Irish property bubble
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This article is about the housing bubble in Ireland. For the general phenomenon of housing bubbles, see real estate bubble.
The property market in the Republic of Ireland in 2006 is controversially described by some as the Irish Property Bubble.
Contents [hide]
1 Current situation
2 Growth background
3 Crash Predictions
4 Facts and Figures
5 References
6 See also
7 External links
[edit] Current situation
As of December 2006 the much warned about collapse of the Irish property bubble has not yet occurred. Anecdotal evidence continues that the rate of increase dropped significantly in 2006, and in certain districts for certain house types, may have turned negative. However at an aggregate level, the cost of Irish property continued to rise in 2006. An IMF report in 2000 said the Irish property bubble, if sustained, would go against all evidence collated in other countries that had experienced such a phenomenon. House prices have tripled since that report was published.
Since 2000, approximately 75,000 housing units have been built every year as detailed by the Department of Environment, Heritage and Local Government [1]. However, a significant proportion of these new homes are unoccupied. Economic commentators give a figure of approximately 230,000 vacant properties. Of these up to 115,000 or so may be holiday homes.[2]
Figures exist for completions because the ESB provides information on the number of properties newly connected to the electricity network and from data supplied by Local Authorities and from The Dept of the Environment and the CSO.
Currently (2005) there is enough zoned land to accommodate 460,000 new homes, though as housing density figures continue to rise each year existing land has the potential to provide an even greater number of housing units.[3]
There had also been reported cases of mortgage fraud where borrowers over-estimate their income to enable them to borrow more. There is a worry that these people "could fall into serious debt if Ireland had a property crisis like that in Britain in the late 1980s."[4]
In December 2006, the Irish state-owned broadcasting organization, RTE, broadcast an investigation in a Prime Time documentary which unearthed evidence of financial details of prospective customers were being sold by mortgage brokers to auctioneers. Such information would enable auctioneers to maximize the price attained from prospective buyers. This issue, and further allegations in this area, are currently being investigated by the Irish Office for Data Protection.
The increasing cost of property and the willingness to borrow money to acquire Irish property has resulted in substantial increases in the total level of private sector debt, due to property investment in the Irish economy. This has become of increasing concern to the Irish Central Bank, which has issued many warnings, in an effort to affect consumer behaviour.
Rising property values in Ireland, and prosperity acquired from property trading, has been a strong factor influencing Irish people, to invest in overseas property. The main focus of such activity has been the newly admitted members of the European Union. Irish corporate concerns have also become substantial investors in London, Berlin, Paris and American cities.
The increase in property prices has also resulted in high prices being paid for development land. Irish property valuations are highest in Dublin, where the valuations are being driven by confidence, the highest salary rates in the Irish economy, and heavy US private sector direct investment. Valuations are most pronounced in locations that are perceived as the fashionable residential locations. This has resulted in the redevelopment of many sites to build apartment complexes in the Dublin 4 district. The valuations in this district have become the most expensive in Ireland. The sale of the Veterinary Surgeon site, in Dublin 4 by University College, Dublin (UCD) for a price of €171.56 Million occurred in 2005. This accounted to a cost of almost €85 Million per acre, or €212 Million per hectare. This record was beaten in 2006, by the sale of another site, again in Dublin 4, also owned by UCD, in 2006, for €36 Million. This equates to €95 Million per acre, or almost €240 Million per hectare. There were several sites in the same district which made similar prices. In many cases, the developer has to face down local objections, which delays the planning process for redevelopment substantially.
Another side-effect of high urban housing valuations is a drift into rural hinterlands to live in lower cost housing. This has happened on a substantial scale in the greater Dublin area, in counties Wicklow, Kildare, Meath, Louth, and Carlow. This results in overdevelopment in rural villages, and provincial towns as residential developments exceed the pace of infrastructural development, and services for urban population. This may create social and environmental problems, in rural areas. It also leads to locals being unable to live in the own area, due to prices rising at a rate greatly in excess of local wages. Another effect is this development of increased commuting times for people living in locations that are distant from the large employment centres. This has increased demands on the transport infrastructure, with the Irish public transport company CIE being asked to upgrade capacity in a short time. Ireland's increasing carbon dioxide emissions due to increased road traffic are also causing Ireland to breach previously agreed commitments contained in the Kyoto Accord. These breaches will result in direct cost to the Irish exchequer. The Irish state budget for the fiscal year 2007 contains a number of initiatives and incentives to improve energy efficiency in other areas, and reduce the overall cost of this measure in the future.
