Where is the housing market going in 2012?

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of the house price boom and the start of the house price bubble, as well as the crash, it appears as though this will not be published at least not initially.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.

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11 thoughts on “Where is the housing market going in 2012?

    1. Cathyby

      I’ll go on a tangent – why are the Revenue sitting on these figures? Why, as a body, is the government make hard figures so hard to find?

      We’re in the soup, I don’t see any prospect of any radical fix in the near future, so I think the government should try for the title of “most transparent”, “bringing the truth into Irish politics”. It’s something they could do, that would be valuable to do, but they seem oddly uninterested in.

      Reply
  1. Edward Smyth

    It`s a downward out of control spiraling vicious circle. In 09 and the NAMA take up of bank property debt was the starting point for property price distruction, public pressure, professional analyst`s predictions and the rush to appease this anger opened the flood gates. The distruction and devistation that will be left behind by NAMA in their quest to be seen to perform will depress prices and meaningful property transactions for 5 years or more unless this bank related debt is restructured and spread over decades. Like the 70`s 80`s and 90`s we now have huge emigration all lost through recession, Ten`s probably hundreds of thousand of people that should be the home buying generation. Like the 00`s when we had huge repatriation could the same happen again in twenty years down the road? yes it could, unless as suggested, historic economics would be a big part of formal education for economists, estate agents, bankers, legal`s etc and some strict rules are put in place to control such market forces.
    “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?” OH not a great idea, I consider this section were one of the main causes of the boom to bust situation driven by general greed everywhere. Even in the bust some of these guys are still creaming it in, these estate agents have a vested interest in both scenarios.
    Anger, apathy and cynicism will prevail, surely mistakes were made, big egos bust, blind liality by some but we were all to blame, we need to get over that bit in order to heal. Sin and expect penance.
    I was there too, I had to emigrate and this is not just populist crap> http://www.independent.ie/opinion/analysis/ronald-quinlan-enda-youre-wrong-we-all-spent-we-are-all-at-fault-2960281.html

    Reply
  2. Lisa Mc Carthy

    No price index is made available because there are (still) too many vested interests profiting from the secrecy. The government benefited hugely in the past with the overinflated stamp duty on overinflated prices. Ireland is a small colloquial community where auctioneers, bankers, developers all reaped the rewards from this closeted information. Given that the government has also now subsumed the roles of bankers and developers it has complete control on what information it is willing to provide. I fear that the reality is far worse than even the worst conjecture being proposed. By releasing any such information now will actually traumatise the market and stun it into complete inertia.

    The CSO mortgage approval data is highly flawed and I consider totally irrelevant when trying to assess current market prices. it does not take into account the amount of deposit being paid. Its only purpose in my opinion is to compute the values of credit being given by the banks.

    Reply
  3. Pingback: A short Poll on house prices | Brian M. Lucey

  4. Chasler

    I believe the strength of the Euro will also be a factor in the housing market reaching the bottom. As an expat back home for the Christmas holliers, I am finding Ireland way overpriced and poor value for money, despite the fact that standards have improved. This poor value is not helped by every Euro costing USD1.35. If the ECB takes the necessary steps to buy up debt and allow the Euro to fall (expat?) foreign investors like me will step in buy Irish property as a good value play, or as a retirement home, or whatever, which in turn will remove some of the excess housing capacity and help stabilize prices.

    Reply
  5. Constantin Gurdgiev

    Good post, Brian, as usual.

    No rational or behavioral analysis of house prices can come up with an increase in prices this year. That much is clear. What is uncertain is: (1) what the equilibrium post-contraction price floor will be (in my view – prices will run at ca 3.3-3.5x median household income or around €160-170K average in the medium term equilibrium scenario) and (2) to what extent prices will overshoot target equilibrium on adjustment path (in my view, overshooting to the trough of 65-70% off peak would be rather conservative). There is a host of associated risks that are not factored in the above: (1) risk of significant economic contraction in 2012-2014 driven by external shocks (ranging from global to euro area) and/or domestic disruptions, (2) risk of a significant set back on mortgages defaults assumptions built into 2011 PCARs, (3) risk of large-scale deterioration in Exchequer performance in 2012-2013, leading to a full insolvency crisis, etc. All of these risks, as well as smaller ‘gray swans’ suggest that the property markets are likely to remain on downward trend for some time.

    Lastly, see my today’s Sunday Times article for estimated duration of the balance sheet recession through cycle for Ireland. We are nowhere near the bottom on this, if past history were to be our guide.

    And for those who are keen on talking about ‘historical averages’ – here’s a chart from the Economist database on house prices:
    http://trueeconomics.blogspot.com/2012/01/812012-irish-property-prices-history.html
    Enjoy…

    Reply
  6. Pingback: Where do people see new house prices going? down…. | Brian M. Lucey

  7. AgentCampus

    In my own personal view, 2012 would be quite a modest year for the housing market. With all the possible aspects that may affect the housing market not only in US but also in other countries, even in UK.

    I am not an expert, cause I had never finished my texas real estate license yet, but I just remain positive on these thoughts.

    Reply
  8. kubathemaster1

    What I think a lot of these reports tend to forget is that the mortgages of 2007/2008 had a 5 year low-start, just paying interest. Those low-start periods are about to end, and sooner or later people won’t be able to pay their mortgages. Banks currently give a 12 month period on late payments, so the effect is delayed somewhat, and will kick in next year.

    Reply

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