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 Post subject: Irish house prices: Déjà vu all over again?
PostPosted: Mon Feb 12, 2018 2:31 pm 
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ESRI paper

Irish house prices: Déjà vu all over again?

http://www.esri.ie/pubs/QEC2017WIN_SA_McQuinn.pdf

Quote:
ABSTRACT
The pace at which Irish house prices have grown since 2013 has surprised many observers. The Irish housing market was one of the most affected across the OECD after the international financial downturn of 2007/2008, with prices falling by 54 per cent in nominal values between 2007 and 2013. However since 2013 prices have increased by 50 per cent with recent house price inflation showing no signs of abating.

The performance of the housing market currently very much reflects developments in the real economy with Ireland’s strong recovery in macroeconomic terms post-2013 resulting in falling unemployment and growing income levels, all set against the backdrop of persistently low Euro Area interest rates.

In this paper, using a variety of approaches, recent developments in house prices are appraised; in particular, the sustainability or otherwise of current prices is evaluated and cross-country comparisons are also drawn. The unifying
conclusion which emerges is that, given Ireland’s expected strong economic performance over the next five years, the domestic market, in the absence of a significant supply response, looks set to experience consistently rising house
prices over the medium term.


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 Post subject: Re: Irish house prices: Déjà vu all over again?
PostPosted: Mon Feb 12, 2018 3:44 pm 
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Met a German friend in Dublin this weekend. He picked up the Irish Times in a cafe and nearly keeled over at the section entitled; What '700k gets you in Phibsboro etc.' He had already heard a radio ad for 15-year interest-only BTL mortgages...safe to say our European partners are a bit worried we might have learned very little. Wanted to tell him we had it all under control this time but not sure I made the case


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 Post subject: Re: Irish house prices: Déjà vu all over again?
PostPosted: Mon Feb 12, 2018 4:09 pm 
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Interesting to see the shape of the graph in Figure 1 for Ireland (Ratio of House prices to disposable income). Looks remarkably similar to a Market Cycle of Emotions graph.


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 Post subject: Re: Irish house prices: Déjà vu all over again?
PostPosted: Mon Feb 12, 2018 5:01 pm 
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Some extracts from the paper

Quote:
In this paper, following earlier studies, we evaluate the present level of house prices in the Irish market. To ensure that the analysis and consequently the policy implications drawn are not ‘model specific’, a variety of approaches are adopted; well established econometric models estimating fundamental prices, cross country comparisons of relative housing affordability and standard house price to-rent ratios are all examined to see whether the current level of house prices is warranted on the basis of market fundamentals. The results are unambiguous; the Irish market does not yet display any signs of overheating. By international comparisons, Irish prices would appear to be quite affordable. The results suggest that prices, barring some unexpected significant shock or a substantial increase in housing supply, are set to increase over the medium term.


Prices would appear to be quite affordable? Not overheating? Not sure I'd agree

Quote:
At present it would appear the Irish residential sector can be characterised as a market where prices have almost fully recovered from the substantial declines experienced between 2007 and 2013. However, the fundamental level to which prices normally tend to converge is itself increasing due to factors such as strengthening labour markets. Increased housing demand can also be observed in the significant increase in rents observed in the Irish market. Indeed, since 2007, the recovery in rents predated that of house prices.


I hate that term prices recovered / rent recovery - as if a return to bubble time mortgages and rent is a good thing

Quote:
Most of the developments observed since 2013 in the domestic market have occurred in the absence of any significant increases in mortgage credit; indeed, one could argue that in terms of both the general economy and the housing market in particular, the recovery has been a ‘credit-less’ one. Coates et al. (2016) estimate that by 2014 up to 60 per cent of housing market transactions were accounted for by cash-only buyers. Since 2016 the provision of mortgage approval is increasing. While a normal, functioning credit market is essential for an economy generally, it does raise the possibility that credit growth in itself could start to become an engine of house price increases as it did in the Irish market post-2002/2003. This would result in prices growing at a greater pace than the underlying fundamental factors in the economy would suggest, inevitably resulting in overheating.


No credit = no bubble argument again

Quote:
As noted in McQuinn (2014), credit bubbles often emerge after periods of sustained improvements in fundamental factors in the economy. Therefore, policymakers must be particularly alert to this possibility. In that context, the presence of the macroprudential policy regime introduced by the Central Bank is the most efficient manner to prevent such a credit bubble emerging.


Except the Government is trying to bypass this by giving council mortgages to the riskiest buyers
https://www.irishtimes.com/business/per ... -1.3363921

Quote:
based on actual Irish disposable income and a cross country average of the relationship between disposable income and house prices, Irish house prices over the period 2000 to 2017 experienced overvaluation in the 2006/2007 period and significant undervaluation in the post-2008 timeframe. It suggests the market is still somewhat undervalued in 2017.

Quote:

The corresponding house price-to-rent ratio (plotted in Figure 4) indicates a discrete change in the ratio from about 1997 onwards. The ratio reached a peak in 2007 before declining sharply afterwards until 2012. It has remained static for most of the period since then. While rents are rising significantly, reflecting the strong underlying performance of the economy, the fact that the ratio is both relatively stable and at 11.5, the lowest it has been since 1998, would again suggest that no bubble or overvaluation is apparent in the Irish property market at present.


Quote:
One issue which will require ongoing, critical assessment is likely future developments in the provision of credit. Much of the persistent increases in house prices observed since 2013 have occurred in the absence of any credit growth. Consequently, as the Irish banking sector slowly heals itself and economic growth continues, credit conditions are likely to become more expansive over the medium term. The danger is that similar to the 2003-2007 period, credit growth, itself, will fuel greater house price inflation. In that regard the new macroprudential policy framework adopted by the Irish Central Bank will be hugely important. As suggested in Duffy and McQuinn (2014), an integral component of this framework should be an evaluation of house prices vis-à-vis fundamental levels and an assessment of the growth of the stock of mortgage credit. Based on the analysis conducted here, any future changes in macroprudential policy should not serve to increase affordability, i.e. by easing loan-to-value or loan-to-income restrictions. Furthermore, over the medium term, if any imminent overvaluation is detected in the housing market, macroprudential policy should act in a counter-cyclical manner and actively seek to restrict housing demand due to the extent that is fuelled by credit growth and hence price growth.


to date any act by CB to enact macroprudential policy has been met with criticism. If they tighten lending when a bubble emerges this criticism will no doubt be magnified


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 Post subject: Re: Irish house prices: Déjà vu all over again?
PostPosted: Mon Feb 12, 2018 6:12 pm 
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Outside of Dublin (and maybe a few other zones) prices are still quite affordable. I think there is an issue in treating Ireland as one market (instead of two markets at different points of the market cycle).
Dublin has bounced back close to top of the bubble territory but the other regions are still low priced, even those just outside Dublin. If you average out prices for the country as a whole it will not look like a bubble, even though some parts of Dublin are looking very high again.


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 Post subject: Re: Irish house prices: Déjà vu all over again?
PostPosted: Wed Feb 14, 2018 8:56 pm 
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Interesting choice of words in so far as the title indicates that the feeling of that which is being experienced has been experinced before is occurring again - Déjà vu squared?

Which leaves open the possibility of interpretation on other levels. (much like noticing the chart resembling the cycle of market emotions).

Is there a deeper message we're not considering and should we look to the past for some cynical re-calibration?

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