To address a perceived lack of planning on the part of Irish state bodies, and to develop poles of growth in the regions, the Irish government initiated the National Spatial Strategy. This was initiated to spread urban development to region centres. However, this contained many promises that were not feasible. It also resulted in standstill, due to disputes over local concerns.
The Irish government's Decentralization Plan for the Civil Service, was created in 2004, and was based loosely on the model previously implemented in Denmark. One of the expected results of this move is to reduce the share of Irish state investment in Dublin, and thereby alleviate the difficulties experienced by first time house buyers in the city. Because the age profile of civil servants is older, than people employed in Ireland's private sector, this would effectively result in older people making way for younger people in Dublin. This would also result in an overall reduction in the cost of doing business in Dublin, and thereby preserve its attractiveness as a location for direct investment. However this was only partially successful, with the first location to fill its allocated quota, being the one nearest to Dublin, Trim. Many civil servants have expressed a wish to reside in other urban centres with sufficient third level institutions, for example Galway. Implementation of the Decentralization plan is considerably behind schedule, and it remains to be seen how this will eventually completed.
[edit] Growth background
Interest rates set by the ECB to accommodate a German economy with record post war unemployment, falling house prices and consumer spending, apply in a country with record levels of employment, rising house prices and consumer spending. The Irish economy has fallen down the global competitiveness table from fourth to thirtieth in the past three years due to the rising costs of doing business.
The housing boom is responsible for the employment of approximately 20-30% of the working population. The independently produced Review of the Construction Industry, commissioned by the Department for Environment, estimates that 12% of the workforce are employed directly in the construction industry.[5]
[edit] Crash Predictions
The Economist newspaper says that a large bubble exists in the Irish market.[6]
The Economic and Social Research Institute in Ireland says that a bubble probably exists. [7]
The IMF says that residential property in Ireland is overvalued. [8]
The OECD and certain senior Irish officials of the Central Bank and Financial Services Authority of Ireland agreed in November 2005 that Irish Property is overvalued by 15%. However this was only released to the public by The Irish Times shortly afterwards[9]. The Central Bank denied that they had deliberately withheld this information to avoid triggering a crash, and in April 2006 said the housing boom may be "unsustainable" and poses a "significant risk" to the economy.
Most Economists think that property prices are unsustainable because rental yields have fallen below the risk free rate of over 3.5% offered by Government bonds.[10]
The Economic and Social Research Institute issued a statment on 18 April 2007 in light of the RTE documentary on 16 April 2007 stating that the only activities there is economic certainty in is cigarette manufacturing and undertaking.
[edit] Facts and Figures
Inventory is rising fast all over Ireland at unprecedented levels http://daftwatch.atspace.com
12.6% of the Irish workforce is employed by the construction industry.[11]
23% of Irish GNP is dependant on construction. Of this new residential housing construction makes up nearly 13% of GNP.[12]
There is no true shortage of land, only a shortage of planning permission. Even in Dublin, Cork, Limerick etc. there is no shortage of land.[13]
The p/e (Total Price divided by annual earnings) ratio for private housing is at an all time high. A Davy Stockbrokers report (Mar 06) suggests that for prosperous Dublin suburbs the ratio could be approaching 100 times. Davy states that these ratios can only be justified if investors are extremely bullish about rental growth. Given the plentiful supply of rental properties in these areas however, Davy suggests that it will be an adjustment in property prices, rather than rents that will eventually bring valuations down to more realistic levels.[14]
The Daft.ie Report Quarter 2 2006,[15] which provides a comprehensive analysis of recent trends in the Irish property and rental markets has indicated that the average gross yield of a Buy-To-Let property investment in Ireland is 3.27%. This rate of return is considerably lower than any available mortgage rate in Ireland [1] and also lower than the Jan 2007 ECB base rate [2].
ECB interest rates (Jan. 2007) are at an accommodating 3.50%, with many Jumbo mortgages taken out in Ireland.
