For the first time, the housing stock and vacancy data from the Census has been released at the new Small Area (SA) level. This new statistical geography, developed by the National Centre for Geocomputation at NUI Maynooth for Ordnance Survey Ireland, consists of 18,488 areas, typically consisting of 80-130 households.
So, a totally unscientific poll over the last few days (promoted by my post on property) has confirmed what I and I suspected many others felt : people do not see any improvement in house prices.
For what its worth, and no this is not scientific (well, by Sunday Independent standards maybe, it has nearly as many respondents as their infamous Quantum Research polls….:) ) the results for where people see New House Prices by end 2012 are….
I would caution about taking too much credence from this: but it is a straw in the wind.
This is an extended version of a column published in the Irish Examiner on 7 January 2012.
http://www.examiner.ie/business/uncertainty-over-end-of-fall-in-house-prices-179355.html
In the last week a number of publications have emerged which indicate that far from the house price crash reaching the bottom it appears, at least if you believe Daft.ie, to be accelerating. Daft.ie suggest that the asking prices for houses are now 52% below the peak, showing 18% fall in 2011 alone. Myhome.ie, owned by the Irish Times, is a little less apocalyptic, suggesting that Asking prices are only 43% down. The CSO, and Alsop properties, basing their data to November on paid prices, suggest that the declines are 46 and 67% respectively. Prior to the difficulty in interpreting exactly where we are is that the indices used are based on different constructions. For example the Allsop data reflect distressed properties at auction, while the CSO data represent purchases based on mortgages. We are, in other words, still unsure as to exactly where we stand. And not knowing where we are it is hard to know where we are going.
There is a proposal that in June 2012 we will, if all goes to plan, finally see a official government house price index based on settlement prices. To say that this is long overdue is akin to saying that the Titanic had a slight damp problem. It is arguable that a large part of the crisis which we are in now is as a result of people not knowing where we were, how we got here, and therefore not being able to make an intelligent prediction about where we would likely go. Note that this did not prevent people, including myself, from making predictions, nor did it hamper some form making more cogent and less erroneous predictions. However, I think it reasonable that the absence of an official house price index contributed in large part to the lack of coherent analyses. Moreover, as I understand it, the initial publication of this will only be back to 2010. While there will be data available back to 2001, covering therefore the end of the house price boom and the start of the house price bubble, as well as the crash, it appears as though this will not be published at least not initially. Why this is so is baffling, as giving a full picture of the noughties house price dynamics would be invaluable. There is a plethora of administrative data on house prices available within Revenue. While it is not their job to disseminate it, they do hold it. The CSO have run seminars on using administrative data, but as far as I can see the issue of house price data has not been a topic.
Coming off the reports noted above the consensus is that far from seeing a leveling out, the market reaching the bottom, in 2012 house prices will continue to decline throughout this year and into next year. Indeed, one commentator has suggested that the average house price fall from peak could be as high as 90%. But this perspective is even gloomier, and founded in decent analysis, than the analysis by Morgan Kelly that we could see price drops of up to 80%.
Part of the difficulty in relation to ascertaining when we will see the bottoming out of the market is that the dynamics, both statistical and psychological, of turning points and not particularly well understood. In there is a reasonably large body of research on the dynamics of house price booms. It is a pity that more cognizance was not taken of these reports by the relevant authorities, and indeed by commentators including myself. However, in Ireland we tend not to engage in that foreign continental vice of evidence-based policy making, and therefore one can’t but wonder as to whether or not any amount of analytical evidence into 2004-2007 period would have made the blindest bit of difference to government policy.
