How much will property prices drop by?

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Superman

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People seem to have different opinions regarding how much property prices will drop as and when this bubble bursts.
I'd like to get people's opinions on what a sustainable relationship between rental yields and capital costs of properties, which should give an idea of how much of a fall is to be expected (excluding any overshoots).

Current yields are 1%-3.5%.
This is based on rents which are high in real terms.
In real terms I believe that rents will fall, going forward:
There is additional housing stock coming on stream, which will increase supply (as well as those currently uninhabited 240k houses discovered by the Census).
There is currently an economic boom - which means, relatively speaking, a high demand for property and wages are high.
A downturn would mean that economic migrants would leave and further dampen demand.
Rents in Ireland are high relative to wages when compared internationally, taking about 25% of take-home pay. (Though this is not a reason that they should drop, it does give a perspective on the expense of renting in Ireland at present).

Now, should yields be as high as 10% - as I believe someone on the Current Sentiments thread said was mentioned by an American Property Ladder program?

The general wisdom on this website seems to be that yields should be above bank interest rates:
But I wonder if this is necessarily true - since rents and therefore yields are a function of the state of the economy and wage inflation, … As such can the security offered by property that the rental yield will match inflation compensate for a lower return?

(For example, as Walk2dewater suggests that there may be a period of inflation in the coming years, is property not a better place to weather the storm than a bank account?)

Alternatively, some people suggest that 2001 was when property prices last reflected fundamentals - this being the last time that normal interest rates applied.
But since then -
A. there has been a massive increase in housing supply.
B. A recession in elements of the economy not reliant on the low interest rate fuelled construction boom.

So as the bubble bursts, wouldn’t rents in real terms not be lower, thus meaning that property prices will in real terms be lower than in 2001?

Comments and insights welcome.
 
Prices generally doubled from 1997 to 2001/02, then doubled again to 2006, right? What was 75k in 1997, went to 150k and now is well north of 300k. Well I'd say, for starters, the second doubling will get rolled back. However by the time this down cycle is done people will be very very sour about property, so sour in fact that who knows what levels of mad, irrational pessimism will be reached. Of course, all in my humblest of opinions backed up by years of investing over all sorts of cycles but without one single link or shred of technical research or backup :)
 
Good to get some debate on this:
Whereas I can foresee a property price drop of above 50% (i.e. a correction back to 2001 fundamentals, with compensation for worse fundamentals in the current (and future) environment [IMO], together with an overshoot) - when this 50% drop in price stage is reached, yields will be 5%
(I'm knocking off a % point for what I see being currently high rents in real terms and I'm excluding those Dublin properties which return 2% etc.)

At that stage, wouldn't the yield on the asset not make it a buy - considering the above mentioned inflation resistant attributes of the asset, and excluding the possibility of an overshoot? (As part of a balanced portfolio etc.)

Edit:
Also can anyone foresee and explain a Soft Crash (TM) situation where property prices drop only 20%?
 
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Superman said:
Alternatively, some people suggest that 2001 was when property prices last reflected fundamentals - this being the last time that normal interest rates applied.
But since then -
A. there has been a massive increase in housing supply.
B. A recession in elements of the economy not reliant on the low interest rate fuelled construction boom.

So as the bubble bursts, wouldn’t rents in real terms not be lower, thus meaning that property prices will in real terms be lower than in 2001?

Comments and insights welcome.
Click to expand...

Well i bought a property in 2001 for what i would consider a fair and reasonable price for what i was getting.
In the space of 4 short years the price of that property doubled and then increased by a further 15% for IMHO no good/fundamental reason whatsoever.
Taking into consideration the fact that wages have risen slightly in those 4 years if the price of that property today was to fall by 50% it would still be up on what i paid for it in 2001 when i considered it a fair and reasonable price.
So i certainly would not argue against anyone who claims we will see price drops of 50%,rental yield and property investment is of no concern to me,i just want a home but i'm sitting on the sidelines for the moment.
 
I'd have to go with 50% based on 2001 plus inflation. I wouldn't be too surprised if some areas dropped more than that.
 
What's inflation resistant about housing? If you look at the long term (50 to 100 years), housing has lagged inflation. To help you to maintain whatever pace housing keeps with inflation, you also have to pay upkeep which adds to expenses.

I think speculating on % is a waste of time unless you can explain the basis of the %. 10% yield is about what a landlord should be looking for, so extrapolate that onto current house prices. Assuming interest rates haven't entered a permanently lower average (and why would they), then borrowing more than 3-4 times salary does not make sense over a lifetime. So with average wage in Dublin at around 35-40k, that leads to average house prices in the 140k range, which is a long way from where we are now.
 
My prediction is that your house is going to worth between 5% and 10% MORE this time next year.

Everybody will be paying more to the banks in interest (say 5%) and rents will start to creep back up.

Most city born people will still not be able to afford a house in the area they grew up in. That regrettably, is never going to change. Some dream about house prices falling 50% but if that happens there will be other consequences for the economy such as job losses and therefore no income for those on the fence to buy that cheaper house.
 
davidoco said:
Everybody will be paying more to the banks in interest (say 5%) and rents will start to creep back up.

Most city born people will still not be able to afford a house in the area they grew up in. That regrettably, is never going to change. Some dream about house prices falling 50% but if that happens there will be other consequences for the economy such as job losses and therefore no income for those on the fence to buy that cheaper house.
Click to expand...

Explain to me the link between interest rates (set by the ECB) and rents (set by the rental market)? I find this landlord delusion of putting up rents when interest rates rise fascinating.

On your second point - are you saying that if the economy tanks (as it unfortunately may), house prices will remain at their current levels? So, we have a market where no-one has any money but house prices are kept afloat by...what?
 
