"Collapse in house prices is good for the economy"

spockety

McWilliams obviously on a roll..

http://www.independent.ie/opinion/columnists/david-mcwilliams/collapse-in-house-prices-will-be-good-for-economy-1736856.html

Wednesday May 13 2009

Many people in recent weeks have tried to explain what is happening to the economy.

How can we visualise why credit has dried up? How do we rationalise the fact that we went from a situation of so much money we didn't know what to do with it, to a situation of no cash at all? Where did it all go?

One interesting way to look at this, and this column has used it before, is to think of events in the natural world.

Think of the aerial photos of the Serengeti at the beginning of the annual rainy season. What was a parched arid climate where nothing grows suddenly become florid, verdant and full of life. Animals, flowers insects flourish and the place is abuzz. We see migrating wildebeest, crocs and birds and then, at the height of the season, the whole plain is crackling with energy, fuelled by that most precious of commodities, water.

Then as the seasons change, the water begins to evaporate. Life disappears from the edges of the plain, animals flee, plants die and as the waters recede life recedes with it. In the end, there is only a pathetic lush patch at the source of the river, everything else is barren, lifeless and arid.

Credit in the Irish economy acts the same way as water does in the real world. When it gushes into the various different nooks and crannies of the globe, economic life and vitality springs. So, all over the country, the water of the economy ushers economic vitality in -- credit. Anything is possible, anywhere. Money gushes out of the traditional core countries such as the US and Europe and finances projects in the most remote places, giving people hope.

Then the financial season changes, due to the psych- ological interaction between investors' hopes and fears, and the money retreats back to the centre again, leaving the exposed areas like the high plain of the Serengeti, exposed and lifeless. This process is happening all over the country now as businesses are left to fend for themselves without their lifeblood, credit.

This is why Irish house prices will continue to fall and fall. We are the victims of the retrenchment of credit. No-one will lend to our banks and they won't lend to everyone else.

Yesterday, I drove to Galway from Dublin and then up to Letterkenny. It was quite a trip, but it gives you a good idea about what is happening in our towns around the country and why the thousands of vacant properties will continue to fall like a stone.

Every single town I passed has a huge ghost estate on the outskirts: Athlone, Craughwell, Oranmore, Tuam, Castlerea, Sligo, Ballybofey, Bundoran, all the way up to Letterkenny. The place is full of them. These houses will never sell for the prices that are demanded. The reason is simple: they are still madly overvalued.

In most cases the houses will never produce any rental income. With unemployment rising so quickly and emigration replacing immigration, there simply are not the people to fill the houses. Even if credit were available, there is no demand.

Also, if we look out a few years, the banks will have to wean themselves off all the money they were borrowing abroad to sustain the boom. For the two main banks this was 160pc of their deposit base. Put simply, the banks were lending €16 for every €10 of deposits. In order to get their capital ratios back to a reasonable level, this figure needs to go back to parity. This financial pendulum swing means billions of euro will be sucked out of the economy in the next few years and not replaced.

So, how low will Irish house prices go? To establish this, we need to figure out what a house is worth.

A house is just a simple investment and should be valued according to some financial benchmark. In America, where they have had booms and busts in every generation, the long-term price of a house is equal to 14 times the annual rent the place can generate. Using this valuation, where could Irish prices go?

So, let's pick a typical ghost estate area such as Oranmore in Galway. If you go on Daft.ie you will find all the answers. If you want to buy a three-bed semi in Oranmore, it will set you back €335,000. However, you can rent the same place for €800 a month. What's more, there are 75 vacant three-bed semis in Oranmore advertised on Daft.ie alone.

Using the American valuation method, it implies that the house generates rent for the owner of €9,600. The house is worth 14 times that which gives us a value of €134,400. Yet the seller expects to get €335,000 for it!

