Housing Bubble Bursting

is_that_so

The Indo this morning suggests that ECB will go for 0.5% in April. There was also a unsubstantiated rumour that there would a co-ordinated cut between the Fed, BOE and ECB.
Full story

"I have felt for a long time that rates in Europe have peaked. We will get at least a 0.50pc cut and the markets now think that," Bank of Ireland Chief executive Dan O'Loughlin told the Irish Independent.

Given the potential knock on effects of a "US recession" it is probably more likely than not. But given the caution the ECB consistently shows, it could be anywhere from February to December! There is also the extra cost that the credit crunch gave us. Once credit eases , it is not unreasonable to expected lenders to roll back on the 0.1 or so they added before Christmas.

Afuera

Roonbox wrote: »

Does anyone know if the sudden drop of .75% in the interest rate that the Federal reserve suddenly brought in yesterday in the States will impact our rate shortly??
Surely if rates drop again and make houses more affordable then the dropping of house prices will slow down..???

I think that the interest rates are only a small part of the problem at the moment tbh. The main issue as far as I see it is that banks no longer have confidence in each other and are unwilling to provide liquidity. A lot of dodgy loans were made in the previous years and it still needs to be revealed where they ended up and who's going to get caught with all this crap on their books. Until this is fully sorted out there will not be so much money washing around to soak into the various assets out there. Many of the Irish banks have already raised their interest rates independant of any moves by the ECB to try and maintain their profit margins.

Afuera

seamus wrote: »

I'm very willing to accept that I could be wrong, but in my view the main problem with the market is not that people are unwilling to buy property, or that they don't want to buy property, but purely that they are unable to get the money that they need together.
Once prices hit a point where people can afford housing that's suitable for them, people will return to buying property. I don't think the majority are that affected by negative sentiment in the media.

I agree with you that there is still demand for property out there and I feel that the lack of affordability was the main catalyst that caused the market to stop dead. However I think that once this happened it has caused the dynamics of the market to change dramatically; I don't think the lack of affordability is the main problem anymore.
Figures from some of the estate agents (Lisney or Sherry Fitz I think) in 2006 showed that 40% of new builds were being bought by investors. It was clear at the time that the rents on these would not be able to cover the mortgages however obviously many still seemed to think that it was decent low risk strategy to subsidise the mortgage while they were making a paper profit on capital appreciation. Annecdotally, I know plenty of first time buyers that jumped into the market, buying a property that was maybe less than ideal, just to get on the ladder. The fear was that prices were rising so fast that any savings they had or wage increases they received would not get them any closer to buying a home. AFAIK FTBs accounted for about 35% of the market in 2006. Both of these types of buyers (the investor relying on capital appreciation and the FTBer buying something just to get their foot on the ladder) were making their purchases purely based on speculation.
The big problem when price rises stop happening is that the demand from these two groups dissappears into thin air. It does not make sense for an investor to buy a depreciating asset that is costing them money every month. It does not make sense for a first time buyer to purchase a less than ideal property when price reductions show that they are getting closer to being able to afford the house they really want. I'd estimate that the real demand for property is probably less than half of what it was during the peak of the market. Even if affordability returned quickly to the market, we still have to deal with the fact that the property industry, which accounted for close to 20% of our entire economy, needs to be greatly reduced. Unfortunately I think it's gone beyond the stage where we can simply return to "business as usual" just because afforability is improved somehow.

gurramok

is_that_so wrote: »

The Indo this morning suggests that ECB will go for 0.5% in April. There was also a unsubstantiated rumour that there would a co-ordinated cut between the Fed, BOE and ECB.
Full story



Given the potential knock on effects of a "US recession" it is probably more likely than not. But given the caution the ECB consistently shows, it could be anywhere from February to December! There is also the extra cost that the credit crunch gave us. Once credit eases , it is not unreasonable to expected lenders to roll back on the 0.1 or so they added before Christmas.

Don't believe a word what Dan says, he and his ilk have been proven wrong many times before.
I'd rather believe what Trichet/overseas economists say than the VI here in Ireland.
Its interesting though, why should they cut rates in eurozone when they don't have an asset bubble(bar Spain and little Ireland) which US/UK/Aus have?

