Tuesday, February 12, 2008

Irish Property Crashes / Bubble World Tour

Together with Spain & UK Ireland is the posterchild for the housing bubble in Europe. It looks like the next hangover won´t be caused from Guiness.......

Zusammen mit Spanien & UK ist Irland unzweifelhaft die Speerspitze des europäischen Immobilienwahnsinns. Sieht so aus als wenn der nächste Kater nicht vom Guiness kommen wird.....

Global Property Guide The Irish property crash is worsening. Prices paid for second-hand apartments in Dublin fell by as much as 17% in 2007, and house prices in Dublin dropped by an average of 10% on the year, according to a review by the Irish Auctioneers and Valuers Institute (IAVI) (However Sherry Fitzgerald, an agent, reports a more moderate fall of 6.8% in 2007 on second-hand Dublin properties).

In the new apartment market, developers have been giving away cars, bathroom and kitchen suites in a vain effort to hold up prices. That is now starting to crack, as in January, two developers dropped prices 20% on two different developments. .....

Previously, house prices in Ireland had risen further and faster than those of any other country for which figures are reported, except Estonia, having risen for 17 years without a break.

Since 1996, when the surge began in earnest, national house prices rose from €75,000, to €287,664 (end-2006), i.e., a rise of 283% in nominal terms. House prices in Dublin rose even more during the same period, with a 366% rise from €82,400 (1996) to €384,247 (end-2006).

These price rises had one major explanation, the exceptional growth of the Irish economy. In 2006, Ireland experienced 5.6% real GDP growth, and 6.5% real GNP growth. Ireland’s economic growth has been way beyond EU average growth. Ireland experienced average GDP growth of 9.8% during the six years 1995-2000, with no less than 10.7% real GDP growth achieved in 1999, and 11.7% in 1997. Unemployment has fallen from 15% in the early 1990s, to around 4.4% today. There will be an estimated 4.75% GDP growth in 2007, with 3.25% growth forecast for 2008 (Central Bank Bulletin Q4 2007). Inflation is significant, at 4.9% for 2007.

There are two key causes of the slowdown:

Interest rates have risen in tandem with the rest of the Eurozone, moving from 2.25% in December 2005, to 4.0% in June 2007.

Yields across Ireland have averaged 3.1%, according to the most recently bi-annual Daft Report (update expected February). These yields are comparatively speaking very low.

There has also been significant overbuilding. The numbers of dwellings completed has risen very sharply, more than doubling from 30,000 in 1995 to nearly 81,000 in 2005. A third of current housing stock has been built since 1992. During 2007, the stock of houses for sale rose 62%, and transaction volumes fell drastically, according to the most recent Daft report.

The developers have responded, and in 2007 the number of new homes started fell 47% compared with last year. For December, only 925 new homes were registered, down 60% on the same month a year earlier - the lowest monthly figure since records began in 1995.

Gross yields in Dublin are somewhat higher than elsewhere in Ireland, at around 4%. Is this a crisis level?

Readers will know that the Guide gets uncomfortable when yields drop below 5%, significantly uneasy at 4%, and really worried by yields dropping to 3%.

In much of Ireland, current yields levels are at levels which worry us.

True, Ireland is a stable developed country (historical yield figures are unavailable, so it is hard to see whether there has been significant yield compression), its growth and stability justifies somewhat low yields. Central Dublin’s per square meter prices of €3,750 to €5,000 are also high, but arguably not perilously so.

But such low yields make a market very exposed when interest rates rise, especially when the market is largely floating rate. And interest rates have risen – and the market has responded.

Most mortgage loans are variable interest rate (78%). Most fixed-interest mortgages are for periods less than three years (60% of the total). Such high proportions of variable and short-term fixed rates are inherently dangerous.

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Anonymous eh said...

Super Grafik.

12:19 AM  
Blogger jmf said...


Bradford & Bingley's funny numbers

"In order to provide a clear understanding of the ongoing performance of the Group, we report on underlying profits which exclude certain items resulting from strategic decisions, extreme market events or accounting volatility."

Which to our mind is rather disingenuous. Some of those “excluded items” include: a loss on the sale of commercial and housing association portfolios of £58m (remember those?) a treasury asset impairment of £94.4m (SIVs and cash flow CDOs) hedge ineffectiveness of £23.5m (monolines, perhaps?) and “other fair value movements on treasury instruments of £49.7m (on a further portfolio of £250m synthetic CDOs).

Deduct all those from the headline figures and B&B’s actual profit for 2007 is £126m, down 49 per cent from £246m in 2006.

No wonder the shares opened 11 per cent lower on Wednesday.

In any case, what’s this about excluding items “resulting from strategic decisions”? Sounds like the bank trying to treat bad management decisions as an exceptional.

What a farce......

12:30 AM  
Anonymous Brian Woods said...

The Irish property bubble expansion was aided by lax lending standards as finance houses sought greater market share and individuals sought higher commissions on sales. The median house price is approximately 5 times the median wage! Reversion to the Mean is underway, without a significant level of monetary inflation to cushion the fall.

The real crash will gather pace when energy and some commodity costs rise due to increasing scarcity, and consumers have to pay down their truly horrific credit card debts.

The property-price correction will vary; -30% to -60% of January 2007 prices;(inner-urban to rural). Very nasty time ahead!!

Brian P

11:11 AM  
Anonymous traderboy said...

Most mortgage loans are variable interest rate (78%). Most fixed-interest mortgages are for periods less than three years (60% of the total). Such high proportions of variable and short-term fixed rates are inherently dangerous.

I don't know the numbers, but I bet the UK is at least as bad as this. Nearly everyone gets a 2 yea fixed rate, then it turns into a floating rate...of course, folk usually refi after those 2 years, but I bet that's going to get harder to do at decent rates. When I've spoken to friends/family who have bought property in the past, I always urged them to lock in for 10 years (which is about as long as you can in the UK), but they look at me like I'm crazy. It usually goes along the lines of "but I can get a 2y rate at 5% instead of a 10y rate at 5.50%", I try and suggest to them what would happen if rates go to 10% but there is just no telling some people...

2 years ago in the UK you could get a mortgage for under 4%. I bet those resets will be hurting today...

5:03 PM  

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