House prices set to slump further despite signs of sales activity

HOUSE prices are likely to plunge faster than expected to hit rock-bottom but there are some signs of activity in the market.

Joan Henry, head of research at Savills Ireland, one of the country’s leading property firms, said the drop in house prices that the Central Bank is building into its scenarios for 2011 to 2013 are likely to materialise and data would indicate that price drops of 55%-60% are already in effect on the ground, particularly in prime locations.

She said they are seeing evidence that where prices have been adjusted from the peak by these amounts, sales are taking place again.

Some more traditional family homes are transacting again at close to 45%-50% down but for other types of properties, such as apartments or larger homes, corrections of 55%-60% are required to see actual sales brought over the line.

“This activity on the ground may not yet have fed into the data the Central Bank has available and that is why it must build it into its future scenarios.

“We would be of the view that developments in the market in 2011 will be such that the price drops envisaged by the Central Bank will happen in 2011, rather than over the 2011 to 2013 period — as lending conditions remain tight and cost of money more expensive.

“There is also a considerable supply of stock that has been on the market for some time — these factors combined will put further pressure on prices in 2011 and see that minus 55 to 60% levels reached quicker than forecasted.”

Under the potential scenarios outlined by the Central Bank, which include considerable further drops in both house and commercial property prices, the loan losses of the AIB, Bank of Ireland, Anglo Irish and EBS may be higher and therefore the next capital requirement of €10 billion is much more likely to be in line with the estimate that has been suggested of €25bn, according to Savills.

In the case of Anglo, where the loan book is dominated by commercial property loans, the drops in values as outlined in the Central Bank’s “adverse” or worst case scenario, could see the bank require a hefty additional capital requirement from the Government in 2011, they said.

They claim that a lack of confidence, liquidity and Government uncertainty on the rent review system are having a negative impact on the level of transactions in the first quarter of 2011.

Ms Henry said: “These negative influencing factors need to be addressed as soon as possible to ensure that the Central Bank’s most adverse scenario does not actually materialise for the commercial property market.”