If they do cut even by 0.5%, there are other factors here still putting pressure on the market:

-Severe oversupply of housing
-Unemployment going up due to construction contracting from oversupply
-Some consumer spending reducing due to above
-US recession means bad news for us, MNC''s will cut back here, remember 2001/02
-Negative sentiment here
-Interbank rates, will they retract or go even higher as extent of US sub prime has not been fully played its head yet
-House prices still too high here fo FTB's, a 0.5% cut may give some more lending power to borrowers, but not enough to sustain high prices i believe.
-Investors, will they come back, all that depends if price falls continue or not and i beleive they will not as falls will continue
-Migrants filling rentals, they'll stop coming and some will leave as our domestic ecomony tanks plus our own will emigrate again hence less renters about helping drive rents down and surplus property for sale as some landlords will be forced to sell

-Good news?....oil prices will come down on US recession which will help inflation coming down, the only plus to help ECB reduce rates.
-Maybe Eurozone will be affected by US recession, how much we don't know. If by alot, rates might come down to 'help' growth

To sum up, lots of factors at play on Irish scene. Of course if the US turns around sooner, the cards will be turned on some factors!

gurramok

Now 'Trichet dampens rate hopes' after yesterdays Fed rate shock

http://www.rte.ie/business/2008/0123/ecb.html

Looks like inflation is more important than 2%+ growth when looking at where to go with rates.

The_Conductor

gurramok wrote: »

Now 'Trichet dampens rate hopes' after yesterdays Fed rate shock

http://www.rte.ie/business/2008/0123/ecb.html

Looks like inflation is more important than 2%+ growth when looking at where to go with rates.

Did you listen to the piece? It was very interesting. Apparently with inflation levels as they are Public Sector employees (all 2.2 million of them) in Germany are seeking 8% payrises for 2008 and 6% for 2009 (with the probability they will get 1/2 these- i.e. 7% increase over the next 24 months- which is just keeping pace with inflation levels on the continent). In Ireland negotiations are set to get underway for the successor to the current pay round. With benchmarking a non-event and the perception that the very low increases the last time round were conditional on the government getting inflation under control- which they did not, the increases sought here will be of a minimum of 5% (probably higher) for 08 and 4% for 09- just to keep pace with inflation.

Trichet obviously isn't too interested in our problems, despite the fact that our inflation levels are running at almost twice the EU norms- but the likely increases in Germany are a big worry.

Comments from him to the EU parliament indicate that on the balance of probability further interest rate rises will probably be deferred until later in the year- but increases, rather than decreases, are still very much on the cards.

S.

D'Peoples Voice

Check out people's expectations of interest rates in 2years time
http://www.ecb.europa.eu/stats/money/yc/html/index.en.html

The_Conductor

D'Peoples Voice wrote: »

Check out people's expectations of interest rates in 2years time
http://www.ecb.europa.eu/stats/money/yc/html/index.en.html

Confirms what they have been saying all along about how 4.5-5% is considered "normalisation" of rates.

patrickolee

smccarrick wrote: »

Did you listen to the piece? It was very interesting. Apparently with inflation levels as they are Public Sector employees (all 2.2 million of them) in Germany are seeking 8% payrises for 2008 and 6% for 2009 (with the probability they will get 1/2 these- i.e. 7% increase over the next 24 months- which is just keeping pace with inflation levels on the continent). In Ireland negotiations are set to get underway for the successor to the current pay round. With benchmarking a non-event and the perception that the very low increases the last time round were conditional on the government getting inflation under control- which they did not, the increases sought here will be of a minimum of 5% (probably higher) for 08 and 4% for 09- just to keep pace with inflation.

They'll be lucky. A lot of people out here seeing reductions in their wages over the last 5 years.... and I'm not talking about 'in real terms' or some such. In actual numbers! Time the civil servants woke up, let them strike.

miju

patrickolee wrote: »

Time the civil servants woke up, let them strike.

if public servants were to strike en masses many , many functions would simply cease for the duration for that very reason the government would eventually buckle before any strike came to be IMHO

A Random Walk

At the risk of sounding like a stuck record, the ECB has been given only one official mandate - price stability, i.e. inflation. The US Fed has a dual official mandate, price stability and low unemployment.

