(This article originally appeared in the Sunday Independent)
The Irish property market appears to be out of palliative care and perhaps somewhere between the ICU and recovery ward. If the historical property cycle which we don’t often discuss in Ireland holds true then we should see prices become static then within two years start to rise swiftly.
Obviously there are problems, the combined forces of high unemployment, massive oversupply in many counties, and stock mismatch (apartments for sale when people want standard housing), you could add to that list of negatives almost indefinitely.
Whether you are a fan or detractor, a healthy economy has a healthy property and construction aspect to it and there is no doubt anywhere that ours is in ill health, the National Bureau of Economic Research (USA) paper ‘The housing cycle is the business cycle’ paper is worth reading for anybody who thinks we don’t need property and construction in good order to recover.
The list of positives is smaller, but compelling, we have argued for a long time that credit and confidence are the two main ingredients to getting the property market functional again. Confidence can’t be built, it has to be earned, on the back of a healthy economy or using to a lesser extent by using tax breaks to encourage investment.
Tax breaks are something which won’t be considered because we are so busy bad-mouthing previous tax incentives that we fail to realise that we don’t have to use the same ones twice, there are other alternatives.
On the credit front allowing new banks to enter the market with concessions is a recipe that worked in the early 80’s when Building Societies were regularly running out of money.
This idea has not been embraced, but on the upside the existing lenders seem to be making a big drive towards increased lending, AIB want to nearly double their lending, Bank of Ireland have a €2bn line of credit available, Ptsb will do more than five times their 2012 lending (a less impressive but important €400m or more). Ulsterbank are seeking a 30% increase in draw-downs and KBC are also looking to expand.
All said, it may be possible that the mortgage market could double this year. That mortgage finance is down 95% from the €40bn 2006 peak is an oft cited and perhaps misleading figure, the estimated ‘normal’ is more in the region of €8bn so last year we were operating at about 30% health, should we be able to get to even 50% health this year it could make a big difference in transactions and in turn discovery of where true prices are at.
The Central Bank say property is undervalued by 12-26%, but Fitch say we have another 20% to go, these contradictory statements only verify the only fact available, which is that nobody knows what the future holds and factors beyond cold hard logic are at play. If value was so good why would it fall 20%?
The mortgage market was busy in the second half of 2012, everybody (your analyst included) thought this could be due to Tax Relief at Source coming to an end, bringing forward demand, it became the conventional wisdom. But January has brought a surprise, mortgage applications have not slowed down, in fact, they are almost as abundant as our best month in 2012, and we don’t really know why.
What we do know is that we didn’t do anything in particular that could drive this, and that when you are charging clients fees to deal with you that they are not speculative enquiries, they are sincere clients in the making meaning the likelihood of conversion to sale is higher.
In looking back over mortgage leads made to our firm we saw that they diminished in 2007, fell significantly in 2008 and then were in the doldrums from 2009-2011, last year things picked up early in the year and that fed into what turned into a very busy third and fourth quarter.
It’s too early to tell if this is an accurate leading indicator of any sort, but the appetite for credit does feed into transactions, and we are seeing that mortgage applications seem to show this a few months in advance, sadly there is no national consistent data so we are relying on only the wedge of the market we can see.
The return of credit matters to us all, that half of 2012 transactions were in cash is not sustainable. This is only normal in some parts of Africa, Asia and South America, and it won’t last.
In the meantime, the conundrum of whether we are off to a brisk start or a false hope remains, but in trying to see across the curve we are confident that 2013 will be a far better year than 2012 – certainly from a mortgage availability perspective at least.