House price need to fall by 50%

Cookie_Monster

Interesting article by David mcWilliams today - Any thoughts?

Link

What part of cheap land does the Green Party not understand? The Green Party values the land we walk on, not in the way Fianna Fail does, not for its price but for its value. And the cheaper our land is, the more value it has for the collective good. The more expensive the land is, the more value it has for individual owners.

If the Green Party is really interested in the collective good, it would never support a proposition which prevents land from falling in value.

This goes to the core of the NAMA debate. In Ireland today, we have an opportunity to "lock in" the huge competitive gains that falling land prices give us. Cheap land, commensurate with our sparse population density, is the one thing that will ensure that we never blow the resources of the State on property speculation again.

The Greens are trying to impose a windfall tax on property speculation in order to dissuade people from speculating. However, the best way to prevent people from speculating on land again is to make sure that the collective memory of the land bust is so agonisingly painful that we never touch the stuff again.

If the Greens walked away from NAMA now, the price of land would fall quickly and dramatically and, in the process, we would achieve huge competitive gains which otherwise will have to come from higher unemployment or less capital investment.

And this is the issue. If we are to build a 'green economy' as the Greens say they want, then we have to be attractive to outside investors. We have to reduce or eliminate any impediments to investment in Ireland's brainpower. This means that we should be trying to make permanent the falls in land prices because every percent fall in the fixed cost that is land and the variable cost that is rent is one extra euro to be spent investing in our people.

By supporting NAMA, the Green Party is supporting the land and banking oligarchy whose interests are anathema to practically every Green voter that ever donned bicycle clips.

The Greenest policy that the party could follow would be to see the fall in land prices and the collapse of the old regime as a brilliant, once-in-a-generation opportunity to achieve a real change in the way Ireland runs. This is something that they have always purported to believe in. The way the leadership is going, they risk losing not only the general electorate but their own members as well.

The best gift any middle-aged politician could give the young of this country -- the generation coming now into the labour force, looking for work and accommodation -- is cheap land and houses. Interestingly for the Greens, this is the way the market is going,, so why put NAMA in the middle and try to stop this and in the process bail out the oligarchy?

Think about where the property market is heading now. We have a credit crunch and there's a property tax on the horizon, as well as rising unemployment and falling tax revenue, which will only be plugged by more taxes and a reduction in government spending. So house prices are heading only downwards. Not only are the Greens supporting the reflation of the property market through NAMA, the party is guaranteeing that we overpay for the assets no matter what the haircut, because we clearly are nowhere near the bottom. Let's do a little calculation to see how far house prices have yet to go and, consequentially, how much NAMA is likely to overpay for land and give us the bill.

So how low are prices likely to go? The best way to answer this crucial question is to start with the premise that the age of property speculation is over. There can be no more 'hope value'. There can be no more belief in the notion that there will be a big capital gain in buying a property, any more than there will be capital gain in buying a sofa.

The value of the asset will have some relation to the yield the asset returns. In houses, the yield is the rent. So let's take a yield of 7pc as being a reasonable return on an asset that costs money to update and is not generating a significant capital gain. This 7pc would be a long-run average yield, particularly as government bonds which form the benchmark for yield of other assets are on their way back up to that figure.

Using this 7pc yield idea we can value a house at some multiple of the rent it generates. Typically, the value of a house was calculated at 12 to 14 times its annual rent. (The 12 to 14 times equates to a yield of around 7pc.) 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. Let's take Newbridge in Co Kildare, a typical deckland suburb where unemployment has tripled in the past year. You can buy a new three-bed house for €335,000. This is a steal, according to the ad. Beside the house is yet another predatory ad from AIB saying that it will finance the house for €995 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 way overvalued. It will have to fall by almost half again to make the sums add up.
The real fair value means that, in a world where house-price speculation is over, Irish house prices in commuter land will have to fall on average by 50pc from where they are today to be worth buying. Madly, even after a year of house price contraction, the P/E for the average Irish house stands at over 29 times -- twice the historical average for property -- and the yield at just over 3pc, which is still far too expensive. And this is before the likely property tax is slammed on houses at a rate of 1pc of the average value of the house.