Hmmm:
I didn't know housing lagged inflation, and that would surprise me.
The last statistics I saw on it showed housing (barely) beating inflation for the last 100 years.
Regarding upkeep - this should be counted in the rental yields anyway - i.e. one counts 10 months rent as the annual yield, the other 2 months rent go to upkeep and periods where the property is not let.

Agreed regarding speculating on a % drop without explaining reasoning behind it. (That is the reason for this thread - to throw out reasons that would support (relatively) bullish or bearish arguments regarding a price drop)

Regarding the CB interest rates - I do wonder whether there could be sustained lower interest rates, "a new paradigm".
Conditions are different now, with increased globalisation etc. (I have absolutely no idea - so maybe someone can tease this out).


Davidoco:
I am very much aware of the consequences of a housing collapse - I am an architect, so it could mean no job. So I am not particularly looking forward to a crash.

I cannot follow your logic regarding house prices increasing. You are expecting capital appreciation. Do you expect this to be matched in rental income?
 
[broken link removed]

There should be a rider in the cso report about

the number of non nationals who would not answer the door to the census collector and the house was then counted as vacant as the Census Enumerator wanted to avoid hassle back at the ranch
a recently completed house was counted as a vacant house
owner occupier scams where owner is seeking capital gain without renting
holiday homes
etc etc

I’m sure there are plenty more reasons why that figure of 275,000 should not be read as a glut of houses. I also thought that a 10% vacancy rate is the norm. Where the hell are these 1 in 6.5 houses that are empty. I find that incredible as while I wouldn’t know every house in my area of 150 houses I would guess that there are only two empty ones at any one time.
 
50% sounds about right to me but how will it happen? In my area there are a record number of houses for sale, at asking prices based on sales earlier in the year, which is about €100,000 more than last year on your average semi. Despite all these houses sitting around for weeks without viewings people are not dropping their prices. The agents say that all this stamp duty smoke is slowing the market, are all these sellers prepared to wait till after the budget before reviewing their prices ? My mathematical friend tells me that if people hold out the crash will be harder than if prices were to drop gradually over a period.

Most movement in the irish property market is first time buyers or people trading up. There is very little re-location, maybe because its a small country and we like to commute. Is it possible that all the trader uppers will just take their houses off the market, make do, tell themselves that their house is worth x but not test it on the market. The first time buyers can buy the new homes (still a strong market) and the investor off loads.

As someone with a vested interest in the transaction volume I'd rather see the whole thing go wallop as fast as possible so we can go back to the normal ebb and flow of life, buy a house, sell, buy a bigger one for 20% more (not 120% as now) get old, downsize. People sitting tight deluding themselves is not good, and will make the wallop bigger, but given the irish propensity for being very stubborn I think its a possibility.
 
Superman said:
Hmmm:
I didn't know housing lagged inflation, and that would surprise me.
Click to expand...
Stats are here

I don't see any valid argument that interest rates are at a permanently low level. Globalisation has been acting as a deflator, but that appears to have run out of steam this year (Chinese are reporting labour shortages in some skills and are passing on some cost rises)
 
davidoco said:
....That regrettably, is never going to change. Some dream about house prices falling 50% but if that happens there will be other consequences for the economy such as job losses and therefore no income for those on the fence to buy that cheaper house.
Click to expand...

very true, any idea how we can avoid/decrease the impact of this?
 
Medicine for the Irish economy and people

House asking prices to drop 5% to 10% between August 06 and December 06 – some evidence of this already with asking prices coming down. Interest rates up one quarter of a percent by 31st December. Sellers expectations take a hit and trust in estate agents really goes out the window because houses are on market 4 - 6 months with their valuations and still hasn’t shifted with the decrease in asking price. Estate agents start to be conservative in valuing houses which holds prices. Vendors accept this new climate as plenty of stories in the pubs at Christmas about houses on the market for months.

No changes to stamp duty in December budget or other measures in regard to housing and this brings all the fence sitters out and houses start changing hands again. House prices stay flat for a time (6 months max) before returning to <10% growth.
 
davidoco said:
Medicine for the Irish economy and people

House asking prices to drop 5% to 10% between August 06 and December 06 – some evidence of this already with asking prices coming down. Interest rates up one quarter of a percent by 31st December. Sellers expectations take a hit and trust in estate agents really goes out the window because houses are on market 4 - 6 months with their valuations and still hasn’t shifted with the decrease in asking price. Estate agents start to be conservative in valuing houses which holds prices. Vendors accept this new climate as plenty of stories in the pubs at Christmas about houses on the market for months.

No changes to stamp duty in December budget or other measures in regard to housing and this brings all the fence sitters out and houses start changing hands again. House prices stay flat for a time (6 months max) before returning to <10% growth.
Click to expand...
Keep dreaming.
 
I believe people will just defer selling. Supply will drop way off. What has happened to the 70% of houses withdrawn at auction in Dublin last week - It certainly doesn't seem that all of them are back on the market by private treaty. So people will just stay put. It will be classic head in the sand - "Hmmm, I'm not getting the price I want, so I'll just wait. I don't HAVE to move. The price I want is the highest price a house on my road has ever achieved. My buyer is out there somewhere so I'll just ride it out, and in no time at all prices will be back up again. Sure look what happened in 2001." The market will become distorted by a small number of forced sellers, so we'll see a significant drop off in prices, but on low volumes. I've no idea where equilibrium will be restored.
 
roland said:
I believe people will just defer selling....
Click to expand...

But is this always an option? What about interest rate rises biting? Or interest-only specuvestors getting cold feet as they perceive appreciation to be static? Low volumes could quickly increase out of hand...
 
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