In other words, to make it worth your while buying the house, the price would need to more than half from where it is now. We have to assume that the days of large capital gains on houses are over. Therefore, the average Irish house in these estates is likely to fall by anywhere between 50pc and 60pc in the next few years. And even that is assuming that prices don't undershoot on the downside the way they overshot on the upside.

This is a tragedy for the people who own the properties, and for us, because, ultimately, many of these shells will find their way into the NAMA. However, looking out a few years, the fall in the price of houses will be very positive for the economy.

Cheap accommodation, like cheap energy, is a competitive plus for any economy. In fact, if we look at successful European economies, cheap accommodation relative to wages is the basis of a dynamic economy.

After all, we are amongst the least densely populated countries in Europe. By the time this recession is over we will have house prices that will reflect this sparse population. And the economy will be stronger for it.

www.davidmcwilliams.ie

- David McWilliams

Small Change

Pretty much the same article as the Sunday Business Post one...........with rediculous analogy thrown in to appeal to Independant readers

mrgaa1

House prices are dictated by the cost of land, cost of build, cost of charges, profit and VAT.
Lets take a scenario:
Land bought with planning permission for 50 houses at €4million. Thats €80,000 per unit.
Lets say it takes €80k to build and finish each one costing €4million - thats €8million

so each house price is automatically 160k. Lets add in local council charges, electric and various site costs. So we'll add in another 20k per unit.

Now each unit is worth 180k. Lets add some profit at 20% to cover items such as snag lists, maintenance, insurance, office staff, legal fees etc.... So the unit price is now around 220k. Then there is VAT. the house is now €250k.

So can anyone tell me where the 150k house comes out of this? The working capital has to be paid. The landbank could be revalued. lets say it was by 75% thats still 20k per unit which makes the house 160k+VAT = €182k approx. Also I should point out that no provision has been provided for paying of interest on the loans. Probably looking at something like 50-60k a quarter of bank loans as the loans would be interest only.
So if over 2 years and nothing sold then 400k of interest would have been paid - or not depending on who you are.

If the banks took the houses over they'd have to write off the loans and sell them. No bank wants thousands of houses. They can't do anything with them.

If the landbanks were revalued and house prices came down to where purchasing was a possability then the number of jobs saved would be huge, not only from the builder but other services. The government would not have to pay out dole money.

Also anyone who thinks that all developers are rolling in it would be very mistaken. A lot would have put previous profits into more recent projects - I'm talking about over the past 3-4years.
I'm on a bit of a rant but do any of you know how much it takes to build a house - never mind a housing scheme. From a lot of the posts a lot of people are listening to scaremongering etc... It costs X amount to build a house - thats it. you want a house at 90k go abroad. If the site was 5k and local council planning fees were at 5k thats 10k. then you build your house - materials and labour and remember labour rates are set in stone - include here for the health and safety of the people doing your work, paint it, put a kitchen in, appliances, sanitaryware, all the new ECO friendly materials e.g. solar panels, solicitor fees.
Sorry to shatter some peoples beliefs but you have been badly mis-informed. BTW - materials are actually going up in price. All the floor tiles that normally were imported are up 20%, plastics up 20%, plasterboard, cement up 10%.
This is reality.
I do appreciate that during the boom years some developers upped the price but there was supply & demand and people did buy, and they queued to buy. No shotgun was put to the head to sign contracts and banks loaned the monies. Now that we're on the downturn everybody is doing their best to lower costs but when some costs have to be met - mostly bank loans - and we're all in this position then prices will remain higher accordingly.

oceanclub

mrgaa1 wrote: »

House prices are dictated by the cost of land, cost of build, cost of charges, profit and VAT.

Actually, no - the cost of land is dictated by house prices.

And how comes even the developer representative on Prime Time the other night admitted developer's profits were up to 50%? (And if he's saying 50%, I imagine they were even higher sometimes.)

And as for:

"I'm on a bit of a rant but do any of you know how much it takes to build a house"

This reminds of people talking about how they won't sell their shares for less than they're "worth".

