Irish Property Market chat II - *read mod note post #1 before posting*

Would be interesting to see the data behind the stat. "Publically available info" would imply the likes of IRES, Kennedy Wilson, Hibernia REIT and maybe one or two others. 10% vacancy feels a bit on the high side but with the pandemic and maybe some having properties in "lease up" at the point of data collection you'd give them a pass. The "completed by 2021" again won't reflect the property that was completed in the 12 months to Dec 2021.

I'd expect the likes of Hines, Greystar, Orange Capital, Urbeo, Bartra and other entities participating in the Irish market who may or may not be affiliated with IIP (the property lobby group headed by Pat Farrell) don't disclose their occupancy levels. If the industry was genuine in their "nothing to see here guys, we're not sitting on empty properties" contention it would no doubt be helpful if IIP collected and made such data available.

Lyons in his next paragraph then referenced a new development in Drumcondra with over 300 units which came on stream at year end 2021 which has over 30 units leased in a month. He made the point that 1 unit a day would be too slow for many.

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A 2% rise would be doubling of rates, not sure that's 'mere'.

It seems to vary between the less desirable Dublin post codes and the more desirable ones between higher mortgage repayments or higher rents, but as a general comment rents and mortgages would be a lot closer together than they are now. Then I just threw in the factor of the huge BTR supply in the pipeline which most likely will bring down rents at least a bit in the coming years which, when combined with something like a 2% mortgage interest rate rise, would potentially make renting cheaper than paying a mortgage in a few years (which arguably should always be the case given the equity being built up by a mortgagor).

Cheap labour won't feed into demand for housing at current costs, let alone even higher costs. We will even struggle to get well paid labour into the country this year (hence the labour shortage that will happen now covid is over) as there are practically no rentals available in the country; it is beyond an emergency at this point where there isn't a lot that can be done by the time the impact occurs so we just hope for the situation to resolve. As has been posted in the last few pages, just looking at the rentals available on Daft and considering whether even 500 people could be hired by a Tik Tok or Facebook or whatever and it seems unlikely. The IDA must be sweating as it gets back out on the road the coming months.

Where in you scenario do you see lower housing costs? Is this just for FTB's and renters in your eyes?

The reason I would like to get your understanding on it is because of rates rise I don't see it putting people off buying as it is not the repayments that are preventing them from getting on the property ladder. The fact that they are paying rent way above a mortgage repayment proves this.

But even if this was not the case, you will still have heavy investment from institutional investors who can get a yield of 6% from Irish property and if in your scenario where houses prices will drop they would get a higher yield which would encourage more investment,

Secondly without supply increasing there will still be a shortage in housing so prices won't be coming down till this is addressed.

Personally think it's difficult to know if investors will continue piling in for 6% gross yields when 10 year US treasuries are approaching 2% again and a fairly decent sized spike in the Euro Swap rates the past week or two (55bps as opposed to negative). If they arrived at 5 or 6% gross yields on the basis that risk free rates were negative, they may seek 7% or 8% to keep risk premia as they were (thus affecting purchase prices). Or else they won't look the Irish renter gift horse in the mouth and take the 6% gross with a lower risk premium due to Irish state contributing to the rent of over 20% of the private rental market.

What is your point? Whether or not the landlordism is absentee or not, is not the central issue. The tax issue may be central, and what do you mean by "properly regulated". You say the REITs are "extracting the rent out out of Ireland tax free". I was referring to economic rent in the sense of a surplus, in this case paying over and above what is necessary to acquire property. A completely different point and a bit mysterious in that implies that REITs are eejits to pay more than they have to.

You are correct that 10 year treasuries are hitting 2% but with inflation at 7.5% in the states it means the real interest rate is -5.5%

And we know investors were prepared to pile into property when the real interest rate was -2% so even allowing for inflation to drop to 4% we have the same conditions as in the past year or so. We also know that unless countries follow the US with raising rates they will need the buy US treasuries to help protect their currencies which will put downward pressure on yields.

if you look at the data for the last auction you can see this with 75-80% of buyers being overseas and primarily dealers reducing their holding of 10 year which would indicate that they are hedging against the yield falling in the short term.

Im trying to follow your logic. Is your hypothesis that Irish rental yields will prove inflation proof long-term whereas if you buy a ten year Treasury you're guaranteeing yourself a real loss?

I guess my theory is, why would I plough money into "riskier" Irish property for 6% and taking illiquidity and downside risk instead of just banking my 2% p.a. for doing nothing. I guess if I'm a German pension fund with a 25 year horizon the illiquidity doesn't bother me. Will rents or property keep going up? Suppose none of us know the answer to that.

This is before we even get into potential impacts of quantitative tightening (if this even happens) on lower grade corporate debt - ie if inflation and less easy money is sloshing around making it harder for companies to raise money, is it going to pose risks for lower grade corporates? Will investors need a greater compensation for taking that risk and causing spreads to widen against US treasuries?

Yield curve is starting to look quite flat also. Will investors keep ploughing in the money to new apartments? I have my doubts on that one but happy to be proven wrong if the supply does come and brings down housing costs

Ah here this is ridiculous. 410 for a 2 bed has to be worse than any of the celtic tiger mayhem.

interest rates might be the black swan event. That they have to go far higher than anybody seriously considers now. Thing is just, I can’t see it happening in welfare Europe even if that mean massive inflation and a drop in the Euro. Hence property is still a decent investment. At least better than cash.

If you assume house prices and rents have a correlation with inflation as there is no substitute product, take into account that their is a shortage of supply and strong demand. Then the main risk to the housing market is an economic downturn that leads to emigration or large scale unemployment.

If there is an economic downturn then you are equally exposed holding bonds as to holding residential property. Therefore in the short to medium term I believe that investors will still be attracted to residential property. The rental yield would need to drop by 1.5% or rates would need to increase by 2.85% (or some combination of both) to heavily impact demand and have people decided to rent rather than purchase.

The way I see it is that house prices have the potential to rise 8-9% if rents remained flat or for rent to drop by 8-9% before we would see a slow down in investors entering the market based on todays economic conditions.

Even if the stock market fell by 80% and as a result saw investors attracted to it for the potential returns I don't think it would directly impact the institutional investors buying property as the majority of these are not speculative investors and instead are investing for a steady cashflow over a long period.

Even if asset values did fall like after '08 they will more than likely recover over the long term in the same way the stock market does. And for this reason I don't see a Fire sale of properties from non-speculative investors if property prices fell for a year or two. Where I think the pain would be felt is in the financing of new builds as these funds are more a speculative investor and will follow the market for the best return they can get whether it be property, bonds or shares.

What do you think about commercial property? Are we already looking at the ghost estates of the 10s boom in all those glossy buildings or is the commercial property sector outlook as promising as the agents allude to in their outlook reports?

Commercial property has been a particularly buoyant area with less complications compared to residential investment up until just before the pandemic. Also noting the Grafton St write downs by Iput in the amount of 26% back in late 2020 https://www.irishtimes.com/business/commercial-property/grafton-street-landlord-cuts-high-street-property-values-by-26-1.4393537