House prices may be undervalued by up to 26%, says Central Bank

House prices may be undervalued by up to 26%, according to a Central Bank report.

Ireland has experienced one of the most significant falls in house prices anywhere in the OECD. Only Japan has suffered a comparable fall in house prices. However, the Japanese contraction took place over a period of 82 financial quarters, compared to Ireland’s 16 quarters of decline.

Using four different economic models, the Central Bank economic letter completed by Gerard Kennedy and Kieran McQuinn, Why are Irish house prices still falling? found that prices “have fallen somewhat below the level prevailing market fundamentals would suggest,” by 12% to 26%.

The reasons for the ‘overcorrection’ are noted, and include issues such as difficulty in securing a mortgage, and waiting for the market to hit the bottom.

The report highlights the role that irrational exuberance played in overinflating the boom and how it is now having a similar effect on the bust.

“During the house price boom, the concept of irrational exuberance was frequently mentioned where some people were hypothesised to purchase property in the expectation that prices would continue to increase.

“In a downturn, the opposite to this could well be observed — people are reluctant to buy in case prices fall further.”

The Allsops auctions highlight the extent to which prices have dropped. From peak to the recent distressed sales, a fall of up to 70% has been found. However, the auctions also revealed that a demand to buy houses was still present in the domestic market. In all, 87% of the houses sold were bought by Irish buyers and 86% were cash transactions.

Those who do not have the up-front cash to buy properties are being kept out of the market as they can’t secure mortgages. In response to a survey cited in the central bank report, the inability to secure a mortgage was amongst the most common reason for delaying a property purchase.

Despite stating that the market has overcorrected, the report does not predict a return to rapid growth until consumer confidence recovers.

“Investor confidence, a key driver in a buoyant market, has been critically impaired and will likely take some time to recover.”

The Construction Industry Federation, in response to the report, agreed house prices have overcorrected. The organisation said actual sales prices of new homes today are less than construction costs.