Looking for a lift

While the market is well down on boom levels, 2011 could see some signs of movement, writes Rose Martin

AN old-hand auctioneer has a line of apocryphal anecdotes from the 1980s which he tells with malicious glee.

The first concerns the man who walked into his office, put a hedge clippers on the counter and said: “Find your own flippin’ sign.”

The second didn’t involve an overgrown sign, but concerns a sale that fell through when the prospective purchaser decided to emigrate to Australia. Two years later, he returned and met the auctioneer. “I’m very sorry I didn’t buy that house at the time,” he said. “Australia didn’t work out for me.”

To which the reply came: “You mightn’t be too late yet.”

The stories were told at the height of the boom to relay to the shiny-eyed and shiny-suited youngsters of the profession that property had two days — the bad as well as the good.

Alas, that wisdom went unheard and while the property market is now in the fourth year of a deep recession, these stories also illustrate the fact that recessions — no matter how bad — end, and markets recover.

And while we are shocked and horrified at our economic disaster here at home, we are not alone.

The property boom that held sway for 10 years was not just an Irish phenomenon, but worldwide intoxication.

Prices have now plummeted all over and the sub-prime shock is still running its course across the world’s economies.

According to IMF research, this “highly synchronised” boom lasted twice as long as usual, with far more drastic results for economies involved than heretofore: “This boom-bust cycle is commonly seen as a major contributor to the global financial crisis, itself generally recognised as the most dangerous economic threat the world has faced since the Great Depression.

“The median ongoing downturn is approaching the halfway mark in terms of duration and amplitude of price declines,” says economist, Prakash Loungani, of the IMF’s research department, who forecasts further drops before we reach the end of this extreme cycle.

This boom, which began in the mid-1990s and continued for a decade, has been the longest-lasting ever because of a number of factors: “House prices soared in the United States, fuelled by innovations in housing finance.

“They also rose in Ireland, coinciding with a historic growth surge; in Spain and Australia, buoyed by immigration; and in Iceland as part of a boom induced by a tremendous expansion in the country’s financial sector,” says Mr Loungani in his March 2010 report, Housing Prices: More Room to Fall?

Over the last 40 years, house price booms have followed a fairly standard cycle, he says, with the average upturn usually lasting 21 quarters, around five years. Prices usually peak at 40% above the base line and downturns, when they come, last for a similar period with prices back half as much as they did at peak.

This time, however, the boom has lasted twice as long as usual and with house prices now back to nearly 50% in Ireland, we may have reached bottom.

However, Mr Loungani believes this downturn has other elements that will see it last longer. “With prices having risen much more sharply than in earlier upturns, the declines in prices might also eclipse those observed in the past.”

In other words, we’ve got a bit to go yet as house prices are anchored to income and rents in economic theory and all three should move together over the long-run.

House prices should not be higher than people’s ability to afford them, and buying and renting should be on the same level, as they are alternate means of providing shelter.

In Ireland, we haven’t reached that stage yet.

Elements of housing demand can run outside the long-term anchors of rent and income, Mr Loungani says.

“Over the period from 1992 to 2006, Ireland’s annual real income growth was twice the rate of the preceding two decades, but annual growth in house prices was 10 times the rate of the previous two decades.”

This is down to three main effects, he says:

* Supply constraints — where housing by its nature does not respond fast enough to a supply demand, an argument used ad nauseam during the Irish boom.

* Where a boom begins, the inflation of house prices is further heated by collateralisation, when banks are more willing to lend more money on the basis of higher property values — a Catch-22 situation that was also marked here.

* There is the slow recognition of change in the fundamentals, in other words, belief that house prices will continue to rise on the back of continued income and economic growth persists, despite growing evidence to the contrary.

As Mr Loungani shows, the perception of a slow rate of growth only happened in 2007 in the US, whereas the real slowdown began in 2004.

The house price boom was predicated on the belief that growth in productivity would go hand in hand with growth in income which in turns indicates the importance of sentiment in fuelling house price cycles.

