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"Irish property prices still criminally high. Can people not understand it's over?"

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  • 10-05-2009 7:37pm
    #1
    oceanclub
    Registered Users Posts: 3,411 ✭✭✭


    http://www.sbpost.ie/post/pages/p/wholestory.aspx-qqqt=DAVID%20MACWILLAMS-qqqs=commentandanalysis-qqqsectionid=3-qqqc=5.2.0.0-qqqn=1-qqqx=1.asp
    So how low are prices likely to go? [...]

    The value of the asset will have some relation to the yield the asset returns. In houses, the yield is the rent. In the US, a house was traditionally valued at some multiple of the rent it generated. Typically, the value of a house was calculated at 12 to 14 times its annual rent. This relationship has held in the US for over 100 years. There is no reason to believe that this shouldn’t be the way to value Irish houses.

    This is a normal price/earning ratio that we would use in the stock markets to assess value. What the US valuation model is saying is that, over time, property should trade on a price/earnings (P/E) ratio of 14 times.

    So, let’s see where Irish houses will end up. Take a typical house in a commuter town. On daft.ie there are hundreds of them. For example, in Newbridge, Co Kildare, you can buy a new three-bed house for €335,000.This is a steal, according to the ad. A bank will finance this for €9 95 per month.

    According to the same website, the average rent for a three-bed in Newbridge is between €950 and €1,000 a month. This house, if it can be rented, will yield €11,400 a year. This implies that, applying the US valuation to the asset, the house should be valued at €159,600.However, in Ireland, we are expecting the house to sell at €335,000.

    The Irish house, at a ‘bargain’ price of €335,000, is still more than 53 per cent overvalued. It will have to fall by half again to make the sums ad up.

    P.


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