At the end of the day - houses are worth what people will pay for them. Full stop.

P.

mrgaa1

oceanclub wrote: »

Actually, no - the cost of land is dictated by house prices.

And how comes even the developer representative on Prime Time the other night admitted developer's profits were up to 50%? (And if he's saying 50%, I imagine they were even higher sometimes.)

P.

The cost of a house includes the land it sits on plus, construction costs, legal costs, furnishings, local council costs etc....
So if a site was bought at €4million and there were 50 units on it that means each unit has a 80k unit cost - thats basic maths.
It is not possible to determine land cost by house price at the time of buying the ground if the house has not been built. Remember the land is mostly bought at auction.

I was using an example of 20% profit - some may have had a lot more. But the basics of what I was pointing out remain the same. Loans to banks have to be paid back and the house price can not go lower than that.

oceanclub

mrgaa1 wrote: »

Loans to banks have to be paid back and the house price can not go lower than that.

And if the house prices don't go lower than people feel they're "worth", they won't buy them, the developers won't have any cash flow at all, and they will go bankrupt. That's capitalism - though I realise that developers only like capitalism in the good times.

P.

D3PO

Small Change wrote: »

Pretty much the same article as the Sunday Business Post one...........with rediculous analogy thrown in to appeal to Independant readers

exactly lol

notice how he keeps pointing to this ghost estates in the backend of nowhere. 100% of the population agree these houses will never sell at their values or near their values.

I still contend NAMA should buy up these assests level them and rezone as agri land, as in their current guise they are worthless.

silverside

less than worthless, even - cost of levelling probably more than value of agri land... let them rot (maybe fence them off so small kids dont play and hurt themselves)

oceanclub

D3PO wrote: »

I still contend NAMA should buy up these assests level them and rezone as agri land, as in their current guise they are worthless.

NAMA's purpose is not to use public money to bail out developers. (Of course, it will probably end up that way.)

P.

D3PO

oceanclub wrote: »

NAMA's purpose is not to use public money to bail out developers. (Of course, it will probably end up that way.)

P.

of course its not for builders bailout

oceanclub

D3PO wrote: »

of course its not for builders bailout

Yet another reason to emigrate from this godforesaken country; otherwise, give it 10 years, and these ***** will be again driving around in Ferrari's that I paid for.

P.

jmayo

mrgaa1 wrote: »

House prices are dictated by the cost of land, cost of build, cost of charges, profit and VAT.
Lets take a scenario:
Land bought with planning permission for 50 houses at €4million. Thats €80,000 per unit.
Lets say it takes €80k to build and finish each one costing €4million - thats €8million
so each house price is automatically 160k. Lets add in local council charges, electric and various site costs. So we'll add in another 20k per unit.

Now each unit is worth 180k. Lets add some profit at 20% to cover items such as snag lists, maintenance, insurance, office staff, legal fees etc.... So the unit price is now around 220k. Then there is VAT. the house is now €250k.

So can anyone tell me where the 150k house comes out of this? The working capital has to be paid. The landbank could be revalued. lets say it was by 75% thats still 20k per unit which makes the house 160k+VAT = €182k approx. Also I should point out that no provision has been provided for paying of interest on the loans. Probably looking at something like 50-60k a quarter of bank loans as the loans would be interest only.
So if over 2 years and nothing sold then 400k of interest would have been paid - or not depending on who you are.

If the banks took the houses over they'd have to write off the loans and sell them. No bank wants thousands of houses. They can't do anything with them.

....
I do appreciate that during the boom years some developers upped the price but there was supply & demand and people did buy, and they queued to buy. No shotgun was put to the head to sign contracts and banks loaned the monies. Now that we're on the downturn everybody is doing their best to lower costs but when some costs have to be met - mostly bank loans - and we're all in this position then prices will remain higher accordingly.

