Don’t choke on your Cornflakes over The Economist’s Dublin house price analysis
THE finding by ‘The Economist’ newspaper that house prices in Dublin are 25pc overvalued when compared to people’s income, may have caused quite a few people to choke on their Cornflakes before heading to work to get paid and repay the mortgage. You may be about to buy a house and could feel a chill down around the feet.
After all, the publication is not only so well regarded but also has an interesting and often accurate track record when it comes to writing about economic matters in Ireland.
The obvious precedent was the warning in May 2003 from the economics editor of the newspaper at the time that house prices in Ireland were over-valued. She reiterated her comments in 2005.
‘The paper’s writings about Ireland have tended to be fair, if not tough, at times. Back in 1988 it featured a special report on Ireland describing it as ‘Poorest of the Rich’.
But predicting the future is a different business entirely. In that article ‘The Economist’ predicted that Ireland was heading for catastrophe. If uncorrected it probably was, but ‘The Economist’ admitted that it failed to see Ireland’s economic turnaround coming.
In 1997 it featured Ireland on its cover with the headline ‘Europe’s shining light’. After its 2003 house price analysis, the newspaper probably couldn’t believe that a year later Ireland was still economically racing ahead – albeit towards a cliff.
In 2004 its special report on Ireland subtly questioned the fundamentals of our economic miracle and new-found wealth under the headline ‘The Luck of the Irish’.
Looking back, so much of the economic growth achieved between 2000 and 2004 had been a combination of luck and short term political and banking recklessness rather than sustainable achievement.
When it all went horribly wrong in 2008 ‘The Economist’ was quick to raise questions about the sustainability of our banking system with a famous headline, ‘Reykjavik on the Liffey?’
So what should people make of its latest findings on the housing market?
First off it isn’t a prediction that house prices are going to fall. To say they are overvalued implies a serious question mark over their ability to sustain these levels but the newspaper isn’t saying they will fall any time soon.
This analysis is part of a wider regular survey of house prices across many capital cities and it isn’t a detailed analysis of Ireland’s housing market.
However, there is no reason to doubt the validity of its assessment of over-valued house prices in Dublin and if markets were rational, then house prices should fall by 25pc. The thing is, house prices in Ireland are anything but rational and they haven’t been rational in about two decades.
Another factor is the original Economist analysis in 2003. House prices in Dublin went up and up after that year and climbed by 35pc between 2005 and 2007 alone, before collapsing by 59pc by April 2012. The paper’s analysis in 2003 was accurate but early.
The newspaper in the current issue compared house prices to the long-run median disposable household income. The finding about being over-valued came in the context of house prices in other cities carrying much bigger risks than Dublin.
For example, it found that prices in Hong Kong were 94pc over-valued on this measure. In Paris the figure was 70pc and in Vancouver it was 65pc. In London it was 50pc.
The newspaper is not predicting an imminent collapse of house prices in all of these cities in the short term but simply using a valuable metric to question the sustainability of these levels short of other factors changing such as wages.
In Ireland the dangers to house prices are very real, especially in Dublin. However, the dynamics of the market are very different which would mean a very different kind of house price slump this time round, if it were to arise.
For example, while mortgage take-up has been rising, this is not a debt-fuelled housing bubble. Individuals are not nearly as highly leveraged as they were the last time house prices rose rapidly.
The ESRI has estimated that house prices in Ireland actually rocketed by 431pc between 1995 and 2007, before they crashed by 49pc. House prices, especially in Dublin, have climbed steadily since late 2012 and have risen by an estimated 92pc.
Those who have borrowed money to fund a house purchase in Dublin in recent years have not been allowed to take out 100pc mortgages and would therefore be somewhat more insulated in the event that house prices did fall.
It doesn’t mean it wouldn’t hurt, but it wouldn’t hurt as many people or by as much. The significant rises in house prices have been driven by a shortage of supply. That shortage has been put at anything from 20,000 to 40,000 houses per year. Inevitably, as supply increases some of the heat should go out of that market, assuming people are not allowed borrow ridiculous sums of money to fund house purchases on a grand scale, as they were the last time.
The 100pc mortgage doesn’t look like coming back any time soon. Yet, even the Governor of the Central Bank has suggested that house prices could fall in the coming years.
The fact that rising house prices this round is due to a chronic shortage of supply makes the housing problem a social issue as much as an economic one.
The economic consequences of rapidly rising house prices are very real too. Perhaps there is a different ‘Economist’ article that should have garnered as much attention as the house price survey.
In November 2017 it wrote about a survey of 13,000 expatriates who put Dublin fifth from the bottom of a list of 51 global cities, ranked by quality of life.
Their main gripe about our capital city, ‘The Economist’ pointed out, was not “a sudden collapse in the city’s charm, safety or amenity, but its high cost of living, and in particular the difficulty of finding somewhere to stay”.
If we do not sort out our housing problems soon, we will find it increasingly difficult to attract the kind of investment needed to maintain employment levels and the disposable incomes capable of supporting the mortgages people are taking out.
The threats to sustaining these high house prices are very real. The potential for a hard Brexit to hit employment levels, or wider trade wars and corporation tax changes could undermine our foreign direct investment proposition.
Maybe the most likely trigger to a softening of house prices would come from the most direct and most obvious source of all – interest rates.
They look to be on the turn and interest rates directly affect how much money somebody can afford to pay for a home.
The questions around all of these factors are when and by how much? There are few easy predictions that can be made with Donald Trump in the White House and Theresa May in Downing Street.
So if you are about to buy a home and worried, the simplest advice is often the best. Can you afford it if interest rates rise; what do want the property for and how long do you intend keeping it?
If you can answer all of those questions you can probably read ‘The Economist’ without choking on your breakfast cereal.
The fact that rising house prices this round is due to a chronic shortage of supply makes the housing problem a social issue as much as an economic one