Be that as it may the consensus in academia is now that three major elements exist in the dynamics of house price booms.Firstly, these tend to be self-perpetuating, in that rising house prices in one period leads to expectations being formed of house prices rising in the next period. There is a limit to this however, with the not unrealistic finding that as the boom lasts longer and longer it is more likely to collapse.. A recent excellent paper on this is here . Secondly, and this is particularly case in Ireland, the credit conditions are important, with some evidence suggesting that credit laxity can fuel house price booms. This has been discussed here. Thirdly the general economic conditions are of course important, including in particular the conditions and rental market and the overall health of the economy. Income, rental issues, interest rates, unemployment , inflation have all been seen as important drivers. See here for Central Bank analysis on this, here for an analysis of the importance of unemployment. The most recent IMF analysis suggests that deviations from trend national income and a Bundesbank study suggests similar dynamics with deviations from fundementals taking “several years” to correct.
If we then consider all of these we cannot come up with the conclusion other than that house prices will continue to fall through 2012. Daft.ie have noted on a number of occasions that falling house prices are not necessarily a bad thing, if they get house prices back to where they should be based on fundamental economic conditions. I agree with this, but they have also noted that the very self-fulfilling nature of booms also operates for crashes. Expectations of falling house prices will feed into falling house prices, and in the Irish context this is going to be exacerbated by the aggressive deleveraging of banks in general and in particular in relation to mortgage credit. A naive conclusion would be then that we need simply to pull on a happy face and think positive thoughts, and if we really really believe house prices will rise then they will. The reality is that that is both unlikely to happen in an economy grinding to a halt, nor should we want prices to rise until and unless they have reached at or below fundemental value. Outstanding mortgage credit to Irish households is now only 62% of what was at peak, and has continued to decline steadily by 2 to 3% per month. There is no reason to expect that in the near future this will change. The acknowledgement that credit drives the housing market in ireland is evident from the calls for banks to lend more (see same from Sherry Fitzgerald here) and even the astonishing suggestion that the (bankrupt) state should take on board the negative equity of future borrowers.
The evidence is that the longer the boom not only the more severe but also perhaps the longer the crash. There is relatively little research on the macroeconomic determinants associated with house price crashes, and such research as does exist seems counterintuitive, suggesting for example that increases in national income reduced the likelihood of exiting a crash. This may be partially explained by households faced with an increase in disposable income in using these to pay down existing debts rather than to re-enter the housing market. However, much research remains to be done on house price crash dynamics, as opposed to house price boom dynamics. A valuable investment by a mortgage lender would be a couple of postdoctoral researchers focused on this area.
It is quite astonishing that despite the massive wealth created in Ireland over the boom and bubble, from property, there is I would suspect less academic research capacity in property now than there was in 2001. Perhaps in an effort to ensure that this time really is different, and we dont make the same mistakes again and again, one of the estate agencies might consider endowing a lecturer or three in the third level?
A reasonably comprehensive analysis of property bust determinants is given in a 2009 ECB working paper. The determinants of crashes/busts are analysed in the table reproduced below
What can we take from this? That busts are positively associated with short-term interest rates (thankfully low in prospect), increases in property taxes (coming soon) , exchange rate strengthening (hard to call) and banking crises (oh yeah, we have one of them all right…), and are negatively related to the health of the government balance (poor in this case) , monetary growth and credit growth (both poorly here ) , population growth (slowing if for no other reason than due to emigration) and growth in national income (we wont be seeing that for a while). Thus, there is really little cheer from the research such as we have.
Where then might prices go? the CSO data suggest a house price peak of some €331,000 for new houses in Q2 2007. Ronan Lyons uses some relatively simple extrapolations to look at the possible future dynamics and suggests that the market will bottom out in 2014 at approx €150k, representing a fall of 55-60%. In early 2010 I suggested that we could hit €130k region in 2013, a fall of some 60% plus. Cormac Lucey suggests (see his last paragraphs) a fall in average new house prces to perhaps as low as €75k on the basis of overshooting, with a trough perhaps at 2017. Morgan Kelly in his seminal analysis suggested a fall of between 40-60% with a possibility of up to 85%. Recall also that if houses are to fall by say 75% from peak and have already fallen by 60% that does not mean a 15% fall is in prospect: . You are going from 100 at a peak to 40 now and down to 25…. do the math. While NAMA may have declared november 2009 as its valuation date, implicitly suggesting that the crash had then ended (and the ongoing crash has implications for NAMA to which I will return), it seems that in the words of De Bert, when it comes to house price fall, while there is a lot done there is more to do.