Consumer behaviour in Japan is really not so different from Ireland or indeed any other capitalist society. If house prices decreased there for 14 years, then the same is possible in Ireland.
A very high proportion of new houses in Ireland remain unoccupied.[16]
A slowdown in property value growth combined with more profitable property investments abroad could reduce the number of domestic property investors thus exacerbating any slowdown.
The number of houses per thousand of population is lower (~391) than the EU average (~428).
Such is the state of the property development 'buzz' in Ireland, that in October 2006, city councillors and national news media organisation RTÉ, were duped by a promotional campaign for 'Seamróg City' - a supposed Dubai-type development in Dublin Bay, which featured a website www.dublincoastaldevelopment.com, and a video purporting to be about the proposed development - including a giraffe only zoo! Youtube Video It turned out to be for the benefit of property website funda.ie
Prices are starting to fall: irishhousepricesfalling.blogspot.com[3]
Saturday, April 27, 1991
Friday, April 27, 1990
Japanese asset price bubble
The Japanese asset price bubble (バブル景気, baburu keiki, lit. "bubble boom"?) was a time of skyrocketing land and stock prices in the Japanese economy, lasting from 1986 to 1990. It is one of the most famous economic bubbles.
In the decades following World War II, Japan implemented stringent tariffs and policies to encourage the people to save their income. With more money in banks, loans and credit became more easy to obtain, and with Japan running large trade surpluses, the yen was able to appreciate against foreign currencies. This allowed Japanese companies to invest in capital resources much more easily than their competitors, which made goods cheaper, which widened the trade surplus further. And, with the yen appreciating, financial assets became very lucrative.
Unfortunately, with so much money readily available for investment, speculation was inevitable, particularly in the Tokyo Stock Exchange and the real estate market. The rates for housing, stocks, and bonds rose so much that at one point the government issued 100-year bonds. Additionally, banks granted increasingly risky loans.
At the height of the bubble, a commonly-quoted claim was that the land beneath the Imperial Palace in Tokyo was worth more than the entire state of California. Japan regained a sense of national pride and assertiveness as a result of its new power, which manifested itself in works such as The Japan That Can Say No by Shintaro Ishihara and SONY founder Akio Morita. Accounts also report of high-level executives eating gold-sprinkled food and eating with gold chopsticks. Many outside Japan were alarmed by this resurgence, leading to criticism from foreign observers. Michael Crichton, for example, wrote Rising Sun at this time, which highlighted (some say unfairly) problems with the growing Japanese economic power.
Prices were highest in Tokyo's Ginza district in 1989, with some fetching over US$1.5 million per square meter ($139,000 per square foot), and only slightly less in other areas of Tokyo. By 2004, prime "A" property in Tokyo's financial districts were less than 1/100th of their peak, and Tokyo's residential homes were 1/10th of their peak, but still managed to be listed as the most expensive real estate in the world. Some US$20 trillion (1999 dollars) was wiped out with the combined collapse of the real estate market and the Tokyo stock market.
With Japan's economy driven by its high rates of reinvestment, this crash hit particularly hard. Investments were made increasingly out of the country, and Japanese manufacturing firms lost much of their technological edge. As Japanese products became less competitive overseas, the low consumption rate began to bear on the economy, causing a deflationary spiral.
The easily obtainable credit that had helped create and engorge the real estate bubble continued to be a problem for several years to come, and as late as 1997, banks were still making loans that had a low guarantee of being repaid. Correcting the credit problem became even more difficult as the government began to subsidize failing banks and businesses, creating many "zombie businesses".
The time after the bubble's collapse (崩壊, hōkai?), which occurred gradually rather than catastrophically, is known as the "lost decade" (失われた10年, ushinawareta jūnen?) in Japan.
In the decades following World War II, Japan implemented stringent tariffs and policies to encourage the people to save their income. With more money in banks, loans and credit became more easy to obtain, and with Japan running large trade surpluses, the yen was able to appreciate against foreign currencies. This allowed Japanese companies to invest in capital resources much more easily than their competitors, which made goods cheaper, which widened the trade surplus further. And, with the yen appreciating, financial assets became very lucrative.
