Don’t choke on your Corn­flakes over The Econ­o­mist’s Dublin house price anal­y­sis

Irish Independent - Business Week - - Richard Curran -

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

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