Brendan Burgess
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I have attempted in this thread to summarise the arguments on both sides. They are not all my own views. Other than owning my own home, I have no interest in the house market
No one knows the answer to this question. One expert will argue confidently that Irish house prices must crash, while another will argue confidently that they must continue to rise. This post aims to summarise the arguments on both sides.
No matter what level house prices are at, some experts will argue that they are overpriced. Some people have long argued that prices are excessive, but prices have doubled since they began their forecasts of doom. See the links at the end of this post.
However, no matter how optimistic you are about property, most would agree that the risk of a serious fall in property prices has risen recently. This is not a prediction that house prices will fall. It is just a recognition that the level of risk has increased.
Factors which affect house prices
Economic growth, employment and salary levels
Population growth
Interest rate levels
The supply of houses
SSIA maturity may have a temporary effect
Tax changes e.g. increased income tax relief and possible reduction in stamp duty
All of these factors are difficult to forecast. If and when the economy crashes, house prices will probably fall. When the economy recovers, house prices will quickly recover.
What is actually happening to house prices currently?
1) It is argued that house prices are already falling
There is evidence that many vendors are reducing the asking prices of their houses. However, this is not in itself evidence of a widespread fall in house prices. They may have been asking an unrealistic price in the first place. If my home was worth €500k in November, and I put it on the market today at €550k. I get no offers, so I reduce the price to €500k. The house price has not fallen, just the asking price.
There is no doubt that houses in particular estates have fallen. If a typical house in a particular estate was selling for €500k in November and they are now being sold at €400k, then house prices in that estate have fallen.
2) Houses are not selling at auctions
Again, this might be due to unrealistic expectations by the seller rather than any indication of general house price falls. Only a small proportion of house sales are by auction anyway.
3) The statistics show that house prices are not rising significantly at the moment
The permanent tsb/ESRI house price index is the most comprehensive and that shows that house prices are not rising by any significant amount.
Some will argue that these statistics are biased and reflect the vested interests of the publishers.
4) Builders are finding it difficult to sell new homes
There is pretty widespread evidence that builders are finding it very difficult to sell new homes, whereas they used to have huge queues as soon as the show house was launched.
So what about the future direction of house prices?
5) The Irish economy is strong and our population is growing, so the demand for houses is growing and there is plenty of money to pay for them. We must house the immigrants somewhere, so this factor will continue to push up house prices. Of course, if the economy falters, then house prices may crash.
6) Interest rates are rising and so house prices must fall
Interest rates have risen from a low of 2% to 3.75% today. This makes it more expensive for borrowers to meet repayments. It also limits the amounts lenders are allowed to lend. But interest rates are still low compared to the long term trend.
7) Investing in houses makes no economic sense
At the moment, an investor is borrowing at around 5% to buy an investment property. They will get only around 1% or 2% in rent. So a property costing €500k, will probably get only around €10k rent, but will cost €25k in interest payments.
The only way these investors can make money is if they get huge capital appreciation.
8) House prices in Ireland have never fallen for any sustained period of time
In the past, Irish house prices have risen by a lot less than inflation, so they have fallen in real terms.
But even if they had never fallen, that would not be an argument that they can never fall. The same arguments were used in other countries and house prices subsequently fell dramatically.
9) even if house prices do fall, they will recover in time.
10)We are builiding houses at the fastest rate in Europe, so there is bound to be an oversupply. We are building 20 houses per annum per thousand existing units at the moment.
However, the counter argument is that we had the lowest number of houses per head of population, so we are only catching up.
11) Forget all the statistics and analysis. House prices have bubbled up to the present level and, as with all bubbles, this one must burst.
The present price of houses is irrational. They have been pushed up by cheap money, reckless lending including 100% mortgages and massive immigration. Once confidence falters at all, they will come crashing down.
It’s very hard to argue with this. Confidence is a big driver of house prices.
But even if house prices are irrationally high today, they could continue to stay irrationally high and the underlying factors might rise to make them more rational. So house prices won’t fall, they will just wait where they are until the underlying factors justify the prices.
What the independent experts have said
December 2000 Central Bank warns that house prices could fall dramatically
February 2002 David McWilliams analyses the then housing bubble
November 2004 IMF and the Economist predicts Irish house price crash (PDF)
March 2006 Davy Economic Report Dublin house prices heading towards 100 times rent earned
September 2005 US Federal Reserve report on house prices in different countries
November 2006 Central Bank Governor “ even if there is some overvaluation, this should not necessarily mean that house prices would fall; the most likely way that the overvaluation would be corrected is via a period of low and stable house price inflation while the economy continues to grow. Bearing this in mind, a soft landing for house prices is the most likely outcome.”