So, let's snap out of it. Why can't we just mark down prices to where they should get to, take the bankruptcies and move on? Why should we be any different in coming to terms with the new reality?

The Greens could help achieve this competitive bonanza and protect future generations from being conned by the land and banking oligarchy again. It is their decision

dan_d

Agree with the principle of houses dropping by 50%. Not entirely sure of the details of the Greens and NAMA so won't comment on that.
I own a house. I will be burned badly if that happens - but I bought a house I can live in for the next 30 years. But it has to happen.
We've screwed up so badly, the question is do we rip the plaster off now, or do we pull it off slowly and antagonisingly for anything up to the next 10 years or more.

whizzbang

That is assuming that rents don't drop too.

movin_2d_sticks

looks like i have David Macs blessing so to buy

the house im thinking about is about 15x annual rent


there is a rent to buy option but thats pouring money down a big drain

spockety

There's nothing new in what he's saying.

Some people will agree with him, some people will get rabidly offended and start drunk punching.

People in the latter category are unfortunately the ones who run the country.

D3PO

hes said this before. he jsut keeps updating his price falls based off of rnet values anything to sell newspapers

will he be so quick to quote house prices shoud rise when rents stop falling ? :rolleyes:

mrgaa1

there are some things to agree with, some not. Why does the USA model have to be used? Also the cost comparisons need to be done in terms of materials, labour, local tax's, planning permission conditions etc...

To say that "There can be no more belief in the notion that there will be a big capital gain in buying a property, any more than there will be capital gain in buying a sofa" is quite simply rubbish. Historically houses have always, in the long term, been a fantastic return of investment.

The average house price in the USA in 2008 http://www.census.gov/const/uspriceann.pdf shows that €1,741 would have been the average monthly price based on his USA pricing model.

To say that house prices would have to drop 50% from where they are now would surely mean that everything else would have to drop - wages, cost of goods, services etc... This would put the overwhelming majority of the country into negative equity - where would that put the country then?

I don't think this is going to happen given the amount of debt the irish government is in and the tax's they plan to impose.

One question - would this formula have ever worked in Ireland in years gone by? I mean the 40's,50's,60's,70's,80's,90's and what were the wages and the cost of living in those days.

spockety

mrgaa1 wrote: »

there are some things to agree with, some not. Why does the USA model have to be used? Also the cost comparisons need to be done in terms of materials, labour, local tax's, planning permission conditions etc...

We don't have to use a "USA model" (in fact it's not really just a USA model, but Irish people are so obsessed with the USA that it's probably a good place to use as an example)

Here, the architect of NAMA talks about historical norms in property rental yields in Ireland:

http://www.independent.ie/business/irish/rent-rate-reverses-signal-trouble-ahead-1052199.html

It really serves to highlight just how out of kilter the last 10 years have been. And people seem so freakin' resistant to even accepting that what 'normal' is is what it was like BEFORE, not NOW, and not for the last 6 or 7 years.

Why are they so resistant?

MG

spockety wrote: »

We don't have to use a "USA model" (in fact it's not really just a USA model, but Irish people are so obsessed with the USA that it's probably a good place to use as an example)

True. In fact it's not really a "USA model" but rather the theoretical underpinning is in rate of return, historically shown in the US.

The idea that is applies to the US but not Ireland is just a way of trying to undermine it.

Rate of return will vary slightly for local reasons but not significantly.

whizzbang

mrgaa1 wrote: »

To say that "There can be no more belief in the notion that there will be a big capital gain in buying a property, any more than there will be capital gain in buying a sofa" is quite simply rubbish. Historically houses have always, in the long term, been a fantastic return of investment.

To say that house prices would have to drop 50% from where they are now would surely mean that everything else would have to drop - wages, cost of goods, services etc... This would put the overwhelming majority of the country into negative equity - where would that put the country then?

I don't think this is going to happen given the amount of debt the irish government is in and the tax's they plan to impose.

I thought that traditionally houses have only ever gone up about 1% when averaged over 100 years. If you think about it, how prices can't outstrip inflation otherwise less and less people would be able to afford them until no-one could buy a house!

I don't see any problem with wages and costs dropping because of, not despite, the situation the government is in. they can' afford to keep paying high public sector wages, so they will have to drop thus causing deflation and cheaper goods and services.