Ah bless you do appreciate that some developers upped the prices, gazumping was used if I recall correctly :rolleyes:

And finally in you last paragrpah you mention the golden term "supply and demand". It's doesn't matter how much it cost the developer to build them if there ain't a demand he will have to sell them at whataver the market dictates.
You can't use the supply and demand one way and not the other.
The boot is on the other foot now, so welcome to the buyers market.
Lifes a bitch ain't it

Or maybe you would like the banks and other creditors to hold off until the market recovers and the poor developers can flog the houses for the values of 2007:rolleyes:

If I build a car and no one wants it, I will only get what someone is willing to pay and it doesn't matter didly squat how much I spend building it.

Ehhh isn't this whole overvalued thing one of the reasons the banks are f***ed.
They loaned out too much for land and developments that were way overpriced. Now that the market has begun to correct to more realistic levels the sale of the secured assets will not come close to paying off the loans.

silverside

house prices are "dictated" by supply and demand :rolleyes:

right now lots of supply but not much demand so prices are falling, never mind what they cost to build/buy originally - "sunk costs are lost"

I think thats a good thing - once the market gets moving again at a lower level people will be able to move house more easily - pity about bank shareholders (i.e. joe taxpayer) and anyone in negative equity, they're a bit f**ked.

jmayo

mrgaa1 wrote: »

The cost of a house includes the land it sits on plus, construction costs, legal costs, furnishings, local council costs etc....
So if a site was bought at €4million and there were 50 units on it that means each unit has a 80k unit cost - thats basic maths.
It is not possible to determine land cost by house price at the time of buying the ground if the house has not been built. Remember the land is mostly bought at auction.

I was using an example of 20% profit - some may have had a lot more. But the basics of what I was pointing out remain the same. Loans to banks have to be paid back and the house price can not go lower than that.

Hello it doesn't matter how much the bloody house cost to build and how much money is owed :rolleyes:
If there is nobody willing to pay the sales prices, then in order to sell it has to be lowered until someone is willing to pay up.
Do you understand the basics of supply and demand ?
Have you ever heard of selling at a loss ?

Perhaps you would like guaranteed house prices, in order that the builder wouldn't have to sell at a loss ?

PS do you happen to work as/for developer, estate agent/auctioneer or maybe even in the PS ?

spockety

mrgaa1 wrote: »

House prices are dictated by the cost of land, cost of build, cost of charges, profit and VAT.
Lets take a scenario:
Land bought with planning permission for 50 houses at €4million. Thats €80,000 per unit.
Lets say it takes €80k to build and finish each one costing €4million - thats €8million

so each house price is automatically 160k. Lets add in local council charges, electric and various site costs. So we'll add in another 20k per unit.

Now each unit is worth 180k. Lets add some profit at 20% to cover items such as snag lists, maintenance, insurance, office staff, legal fees etc.... So the unit price is now around 220k. Then there is VAT. the house is now €250k.

So can anyone tell me where the 150k house comes out of this?

All your post says to me is that any developer who built during the latter stages of the bubble years is screwed, because they will not be able to sell their houses while the rest of the market which can cope with huge price cuts (1970's 3 bed semi's in Dublin, etc., etc.) will just carry on.

You can bleat on about cost of build and so on, and you can hammer your fist and say no lower than 250k. That's fine, if they can't sell for lower than that, then they just won't sell. There is plenty of supply in the market that can and will go way, way, way lower. Thanks!

Freddie59

mrgaa1 wrote: »

Now that we're on the downturn everybody is doing their best to lower costs but when some costs have to be met - mostly bank loans - and we're all in this position then prices will remain higher accordingly.

Eh - no they won't. Because people won't pay the money. What then? The developers/builders can only delay the inevitable for so long. People now have what they didn't have in the past ten years. Common sense and a realisation that these prices have WAY further to go.