We have the clueless Irish media expecting the ECB to follow the Fed when frankly the ECB couldn't care less as they are focussed on inflation. If people would just keep that in mind the actions of Trichet & pals become all the more predictable. The Germans have lost their currency through hyper-inflation twice last century, after the consequences of that they are not about to let that happen again.

SimpleSam06

smccarrick wrote: »

In Ireland negotiations are set to get underway for the successor to the current pay round. With benchmarking a non-event and the perception that the very low increases the last time round were conditional on the government getting inflation under control-

I'm a bit confused here. Are you referring to the German civil service or the Irish civil service? Because benchmarking and the public sector pay generally in Ireland have been running out of control for the last seven years, and certainly way ahead of private sector, never mind the inflationary side effects.

The_Conductor

SimpleSam06 wrote: »

I'm a bit confused here. Are you referring to the German civil service or the Irish civil service? Because benchmarking and the public sector pay generally in Ireland have been running out of control for the last seven years, and certainly way ahead of private sector, never mind the inflationary side effects.

I was talking about both the Irish and the German situations- the ECB are paying heed to the German events- but here in Ireland we are simply a backwater.

While the Public Sector pay agreements have given small regular increases over the past 7 years- they have not in actual fact kept pace with inflation- particularly the last round- where IBEC and the ICTU negotiated the deal on the basis that inflation would average 6% over the course of the agreement, when in actual fact it was close to 11%. This erosion in purchasing power is what the unions will be beating the government with- when negotiations get underway in February.

When you say public sector pay has been running out of control- I would disagree with you in one respect and agree with you in another. The overall wagebill has soared- as numbers have increased. A lot of these additional numbers are in areas that the electorate demanded- more Gardai, teachers and emergency personnel. However- a lot of recruitment took place in areas such as the HSE- where there is sweet damn all to show for it, other than additional layers of bureaucracy. The civil service in comparison actually fell in numbers by almost 6% in the same period (there was a hiring freeze which was actually adhered to from 1999 for a 3 year period, and strict controls thereafter- which should have happened in the HSE).

Vis-a-vis pay levels- the technical grades and experienced graduate grades in the civil service (admitedly only a small subsection of the Public Service) are actually a lot lower than in the private sector (but this is compensated for with flexitime and family friendly policies). The same can not be said for the purely clerical grades- which do tend to be better paid than the private sector- the reason they tend to be so well remunerated comparatively, is because the government is terrified of their union (the CPSU)- historically they have been only too happy to strike- unlike the members of the PSEU and the AHCPS.

So- we can most probably look forward to increases of at very least inflation levels- as the government did not honour their commitment to get it under control- which in turn will feed into the vicious cycle of inflationary pressures.

Re: benchmarking- the reason increases were not granted to civil servants was because of their defined benefit pension plans. These pensions were viewed as worth an additional 15% topup on salaries. The fact that since 1995 these pensions are contributory pensions (10% of gross salary between different scheme contributions) was ignored- as the government funds pensions, both contributory and non-contributory on a "pay-as-you-go" basis. Anyone who joined the public sector post 1995 is on a similar footing to lots of private sector employees- who in a lot of cases are on identical defined benefit pensions (of late these have been closed to a lot of new entrants- but similarly the rights of new comers in the public sector have been reduced by a commensurate amount- post the 2002,2004,2005 and 2006 superannuation reforms).

S.

SimpleSam06

smccarrick wrote: »

While the Public Sector pay agreements have given small regular increases over the past 7 years- they have not in actual fact kept pace with inflation- particularly the last round- where IBEC and the ICTU negotiated the deal on the basis that inflation would average 6% over the course of the agreement, when in actual fact it was close to 11%. This erosion in purchasing power is what the unions will be beating the government with- when negotiations get underway in February.

Okay now you have definetely lost me. Eurozone inflation in recent months has been 3.1%, and Irish has been generally 4.1%, with no particular reason for it to stray far from that.

Year Inflation (%)
1998 2.1
1999 1.6
2000 5.6
2001 4.9
2002 4.7
2003 3.5
2004 2.2
2005 2.5
2006 4.1

Regardless of purchasing power versus inflation, public sector (for which I sometimes use civil service interchangeably, excuse any confusion) pay and benefits during the course of the benchmarking agreement have scaled considerably beyond private sector, a sure sign of ill health. This damning report give more details.

