The Million Dollar Questions

I know this has been discussed at certain points through various threads ad nauseum but, I would like to try and pull at least some of the various pieces of information together under one thread in an attempt to draw a personal conclusion as to where things may possibly end up. It may also be helpful for some of the many new members as well as the increasing numbers of people browsing the site.

Essentially, as I see it much of the consensus across the site seems to be that:

1)We are now facing into one of either a short, sharp, correction in House Prices to be concluded by (possibly) mid to late 2010/11 or, we are facing into a prolonged Japanese style correction, which will ultimately provide the same result as the short, sharp option, but will require inflation to do the dirty work over many years (possibly to 2014/5/6…). Which will it be?

2)The levels at which the “bottom” will have been reached will be either when prices reach 2000/1 levels adjusted for inflation ie when the price excess of the post-9/11 low interest rate lending frenzy has been washed out of the system or, when house prices revert to a sensibe level of multiples of income (*3/4/5 times?) Which is it?

While there are obviously various other external factors which will actually decide which of the above scenarios play themselves out, would people here agree with the above? If not, why not?

Just as an aside, with regard to the 2001 price scenario, does anyone know if its possible to find out what asking prices were at that time without trawling through the Irish Times Archives?

You can find ESRI figures. I don’t think anyother sources are available.

With regard to reaching bottom. I would imagine it is evident when you see the stock buildup being reduced greatly

Define recovery.

1)House prices rise in real terms above 2006 peak
2) House prices bottom out and rise/fall in line with inflation

I don’t ever see in our lifetimes, the abillity to have access to such loose credit. for this reason alone, number 1 is a dead duck. I am sick to the back teath of the VI insinuation of a recovery A-La #1 not going to happen in our lifetimes.

I see number 2 happening when affordabillity falls to acceptable levels. but there in lies the problem, what is acceptable?
For me an example of sensible affordabillity is maybe=

Couple, one working full time, one part time, combine income=€50k pa should be able to afford a Reasonable 3 bed Townhouse (terrace) in a “Reasonable” area

Couple both working, €70k pa, should be able to afford a Good Semi-D in a Good Area

Both Morts no more than 25-30 years.

I’m not sure of the relative prices, but its all relative, and finding the datum point on these things is difficult.

A quick and probably crap calculation based on the ESRI tables:

Assumption 1: the start of the figures in 1996 indicates the start of the boom (in fact I think the boom started earlier)
Assumption 2: use Morgan Kelly’s 70% of gains deflator

So peak price Feb 2007: 311,078
Start price: 75,169
Boom gain: 235,909
70% of gain: 165,136.30
Bottom at Feb 07 prices: 145,941.70 (311,078-165,136.30)

So roughly a 47% fall.

What inflation measure should be used to get real price? I presume it should be wage inflation (to reflect diminished expense of debt)? Anyone know what that is?

Yoga has spelt out my expectations. If not this then seriously worse. :smiley:

Does MK adjust his figure of 70% include or ignore inflation?

Should have said… Yoga’s figures I would only apply to houses. I firmly believe the appartment stock is going to be worth -75% inflation not included.
For example when the dust settles this place will be worth 80-100k.

I think Morgan Kelly’s example refer to real prices so you need to affect your figures with inflation

Yes he does, but I am not sure what inflation measure to use or where to find it. I presume wage inflation, but as I say, I’m not sure.

I presume the 70% loss of increase includes an inflation deflator? So using nominal top of peak - nominal start of rise understates the level of fall since start of rise price should be deflated by inflation over the period.

Inflation since the peak would then need to be taken into account to get the loss so far (so inflation since Feb 2007).

BB - I’ve used the national price, within that I expect there will be variations and would share your opinion on apartments. Houses should do better than this to offset it, providing they are in saleable areas etc. etc. So this is a very rough measure based on averages.

Many people have identified inflation-adjusted 2001 price levels as the mean to which we must revert. This is understandable as for many it corresponds to the start of the, post-911 global credit splurge and the end of our export led growth phase. However, it ignores an important fact; In 2001 house prices were already grossly inflated.

Demonstrably, the bubble began in 1996, when house prices deviated from their long-term trend.
By 1998, the government had commissioned the Bacon Reports “to alleviate the desperate plight of first-time buyers”. Which publicly states “Following the unprecedented growth in house prices, the Irish government openly acknowledged that a crisis existed in the Irish Housing Market.”
By 2001, David McWilliams was already talking about the bursting of the bubble.