Behavioural factors play an important role in house price cycles — the idea that prices will never drop, that this time a boom will be different — are all forms of warped reality that are part of the drivers of an inflationary cycle.

Belief in the infallibility of the property market and in ever higher prices can be enough in some cases to increase the momentum of a cycle even when the fundamentals have changed.

And while our house prices are back to levels last seen in 2003/2004, there is some deflation left in the market. Most commentators expect the return of some sort of normality by 2012 or whenever all the other indicators come right.

In the meantime, however, it is accepted that reducing stamp duty to 1% will act as a fillip to the middle and upper levels of the property market, where transactions have been slow.

“Deals that were done from August to October, they’ve held together and haven’t fallen apart compared to August of 2008, when we were sending back deposit cheques like confetti — we have a lot of sales signed and closing this week,” says Diarmuid McMahon of Sherry FitzGerald McMahon.

“Buyers are now saying, ‘we’ve found the house we like and still feel we’re getting value’, so a lot sold and buyers have stayed with sales and didn’t back out.

“Compared to this time last year, there’s 12 months more certainty — and no more bad news this year.”

He sees the stamp duty cut as a positive thing and underlines its value as cash money — a direct 6% cut off an asking price.

On a good mid-range price, the saving can be in the order of €50,000, he says, with the money in the buyer’s back pocket, but the main issue he sees for the coming year is stock.

“Getting quality property is becoming difficult, building has stopped and the good estates have been mopped up. Badly-conceived and badly-located estates will remain virtually unsaleable, but a person in Ennis who wants to buy a house doesn’t care if there’s 1,000 apartments in Sandyford — it’s of no consequence to them.”

Not so, says Irish economist, Annette Hughes of DKM Economic Consultants, who believes we have quite a way to go before we reach the end of this cycle and says income and rental levels have to be on a par, before the market fully recovers.

While the market is still at low transaction levels, the perception is that a thaw is happening with more sales last year than in 2009, but with capital values down.

This is borne out by the IBF mortgage market report which shows a 40% retraction in values from 2009 levels, but with a subtle rise in the number of buyers.

That being said, the mortgage lending market is over 80% back on the peak of the boom — however, that level of lending was at unsustainable levels.

The market is driven by the ‘First Time Buyer’ (FTB) sector, which dominates at 42%, with the mover purchaser in at 25% of total transactions and re-mortgages/top-ups at similar levels, according to the most recent Irish Banking Federation/PWC Mortgage Market Profile.

Ms Hughes feels the budget provisions will have little impact on the market. She says the market is all about confidence and that we are not there yet: “It’s too early to call the trend and the EBS Index would be saying that we’re not at the bottom yet — weighing up the positives and negatives, the outlook is that there is some stability for the next six to nine months.

“Cycles are cycles and the severity is decided by how high you rise and how far you fall; Michael McDowell shut the market down overnight by a flippant comment on stamp duty and had no basis to say it — but we would have ended up where we are anyway.”

Employment growth typically lags economic recovery, Ms Hughes says, particularly after a sharp contraction and that uncertainty in the employment outlook can be expected to continue to act as a drag on the housing market. In terms of where house prices might settle, the economist offers an example: “If one were to assume an average house price to earnings ratio of around 3.5, this would imply that national average FTB house prices would bottom out at around €136,000, based on income levels used to calculate the affordability index.

“It’s important to remember that a key risk going forward comprises the possibility of further increases in mortgage rates, as a result of the international debt crisis.

“Any increase in mortgage rates could impact confidence further and delay the return to stable house prices.”

Munster estate agents see the stamp duty cuts as a stimulus to the mover/purchaser market.

They expect a significant increase in mid-range transactional activity for 2011 on the basis that mid- and upper-level buyers have every incentive to move.

They are the section of the community that for the most part, won’t be in negative equity and most probably have equity built up in their properties, with a low loan-to-value ratio, making them also attractive to banks.

This demographic goes to ground when the market goes south — taking no risks, saving and generally being providential about the future.

With the removal of stamp duty and some semblance of stability for the coming year, these buyers could re-start the property market once more.

And why? Because there is value to be had.