NERI seminar: A long-term assessment of house price affordability

Brendan Burgess

Brendan Burgess

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NERI Seminar Dublin: A long-term assessment of Irish house price affordability


7 June 2017
Topic: A long-term assessment of Irish house price affordability

Speaker: Dara Turnbull, Economist, AIB

Date: 7th June, 2017

Time: Tea and coffee from 15:50. The seminar will commence at 16:00

Venue: INTO Learning Centre, 38 Parnell Square, Dublin 1

Abstract:

The issue of housing affordability has become a more pronounced part of the public discourse in the past decade or so. This reflects a number of issues, including higher house and rent prices, changing household formation patterns, stricter credit lending regulations and a misalignment between supply and demand for housing. This paper aims to use a number of different measures of housing affordability in order to assess the ease with which different types of income groups have been able to purchase residential property over a roughly 30-year period. This will include making a particular effort to assess affordability for younger people, using income data from a number of different sources. The paper also makes an effort to assess affordability in the context of the wider issue of the cost of living. The overall conclusion is that while housing affordability is more favourable today than at the height of the boom years, getting one’s foot on the property ladder is still more difficult than was the case a generation ago, particularly for younger workers and those living in urban areas.
 
Anyone going to this tomorrow?

I have been discussing the issue of saving up the deposit with a few people recently. They say it's very difficult and much more difficult than it was in my day. But one particular couple aged 28 and 25, took a year's leave of absence to travel the world.

I don't know if it's more difficult or not. I do know that for many people, the concept of saving is just alien to them.

Brendan
 
I would say it is more difficult these days. Savings accounts offer scant interest rates. Wages are growing, but at snails pace, and house prices are increasing again at stupid levels.
The savings concept being somewhat alien is not surprising. Easy credit and an economic system built around perpetual debt can account for a lot of that.
 
At the height of the boom, we didn't have USC, property tax, costs of running a car were lower, energy bills also I think... as noted deposit interest rates were higher.

It would be interesting to see if NERI included these changes in their concept of 'affordability' - they mention 'income data' in the introduction, but not 'outgoings'.

Also in the boom parents had more in reserve I think to help their children get onto the property ladder... having gotten through the recession, I think those reserves are much diminished.
 
TheBigShort said:
I would say it is more difficult these days. Savings accounts offer scant interest rates. Wages are growing, but at snails pace, and house prices are increasing again at stupid levels.
The savings concept being somewhat alien is not surprising. Easy credit and an economic system built around perpetual debt can account for a lot of that.
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I agree. It's not just our economic system that's built around debt though; our public services are also funded by debt. The individual and the State wants instant gratification. The individual wants a 4K tv and the State wants to give out free GP care to under 6's, no matter how much their parents earn (etc).
At no level do we say, "nice idea, but can we afford it?"
 
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A generation ago home buyers had one income, today they have two. That puts prices up relative to incomes.

A generation ago, people lived at home with their parents until the could afford their own home, today they move out and pay rent. That puts savings down.

The market has responded in part to these changes, smaller housing units, located further from the centre. It will continue to reduce what is offered to young people. Less space, less valuable locations.
 
cremeegg said:
A generation ago home buyers had one income, today they have two. That puts prices up relative to incomes.

A generation ago, people lived at home with their parents until the could afford their own home, today they move out and pay rent. That puts savings down.

The market has responded in part to these changes, smaller housing units, located further from the centre. It will continue to reduce what is offered to young people. Less space, less valuable locations.
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And there are more of us but the country is the same size.
We do need the culchies to start staying where they are and not keep moving up to the big smoke to take our houses and steal our women ;)
 
An interesting presentation.

Most of the analysis to date says that mortgage repayments today form a higher percentage of the average industrial wage and conclude that houses have become less affordable.

There were two different aspects to his approach
  • He looked at how affordable they were as a percentage of the salaries of young people (Aged 25 -34)
  • He looked at how it has become more difficult to accumulate the deposit
Average national house prices
In 1987, a young couple spent 20% of their net income on annual mortgage repayments. That rose to 35% in 2007 and is now at 25%.

In 1987, a young couple required 30% of their net annual income to come up with the 10% deposit. This rose to 60% in 2007 and is now at 40%. So it's more difficult for a young couple to get the deposit together now than it was in 1987. ( In 2007 - they could get 100% mortgages so it was easiest of all to get on the housing ladder.)

Dublin house prices
A young couple requires 30% of their net incomes to pay the annual mortgage repayment now. (compared to 25% for the country as a whole.)

They require 50% of their net income to come up with the 10% deposit (compared to 40% for the country as a whole.)

Conclusions
National House Prices have increased by more than net earnings
Mortgage repayability broadly in line with 80s levels
But repayability more difficult for young people.
Young people and urban dwellers have lost out in recent decades
 
:)Purple I hope no more of the culchies follow you back up:)
 
Discussion afterwards

Brendan Burgess
There was no mention of saving in the presentation. My friends and I bought our first houses roughly 30 years ago. It was part of a plan. We saved. We cut back. We skipped holidays to get the deposit together. I am from Dublin so my experience might have been untypical, but we tended to live with our parents until we bought a family home.

His response: (The presenter is 28 years old). None of his friends have moved out and they still can't save. The deposit is so high, they don't bother saving as there is just no point.

