is already below the replacement rate and there is no prospect of this changing anytime soon.
China will become more a consumer rather than exporter (thus competing for raw materials, rather than supplying cheap goods), many foods have increased massively in the last year (and will probably do so this year) and the days of pay rises above inflation are over (and inflation is effectively fixed).
While I agree that it’s unlikely that we’re going to see food/clothing prices to increase below wages, China and other low-cost countries are not going to change overnight. Food and clothing will stay cheap for awhile yet.
Can’t say I’m convinced that the current situation, where nearly all houses are initially bought against two incomes, will be around forever.
The Celtic-Tiger era has put a heavy burden on many young couples to choose between career/house and starting a family (or at least postpone starting a family until they’re in a house a few years).
With rising unemployment, will many women decide to put family first, since house price pressures will most likely have diminished somewhat, allowing single-income families back into the market? Or better yet, will the govt eventually incentivise single-income FTB’s in order to attract them into the market…???
I know I’m playing with stereotypes to a certain extent here, so ladies, please don’t kill me!