Irish Public Service 2001-2006: Salaries up 59%; Payroll up 18% - 38,000 workers and Pensions up 81.3%
By Finfacts Team
Jun 29, 2006, 08:27

Irish public service salaries have risen by 59% in the past five years and the payroll has expanded by 38,000 extra staff. The increase in the average industrial wage for a male worker in the period 2001-2005, was 19%.

The Exchequer’s annual wages and pensions bill increased sharply from €10.2 billion in 2001 to €16.2bn last year, with what has been termed "benchmarking" accounting for up to €1.32bn of the rise.

The number of public servants grew by 38,760, or 18%, since 2001 to 257,013 last January.

The education sector saw the biggest increase with pay costs rising by 65%. Health sector pay surged by 63% in the period, civil service salaries rose 48% and in the security sector they rose by 34.8%. The average weekly earnings for non-health service public sector workers stood at €848 last September, according to the CSO.

This was above the €754 for the banking and insurance sector and €579 for industrial workers.

Public sector pay rose by 8% in 2005 and pensions now account for 10% of the total pay bill, up from 8.6% in 2001. The pensions bill has increased from €876m in 2001 to €1,588m in 2006 representing an 81.3% increase over the period. The increase in the health sector has been 104%. Pensioners also received the special benchmarking increase of an average of 9%.

The core finding was that on average, public servants earned 13 per cent more than their private sector counterparts on a like-for-like basis in 2001. The researchers also discovered that the size of this margin (the public sector premium) in 2001 was not significantly different from what it had been in 1994, suggesting that pay increases in the public sector had kept pace with the private sector throughout the Celtic Tiger period.

Another discovery was that the margin by which public service workers outearned their private sector counterparts tended to be significantly larger at the bottom of the income distribution than at the top.

A particularly striking finding was that the estimate of the public sector premium for Ireland was more than twice as large as the available estimates for other countries.

Last November, Davy Stockbrokers said that Irish public sector pay is on average around 120 percent of private sector earnings, having risen from 113 percent in the past five years, according to Davy Stockbrokers.

In a weekly market comment, Davy said that figures from the CSO (Central Statistics Office) indicated that average earnings in the public sector are now more than €43,000 a year. This compares with €33,500 in the private sector (industrial, construction, distribution and other sectors).

"Moreover, these crude comparisons take no account of the superior pension entitlements available to the public sector," Chief Economist Robbie Kelleher said.

gally74

i think things are actually turning around.

property that people are willing to drop a bit is selling, just do a sale agreed search on daft, then numbers are imprving every week now from a trickle last year.

Gurgle

gally74 wrote: »

i think things are actually turning around.

property that people are willing to drop a bit is selling, just do a sale agreed search on daft, then numbers are imprving every week now from a trickle last year.

Add the fact that we are now expecting interest rates to be cut this year. A few months ago the doom & gloomers were telling us they were going to keep going up for years.

My guess is that the overshoot is done and prices are likely to level off now at somewhere around 10% below the peak.
The average price peaked at around €310k, I'd expect to see it around ~€280k over the next couple of years.

SimpleSam06

gally74 wrote: »

property that people are willing to drop a bit is selling, just do a sale agreed search on daft, then numbers are imprving every week now from a trickle last year.

Yes, the message is clear, drop your prices and you'll sell. Keep that up for a couple of years and we'll be back to normal.

Gurgle wrote: »

Add the fact that we are now expecting interest rates to be cut this year. A few months ago the doom & gloomers were telling us they were going to keep going up for years.

Sigh. Not according to Trichet, head of the European Central Bank.

Mr Trichet told the European Parliament that although the ECB was sticking with its forecast for 2% growth this year, risks to this figure were growing.

He also stressed the importance of keeping inflation. The remarks dampened hopes that the ECB would follow the US Federal Reserve in cutting interest rates.

Whcih completely excludes the interbank rates, which are climbing ever higher, because banks don't trust each other any more.

Gurgle wrote: »

My guess is that the overshoot is done and prices are likely to level off now at somewhere around 10% below the peak.
The average price peaked at around €310k, I'd expect to see it around ~€280k over the next couple of years.