Unfortunately, with so much money readily available for investment, speculation was inevitable, particularly in the Tokyo Stock Exchange and the real estate market. The rates for housing, stocks, and bonds rose so much that at one point the government issued 100-year bonds. Additionally, banks granted increasingly risky loans.
At the height of the bubble, a commonly-quoted claim was that the land beneath the Imperial Palace in Tokyo was worth more than the entire state of California. Japan regained a sense of national pride and assertiveness as a result of its new power, which manifested itself in works such as The Japan That Can Say No by Shintaro Ishihara and SONY founder Akio Morita. Accounts also report of high-level executives eating gold-sprinkled food and eating with gold chopsticks. Many outside Japan were alarmed by this resurgence, leading to criticism from foreign observers. Michael Crichton, for example, wrote Rising Sun at this time, which highlighted (some say unfairly) problems with the growing Japanese economic power.
Prices were highest in Tokyo's Ginza district in 1989, with some fetching over US$1.5 million per square meter ($139,000 per square foot), and only slightly less in other areas of Tokyo. By 2004, prime "A" property in Tokyo's financial districts were less than 1/100th of their peak, and Tokyo's residential homes were 1/10th of their peak, but still managed to be listed as the most expensive real estate in the world. Some US$20 trillion (1999 dollars) was wiped out with the combined collapse of the real estate market and the Tokyo stock market.
With Japan's economy driven by its high rates of reinvestment, this crash hit particularly hard. Investments were made increasingly out of the country, and Japanese manufacturing firms lost much of their technological edge. As Japanese products became less competitive overseas, the low consumption rate began to bear on the economy, causing a deflationary spiral.
The easily obtainable credit that had helped create and engorge the real estate bubble continued to be a problem for several years to come, and as late as 1997, banks were still making loans that had a low guarantee of being repaid. Correcting the credit problem became even more difficult as the government began to subsidize failing banks and businesses, creating many "zombie businesses".
The time after the bubble's collapse (崩壊, hōkai?), which occurred gradually rather than catastrophically, is known as the "lost decade" (失われた10年, ushinawareta jūnen?) in Japan.
Thursday, April 27, 1989
Residential property market in the United Kingdom
The British residential property market has experienced massive price expansions over the past few years (beginning around 2000/1) with house prices often expanding at a rate of 20 per cent per annum. Since early 2005 the market appears to have begun to cool (with prices remaining relatively static and dropping in some cases). Total residential housing stock represents over 22 million units as of 2005, with approximately 134,000 new houses built p.a. (based on 2002). The British Government has launched two reviews of the housing market, due to a perceived market failure (only 134,000 new builds for 179,000 household formations), the Barker Report (supply issues and what can be done to increase flexibility in the market) and the Miles Report (the UK mortgage industry and how it can be made more long-term). Issues of social exclusion have also arisen in recent years, especially for critical personnel (nurses, teachers, police, etc.) in most areas (both urban and rural). Widespread disillusionment with property prices has recently led to the formation of political campaigns such as Priced Out aiming to pressure the government into taking action on the affordability issues particularly for the under 40's.
There has also been uneven growth in house prices, both in regional terms (London has not seen much growth in the past few years[citation needed], whereas the North of England and Scotland have seen dramatic rises) as well as affordability issues for locals (such as in the Highlands, where second-home buyers have nearly priced out of the market the local population). In some cases buy-to-let investors and second-homes buyers are the cause of house-price inflation, but there remains the simple problem that insufficient housing stock is built as compared to household formation. Areas with low density (especially those desired for their natural beauty) are having a harder time dealing with the present housing/household ratio, as simply building more houses is often politically impossible or undesirable.
Some have questioned the Baker reports estimates of a housing shortage and there being little evidence of any shortage of property to rental (if not buy), particularly in the North of England. The figure of 134,000 built in 2002 is contradicted by the National House-Builder Council http://www.nhbc.co.uk/Newscentre/Library/filedownload,28930,en.pdf which quotes there were 160,800 homes built in 2002. In 2006 they quote 185,000, which is above the Barker report estimate of household formations. There appears to be little statistical evidence to support the claims of the number of new homes built are the cause of the house prices rises, for example in 1990's an average number of houses built a year was 158,910 (NHBC figures)against 172,000 for the 5 years to 2006. Yet prices at the end of 1990;s when adjusted for inflation were less than at the start 1990, where as prices from Q4 2001 to Q4 2006 increased 60% when adjusted for inflation. Using the Nationwide's house price data http://www.nationwide.co.uk/hpi/downloads/UK_house_prices_adjusted_for_inflation.xls . House price at the end of 2006 were 35% above the trend prices of the last 30 years.
