Ireland’s residential property still in deep crisis
Ireland’s property market is in trouble. Residential property prices plunged by 11.9% during the year to end Q1 2011.
On a quarterly basis, the average national house price index fell by 3% in Q1 2011, after a 3.5% decline in the previous quarter.
The national average asking price for residential properties was €210,000 in Q1 2011, down 43% from its high of 2007. According to Daft.ie, Ireland’s biggest property website, it takes an average of nine months to sell a house, the same average as last year.
Dublin has experienced the largest house price declines with houses today 47% lower than at the early 2007 peak, according to Central Statistics Office Ireland. In the rest of Ireland, house prices are 35% below peak.
House prices in Dublin rose slightly by 0.3% m-o-m in May 2011, but were 10.9% lower than a year earlier. Real estate in the rest of Ireland fell by 2.1% m-o-m in May 2011.
The continuous drop has been due to massive tax hikes and sharp spending cuts.
Before the global crisis, Ireland’s house price boom was one of the biggest in Europe, with prices for new houses surging by more than 200% from 1997 to 2007, and average used home prices rising by around 280%. When the bubble burst in 2008, it was the world’s biggest property bust.
Rent levels are now stabilizing from their downward trend in 2010, rising 0.6% y-o-y and 1.5% q-o-q to April 2011, the largest quarterly rise since 2008.
However, the low and unsustainable Irish rental yields (an average of 4% this year) signify that residential property prices are likely to further fall, when consumer spending contracts as savings go up.
Massive bubble and crash
Ireland’s house price boom was one of the longest and biggest in Europe. It saw prices of second-hand homes surge by around 330% from 1996 to 2006. The average price of new houses rose by 250%, according to the Department of Environment, Heritage and Local Government (DOEI). Historically low interest rates encouraged variable rate mortgages.
The housing boom was originally fuelled by strong economic growth, immigration, and generous tax incentives and grants from the government, creating a virtuous cycle of economic growth and house price increases. Low interest rates and loose credit conditions provided financing.
Vicious cycle
All these elements are now gone, and the cycle has turned vicious. When interest rates were raised in 2006 and 2007, many borrowers ran into problems, triggering a housing market crash.
The situation was exacerbated by the 2006-2007 US subprime mortgage crisis which led to the global financial meltdown in 2008. The resulting credit crunch made it extremely difficult for Irish banks to find additional financing to cover their losses. The mortgage market continues to shrink, as job losses and falling wages lead to more mortgage defaults and foreclosures.
From its peak level in Q4 2006, the average house price dropped 36% to Q3 2010. In Dublin, the price fall was 44% while it was 32.6% in areas outside Dublin, according to Permanent TSB/ ESRI.
Shrinking mortgage market
The amount of new housing loans approved in Q3 2010 fell 10% from a year earlier, to a mere €5.91 billion, a pittance compared to the heights of Q3 2006 when housing loan approvals reached €15.57 billion.
Despite a key interest rate of 1%, unchanged since October 2008, mortgages are still not flowing freely, because banks are tightening up. In Q2 2010, 10% of banks were reported to have tightened their credit standards on loans for house purchases, according to the ECB’s bank lending survey (BLS), mainly due to the deterioration of banks’ own balance sheet situation.
The average interest rate on mortgages with floating rates or initial rate fixations (IRF) of up to 1 year was 2.94% in October 2010, up on 2.6% in January.
Outstanding housing loans continue to shrink, falling to €107.524 billion from €127.3 billion in May 2008. Yet because the economy has shrunk even faster, the ratio of mortgage loans to GDP actually rose to around 68% in 2010, from 63% in 2008.
Rents stabilising, but yields poor
The housing market crash devastated the rental market, but the situation is now stabilizing. The housing crash initially resulted in a huge expansion of rental offers. From 6,200 units in August 2007, the number of properties for rent rose significantly to more than 23,400 in August 2009. However, the stock of rental properties has now fallen to less than 18,000 (October 2010).
