We have updated our Cookie Policy

Daft.ie uses cookies to give you the best possible experience when using our service; to offer additional functionality, to personalise content and advertising, to analyse our traffic, and to provide social media features. We also share information about your use of our service with our partners. By continuing to use our site we'll assume that you are happy to receive all cookies on Daft.ie. Please read our Cookie Policy for more information on how we use cookies and how you can manage your preferences.

Seamus Coffey - Lecturer in Economics, UCC

According to this latest daft.ie report, the first quarter of 2012 provided the
least change in the property market since the middle of 2007. Asking prices
continued to fall, but the drop of 1.7% is the smallest quarterly drop since
the market collapse began in earnest in 2008. Meanwhile, in the rental sector,
stabilisation has been present for almost two years and nominal rents at the
start of 2012 are no different than they were at the start of 2010.

Measuring the fall

Measuring prices in the Irish property market continues to be an art rather than
a science. Using mortgage market data, the Central Statistics Office reports that
house prices fell by over 4% in the first two months of the year. When looking at
falls from the peak, though, a different picture emerges. The daft.ie report shows
a total fall of 53%, compared to 49% in the CSO index. The scope for divergence
in estimates of falls from the peak will hopefully be put to an end when a National
House Price Register is launched later this year.

House prices are always and everywhere a function of bank lending, but they do
have a fundamental value to which they must eventually return. This can be given
as a ratio to household income or, more usually, annual rents. A good guide is
that house prices should be somewhere between 12 and 15 times the annual rent
that a property can generate. This is a range that should never be ignored but
often is.

A market that has normal level of activity would be near the top of this range
but a malfunctioning market will be towards the lower figure and possibly even
below it. And Ireland does not have a properly function property market.

A depressed market

Data from the Irish Banking Federation show that there are fewer than 4,000 mortgages
being drawn down each quarter, with around half of these going to first-time buyers
and a further third to mover-purchasers. The remainder is largely accounted for by
re-mortgages and top-ups. The residential investment borrower has virtually disappeared.

Anecdotal reports suggest that around 30% of all purchases are by cash buyers. This
cannot be independently verified but a figure close to it would suggest there are
around 4,000 residential property transactions a quarter. Ireland has a housing
stock of around 2 million units. An annual turnover rate of less than 1% is indicative
of a market that continues to be distressed.

The stock of properties for sale on Daft.ie in March 2012 was 54,000, which is
the lowest level in four years. This could be because properties on the market
are selling quicker or because the number of properties being offered for sale
is declining. The speed at which properties on Daft.ie found a buyer did increase
slightly in the first quarter but two-thirds of properties remain on the market
for four months or longer before finding a buyer.

Thinking like investors

The average asking price for the first quarter of 2012 was €176,000. In order to
justify that price using the above range, the monthly rent should be somewhere
between €1,000 and €1,250. Averages do not provide the necessary insight and this
must be done on a town-by-town or even a street-by-street basis.

For example, a three-bed house in Cork City had an average asking price of €189,000
in the first quarter. The average asking rent for a similar property is €850 a month.
The annual rent is still more than 18 times the asking price. At a ratio of 15 times
annual rent, a monthly rent of €850 should equate to a price of around €155,000. By
this metric, asking prices for three-bed houses in Cork City are still around
one-sixth over-valued. This can be repeated right around the country. With the
inability and unwillingness of banks in Ireland to issue loans a fall below this
level is all but guaranteed.

The importance of lending

Just as the banks are almost certain to cause an undershooting of property prices
relative to their fundamental value they must accept the responsibility for the
market bubble that peaked almost five years ago. The banks based their lending
model on the prices that people were willing to pay for properties, but seemed
to ignore the fact that the price someone was willing to pay was based on how much
a bank was willing to lend to them.

A house in a particular estate may have sold for €350,000 because one bank was
willing to lend one purchaser the money for such a transaction. The other banks
provided similar mortgages to other buyers on the basis that the first transaction
provided the "market value".

The price reflects the amount of money that someone is willing to pay for a good.
Value reflects the benefits that a good can offer. In most cases, these are the
same but this does not have hold. Residential property provides accommodation
service. As a result of the madness of the boom, we now have thousands of households
paying a price for accommodation far in excess of the value they are receiving.

This reality must be addressed and the burden of the mortgage debt is largely a
function of the actions of the banks so they must offer what ever forbearance is
necessary to assist households. The banks must also realise that there are
thousands of homeowners who will never be able to repay the huge loans they
issued to them. It is very difficult to gauge the number of unsustainable
residential mortgages that need to be ended but it could be anywhere between
15,000 and 30,000. These are households who are in deep mortgage arrears and
negative equity and have little prospects of recovery.

The banks must face up to losses that exist on these loans. The homeowners must
accept that they will never be in a position to repay the loan and that by
surrendering the property they will be able to make a fresh start. Households
with unsustainable mortgages must be allowed to do so.

The recovery in the housing market will not be when prices start to rise; the
recovery will be when activity starts to rise. With our ailing banks still in
no position to lend and the many problems created by the bubble still outstanding
there is no sign that this is about to change.