We have said for some time that house prices will fall throughout 2008, we saw a recent article in the Sunday Tribune saying that house prices would fall a further 10% in 2009. Our belief has been for some time that we will see the most dramatic drops in Q1 & 2 of 2009 and that after that the speed of decent would slow down considerably, coming to a ‘no growth’ landing some time in late 2009. There are reasons for this which we will explain below.
Firstly we have to see the market accept the rationalisation that is upon it, sites like Irishpropertywatch.com are tracking the fall in prices, yet there are still well publicised people in the construction and business communities calling for government intervention. This must be resisted as must all irrational request on the government. They hold the purse strings but that doesn’t mean they have to spend until lobbyists or special interest groups are satisfied, they must instead practice prudence and leadership. Going into a faltering market to save the day is only acceptable on the grounds of saving the wider economy or the currency (e.g. ECB/Fed action).
Why can’t lobbyists just let go? What is worse, a market that falls or one that is falsely bolstered and ultimately does the same thing (as rational markets ultimately will) yet at a more extreme cost to the state and taxpayer? Financial advisers and brokers in Ireland are not immune to this pain, we are at the coal face of the credit crunch and downturn issues, and already livelihoods have been lost as the perfect storm of reduced commissions, rising rates, and decreased transactions take their toll. However, nobody is coming to bail out brokerage, and rightly so, which is why we are of the belief that the same approach must be taken towards construction. There is no industry bigger than the common good and construction must contract as must financial services and many other property related businesses so that they can operate effectively in the new economic environment.
As for what will happen in the Irish property market in the remainder of 2008 and into 2009 it is anybody’s guess, however we have made a few calls on this in the past and today we will stand by much of what we felt all along. (check the radio exerts to the right to hear some of the opinions).
Summertime will be (in retrospect) the period where we witnessed the greatest drops or at least the situation that would lead to the greatest drops in property prices. The reasons for this are relatively simple to understand, firstly there is the credit & liquidity crunch which has triggered an almost worldwide fall off in property prices, this means that many people don’t have the confidence to enter the market, why would you buy a property if you felt that it might drop in value shortly thereafter?
The credit crunch has had the effect of reducing the lending capability of banks, they are seeking deposit products with more zeal than they are seeking loan clients. This is to increase their capital position and gain liquidity, in an effort to bring in money they have also (and also due to the wholesale cost of funds) increased the actual margins on loans, in late 2006 a margin of ECB + 0.75% (tracker mortgage) was widely available, in mid 2008 that is unheard of and the loans now look more like ECB + 2.5%! which is a huge 1.75% increase on margin in lending, to put that in perspective its an additional€1,750 per annum for every €100,000 borrowed, so on a mortgage of €300k it will cost the borrower €5,250 a year or €437 per month and this is for an identical loan amount and term, the increased margin is 100% down to the banks increasing mortgage costs.
The ECB has also been doing their job in fighting inflation and the way they have done this (as they should) is to increase EU interest rates. This drove up the cost of borrowing before the credit crunch but it has also meant that we had this upward trend in cost coming for some time, the effect of which is to calm inflation.
So back to the summer of 2008, we are seeing the convergence of a falling market, this is tied in with increased lending margins (loans are more expensive), higher ECB rates, and very low consumer confidence. There are tens of thousands of unsold or vacant units of property in the nation meaning supply far outstrips demand, thus implying further price drops and finally there is the Summer (you could be forgiven for thinking ‘we didn’t get one!’) itself which is seasonally one of the two quietest times of year in the property market.
Price drops are occurring as mentioned, but they are also ensuring a backlog, people who actually may want to buy are seeing the properties they are interested in coming down in price and that is causing them to ‘hold out’ even further, until some point in time where they feel it has reached rock bottom. Talk of ‘rescue’ also keeps people out of the market the same way that rumours of ‘stamp reform’ had done in the past, the end result is that the government are actually forced into adopting policies like this because it becomes self fulfilling.
In the marketplace there has also been a strong resistance to dropping prices which means there are more and more units for sale all sitting unsold, increasing the supply and watering down demand, the interesting point in this is that buyers who are trying to hold out to get a better price will actually help to cause further price drops as competition for buyers intensifies. A single motivated seller on a street where there are many properties for sale can then shift their house and in effect it reprices the whole road.
Rental prices are also falling fast, one investor who bought in Longford had to wait 7 months to fill a vacant house and could only do so at a 35% reduction in the asking price of the rent that had been received at the start of the year, investors have a choice of either taking less rent or surviving with an empty property and shouldering the cost, weighing the two up tells me that the rental market will also head south.
What does that mean? It means that the summer of 2008 is the time when all of the property price factors mentioned thus far come to a head. All of these factors acting at once is going to have a strong downward effect on prices. There was a glut of property for sale coming into the summer and the seasonal slowdown means this glut will still be there (for the most part) in Autumn when the selling season typically begins (although autumn 2008 likely won’t be anything special).
This is why we feel that one of two things will happen, either the markdowns will occur in the summer or in the autumn, some people might hold out price cuts to see if they get any interest in the autumn time but the end result will be the same, the price drops will come and when they do it will be a quick jolt and that jolt will occur in 2008 unless somehow the sellers are all capitalised enough to keep supporting their asking price inevitably.
The property market predictions are therefore as follows: we expect a fall off which will show a rapid drop which will occur/occurred in the summer/autumn, this will be followed by a period of decline as the market reaches bottom, then it will bounce along the bottom for several years. Property cycles do not turn around as quickly as stock markets and until sentiment returns to the market we will not see prices trend upwards, that said, it is vital to remember that money can be made in down markets and for investors or home buyers to have their plan in place so that when conditions meet their criteria that they are in a position to profit from them.