By conceding that a reversion to 2001 levels would constitute ‘normal’, ‘sustainable’ prices, we are pretending that the bubble didn’t exist pre-2001. For my mind, anyone who bought after 1996 was paying a bubble premium and buying at inflated prices. I am not saying that prices are headed all the way back to 1996, even in inflation-adjusted terms, but I do think that that’s the basis point against which we should be calculating. The residual effects of the bubble, and the valid precipitating factors which caused it (wage growth, double incomes, lower-interest rates and greater access to credit) will most likely prevent a full reversion to the inflation adjusted 1996 mean. But I do see prices falling to pre-2000 levels.

Incidentally, inflation-adjusted 1996 levels would imply a fall of around 64%. While we might not quite get to there, I see falls of at least 50% as extremely likely. And if macro-economic factors (unemployment, bank failures, oversupply, etc.) get bad enough I wouldn’t even rule out an overshoot on our way back to the mean.

Saying that 2001 prices represent good value is to deny the bubble existed at all before that point. Either those were bubble prices or Ireland really is different.

It has certainly surprised me (and many others I guess) that the standoff between buyers and sellers has held up this long already. Although there are certainly indications that this may crumble soon, Joe Duffy for one will be thanked for that if it does happen.

Even still I am surprised that price cuts by developers have not been more widespread. What I am becoming increasingly aware of, is developers who make a cut and still don’t sell are putting the property up for rent. (This weekend I found out of one such small development of 20 houses which had had a cut of €35K and still none sold, the developer will not cut more and is placing all up for rent) This is going to drag the phoney war out even further, as it will take another 6 months for them to realise that they can’t rent them all either.

I certainly think that the odds are on us having a long drawn out correction.

Of course there are numerous things that could speed up the fall. For one if we see unemployment rising above 10% in the next 18 months then the number of distress sales could seriously impact the market.

Six months ago I was saying, “What happens in the next six months will tell all!” and still we are no further on in terms of getting a sharp correction, will we know more in another six months?

Looked at another way, given average industrial wage:
1998 20,000
2003 26,000
2008 33,000

In 1998, the income multiplier of house price by ave ind wage was 5.15x

For prices to come back to the same level, the average price of a house would have to drop to 170k from its current 280k or 45% off peak (Feb07).

A remarkably, but probably coincidentally, similar figure to using the 70% of gain deflator.

The same caveats apply - variation between property type & location, 1998 was also a bubble, 5.15x is probably too high, 4.5x is probably tops and it may go below that, average industrial wages can fall as well as rise, should we be using average industrial wage at all?

And I thought that I was bearish.

I was utterly convinced in 2000/2001 that we were in the throes of an unsustainable housing bubble.

Even the Central Bank agreed with me at the time. lol.


I would concur with fable, and believe that ultimately we will see 1996 prices adjusted for inflation.

We will see inflation account for a large portion of real price falls.

I have always taken price inflation as the measure of real prices as above.

It should also be noted that momentum on the way down tends to overshoot fundamental value - making a full retrace to 1996 (Real Prices) a distinct possibility.

It could take another 5-6 years though. Remember prices have to rise at a greater rate than inflation to be rising at all…

That would be wage inflation that they have to be rising greater than. Otherwise they are just another component in consumer price inflation.

Is there a balanced measure of wage inflation anywhere? (One that includes public and private sector employment and is balanced for the proportions that work in both). Geckko? Anyone? Help?!

Then you have to concede that a proper market crash, one that purges the excesses of the bubble, would return us to prices before 2001. No?

Just how far before 2001 is arguable. That is, how much of the excess will be purged? Morgan Kelly says 70%, and that seems reasonable. But in the OECD countries he measured, I bet none increased their housing stock by as much as we did during the bubble.
And the extreme scale of our bubble may leave us more exposed to financial shocks, e.g. bank failures and high unemployment.

The country needs a successful crash; One that clears out as much of the bubble dead-wood as possible. But you can be sure those with a vested-interest will do everything in their power to prevent just that.

If property values today were cut in half we’d be there or thereabouts. However, it’ll be at approx 2012 before we get there.

Why does it have to be wages YG ?

Surely the relative cost of any good/service is measurable against the price in money - why should houses be different ?

Don’t forget about interest rates, MIR, FTB status - all of these would have a huge bearing on a wage based calculation of HP’s.

The question is about money and it’s value - not the amount I earn. What does it buy - if the cost of a house is 2000 weekly shops - and CPI makes it 2100 next year then the value of my money has decreased by 5% regardless of how much of it I earn.

Thus if I sell at the same price I bought, the purchasing power of my money has been reduced by 5% and I have made a loss, because I will only be able to buy 95% of the goods/services I bought last year.

Just can’t see any other way of measuring ‘price’.