 |
| Source: Goodbody |
There is a substantial correction underway in the Irish housing market and the evidence has been clear since the collapse in the advertising of second-hand houses in the closing months of 2006.
In the new housing sector, an Ulster Bank report published today, says the residential house building sector recorded its sharpest decline in March, for five years.
Whether there will be a soft or hard landing in the housing market, is an issue of debate. However, we are in the midst of a crash landing in a related area that will result in significant collateral damage, irrespective of the way the housing sector will adjust.
Until recent weeks, Government ministers of both parties in the current Coalition, were cheerleaders of the story that it had invented the free lunch, built on the shaky foundation of a big surge in foreign direct investment in the 1990's and a related boom in construction. The public sector payroll has expanded by 77,000 since 1997 according to the CSO and direct employment in the construction sector has grown from 126,100 in early 1998 to 281,600 in late 2006, compared with 240,000 in industrial employment.
Our economy is more dependent on construction than any other in the Developed World.
There has been no public sector reform and the current nurses' dispute is just the start of a very messy adjustment to a more sober world.
Through the outsourcing of pay determination, Ministers and TDs have been the biggest gainers of the public sector pay bonanza - putting Irish parliamentarians amongst the best paid in the world even though we effectively have a part-time parliament and a system of governance that has been unreformed since the 1930's. A TD's pay excluding allowances, has risen by 120% since 1997 - double the rise in the average industrial wage. Public sector pay - excluding the cost of additional staff - rose by 38% in the period 2001-2006. The average industrial wage rose by 19%.
Benchmarking has been shown to have been a fraud and the first report that gave Ministers two benchmarking payments - was not even published - because the claim that comparable grades in the public sector were underpaid compared with the private sector, was well-known to be a complete sham. To add to the fantasy, pension coverage was ignored!
Ministers have begun to warn about the need for prudence but when you give an alcoholic a crate of liquor on condition that he will stop drinking, don't expect a seamless change of course. The ending of the property boom, that dominates so much of the economy and the crash landing in expectations, will have serious consequences.
Annual average House Price Rise 1996-2005 - 14.9%
National House Prices in Ireland rose by an average of 14.9% for each of the ten years 1996-2005, according to a special edition of the permanent tsb House Price Index published in June 2006. Compiled in association with the ESRI, the index is widely regarded as the most authoritative measure of house price movements in Ireland. Today’s special edition of the index was published to mark its 10th year measuring house price changes in Ireland. Headline figures from the special 10th Anniversary Index reveal the following:
- National house prices increased by 270% over the past ten years – compared to a total rise of just 30% in the consumer price index.
- The average cost of a house in 1996 was just €75,000. Ten years later (2005) the average cost had increased to €280,000.
- On average national prices rose by an AVERAGE of 14.9% each year for those ten years.
- In one year (1998) average national prices grew by a massive 30%.
- Ten years ago the average difference between buying a house in Dublin or outside of Dublin was just €10,000. Today that figures has grown to some €130,000.
- A third of the current total number of houses in Ireland (547,000 houses – known as “the housing stock”) was built in the last ten years.
- The value of all the houses in Ireland is estimated at some €412 billion – a four-fold increase on the figure ten years ago.
- Rise in number of house completions each year from 33,700 (1996) to 81,000 (2005).
Current Housing Market
In 2007, up to last Thursday, the Irish Times Property Supplement has not carried more than ten full-pages of multiple display advertisements for second-hand houses, compared with about forty pages per issue in the first half of 2006.
On Sunday, The Sunday Independent reported that as the residential auction market swings into gear for its second selling season of the year, the signs are not good. If you count, as it did, the houses that sold in the February to April period you find that two-thirds of the houses failed to sell.
Of the one third that was successful - compared to an estimated 95 per cent this time last year - only 23 per cent actually sold under the hammer, with 11 per cent finding buyers after auction. In volume terms 34 houses sold at auction, 99 were withdrawn and 17 sold afterwards.
The newspaper says that given that kind of success rate you'd have imagined more auctioneers would be advising people to take the private treaty route. But when you look at the ads gearing up for this coming season there seem to be as many auctions pencilled in as there are private treaty sales. The Sunday Independent asks why are they pushing so many vendors through the auction method when, on the evidence of the previous few months, they are destined to fail? It would make you wonder, it says.
Another source of wonder is why no one in the auctioneering profession actually tracks the success or otherwise of the auction method. There are no figures or statistics available unless you count them yourself.