Contents [hide]
1 Debate
2 Affordability Ratios
3 History
4 See also
5 External links
[edit] Debate
The health of the British residential property market is seen as an important factor in the British economy.
Residential property prices in Britain have risen dramatically between 1996 and 2005. Many commentators (property bears) believe that in part this is not due to economic reasons but to a bubble mentality among speculators.
Other commentators (property bulls) claim that the rise in prices is a rational reaction to the low housing supply, high employment, economic stability and low interest rates.
What cannot be debated is that unprecendented price levels have excluded record levels of first time buyers from buying and are preventing many more buyers from being able to trade up.
[edit] Affordability Ratios
A number of ratios have been developed to judge the sustainability of house prices.
Proportion of Average Income. The long term average ratio of average house prices to average annual incomes has been 3.5:1. In 2005 the ratio was around 6:1 - leading to some analysts claiming that house prices were overvalued by about 40%. A further report from Home.co.uk in 2006, [1] comparing average asking prices with average incomes, has shown the UK average ratio to be as high as 10:1.
New Mortgage Cover. This is the ability of a person on an average wage to cover a mortgage for a "first time buyer" property (that is one that is somewhat below the average specification). Currently it is around 30% of post tax income, compared to 39% in 1989.
Comparable Large Purchases. House Prices are often compared to the cost of other large consumer purchases (often new cars). This is more inexact, because of qualitative changes in many of these other purchases, but indications are that a house is historically highly priced in comparison to other consumer goods.
Rental Yield. This is the market rent for a property divided by its price, or the average market rent divided by the average house price. Due to the popularity of buy to let this has become a popular measure. This is now around 4% (the equivalent to the post tax yield from a high interest savings account) which many commentators believe does not reflect the risk.
Rent to Mortgages. Historically it has been more expensive to rent than to pay a mortgage, as fewer people could get credit than could rent and repairs and maintenance would be covered in rental payments. In recent years, this has reversed in Wales and the South West (Source: Abbey) although for the UK as a whole, averaged over 25 years current prices imply a buying cost of £379341 over 25 years versus renting costs of £403,173.
[edit] History
British property prices were at an all time nominal high in the late 1980s due to the prosperous economy, the increasing quality of housing through an increase in newly-built housing stock and newly leased right-to-buy council housing.
Property prices fell by 30% in real terms (though nominal decreases were smaller) through the early nineties mainly due to higher interest rates. There was an increase in property repossessions by banks and building societies, and many people were left in negative equity for a number of years.
Prices started to recover in 1996, slowly at first and in some limited areas. By 2001 prices had in most places returned to their pre-collapse levels, and continued to rise, so much so that in 2004 many properties were "worth" double their market price only three years before. In many cases prices were increasing by 20% per year (1.5% per month).
Prices saw a cooling in 2005 that led some forecasters to predict a sharp correction in the market, that might have reduced house prices by as much as 40%. However, these fears proved unfounded, as a renewed strengthening in late 2005 continuing throughout 2006 and early 2007 has led most analysts to predict growth, albeit at a more modest pace, in the medium term.
however world markets especially in the American rental market has fallen which could lead to a reduction in property prices in the UK if the market continues to fall.
There has also been uneven growth in house prices, both in regional terms (London has not seen much growth in the past few years[citation needed], whereas the North of England and Scotland have seen dramatic rises) as well as affordability issues for locals (such as in the Highlands, where second-home buyers have nearly priced out of the market the local population). In some cases buy-to-let investors and second-homes buyers are the cause of house-price inflation, but there remains the simple problem that insufficient housing stock is built as compared to household formation. Areas with low density (especially those desired for their natural beauty) are having a harder time dealing with the present housing/household ratio, as simply building more houses is often politically impossible or undesirable.