Just because it would be bad for something to happen doesn't' mean it won't happen.

Tech3

mrgaa1 wrote: »

To say that house prices would have to drop 50% from where they are now would surely mean that everything else would have to drop - wages, cost of goods, services etc... This would put the overwhelming majority of the country into negative equity - where would that put the country then?

Sorry but the comment above doesn't make sense. The housing bubble in Ireland had a higher level of inflation to that of the average wage increase in that period of time. 3X the average wage is around 120-140K right. Now the average is undoubtedly lower than the last recording of it. The average house price is now 220K still way overpriced.

I don't think this is going to happen given the amount of debt the irish government is in and the tax's they plan to impose.

It is happening, unemployment is now over 10%, jobs are still being lost, taxes are going to be increased= less disposable income.

One question - would this formula have ever worked in Ireland in years gone by? I mean the 40's,50's,60's,70's,80's,90's and what were the wages and the cost of living in those days.

"in those days" you could realistically own a house.

MG

Just a quick one on whether D McW's theory might be correct

Unemployment: Aug 06: 11.4% Aug 09: 12.4%

Av House Prices: Aug 06: 89k Jul 09: 239k

CPI: 1996: 6455 2008: 9702 (change 50%)

Aug 06 House price adjusted to 2008 CPI 133k (44% lower)

Stats from Status Ireland

MG

mrgaa1 wrote: »

One question - would this formula have ever worked in Ireland in years gone by? I mean the 40's,50's,60's,70's,80's,90's and what were the wages and the cost of living in those days.

Good question - anyone paying rent on a house 10 or 15 years ago?

Calina

Rent on a 4 bed in D9/Collinswood in 2000 was about 1400E. I think current rents there are slightly lower than that now.

House asking prices comparatively are around 150KE higher now even after the falls than they were then. I believe at the time rents were comparatively high compared to buying owing to shortages in investment property. As supply is now massive due to building in the last 5 years, a straight comparison may be difficult.

whizzbang

2000 was pretty crazy times for trying to rent. 10 or 20 people queuing up to view a place was not unusual.

ZYX

Typical journalist bull. On daft at present there are 63 3 bedroomed semi detached houses for sale in Newbridge. All are for sale for less than €300,000. Not the €335,000 he is implying is typical. Indeed I found only one house at the price he is quoting (and none above it). 25 of them are for sale for less than €250,000.

Just to add he overestimated the rent also. 29 Houses to rent in Newbridge on Daft today. Only 14 are between €900 and €1000 that he says is typical. 17 are less than €900. And indeed 7 are less than €800

ZYX

Just one more point. McWilliams constantly says we should look at a rental yield of 7%. What is that based on. I found this list of various countries rental yield.
http://www.globalpropertyguide.com/investment-rating


Of 77 countries only 27 had a yield above 7% and New York (the only listed US city) had a yield of 3.75%.

di2772

whizzbang wrote: »

2000 was pretty crazy times for trying to rent. 10 or 20 people queuing up to view a place was not unusual.

Dont talk to me. I remember my brother was coming home to Ireland. I told him id get him an apartment sorted out before he got home. One of the worst decisions of my life. It was next to impossible. Added up I must have spent days in queues.

MG

ZYX wrote: »

Just one more point. McWilliams constantly says we should look at a rental yield of 7%. What is that based on. I found this list of various countries rental yield.
http://www.globalpropertyguide.com/investment-rating


Of 77 countries only 27 had a yield above 7% and New York (the only listed US city) had a yield of 3.75%.

The Long term investment rating on that link kinda backs McWilliams up, Above 7% is rated as good, 6-7% as moderate to good, 5-6 as moderate and below 5% as poor.

BTW the reason you can pick holes in his figures is that he published the same paragraph verbatim back in May

http://www.davidmcwilliams.ie/2009/05/11/exposing-the-lie-of-the-land

stepbar

I agree with McWilliams in theory (mind you I wouldn't be his biggest fan either. However there's one flaw in his theory. He's making the assumption that every property in Ireland has the same characteristics.