D3PO

Freddie59 wrote: »

. People now have what they didn't have in the past ten years. Common sense and a realisation that these prices have WAY further to go.

thats a dangerous assumption to make. Im not so sure the general population have the economic savvy to know when and at what price is reasonable.

oceanclub

Freddie59 wrote: »

Eh - no they won't. Because people won't pay the money. What then? The developers/builders can only delay the inevitable for so long. People now have what they didn't have in the past ten years. Common sense and a realisation that these prices have WAY further to go.

"Jaysus, lads, I need the cash, come on - these don't grow on trees, you know:"

http://graphics8.nytimes.com/images/2009/01/04/business/02ireland.xlarge1.jpg

P.

mrgaa1

Freddie59 wrote: »

Eh - no they won't. Because people won't pay the money. What then? The developers/builders can only delay the inevitable for so long. People now have what they didn't have in the past ten years. Common sense and a realisation that these prices have WAY further to go.

What inevitable are you talking about? If a developer owes for example 100k per unit they sell to the bank for the loans that are outstanding and has to sell at 80k the maths don't work. The banks don't want the houses - if the builder can't sell them what makes you think the banks will. Anyone who thinks that a house that was on the market for 300k will be soon on sale for 100k is quite simply barking mad - and I'm talking about in general not just a one off house. This will not happen.
Would it not be better for the bank to allow the builder to sell at a price that does not put people out of work - surely its in the governments interest as they have 25% of AIB and BOI to allow builders the chance to sell houses and not have more people on the dole? I'm not just looking at builders I'm talking about business's in general - they all need help.
House prices do not have WAY further to go - they are almost if not already at bottom. There will be a long period of slow selling - that is what history tells us after previous recessions.

oceanclub

mrgaa1 wrote: »

they are almost if not already at bottom.

Ah, you join a long line of esteemed vested interests who've been telling us we're at the bottom for the last 2 years:

Tom Parlon, Newstalk Breakfast Show, 11 Feb 2008:

"We're at, or very close to, the bottom now and it's turning around"

Tom Parlon, Irish Examiner, 24 May 2008:

“A lot of buyers have been sitting on the fence for nine to 12 months, our message is now is the time to buy, there is real value out there"

Isabel Morton, IT Property writer, Irish Times, 24 April 2008:

"We all got such a fright last year, that we huddled up in the far corner of the field waiting for the sheepdog to herd us towards the gate. Well the property gate is open again. Not quite as wide open as it had been before, but open nevertheless. So let's get moving. You can never buy at the wrong time."

Same person, Irish Times, 12 Mar 2009:

"MANY HAVE hinted at it over the last couple of weeks, but I’m just going to say it: THE PROPERTY MARKET HAS REACHED THE BOTTOM!"

Bertie Ahern, Irish Times, 28 April 2007:

"On the other side of the election we'll get back to normality. And I think that normality will be the soft landing."

Ken McDonald, Irish Independent, May 2 2008:

"I would have no hesitation recommending any friends of mine to buy at the present time because with the sharp reduction in new starts, it is inevitable that there will be a shortage of supply in Dublin in the very near future".

Gerry Ryan, Gerry Ryan Show, 17 Feb 2008:

"Now is your time to go out and buy that house because they're never going to be cheaper. Never going to be cheaper."

Welcome to the august pantheon!

P.

D3PO

mrgaa1 wrote: »

House prices do not have WAY further to go - they are almost if not already at bottom. .

Denial or vested interest ?

hmmmmm

CiaranC

mrgaa1 wrote: »

House prices do not have WAY further to go - they are almost if not already at bottom.

lol

gurramok

D3PO wrote: »

thats a dangerous assumption to make. Im not so sure the general population have the economic savvy to know when and at what price is reasonable.

250-400k for a gaff in a no-go area full of junkies etc is enough savvy for the average joe and jane to just cop on that something is amiss.

Freddie59

mrgaa1 wrote: »

House prices do not have WAY further to go - they are almost if not already at bottom. There will be a long period of slow selling - that is what history tells us after previous recessions.

