Tuesday, October 27, 2009

Freefall and denial in the Irish Housing Market

The Irish housing market (and the ongoing attendant commentary) is pretty interesting.

I purchased a house with my better half (deciding that we couldn't wait forever) early in 2006. As luck would have it, that turned out to be very shortly before the peak of a historically insane price bubble, which is now in the process of bursting in an extended and messy fashion. They say the secret of comedy is in the timing.

Since 2006 or 2007, there's been an ongoing fall in the value of houses here, but recently there's been intermittent talk of green shoots of recovery, a bottoming out, a slowing down in the rate of descent (you always know you're in trouble when things getting worse at a slower rate is presented as an improvement), the start of a recovery etc etc.

For some reason connected no doubt to my interest in economic trends, statistics, truth, and a desire to view life-changing financial crisis through the prism of small, cute coloured Excel graphs, I started tracking the asking prices in our immediate neighbourhood in September 2006, about 6 months after we purchased.

Since then, every month (or thereabouts), I tap in the asking price for every house in about a half-mile radius that is on the market. While this doesn't give an accurate picture of prices achieved, it's a good guide to the trend. You can also make a reasonable assumption that when prices are falling, the achieved prices are below the asking price, and the opposite when prices are rising - in other words, the achieved price most likely drags the asking price around kicking and screaming behind it.

So based on the figures I have for my own area of Dublin (old settled low-density ex-council estate close to the town centre, for those seeking Irish context), from Sept 2006 to October 2009, here is what has happened.

Asking prices stalled in summer-autumn 2006, and remained static until Feb 07, when I recorded the first fall in my area. (My guess: achieved sale prices stalled somewhere around summer 06, and started to fall back prior to that Christmas.)

Between Feb 07 and May 08 asking prices fell slowly and steadily, shedding around 8.6% from the peak during this 15-month period (averaging a 0.7% drop per month).

Something went seriously to hell in spring 08, because around May prices started falling off a cliff. In the 17 months from May 08 to Oct 09, asking prices dropped 31% from the May 08 figure (averaging a 2.5% loss every month).

So where are we now?

Well my figures from the official asking prices (which come from a variety of estate agents) say this: we are currently in a situation as of Oct 09 where asking prices are 39% off their late 06 peak. So the next time you hear a news item telling you that house prices might fall by up to 40%, it's worth remembering that in reality, they already have. Not only that, there's nothing in the figures I've collected in my area to even hint that there's a floor in sight - the asking prices this month have fallen as much as any other month in the last 12.

Apart from the rash of unemployment in Ireland, a major reason for the continued express-elevator treatment house prices are undergoing, is the fact that the banks have abused their position as lenders, speculated wildly in markets and products in which they had no understanding of the risks, and now we the public are supposed to be paying through our taxes to keep them afloat.

As a result of the fact that the banks and financial houses are sitting on a carelessly stacked wobbling deck of completely opaque financial products, nobody knows where all the debt is. It's sort of like playing pass the parcel where everyone has a parcel, and a few of the parcels have booby-trapped bombs inside - except nobody playing the game thought to check before starting. The music has stopped, everyone has been left holding a package, and nobody wants to open theirs. Everyone wants to pass their package on, but nobody wants to take anybody else's. Endless stalemate - and the dissipation of trust that results means that the banks are not lending anything, to anybody.

In short, the banks totally irresponsible game of pass-the-parcel in the hope of astronomical profits has led them into a cul-de-sac where they are terrified to loan to anyone - they may need all the cash they can possibly lay their hands on when they are finally forced to take their grubby little grabbing hands and open their little parcels.

Without banks prepared to loan, there can be no mortgage approvals. Without mortgage approvals, the only way is down.

Minus 39 percent, and falling...


Anonymous said...

Celtic Lemming?

About 4 years ago, under the influence of many beers I said to a highly educated Irishman (or was he Italian? Ach, I'm such an American....) who held his liquor better than me that Ireland is following in the footsteps of America economically and to a lesser extent socially. Usually I'm dead wrong about these things - but sadly, not this time... Well at least your politcians are not corrupt!
Excellent read as always.

Ste - Statusireland.com said...

I like it. Many people complain about the lack of clarity when it comes to statistics about house prices. There are plenty of stats out there and in the end common sense is the best method of judgement. Anyway, people delude themselves into believing something that they have a vested interest in. When the figures don't stack up they say that the figures aren't right. The latest official house prices drag a little behind your stats but the trend is very, very clear.. and it'll be a while before it reverses. That can be a good thing too.

rudegary said...

Great article as always