For example, I could rent a 2 bed apt in Ranelagh for 1.2k (for argument sake). I could also rent a 2 bed apt down the road on Charlotte Quay for the same amount. However, one house might have parking for 2 cars, whilst the other might have no parking at all. Then it might be the case that the Luas might pass my door, how does one make allowances for that in the price? Add 10k, 20k, 40k???

I certainly agree that the formula a good base to start with but allowances much be made for other factors as well.

irish_bob

Cookie_Monster wrote: »

Interesting article by David mcWilliams today - Any thoughts?

Link

having read this article and listened to the ginger one speak on radio this evening , i finally understand NAMA , it is intended to reinflate property , this does not need to happen nor should not happen , i am tottally against it

no to NAMA , yes to LISBON

bunkbedman

I like David McWilliams and he is usually worth istening to. However his yield/asset ration is typical of his personal choice of economist's tool.. it is sentsationalist and works best at the trough(low end of the cycle) he is a bear by nature.... it sells book! Got George lee elected to incidentally

There is a flaw in his argument his spposition assumes there will be no increase in either the property price or the rent over the term likely 30 years........ In time inflation will return and yes prices will rise so to will interest rates however the amount you owe should decrease....thats how investing in property work
You borrow now at say 3% you get yield of say 7% you pay the surplus (allow 1% for costs) say 3% off the capital owed.. DO THE MATH!!!
Also he convenientlt forgets to mention you will own the property asset long after the loan is paid it will still have value or genertate income...

David knows this but it is not nearly so popular to state that over the very longest term property will return slightly less than shares and slightly more than bonds.. FACT

I call on David to tell us(truthfullly) what he paid for his house and what was the yield at that time? 14 times? not likely

That USA model re refers to conveniently leaves out New York where the long term yield average is in the order of 3.5% strangely similar to that here and prevailing in Newbridge..
Our biggest problems (which he also fails to mention) we are in the biggest global recession for 70 years unemployment is rising and a global banking crisis that was toxic to the core is distorting fundamentals
yes we built too manyhouses.. yes they got too dear relative o income levels..however normal supply and demand will return in time, dont allow Dvaiid and other bear commentators persuade you there is correlation between NAMA and house prices its tentative at bets....

If anything NAMA by its very existence will cause a shortage of developers/development land in the near term which will underpin proeprty prices in an orderly manner natural inflation will take over and NAMA will drip feed land to the market over 10 -15 years thereby removing inflated cost of land to the basice house price... not ideal but asset bust cycles are human nature and are happening since free market trade began..

Yes we made mistakes however we are far more advanced as a nation nation we just got too far too soon..

bunkbedman

Oh yeah..... I forgot to mention

http://www.globalpropertyguide.com/most-expensive-cities


and yes its not godd but its getting better


http://www.globalpropertyguide.com/investment-analysis/Recovery-on-track-for-the-worlds-housing-markets


Dont sit on yer arse being spoon fed misery.....

ZYX

MG wrote: »

The Long term investment rating on that link kinda backs McWilliams up, Above 7% is rated as good, 6-7% as moderate to good, 5-6 as moderate and below 5% as poor.

Of course above 7% is good. He is saying it is average

MG wrote: »

BTW the reason you can pick holes in his figures is that he published the same paragraph verbatim back in May

http://www.davidmcwilliams.ie/2009/05/11/exposing-the-lie-of-the-land

He is still using figures way above the average and saying it is a typical price. The figures were way above average in May also. Purely sensalationist journalistic crap. By the way I think Newbridge prices will go down. It is just the way he is trying to make the point by basically making up figures.

MG

bunkbedman wrote: »

There is a flaw in his argument his spposition assumes there will be no increase in either the property price or the rent over the term likely 30 years........ In time inflation will return and yes prices will rise so to will interest rates however the amount you owe should decrease....thats how investing in property work

There is no supposition that either prices nor rents will not rise, just that they are correlated and their relationship will be in and around 7% over the long term. (in previous writings he has made allowances for the Irish psyche by adjusting this multiplier up). The yield is based on rent and value, not equity. The fact that you have equity built up means that you are achieving a better return on your equity but the value is determined by the next buyer for whom yield is a investment decision driver.