Posted in Blogpost, Journalism
Tagged crash, economy, house prices, ireland, property, recovery
Over the bubble the irish economic system came to resemble a snake, swallowing ever larger , more indigestible loan financed assets. NAMA was set up to clearthe property loans from the irish banking system. The originator of the scheme, Peter bacon, had felt that the best solution to the colossal property and related loans of the banks was to deal with them swiftly and remover over 150b of same , cleaning their balance sheets at a stroke. The Fianna Fail government balked at this, and cut NAMA in half, removing “only” 72b of loans. Thus, from the outset the Irish banking system was crippled. Like an anaconda that has swallowed a pig it found itself unable to move backwards or forwards, and with only half the pig removed it is now clear that the banks are unable to process these, or to restore credit. Oh how we recall the heady days when NAMA advocates stated, as a matter of faith and fact, that “NAMA will get credit flowing”
One of the key problems that NAMA has created is that it has effective control over a vast overhang of property. It’s a vast empire, opaque and closed to the people who fund it, structured in a way to ensure that although the taxpayer is on the hook for its inevitable losses they cannot easily discern what is going on, closed to scrutiny bar the occasional stage show where the very highly paid management ruck up to be quizzed for a few hours by an oireachtas committee.
The NAMA design is flawed. While NAMA aims to try to make a profit it has an incentive to sit on its assets until, micawber like, something, in this case property prices, turns up. And that is unlikely to happen in the short or even medium term. NAMA has two main tranches of property – commercial and residential. And, lets recall that the banks, via the smaller developers (those with sub 20m in loans) and residential mortgages, are also looking at the residential property market in Ireland with hopes if not expectation of it emerging lazarus like from its tomb.
NAMA priced the loans that it bought from the banks with reference to November 2009 prices. Its now clear that these were a major overpayment. Since then commercial property prices have fallen by a further 18%, residential prices by 20%, although there has been a rise in the London property market which accounts for a small portion of NAMA assets. Theres no sense yet that we are at or near the bottom. The irish commercial property market can best be described as sickly or moribund, with most activity being apparently driven by movement to higher spec/lower cost offices and premises by persons taking advantage of this weakness. The residential market is deader then the dinosaur, with the result that the property crash is actually slower than it should probably be. Prices in Northern Ireland have fallen from a (relatively smaller) peak by over 50% while here they are down by just over 40%. Planning permissions have collapsed to 1/3 of the peak, while sales remain stagnant. While a large part of this retardation can be down to greater “Stickiness” here in terms of more onerous bankruptcy and a much lower propensity to repossess, a large part must be down to the gigantic overhang of residential property. We do not know how large this overhang is – estimates have ranged from 40 to 140 thousand, or from one to several years “normal demand”. Until this is cleared normal activity in this market cannot resume and we cannot know the true bottom line cost of the crash.
NAMA and the state and the banks are locked in a financial standoff, as ugly as the ending of Reservoir dogs. If and when NAMA loses money it is state money, borrowed money. If the banks lose money, then yes, its again state money as they have no space capacity. But the rotten meat of the oversupply of residential properties in NAMA and in the banks is clogging their ability to generate credit. Nobody wants to see a reigniting of the property bubble but without some economic laxative being applied to the banks and NAMA they will continue to sit, dyspeptic and immobile. Yet, all assets have a price, it’s a matter of finding that price.