Brendan Burgess
First time buyers don't buy the average house, they buy the first time buyer's house. He had a slide towards the end addressing this issue, but I didn't really follow it at the time. It seems to show that back in 1987, 90% of average Dublin FTB price was 2.3 times, 3.5 times the gross earnings. Today that ratio is 1 time.

Colm McCarthy
This is a Dublin problem. Dublin forms 30% of the market, so showing Average Ireland figures is misleading. He should show Ireland excluding Dublin.

His response: Those figures are not available.

Colm McCarthy
Back in the 80s(maybe he said 70s?) a house in the outer Dublin suburbs was the same price as a house in the country. We have plenty of zoned land in Dublin, but it's difficult to get actual planning permission. If we eased the restrictions on building houses, we would bring house prices down significantly. Irish politicians want more houses to be built and at the same time they don't want to see a fall in house prices.

Tom Dunne
When we bought houses back in mid 1980s, there was huge salary inflation. So although we were paying high rates of mortgage interest and really struggled for the first year or two, after a couple of years, mortgage repayments became a much lower percentage of our salary.

There were very generous grants for First Time Buyers back then. He bought his first house, in Cabinteely, for £34,000 and got c. £3,000 First Time Buyers Grant from the government. Stamp duty was much higher back then as well but did not apply to new housing, therefore there was a price differential of up to 15% between a new house and an existing house for FTBrs

Hugh from [broken link removed]
They got sites in Poppintree from the local authority for €1,000 each compared to €20,000 in the market.
They don't have to pay any development levies as they are a Housing Cooperative.
They have a 5% margin instead of the much higher property developers' and builders' margins.

They sell their 1,200 sq ft houses in Ballymun for €170k and the buyers are delighted.
 
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We still have High rates of unemployment and low wages for people under 30 still.Lots of young people who are employed do not have permanent contracts of employment so they will not get a loan to buy even if they are well paid.In the 1970/1980/1990.We were building lots of houses in Dublin that people could afford,

Back in the 1970/1980/1990/ to get the first time buyers grant the new house had to be under 1280 sq ft .If it was over 1280 sq ft you did not get the grant builders were building lots of estates under grant size for first time buyers,
 
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If it is the case that in the 70s dublin v outside dublin prices were in synch, but now are not, then whatever factor they are out by would also apply to mortgage affordability in Dublin.
 
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Brendan Burgess said:
Brendan Burgess
First time buyers don't buy the average house, they buy the first time buyer's house. He had a slide towards the end addressing this issue, but I didn't really follow it at the time. It seems to show that back in 1987, 90% of average Dublin FTB price was 2.3 times, 3.5 times the gross earnings. Today that ratio is 1 time.
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Brendan, I don't understand that point.
 
If I am not mistaken, didn't C McCreevey take house prices out of the CPI in mid-nineties, in line with other countries like UK and US?
Now instead of fluctuating interest rates and flat property prices, we have fluctuating property prices and flat interest rates.
 
AFAIK, house prices have never been in any CPI basket, anywhere, anytime.

As they are not a consumer good or service.

Housing is a consumer service. The price of housing is in the CPI.
 
Mortgage rates are still in the CPI

Mortgage interest methodology (PDF 40KB)


Consumer Price Index
Introduction of the weighted average interest rate used in the
compilation of the mortgage interest component of the CPI
Background
Mortgage interest was introduced as an item in the Consumer Price Index (CPI) basket of goods and services as
part of the November 1975 rebase. The methodology used to compute the mortgage interest component of the
CPI was based on the standard variable rate (SVR) of interest for existing customers only. Each lending
institution supplied their advertised SVR as on the second Tuesday of each month to the Central Statistics Office
(CSO). A weighted average SVR was computed by the CSO using market share data supplied by the Central
Bank.
In the past number of years various types of mortgage products have become available to Irish residents to
purchase their principal dwelling. Tracker, variable and fixed mortgages represented 51%, 32% and 17% of the
residential mortgage market respectively in 2011 (source: Central Bank). Therefore, it was necessary to
introduce a methodological change to the computation of the mortgage interest component of the CPI to more
accurately reflect the current residential mortgage market.
Along with updating the expenditure weights and the basket of goods and services, methodological changes may
be introduced, if necessary, in conjunction with a CPI rebase which is currently carried out by the CSO every five
years. The December 2011 CPI rebase provided an opportunity to introduce a methodological change to the
compilation of the mortgage interest component of the CPI.
New weighted average interest rate
Weighted average tracker, variable and fixed rates are supplied by each lending institution to the CSO (see
interest rate definitions below). The interest rates are those associated with mortgages taken out by Irish
residents to purchase their principal dwelling. Mortgages that are on the lending institution balance sheet and
mortgages that are securitised are both included. The interest rates reported correspond to the rates as on the
second Tuesday of the reference month.
The interest rates supplied by the lending institutions are combined by the CSO to produce an overall weighted
average interest rate. The weights used by the CSO to compute the overall weighted average interest rate are
updated on an annual basis each January using the latest available volumes data (both on balance sheet and
securitised) reported by each lending institution to the Central Bank
1
.
 
Yes, mortgage interest and rents are in the CPI, as they are the costs of housing.

House prices are asset prices, not consumer prices.
 
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