MG

ZYX wrote: »

Typical journalist bull. On daft at present there are 63 3 bedroomed semi detached houses for sale in Newbridge. All are for sale for less than €300,000. Not the €335,000 he is implying is typical. Indeed I found only one house at the price he is quoting (and none above it). 25 of them are for sale for less than €250,000.

Just to add he overestimated the rent also. 29 Houses to rent in Newbridge on Daft today. Only 14 are between €900 and €1000 that he says is typical. 17 are less than €900. And indeed 7 are less than €800

So what is the rental yield in Newbridge? From your figures (check your tots on the rental houses BTW) 250,000 and 900 might be typical would you say?

That's a gross yield of about a 4.3% - would you be happy with that?

20goto10

MG wrote: »

That's a gross yield of about a 4.3% - would you be happy with that?

It's Newbridge, not Manhatten. Don't expect too much.

I don't get McWillams' gripe about commuter belts. Some people like to live in the country but have a city job/salary. Ireland is not unique in this.

20goto10

It's also a bit convenient that he ignores the fact that the "historical norms" is exactly what leads to bubbles. If we have a situation of record yields does he seriously expect that prices will just stay like that? That people looking for something to invest in will just stay away from property? It's nonsesne. People will jump in and hope to get out before the new bubble bursts. It happened in the UK in the space of 10 years.

What annoys me about economists is that all they ever talk about is what the text books say or the historical situation as they put it. We need new ideas to break the boom/bust cycle.

And regarding NAMA, what does he suggest as an alternative? What does anyone suggest as an alternative? How are we supposed to get credit flowing in the economy again? They're all great at spotting flaws, and its by no means perfect, but I'd like to hear what the alternative is. Fine Gaels "Good Bank" is a joke.

MG

20goto10 wrote: »

It's Newbridge, not Manhatten. Don't expect too much.

I don't get McWillams' gripe about commuter belts. Some people like to live in the country but have a city job/salary. Ireland is not unique in this.

Location is more or less irrelevant as rents & values wil adjust to be in the same range in the long term. Apart perhaps from some tax differences, yields from any location should be in the same range as capital is mobile and will seek out the best returns.

20goto10

MG wrote: »

Location is more or less irrelevant as rents & values wil adjust to be in the same range in the long term. Apart perhaps from some tax differences, yields from any location should be in the same range as capital is mobile and will seek out the best returns.

Location is everything when it comes to property. Good yields should only be found in good locations otherwise we're back to square one where you can snap up a house in the arse end of Craggy Island and expect to make a nice healthy profit for yourself.

To suggest that any location in Ireland should have the same yields (albeit smaller returns) as Manhattan or London is madness.

gurramok

stepbar wrote: »

For example, I could rent a 2 bed apt in Ranelagh for 1.2k (for argument sake). I could also rent a 2 bed apt down the road on Charlotte Quay for the same amount. However, one house might have parking for 2 cars, whilst the other might have no parking at all. Then it might be the case that the Luas might pass my door, how does one make allowances for that in the price? Add 10k, 20k, 40k???

I certainly agree that the formula a good base to start with but allowances much be made for other factors as well.

I live near Charlotte quay. The complex i'm in has all undesignated parking spaces(never full) unlike Charlotte where its designated.
Then again, the car is not important as the bus stops are outside the door and the dart is around the corner(Luas 15min walk away). Point being that transport is critically important factor when renting just like the Luas is on the doorstep in Ranelagh.

I don't think having 2 car spaces is important in the city centre with options of Luas, Dart & bus beside you. However if we were comparing maybe Blanch with Lucan, the car spaces would indeed be like gold dust!

20goto10 wrote: »

It's Newbridge, not Manhatten. Don't expect too much.

I don't get McWillams' gripe about commuter belts. Some people like to live in the country but have a city job/salary. Ireland is not unique in this.

Not all though. In Ireland and the UK, most moved out of the city because they couldnt afford to buy in the city. They are stuck with commutes for work and nightlife. Its this demographic that are stuck.

My fair price for a 3bed in Newbridge on what its worth to me would probably be about 120-130k.

Agree about Newbridge being just another commuter town like Navan or lets be honest its like Tyrellstown right on the city outskirts. They all have one purpose, that is to commute day and night. (slowly changing with small business parks in the towns)