I have suggested for over a year that we have the ideal mechanism – ebay. NAMA is going through a complex, costly and opaque system of auctions for various of the goodies it has taken from the developers. The banks are auctioning off in bits and pieces the swampy fields, decaying ghost estates, crumbing half built factories and weed infested sites that are the legcy of the bubble. But they are not selling. Lets take a deep breath and lets have some vision. Instead of paying massive auction fees, and instead of waiting for something to happen, like godot meets micawber, lets see Michael Noonan instruct NAMA to put it all for sale. Put it on ebay and clear out the system. Lets get the banks to do the same. The economic house having burned down its time to embrace the firesale.
Ebay is a wonderful, worldwide, cheap auction platform. There is an ocean of international money that would conceivably purchase some irish property. All that’s needed is that it be brought to its attention. Of course, this process would crystallize the losses in both the NAMAsaurus and the Banks., but then we would be clear where we were, instead of sailing up denial with an undigested lump in our economic gut…. What price clarity?
A shorter version of this was published as a column in the Irish Examiner
One of the by now accepted memes of the irish boom and bust is that left to their own devices the banks (well, AIB and BOI anyhow) would have toddled along as the staid institutions we all knew and loved, but that the dastardly forces of competition (with the finger pointing usually to either Anglo or to “foreigners“) made them engage in a race to the bottom of the standards market.
Every quarter Irish and indeed eurozone banks complete a survey on credit conditions. For whatever reason this (to me anyhow) fascinating survey doesnt get near enough attention when its released. The Central Bank do publish some commentary on it: see here for the page where it now lives, here for a description of the survey, and here for an analysis (as of 2007) and discussion. In essence the survey asks the chief lending officers to respond on the reasons behind the tightening or loosening of credit over the previous quarter. Some ad-hoc questions are also added but for the most part the questions are fixed across the eurozone. 5 banks (as of the april 2011 survey) are surveyed in Ireland. Although these are not named one can surmise that they would include AIB, Bank of Ireland, ILP and Anglo.
What do we see from the survey? I concentrate on the following questions :
Over the past three months, how have the following factors affected your bank’s credit standards as applied to the approval of loans or credit lines to enterprises (as described in question 1).
A) Price
* Your bank’s margin on average loans (wider margin = tightened, narrower margin = eased)
* Your bank’s margin on riskier loans
B) Other conditions and terms
* Non-interest rate charges
* Size of the loan or credit line
* Collateral requirements
* Loan covenants
* Maturity
and
Over the past three months, how have the following factors affected your bank’s credit standards as applied to the approval of loans or credit lines to enterprises (as described in question 1)
A) Cost of funds and balance sheet constraints
* Costs related to your bank’s capital position (1)
* Your bank’s ability to access market financing (e.g. money or bond market financing, incl. true- sale securitisation (2))
* Your bank’s liquidity position
B) Pressure from competition
* Competition from other banks
* Competition from non-banks
* Competition from market financing
C) Perception of risk
Expectations regarding general economic activity *Industry or firm-specific outlook
* Risk on the collateral demanded
Analogous questions, on the terms and conditions applied by the bank and on the credit standards applied are posed for loans for house purchase. Questions are ranked 1-5 where 3 is unchanged, 1 is tightened significantly and 5 loosened.
So what do we find?
First, lets look at the terms and conditions for house purchases
and for commercial (not just commercial property) loans
As we might expect on most issues, over the last couple of years, the terms and conditions that the banks were imposing on themselves or on customers, were acting to tighten lending standards. However, while some were acting to loosen standards in the 2003-07 period these were not massively so. Albeit self reported, there is no smoking gun on for example slacker LTV ratios or longer mortgages.
If we look at the factors acting to tighten or loosen credit standards, first for residential mortgages
and then on commercial (again not just commercial property) lending
we also see some myths debunked (or at least, they would be if we took the reports at face value). There is no significant evidence from these survey data that banks loosened credit standards consequent to competition. Mind you, the question is whether or not the data are accurate… While all survey data which ask qualitative information are only as good as the respondent is accurate, we have to take them as such absent any other information. Either the banks were engaged in the lending habits they were engaged in for reasons other than competition, or the respondents over the years honestly did not see the competitive issue as a major force.
