Source: Royal Institution of Chartered Surveyors' European Housing Review 2010

NCB Stockbrokers on Monday published a report asking if the decline in Irish house prices is over?

Last month, Deutsche Bank published a report which said house prices in Europe remain above the long-term average and further price declines are likely in particular in markets in Spain, Ireland, the Netherlands, Italy, France and to a lesser extent in the UK. The DB economists said that it has been frequently argued that house prices in the Eurozone follow similar cycles to those in the US, but with a lag of six months to two years - - depending on sample periods and data series. Comparing the long-term development of house prices in the US and house prices in the Eurozone, a remarkable similarity is evident: Since 1970 (nominal) house prices have been rising in both the US and the Eurozone by roughly 500% until their latest peaks in 2006 and 2007, respectively. What is more, in both the US and the Eurozone the house price bubbles have been concentrated in some hot spots: Between 2000 and 2006 house prices in California, Florida and Arizona rose just as strongly as house prices in Europe's most affected housing markets Spain and Ireland.

However, the economists, Tobias Just and Thomas Mayer, said the downward adjustment in many European countries has not been as strong as in the US. The statistical phenomenon that the Eurozone followed the US in the past therefore suggests that house prices in Europe need to fall further. They say the financial crisis started because many US citizens could not afford their subprime loans any longer. Affordability issues have obviously been crucial. The simple price-over-income index proved to be a good indicator in the past few years.

Irish house prices may continue to fall for another 18 months according to Brian Lucey, professor of finance at the Trinity College School of Business said this month.

Lucey said in a commentary in the latest Daft.ie report that on the basis of a straight line projection of average declines in value since the peak, another 18 months of declining prices would be expected. "That would be 50 months of house price falls, or just over 4 years, towards the lower end of historical experience. It is probable that as we decline towards the trough, the speed at which house prices fall slows down. And this is what we are starting to see - in the last six months, the average decline has been lower than the previous six months, itself lower then the period before."

While the economy in output terms is back to the 2003 level, the medium term prospects and the overhang of 345,000 vacant units amounting to 17% of the workforce, point to a darker economic backdrop. The rise in emigration; the challenges facing all the debt laden advanced economies; more stringent credit availability; the current ECB benchmark rate to at least double to 2% in the next 3 years and the impact of negative equity, will likely keep Irish demand subdued for many years more.

NCB economist Brian Devine says that house prices as officially measured - - 31.5% peak to trough - - are still overvalued. Anecdotally, the general perception is that prices are in fact down somewhere in the region of 40—45%. This may not be too far off the bottom based on the various valuation measures. He says under certain assumptions it is even rational to purchase at current prices given the costs of renting.

Department of Environment statistics show that the average price of a second-hand house in Dublin in Q3 2007 was €488,749 and in Q3 2009 was €314,902 - - down 35.5%.

In Q3 2003, the price was €350,603; in Q3 2000, the price was €254,758 and in Q3 1998, the price was €188,033.

An international survey showed in 2006 that for the cost of a typical house - - 2,200 square foot single-family dwellings with four bedrooms, two and one-half baths, a family room (or equivalent) and a two-car garage - - in an area favoured by a management level family in Dublin, Ireland, you could buy nine similar houses in Houston, Texas, three in Amsterdam, two in Sydney and almost two in Tokyo.

It is likely that the houses which experienced the biggest gains during the bubble will continue to drag down the price index as the volume of activity increases in the short to medium term as occupiers in distressed situations are unable to afford high mortgages.

Brain Devine says that in the 25 years between 1975 and 2000, the ratio of house prices to household income was approximately 3. If this ratio were to be restored, it would imply that average house prices would need to fall to approximately €170,000 in 2010. However, he says despite house prices as a multiple of disposable income being the same in 1981 and 1998, repayments as a percentage of disposable income were 41.3% in 1981 versus 24.3% in 1998. Clearly this has a material impact on a household's decision to purchase and a banks willingness to lend. As of Q4 2009, a household with two earners on the average wage who purchased the average house at €220k would be using 15% of their disposable income servicing the mortgage, the lowest amount on record.

Assuming wage cuts, interest rate hikes (using Euribor curve) and a constant tax regime, the percentage of disposable income that is required to service the mortgage rises to nearly 24% of income by 2014, showing that while things do remain relatively attractive the cost of servicing the mortgage does rise and today's ratio of 15% is not as appealing as at first glance.

New 3-bed houses that were selling for £28,000 in Bray in 1981, were fetching £26,000 or less in 1987 and inflation in 1981 was 20.4% and 17.1% in 1982.

When attention was given to the public finances from 1988, it was against a backdrop of a positive international environment; ditto for Sweden in the early 90s. It will be a different story in coming years.

NCB report

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