Some have questioned the Baker reports estimates of a housing shortage and there being little evidence of any shortage of property to rental (if not buy), particularly in the North of England. The figure of 134,000 built in 2002 is contradicted by the National House-Builder Council http://www.nhbc.co.uk/Newscentre/Library/filedownload,28930,en.pdf which quotes there were 160,800 homes built in 2002. In 2006 they quote 185,000, which is above the Barker report estimate of household formations. There appears to be little statistical evidence to support the claims of the number of new homes built are the cause of the house prices rises, for example in 1990's an average number of houses built a year was 158,910 (NHBC figures)against 172,000 for the 5 years to 2006. Yet prices at the end of 1990;s when adjusted for inflation were less than at the start 1990, where as prices from Q4 2001 to Q4 2006 increased 60% when adjusted for inflation. Using the Nationwide's house price data http://www.nationwide.co.uk/hpi/downloads/UK_house_prices_adjusted_for_inflation.xls . House price at the end of 2006 were 35% above the trend prices of the last 30 years.
Contents [hide]
1 Debate
2 Affordability Ratios
3 History
4 See also
5 External links
[edit] Debate
The health of the British residential property market is seen as an important factor in the British economy.
Residential property prices in Britain have risen dramatically between 1996 and 2005. Many commentators (property bears) believe that in part this is not due to economic reasons but to a bubble mentality among speculators.
Other commentators (property bulls) claim that the rise in prices is a rational reaction to the low housing supply, high employment, economic stability and low interest rates.
What cannot be debated is that unprecendented price levels have excluded record levels of first time buyers from buying and are preventing many more buyers from being able to trade up.
[edit] Affordability Ratios
A number of ratios have been developed to judge the sustainability of house prices.
Proportion of Average Income. The long term average ratio of average house prices to average annual incomes has been 3.5:1. In 2005 the ratio was around 6:1 - leading to some analysts claiming that house prices were overvalued by about 40%. A further report from Home.co.uk in 2006, [1] comparing average asking prices with average incomes, has shown the UK average ratio to be as high as 10:1.
New Mortgage Cover. This is the ability of a person on an average wage to cover a mortgage for a "first time buyer" property (that is one that is somewhat below the average specification). Currently it is around 30% of post tax income, compared to 39% in 1989.
Comparable Large Purchases. House Prices are often compared to the cost of other large consumer purchases (often new cars). This is more inexact, because of qualitative changes in many of these other purchases, but indications are that a house is historically highly priced in comparison to other consumer goods.
Rental Yield. This is the market rent for a property divided by its price, or the average market rent divided by the average house price. Due to the popularity of buy to let this has become a popular measure. This is now around 4% (the equivalent to the post tax yield from a high interest savings account) which many commentators believe does not reflect the risk.
Rent to Mortgages. Historically it has been more expensive to rent than to pay a mortgage, as fewer people could get credit than could rent and repairs and maintenance would be covered in rental payments. In recent years, this has reversed in Wales and the South West (Source: Abbey) although for the UK as a whole, averaged over 25 years current prices imply a buying cost of £379341 over 25 years versus renting costs of £403,173.
[edit] History
British property prices were at an all time nominal high in the late 1980s due to the prosperous economy, the increasing quality of housing through an increase in newly-built housing stock and newly leased right-to-buy council housing.
Property prices fell by 30% in real terms (though nominal decreases were smaller) through the early nineties mainly due to higher interest rates. There was an increase in property repossessions by banks and building societies, and many people were left in negative equity for a number of years.
Prices started to recover in 1996, slowly at first and in some limited areas. By 2001 prices had in most places returned to their pre-collapse levels, and continued to rise, so much so that in 2004 many properties were "worth" double their market price only three years before. In many cases prices were increasing by 20% per year (1.5% per month).
Prices saw a cooling in 2005 that led some forecasters to predict a sharp correction in the market, that might have reduced house prices by as much as 40%. However, these fears proved unfounded, as a renewed strengthening in late 2005 continuing throughout 2006 and early 2007 has led most analysts to predict growth, albeit at a more modest pace, in the medium term.
however world markets especially in the American rental market has fallen which could lead to a reduction in property prices in the UK if the market continues to fall.
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