Dublin rents actually rose during 2010, but are still 30% below their peak levels.
The all-Ireland rent index fell 2% y-o-y to October 2010, according to Daft.ie, a significant smaller fall than last year’s 17% rent collapse. The average rent in Ireland in Q3 2010 was €840 per month, down from €880 in mid-2009.
On average, rents in cities rose 0.7% y-o-y while rents in non-city areas fell 0.7%.
Yields have slightly improved but remain stubbornly low.
The average rental yield across Ireland for Q3 2010 was 3.8%, up from 3.4% in Q3 2009.
Dublin’s yields are slightly better at 5.5% in the city centre. In other Dublin counties, yields range from 4.0% to 4.7%.
Huge oversupply of housing
Ireland dwellings houses properties real estate completed graph chart new construction
Oversupply is estimated at 17.4% of the housing stock, 345,116 units (April 2009), according to a University College Dublin report of March 2010. The vacancy rate is also around 17%.
During the house price boom, dwellings completed tripled from 30,000 in 1995 to over 93,000 in 2006. After the bubble popped, completions fell dramatically to 26,420 units in 2009. Less than 20,000 units are expected to be completed in 2010, the lowest completion rate since 1991.
Due to the house price falls, the housing market may already be undervalued by about 12%, according a Standard and Poor (S&P) report of June 2010.
Ireland’s fatal mistake?
Ireland’s decision to save the banking sector at all costs is becoming one of the most expensive bailouts in the world. To prevent the banking sector from collapsing, the government has poured billions of euros into bank bail-outs. It also spent around €80 billion to establish National Asset Mangament Agency (NAMA) to acquire toxic loans primarily with a view of improving the availability of credit in the Irish economy, and to remove uncertainty about non-performing assets on bank balance sheets.
The fragile financial sector has only been kept afloat by the government by multi-billion bail-outs. The best example is Anglo Irish Bank or simply Anglo. In 2009, it was nationalized with a €1.5 billion capital infusion, followed by a €4 billion additional bail-out. In March 2010 an additional €8.3 billion was provided by way of promissory notes. In June, an additional €2 billion was injected into Anglo as part of the €10 billion estimated to be needed to keep it afloat. The government also announced that bank rescue efforts might need an additional €34 billion.
Of the €85 billion EU-IMF bailout fund, €10 billion will go to bank recapitalizations (primarily Anglo), €25 billion for banking contingencies and €50 billion for financing the budget.
In exchange, Ireland agreed to one of history’s harshest austerity programs. The government is set to cut spending by €4.5 billion, and increase taxes by €1.5 billion.
From a budget surplus of 3% in 2006, the fiscal situation has worsened to a deficit of 7.3% in 2008 and 14.3% in 2009. The deficit for 2010 is expected to be around 11.6%, lower but still very high, given the massive budget cuts and tax hikes implemented since 2009.
The government plans to slash the deficit further to 3% by 2014. But this ambitious plan will involve yet more tax hikes and spending cuts.
Yet these moves have failed to reassure investors, because the government’s overall debt is expected to be around 100% of GDP by the end of 2010, significantly up from a mere 25% of GDP in 2007. By 2011, the debt is expected to be around 124% of GDP. If the debts of NAMA are included, these figures go up significantly.
However the economy is slowly improving, and the government hopes that GDP will expand by 1.7% in 2011.
Ireland experienced a 7.1% GDP contraction in 2009, its worst recession in decades. After 0.5% q-o-q growth in Q3, GDP will probably fall a mere 1.55% during 2010.
The massive tax increases and budget cuts, however, may halt this fragile recovery.
Unemployment continues to rise
Unemployment has drastically increased to 11.8% in 2009, and is expected to rise to 13.5% by end-2010, before easing to 13% in 2011, according to the IMF. Unemployment was below 4.5% from 2000 to 2006.