Hahah, I am so going to quote you on that. Bookmarked the page and all.

miju

Gurgle wrote: »

Add the fact that we are now expecting interest rates to be cut this year. A few months ago the doom & gloomers were telling us they were going to keep going up for years.

I think a certain member of the ECB would disagree with you on that point especially as they have stated they will not be following the Feds current cutting of rates practice and they will concentrate on their single mandate of controlling inflation.

but how and everyou entitled to your opinion.

miju

jesus just read this post on AAM (interesting anecdotal thread BTW on how builders are responding to the credit crunch)

how stupid and cavalear were some / alot of people during the boom?

gurramok

Gurgle wrote: »

My guess is that the overshoot is done and prices are likely to level off now at somewhere around 10% below the peak.
The average price peaked at around €310k, I'd expect to see it around ~€280k over the next couple of years.

We're going to hold you to that for the next 2 years!

Surprised that you called the bottom NOW(10% down of 310k=281k) at 280k average in that timeframe which is still unaffordable for the bulk of the masses.

To hold your prediction, prices shall not go down any further from now hence your post is now bookmarked for future reference

As always, your prediction is just a guess.:D

Gurgle

gurramok wrote: »

We're going to hold you to that for the next 2 years!

Surprised that you called the bottom NOW(10% down of 310k=281k) at 280k average in that timeframe which is still unaffordable for the bulk of the masses.

To hold your prediction, prices shall not go down any further from now hence your post is now bookmarked for future reference

No, I think prices will go down further then come back up and eventually settle at a national average of €280-ish k. I certainly didn't say they were going to stabilise over the weekend

SimpleSam06

Gurgle wrote: »

No, I think prices will go down further then come back up and eventually settle at a national average of €280-ish k.

And in twenty years, you'll be bang on right. We'll hold that quote over your head until then, however.

Do-more

Gurgle wrote: »

My guess is that the overshoot is done and prices are likely to level off now at somewhere around 10% below the peak.
The average price peaked at around €310k, I'd expect to see it around ~€280k over the next couple of years.

Gurgle wrote: »

No, I think prices will go down further then come back up and eventually settle at a national average of €280-ish k. I certainly didn't say they were going to stabilise over the weekend

Ah come on! If your going to make a pridiction and least hold it for a day!

In one post you say that you think the over-shoot is done and prices are likely to level off now and in the next post you say no, I think prices will go down further!

Which is it to be!:D:D

astrofool

I'd assume all these figures are inflation adjusted, in 20 years time, 280k will be far too cheap, assuming 4% inflation for 20 years, average earnings go from 34k to 75k

Afuera

astrofool wrote: »

I'd assume all these figures are inflation adjusted, in 20 years time, 280k will be far too cheap, assuming 4% inflation for 20 years, average earnings go from 34k to 75k

Why do you assume that inflation would be running at 4% (this is twice the target set by the ECB)? We wouldn't be long pricing ourselves out of the global market if our wage inflation continued at that rate.

Black Swan

The housing bubble has burst big time in the USA, with double digit drops in values which may be a contributing factor to a recession before 2008 ends. Bush is in a panic trying to give tax money back to the voters in the forthcoming November elections, or his Republican party may be swept from office (a good thing indeed for the USA and the world;)).

astrofool

Afuera wrote: »

Why do you assume that inflation would be running at 4% (this is twice the target set by the ECB)? We wouldn't be long pricing ourselves out of the global market if our wage inflation continued at that rate.

Even at 2%, you're still looking at an average wage of €50,000 per person, €100,000 for a couple, so unless a lot of women/men stop working, then the average house price of 280k will be too low.

Afuera

astrofool wrote: »

Even at 2%, you're still looking at an average wage of €50,000 per person, €100,000 for a couple, so unless a lot of women/men stop working, then the average house price of 280k will be too low.

Are you assuming that unemployment rates are going to stay constant over the next 20 years as well? I'd need to see your justification for why our unemployment levels would stay the same as they were during our boom years before I can accept that.

astrofool

The assumption above was that for most mortgages, there will be dual incomes rather than single, irregardless of unemployment levels.

miju

but for example if unemployment rises would that not effect dual income houses for example this link