IMF-House prices Overvalued by 20%

TheLedge

Sharp drop in Irish house prices could harm EU - IMF
14/04/2005 - 08:12:14

The US-based International Monetary Fund has reportedly warned that a sharp fall in Irish and Spanish house prices could harm the European economy.

Reports this morning said the organisation had identified house prices in Ireland and Spain as a risk to economic recovery in the Eurozone - the countries that use the single European currency.

The IMF, which has previously concluded that Irish property is overvalued by up to 20%, also identified volatile oil prices and an increase in household savings as threats to consumer demand in the Eurozone.
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I generally pay attention when a body who hasn't got their own personal agenda directly linked to the Irish housing market comes out with stuff like this. Of course you'll hear the usual Estate Agents/Mortgage lenders saying that theres nothing to worry about etc... I mean whats wrong with another 15% on top of already overvalued market??

Discuss!

magpie

The IMF bleats on about this every year without fail. What its seems to fail to grasp is that house prices in Ireland are fuelled by steady demand. Also houses were seriously undervalued here until the late 90s, and are just catching up with everywhere else, hence year-on-year jumps in value.

MG

What I worry about (well actually I don't care that much) is that too much of the economy is linked to house building. I think I worked out once that about 3% of the workforce is directly involved in housebuilding and probably the same amount again indirectly.

If there were any interuption to the demand, it would cause a spiral towards a crash.

magpie

If there were any interuption to the demand, it would cause a spiral towards a crash.

We can worry about that after the meteor kills half the population.

Merrion

I think that the huge number of appartments currently being built in the grand canal dock area will reduce the demand side a bit and investment purchasing may be reduced as property becomes less attractive than stocks and shares but counter to that all those people who put money into their special savings accounts to save for a house deposit are going to start withdrawing their savings in the next couple of years....

MG

I though the IMF made a compelling case that the housing market had at best peaked out in terms of value and was quite possibly overvalued, though perhaps not enough to cause a crash. However, with the value gone from the market, how much longer will investment in this area continue? And housebuilding slows what will happen the 6% odd employed in that sectors and what will the knock on effects on other sectors be?

gamer

there is a reason for rising prices,,shortage of sites and serviced land, low density planning ,low interest rates.high rates of immigration,easy to get loans etc.the cost of a site in dublin is 80k plus .i suppose if they say it everyear they will be eventually,right.and wages are going up every year.we have low corporation tax here which makes us different from france germany etc.

shoegirl

I think the IMF may be correct - after a fashion.

The irish market is quite different to most EU markets which are on a maturity phase. Our market is still growing and catering to a younger population. Immigration also plays a part, but much of it caters more to the investment/rental sector (have to say I know very few immigrant workers who own Irish property). Also the high cost of land is not uniquely a Dublin problem.

What I think is significant is the high cost of home purchasing OUTSIDE the Dublin/Cork/Limerick/Galway commuter areas. These are rapidly catching up, and often in areas where native demand is not high. You also have to consider artificial pressures such as the large tax reliefs available for buying holiday homes - the tax reliefs for even the earliest holoday homes do not start expiring until mid 2005, so it will take a couple of years to see the real long term effect of holiday homes on local housing demographics. What I think is worrying is articifically high house prices in areas not suitable as commuter areas for larger cities, and without a strong holiday home demand. The prices are far more disproportionate than commuter areas, and often in areas with poor employment prospects.

Secondly another factor is that in the event of a downturn (or a large upswing in central Europe) many immigrants may leave (in fact many do, but are replaced by new immigrants) and not be replaced. This would hit the local investment market which would have a knock on effect.

Somebody mentioned apartments which is another vulnerable area. Apartments are favoured by investors and step-up homes. If the market starts maturing towards larger properties suitable for family use, or if demand for rented properties fall, then the apartment subsector may be vulnerable. Of course coupled with other factors such as a drop in local employment or in a non-commuter area, they may be likely to collapse.

The problem is extremely complex, but I would look at the north-south divide in house price tendencies in the UK to get some idea of one of the possible scenarios that COULD occur.

Of course there is no guarantee that prices will fall in the short-medium term. However in the longer term it is likely that prices will stagnate at various points (as they did in the 1950s and again in the mid 1980s) to coincidence with extended periods of economic gloom.

gamer

In the long term property goes up year after year decade after decade much more reliable than the stock market ,in any areas of ireland investors make up 20 to 25percent of market,look at mature areas like santry ,beaumont,,almost no sites left 4 housebuilding,limited amount of houses left secondhand,with front and back gardens,as the traffic gets worse more people buy cars commutes are longer prices in areas like that within reasonable distance of city centres like dublin galway ,prices in those areas is bound to go up cos supply is limited by space and planning restrictions,1st law of economics,limited supply, high demand,means high prices for forseeable future.even if corpo wanted to build more house in santry there is practically no land left.if u buy a house in santry or similar area u know theres not much chance of a builder being allowed top build a ten storey apartment block beside you.I expect market in dublin ,galway to go up for the next 10 years at least.imf are treating ireland like uk or france,which is not logical in my opinion.

Bluehair

gamer wrote:

In the long term property goes up year after year decade after decade much more reliable than the stock market

Link? I've seen many articles showing that stocks perform better than property over the long run (discounting the leveraging advantages of property, which can turn into a huge disadvantage in a downturn).

gamer wrote:

1st law of economics,limited supply, high demand,means high prices for forseeable future.

You're making a huge leap from a simple rule that only applies to the short term by extending it into the 'forseeable future'. Unless you have powers I'm not aware of the 'forseeable future' doesn't extend very far at all and certainly not years.

The 'limited supply' is finally being met with an astonishing rate of building in this country and 'high demand' artifically created by low interest rates (unsustainable), investors (many of whom are more speculator than investor) and a fast retreating notion that 'if I don't buy soon I won't be able to afford to'.

I'm convinced that while a collapse may not be on the horizon (though maybe it is) there is undoubtably a period of long term stagnation on the way and may, judging by ancedotal evidence from friends in the market, already be here.

I've recently sold property myself. I won't buying again in the near future.

gamer

I think any1 who can get a mortgage should buy a flat or house cos u need somewhere to live,,,any1 who is waiting for prices to fall in ireland is foolish and is taking GREAT risk of being permanently locked out of the housing market.even to get a decent place to rent out is expensive ,,why spend 400pm on rent when u can get a mortgage for 600 and get tax relief every year on mortgage payments .i,m saying the highest probability logically is for prices to go up in citys and mature suburbs like baeumont,,,u can still get a house cheap in the country ie 5miles from nearest town ,but ull need a car and a job to pay the mortgage.

BigEejit

Supply and demand are what got you (not 'us' anymore as I emigrated) into the current situation. But supply has met and exceeded demand in some places ... it will happen more and more too ....
I'm sure I read in one of the papers that 30% of all the houses in Ireland were build in the last 10 years ... if that isnt supply catching up with demand i dont know what is... (and I did look for a link and couldnt find one)
I know that in Cork last year the student unions were saying that this will be one of the first years that supply will outstrip demand in student accomodation ... I think I heard the same about Galway (supply > demand) ..