Tag Archive for 'house prices'

“I Didn’t Cause This”

“I didn’t cause this problem and I refuse to pay for it”

I’ve heard this a lot recently. The whole mess was caused by evil bankers, speculators and Fianna Failers, and you’ll be damned if you’re going to be the one to clean it up. Fair enough, whether you’re in the public sector, the private sector, unemployed, a student, a pensioner, or pretty much anyone other than Bertie Ahern or Patrick Neary, you’re probably not directly responsible for the massive property bubble which crippled our government’s finances when it burst.

Of course, being a clued in individual who saw this coming a mile off, I’m sure you knew where the money for your big public service pay increases was coming from for the past decade. And for those middle-earners in the private sector, I’m sure you were well aware of where else the government was taking in revenue to be able to afford to lower your income tax bill to the lowest in the developed world. Those who weren’t so well off were of course keeping full track of how welfare payments could be increased at above the rate of inflation year after year during all this.

As a student, I’m sure you knew where the government got the money to pay your tuition fees and those of all your friends. You elderly folks in the back were also right on top of how the government could make such big increases to the state pension without increasing the retirement age. And, not to forget, that all of you in any of those groups or none are well aware of how spending could be increased massively on policing, health and local services without you having to contribute to it.

At the height of the bubble, the construction and finance sectors were contributing tens of billions of euros, directly and indirectly, to the public purse. They were paying for my degree, they were paying for your pension, and they were paying for another guy’s tax break. They were paying for all these things we’ve been taking for granted over the past decade, and they aren’t any more.

So no, you probably didn’t cause the bubble that’s landed us where we are, but you did benefit from it. So did I, and so did everyone else in Ireland. We were all quite happy to take this money that was pouring in from our glorified national ponzi scheme and pretend it would last for ever. Well, of course it didn’t; the money simply isn’t there anymore, and every one of us is going to have to accept the simple reality that we can no longer pay for things with money we don’t have.

House Prices – 27% Decline Yet To Come?

For one reason or another, the housing market has been on my mind recently, and in particular the various guesstimates of how much further house prices have to drop, or if they’ve already bottomed out, as some buyers might like to believe. Hence, as I have a tendency to do in these sort of situations, I decided to throw a load of numbers into an Excel spreadsheet and make my own attempt at empirically forecasting what “stable” house prices might look like, and how far we have to go until we get there. In doing this, I’ve focussed on the ratio of house prices to the country’s per capita GDP, and how this ratio has changed over the years. It would be reasonable to expect this ratio to be quite stable over time; the amount people are willing to pay for a property should be proportional to their earnings at the time.

Using house price data from The Department of The Environment, and indexed with GDP data from the CSO, I’ve put together the following graph of the ratio of house prices to GDP in Ireland since 1976 (click for full size):

House Prices to GDP Ratio

The Department of the Environment provides two separate series of house prices, one for new houses and one for second hand houses. Over the past decade the price of new houses has been quite a lot lower than second hand houses, as new builds have primarily been apartments and small houses which would bring down the average. For this reason I’m going to focus on the prices of second hand houses (red line above), although I’ve included new houses (blue line) in the graph for completeness.

What’s immediately obvious from the graph is the house price bubble over the past decade, reaching a peak of over 9 times per capita GDP in 2006. There was also a similar bubble, although not nearly as pronounced, in the latter years of the 70s. In trying to gauge what a “stable” ratio might look like, it’s the inter-bubble years between these two that we should be looking at. As such, I would propose that a ratio of 6 or below be considered stable for the housing market. The ratio stayed below this level from 1985 to 1997, and, aside from a dip in the mid-90s, was pretty steady throughout. As can be clearly seen in the graph, if a ratio of 6 is stable, we’re still far from stable at the moment.

In order to estimate how much further house prices have to drop to get to a ratio of 6 times per capita GDP, I’ve worked on the assumption that both nominal house prices and GDP will bottom out at the end of 2010. I’ve used the ESRI’s projections of GDP for this year and the next in my calculations. After doing the sums, it seems that nominal second hand house prices will have to fall by a further 27.2% below Q2 2009 levels if they’re to reach a stable ratio to GDP by the end of next year. Of course, I’m using a ratio of 6 as an upper bound for stability; if the ratio was to reach as low as 4.91 (which it got to in 1995), then we could be looking at a drop of 40.4% in nominal prices instead.

This shouldn’t come as pleasant reading for anyone who has a vested interest in high property prices. Unfortunately, with the NAMA legislation now making its way through the Dáil, it won’t be long before we all have such a vested interest, which is becoming more worrying by the day.