:D:D

Whatever you say. That famous Egyptian river comes to mind.:) It is, indeed, inevitable. Whatever you like to convince yourself of. Are you:

a) a developer
b) an EA
c) Tom Parlon

I'm waiting.......;)

mrgaa1

http://www.rte.ie/business/2009/0514/kingspan.html
http://www.rte.ie/business/2009/0514/economy.html
http://www.rte.ie/business/2009/0423/eurozone.html


IMHO we are at this bottom that we are looking for - how long we stay there is another question. The above links give some views on where we are - maybe they are right maybe not. As stated in previous posts I've seen recessions before and we'll come through this one. And from being in recessions before I can see the signs of recovery and they are there now. Its a long road ahead.

oceanclub

mrgaa1 wrote: »

http://www.rte.ie/business/2009/0514/kingspan.html
http://www.rte.ie/business/2009/0514/economy.html
http://www.rte.ie/business/2009/0423/eurozone.html


IMHO we are at this bottom that we are looking for - how long we stay there is another question. The above links give some views on where we are - maybe they are right maybe not. As stated in previous posts I've seen recessions before and we'll come through this one. And from being in recessions before I can see the signs of recovery and they are there now. Its a long road ahead.

1. The first link says the _pace_ of deterioration has slowed - i.e, it's still deteriorating, but not as bad .
2. Ditto.
3. Figures average out over Europe as a whole - but what about Ireland?

P.

gurramok

1st link is UK & Irl combined. Seperate those markets and you get a different picture

2nd link is Davy tryng to report the worst is over without any basis and just speculation as we simply do not know but as you know, its going to get worse here.

3rd link is eurozone area, this won't bring Ireland up out of a recession, its only a small hope as two thirds of the structural economic deficit is domestic(the bubble).

You left out a 4th link from the news of the day http://www.rte.ie/business/2009/0514/exporters.html
"Exports link could cost 90,000 jobs this year"

The Irish Exporters Association says the value of Irish exports fell by almost 10% in the first three months of this year compared with the same period last year.

The association has also warned that the decline in exports will accelerate in the coming months unless the Government provides some additional boost for the sector. The body warns further falls in exports will lead to increased unemployment in the sector - possibly more than 90,000 jobs.

The IEA said total exports in Q1 were just under €34 billion, down 9.6% from a year earlier. It is expected a 13% drop for the whole of 2009 - a loss of more than €20 billion in export revenue.

"we are at this bottom that we are looking for ". What bottom are you talking about?

The economy or house prices? The first in my view will happen sooner than the second one, hopefully before the end of 2010. The second, give it another 2 years at least.

martian1980

D3PO wrote: »

Denial or vested interest ?

hmmmmm

well....

on 14/1/09 on the "temporarily suspend stamp duty?" thread, he posted

mrgaa1 wrote: »

...I was trying to sell a house yesterday and the guy offered me 125k, then 130 and then 140k.

...so, my guess is vested interest

oceanclub

About Davy - to quote someone on the Pin:

AIB - on Davy's focus list
BOI - on Davy's focus list
Anglo - was on Davy's focus list until the bitter end
Irish Life - on Davy's focus list
Aer Lingus - on Davy's focus list

Yup, their record speaks for itself.

P.

SkepticOne

mrgaa1 wrote: »

Would it not be better for the bank to allow the builder to sell at a price that does not put people out of work - surely its in the governments interest as they have 25% of AIB and BOI to allow builders the chance to sell houses and not have more people on the dole?

The government aren't stopping you from selling houses. Unrealistic pricing is stopping you from selling houses. You need to price to sell, not price according to whatever expenses were incurred in the past which are not relevant to the buyer.

BigEejit

<breaking news>
Vested Interest tries to persuade people on the Internet that its impossible for house prices to go below €250,000.... also strong message of BUY NOW, PRICES ARE AT THE BOTTOM being bandied about (or ask the government to buy them for large amounts of cash and then demolish them)
</breaking news>