December 2006 UCD Professor of economics "we may be looking forward to large and prolonged falls in real house prices of the order of 40–50 per cent, and a collapse of house building activity." (PDF)
No one knows the answer to this question. One expert will argue confidently that Irish house prices must crash, while another will argue confidently that they must continue to rise. This post aims to summarise the arguments on both sides.
No matter what level house prices are at, some experts will argue that they are overpriced. Some people have long argued that prices are excessive, but prices have doubled since they began their forecasts of doom. See the links at the end of this post.
However, no matter how optimistic you are about property, most would agree that the risk of a serious fall in property prices has risen recently. This is not a prediction that house prices will fall. It is just a recognition that the level of risk has increased.
Factors which affect house prices
Economic growth, employment and salary levels
Population growth
Interest rate levels
The supply of houses
SSIA maturity may have a temporary effect
Tax changes e.g. increased income tax relief and possible reduction in stamp duty
All of these factors are difficult to forecast. If and when the economy crashes, house prices will probably fall. When the economy recovers, house prices will quickly recover.
What is actually happening to house prices currently?
1) It is argued that house prices are already falling
There is evidence that many vendors are reducing the asking prices of their houses. However, this is not in itself evidence of a widespread fall in house prices. They may have been asking an unrealistic price in the first place. If my home was worth €500k in November, and I put it on the market today at €550k. I get no offers, so I reduce the price to €500k. The house price has not fallen, just the asking price.
There is no doubt that houses in particular estates have fallen. If a typical house in a particular estate was selling for €500k in November and they are now being sold at €400k, then house prices in that estate have fallen.
2) Houses are not selling at auctions
Again, this might be due to unrealistic expectations by the seller rather than any indication of general house price falls. Only a small proportion of house sales are by auction anyway.
3) The statistics show that house prices are not rising significantly at the moment
The permanent tsb/ESRI house price index is the most comprehensive and that shows that house prices are not rising by any significant amount.
Some will argue that these statistics are biased and reflect the vested interests of the publishers.
4) Builders are finding it difficult to sell new homes
There is pretty widespread evidence that builders are finding it very difficult to sell new homes, whereas they used to have huge queues as soon as the show house was launched.
So what about the future direction of house prices?
5) The Irish economy is strong and our population is growing, so the demand for houses is growing and there is plenty of money to pay for them. We must house the immigrants somewhere, so this factor will continue to push up house prices. Of course, if the economy falters, then house prices may crash.
6) Interest rates are rising and so house prices must fall
Interest rates have risen from a low of 2% to 3.75% today. This makes it more expensive for borrowers to meet repayments. It also limits the amounts lenders are allowed to lend. But interest rates are still low compared to the long term trend.
7) Investing in houses makes no economic sense
At the moment, an investor is borrowing at around 5% to buy an investment property. They will get only around 1% or 2% in rent. So a property costing €500k, will probably get only around €10k rent, but will cost €25k in interest payments.
The only way these investors can make money is if they get huge capital appreciation.
8) House prices in Ireland have never fallen for any sustained period of time
In the past, Irish house prices have risen by a lot less than inflation, so they have fallen in real terms.
But even if they had never fallen, that would not be an argument that they can never fall. The same arguments were used in other countries and house prices subsequently fell dramatically.
9) even if house prices do fall, they will recover in time.
10)We are builiding houses at the fastest rate in Europe, so there is bound to be an oversupply. We are building 20 houses per annum per thousand existing units at the moment.
However, the counter argument is that we had the lowest number of houses per head of population, so we are only catching up.
11) Forget all the statistics and analysis. House prices have bubbled up to the present level and, as with all bubbles, this one must burst.
The present price of houses is irrational. They have been pushed up by cheap money, reckless lending including 100% mortgages and massive immigration. Once confidence falters at all, they will come crashing down.
It’s very hard to argue with this. Confidence is a big driver of house prices.
But even if house prices are irrationally high today, they could continue to stay irrationally high and the underlying factors might rise to make them more rational. So house prices won’t fall, they will just wait where they are until the underlying factors justify the prices.
What the independent experts have said
December 2000 Central Bank warns that house prices could fall dramatically
February 2002 David McWilliams analyses the then housing bubble
November 2004 IMF and the Economist predicts Irish house price crash (PDF)
March 2006 Davy Economic Report Dublin house prices heading towards 100 times rent earned
September 2005 US Federal Reserve report on house prices in different countries
November 2006 Central Bank Governor “ even if there is some overvaluation, this should not necessarily mean that house prices would fall; the most likely way that the overvaluation would be corrected is via a period of low and stable house price inflation while the economy continues to grow. Bearing this in mind, a soft landing for house prices is the most likely outcome.”
December 2006 UCD Professor of economics "we may be looking forward to large and prolonged falls in real house prices of the order of 40–50 per cent, and a collapse of house building activity." (PDF)