Residential Auctions:
(Feb to April, 2007)
Sold: 34 (23 per cent)
Withdrawn: 99 (66 per cent)
Sold After Auction: 17 (11 per cent)
In the Ulster Bank's Construction Purchasing Managers' Index for March, that is published today Monday, Ulster Bank Chief Economist Pat McArdle, says that "housing weakened further in March when a bounce might have been expected given that weather was no longer a limiting factor. At this stage, housing activity seems to reflect a slowing in new orders and a perception that selling prices may weaken further."
 |
| Source: Goodbody |
The adjustment in second-hand house prices is long overdue - For the cost of a typical house in an area favoured by a management level family in Dublin, Ireland, you could buy nine similar houses in Houston, Texas, three in Amsterdam, two in Sydney and almost two in Tokyo, according to an international survey in 2006.
The Dublin four-bedroomed house would typically be found in South Dublin; be a boxy four-bedroom detached house with walking space on either side and until recently, would have sold for €1.2 million - $1.6 million.
Even before the expected rise in the ECB rate to 4% in June, affordability has reduced demand from first-time house buyers for new houses.
Davy Stockbrokers says that in 2001, the number of new homes bought by first time buyers was 63%. Now that figure is 33%. But the fall in new houses being built will have an economic side effect. Every drop of 10,000 in the number of completions will slice one percentage point off economic growth.
Housing comprises two-thirds of Irish construction output and the big infrastructure programme will not absorb the jobs shed in the residential housing sector as it is not comparable work.
Up to 100,000 jobs will be shed in construction over the coming decade as the sector contracts to a normal level for a Developed Country.
 |
| Source: Davy |
Morgan Kelly, an economics professor at UCD, wrote in Sunday's Sunday Business Post: The supply of houses on sale is likely to explode, as speculators scramble to unload the 210,000 empty units they are holding, along with the 80,000 or so new houses that will be built this year.
As this enormous supply collides with falling demand caused by expectations of further price falls, and falling employment in building, Ireland may be heading for a fall in house price that is without international precedent.
Along with our sharp fall in competitiveness and the structural problems of the IT and pharmaceutical sectors, the likelihood of further rises in interest rates, and the possibility of a hard landing for the US economy, the Irish economy is sailing blithely into something that is starting to look like a perfect storm.
There may not be an American recession but with Irish economic growth expected to fall sharply in 2008, the adjustment to an economy that is no longer awash with cash, will be painful. It will take time to determine the impact of the contraction in the housing market on the many business areas that have thrived from the property boom. The example given above of the contraction in property advertising, is just one illustration of the negative ripples across the economy that will be evident in coming months.
There will be job losses in many sectors later in 2007, when it will dawn that even an adjustment in stamp duty by a new government, will not reverse the housing market correction as the prospect of an ECB rate of 4.25% will loom following the June hike to 4%.
Public finances are also at risk. In 2006, 17% of direct tax revenues came from property transactions.
To borrow a phrase from ECB President Jean-Claude Trichet, the "risks are on the upside."
A serious crash will be unlikely if a sudden rise in unemployment is avoided. However, a trend upward in unemployment in an economy with a high level of indebtedness among the younger sector of the population, will have an impact amidst serious industrial strife in the public sector.
Life in the tradable goods and services private sector could be on a different planet as far as many in the public sector, including politicians are concerned. Irish factory gate prices actually fell in the year to February while general inflation in Ireland has been amongst the highest in the Eurozone. As the bloated public sector adjusts slowly to a more realistic world, jobs in the private sector are likely to be undermined by damage to investor confidence. During 2006, employment levels supported by the development agencies (Enterprise Ireland, IDA Ireland, Shannon Development, and Údarás na Gaeltachta) increased by only 5,927 to 305,062 – 2,913 permanent full-time jobs in foreign-owned companies, and 3,014 in Irish-owned companies. 53,000 jobs were created in the construction and health sectors.
The tipping point will happen, if unemployment rises and multiple apartment units with limited if any storage space, are placed on the market as distress sales.
Television Programme
RTÉ One Television will broadcast a documentary on the Irish property market tonight, Monday 16th April, at 9.35pm.
Future Shock - Property Crash will put forward the theory that our economy is wide open to a house price crash.
"It could start tomorrow or take another two or three years but it has got to happen sometime," it warns.
Figures reveal that we are set to inherit €3bn worth of property every year for the next 10 years.
While experts and bank bosses talk about a soft landing the documentary warns that out of 52 global property booms since the First World War, each has ended badly.
Examining the underlying realities of current trends, presenter Richard Curran asks if a predicted growth of 3% nationally for 2007 masks a more worrying situation? Looking into the future, he asks could a property crash happen in Ireland and, if it did, who would be most affected?
RELATED:
Report on the European Economy 2007: Irish Economy at risk of significant reversal - Risk of a hard landing illustrated by the experience of the Netherlands
