Irish property bubble

This article is about the housing bubble in Ireland. For the general phenomenon of housing bubbles, see real estate bubble.

As of 2006 the current state of the property market in the Republic of Ireland is described by some as the Irish Property Bubble. This analysis is controversial, not least with the Government of the country (the Taoiseach addressed the issue as recently as April 2006).

Current situation

Since 2000, approximately 75,000 housing units have been built every year as detailed by the Minister For Housing . However, a significant proportion of these new homes are unoccupied. The 2006 census gabe a figure of approximately 200,000 vacant properties. There are another another 70,000 or so holiday homes which have not been included in the this figure.

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 330,000 new homes, (CSO Ireland 2005).

There had also been reported cases of mortgage fraud with the worry that people who "use mortgage fraud [to borrow several times their salary] could fall into serious debt if Ireland had a property crisis like that in Britain in the late 1980s."

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 Irish Central Bank estimates that 15% of the workforce is employed directly in the construction industry .

Opinions

• The Economist newspaper maintains that a large bubble exists in the Irish market.

• The Economic and Social Research Institute in Ireland said in April 2006 that rising property prices and higher interest rates have probably created a bubble for Ireland's housing market. This warning came two weeks after Ireland's central bank said the housing boom may be unsustainable and poses a "significant risk" to the economy.

• The IMF also says that residential property in Ireland is overvalued.

• The property bulls have dismissed the calculations of the IMF as not taking into account Ireland's unique conditions. They have further dismissed the crash predictions of The Economist by stating that anyone who listened to that advice a year ago (and not bought property) would have missed out on the capital appreciation since then.

• Eddie Hobbs argues against buying Irish property: "It's only going one way..." and has directed investors overseas instead. He also argues against the Jumbo Mortgages needed for most purchasers of Irish property today.

• The Central Bank and Financial Services Authority of Ireland admitted on 7 November 2005 that various models show between a 0% and 60% overvaluation of Irish Property. The news was broken by The Irish Times who saw a document from an OECD meeting with their estimate of an overvaluation of 15%. Minutes of the meeting indicate that senior Irish officials agreed with the estimate but couldn't announce a figure to the public in case they would be blamed for triggering the crash. The Central Bank now denies this.

• Following the outing of the Central Bank's estimate, economists have rushed to agree, making their opinions on the morning radio shows that the ratio of rent to property price is absolutely unsustainable and that any downturn in construction would start a spiral that would depress growth by 3-4%. They further state that the market is driven by the 20% of sales to buy-to-let owners, which again is unsustainable as it appears impossible to make a profit at current prices and rents.

Facts and Figures

• 13% of the Irish workforce is employed by the construction industry.
• Values have deviated too far from long-term trends.
• 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.
• There is effectively no price floor for rural/agricultural land.
• 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.[1]
• The Daft.ie Report Quarter 2 2006, 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 only marginally higher than the Aug 2006 ECB base rate and is considerably lower than any available mortgage rate in Ireland. [2]
• ECB interest rates (Aug. 2006) are at an accommodating 3.0%, 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. Investors are relying on capital gains rather than rental income.[3]
• A resurgence in the international stock markets, combined with more profitable property investments abroad will substantially reduce the number of domestic property investors.
• 30% of newly completed housing in 2006 is occupied by immigrants, many of whom work in house-building.
• Demographics: A net 50,000 immigrants per year who must live somewhere, also more people are buying second homes
• House prices have never really gone down much before, only fallen a little and sat there (stagnated) for a period.
• The number of houses per thousand of population is lower (~391) than the EU average (~428).

See also

• Real estate bubble
  • United States housing bubble
  • British property bubble
  • Japanese asset price bubble
  • Spanish property bubble
  • Chinese property bubble
  • Indian property bubble

External links

• Daft.ie Economic Research - Economic Analysis by Daft.ie, Property Portal, on average house prices, rents
• Davy on the Irish Economy - Davy Stockbrokers Report on Price Earnings Ratio in Dublin property market
• End of the housing boom? - Dec's Ramblings
• Eye of the Storm - Every Second Paycheck
• Not a stone will stand upon a stone article by Jason Walsh
• Impending doom in Ireland - Irish Property Commentator
• The Property Pin - Irish Forum dedicated to discussing the Boom / Crisis!