Net outward migration reached 38,000 in the twelve month period ending April 2010; up from 7,800 recorded over the same period in 2009. This was in sharp contrast to the net immigration of 71,800 in 2006, and 67,300 in 2007, according to the Central Statistics Office. Some 120,000 people are estimated to have left Ireland during 2010, including many Irish citizens.
The Irish property bubble was caused by greed, low interest rates, greed, easy money, greed, excessive speculation, greed, inappropriate government policy and greed.
Now let’s see if you can see any similarity to the great Australian property bubble…
The Irish property bubble was caused by greed, low interest rates, greed, easy money, greed, excessive speculation, greed, inappropriate government policy and greed.
Now let’s see if you can see any similarity to the great Australian property bubble…
I can think of lots of similarities - for example, in both countries money is lent to borrowers in order to buy homes. Houses in both countries are often made of brick or timber. In both countries, the houses have roofs. Houses in both countries are usually built on land. Both countries spell 'house' the same way.
However, the similarities are less relevant then the differences when trying to determine whether Australia will follow a similar path to Ireland.
If Irish house prices more than quadrupled in 10 years (rose 330%), and then fell 36% nationally, that still leaves prices today at almost three times their 1996 level. So even after the Irish property crash, prices are still almost triple the level they were before the boom began. And that's with a massive over-supply of empty homes and ghost estates, unemployment at 13%, crippling austerity measures, and net emigration.
If Irish house prices more than quadrupled in 10 years (rose 330%), and then fell 36% nationally, that still leaves prices today at almost three times their 1996 level. So even after the Irish property crash, prices are still almost triple the level they were before the boom began.
Australian house prices are currently only 127% above their 1996 level.
Quote:
our $2 trillion housing bubble has seen prices rise by 127% from 1996-2010
Compare that to Irish house prices, still nearly three times their 1996 level, even after their huge crash!
Sure, Australia will follow the same path as Ireland... that would involve our own house prices booming from here to get close to current Irish 1996 multiples.
Australian house prices are currently only 127% above their 1996 level.
Yes, massive isn't it?
Have you ever wondered what the Australian property market would look like if it too crashed 36% nationally like Ireland? Well it would still be 45% above the 1996 level which itself is higher than almost the entire preceeding century!
Given the above are you really dumb enough to believe that prices must boom from here to get to a level from which to crash? Do you really not think that 127% is enough?
You also point to Ireland massive over-supply of empty homes and ghost estates, unemployment at 13%, crippling austerity measures, and net emigration. This is all true but they didn't have any of these things before their crash and Australia hasn't had it's crash yet so you can't yet say we're different. I really do get the feeling you're struggling for differences here but congratulations on this stunning observation: Both countries spell 'house' the same way.
So what you're saying is that it's different here, except when it doesn't suit you, in which case, it's the same.
In other words, Australia is just like Ireland and will have a big crash just like Ireland had.
But Australia is different from Ireland, and won't have a big boom just like Ireland had.
Maybe you think the EU will also come over to Australia and set our interest rates at excessively low levels for a few years to help our bubble get ramped up a bit, and then just as prices peak, they'll keep interest rates at excessively high levels so the crash is worse. And then Europe might impose some austerity measures on us, and perhaps our huge migrant eastern European non-resident community will head back to their home countries when our 'bubble' bursts?
You're all over the place, wise bear.
Face facts - the Irish bubble (and the Japan bubble) were on a scale of magnitude beyond anything we've seen in Australia.
Expecting the same crash result in Australia is just silly.
Australia has a housing bubble and when sentiment turns it will crash just like Ireland.
It doesn't matter that it's not the same percentage increase as Ireland or as big as Japan's. The fact remains that exactly the same factors were at work on the way up in our bubble as Ireland's (low interest rates, easy money, excessive speculation, inappropriate government policy, greed etc.) and we should therefore expect the same influences to be at work on the way down (tighter money, fear, more inappropriate government policy, unemployment etc). I can understand why you'd like basic human psychology to operate differently here but I believe you're going to be disappointed.
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