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News : Property Last Updated: Apr 13, 2014 - 7:57 AM

Irish Residential Property Prices: Government wants higher prices
By Michael Hennigan, Finfacts founder and editor
Apr 10, 2014 - 6:48 AM

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House prices in Ireland, adjusted for inflation, 1975-2011 Source: http://www.ronanlyons.com

Irish Residential Property Prices: This week Michael Noonan, finance minister, said that he wants to see house prices to rise further while downplaying fears of another property bubble in Dublin.

In another April in 2006, the craziest year of the property boom, Bertie Ahern, then taoiseach, also discussed house prices, saying that had listened for seven years to warnings and arguments about difficulties in the construction sector. "I think you have to look at the asset. This is the question: if you are borrowing 'x', if you sell the asset, if there's a bit of a downturn, will you get 'x' back in return? That's the issue. At the moment, there doesn't seem to be an indication [of difficulties].

"I mean quite frankly, if you had taken the advice a year ago you would have lost a lot of money. Everybody said we're going to see a huge downturn in 2005 linking into 2006 - they were entirely wrong.

"Really we should have an examination into why so many people got it so wrong. My view is there's not a great problem. Really, the bad advice of last year given by so many has maybe made some people make mistakes, that they should have bought last year."

Speaking at the 'Sunday Independent Business Evening ' on Tuesday, Noonan said the Government will use NAMA, the state toxic property loans agency, to tackle the housing shortage. "We need to get property prices up another bit," he told the Dublin event.

The minister said NAMA would join forces with developers to build more than 22,000 homes over the next five years.

"I'm worried about the lack of availability of family homes in the greater Dublin area in particular," he said.

Noonan wants higher prices to help banks pass the European Central Bank's stress tests, thereby avoiding the need to raise fresh capital.

Nevertheless, it's odd that the Irish Government would be eager to see rising house prices while the wreckage of the bust in mortgage arrears and so on remains to be cleared up.

CSO data shows that national home prices rose by over 6.4% last year with Dublin prices up 15.3%.

House prices in Dublin were off 47.4% from their 2007 peak while the price of apartments in the capital were down 54.5% since their peak in February 2007.

National prices were down by 46.4% since 2007.

Ronan Lyons said in the Daft.ie Q1 2014 [pdf] report: "There are currently fewer than 2,300 properties listed in the capital, the lowest since June 2006. Currently, less than 800 Dublin houses are coming on the market each month on average or 10,000 homes over the course of a year. In a city of roughly half a million households, this translates to just 2% for sale - - a healthy market would see at least three times this amount coming on to the market each year and perhaps as much as six times. Unsurprisingly, the market in the capital is incredibly tight, with roughly 1,000 transactions a month in the second half of 2013 - - well above new supply."

CSO data shows that the average price of a new house/ apartment in Dublin in Q4 2006 and Q4 2013 was €419,330 and €304,275 while the price of a second hand houses was €517,865 and €354,866.

Median prices would be more useful as in 2006, price inflation in the expensive market would have skewed the average.

In 2004, Brian Cowen, then finance minister, said that tax and public charges accounted for 28% of the average cost of a new house.

Ronan Lyons has shown in the chart above that the real or inflation adjusted house price is flat in the long term but in recent decades relative to income, the two-person earning household has become more common.

Affordability has improved because of the fall in interest rates but looking at the multiple for the average wage of an industrial manual worker of  €31,000 in 2006 and €32,000 in 2013, the multiple for a new home in Dublin was 13.5 in 2006 and 9.5 in 2013.

On the demand side, we reported last month that mortgage approvals in February 2014 were at a 42-year low.

Finfacts 2014: Irish home mortgage approvals in 2014 at 42-year low

Finfacts 2014: Real price of Amsterdam house only doubled in more than 350 years

Dysfunctional land development market

In 2006 the European Environment Agency cited Dublin as a "worst case scenario" of urban sprawl.

Since the economic crash in 2008, while there have been a number of planning reforms, the land rezoning system that makes development land scare in a country that is estimated to be 4% urbanised, remains a taboo area.

Farmers during the boom got huge windfalls including almost a quarter of the national roadbuilding budget of €18bn and even though accounting for 4.5% of the workforce, politicians are scared of the Irish Farmers Association.

Jerome Casey, in 2003 as editor of the 'Building Industry Bulletin' newsletter, said that site costs accounted for 42.5% of a house nationwide. Casey said that typically in the mid 1990s, Durkan Brothers sold apartments off O'Connell Street for £35,000 to £40,000 (€44,440 to €50,790) for which the site cost was £5,000. "Currently, both the Irish Council for Social Housing and private house builders are reporting city house site costs at up to 50% of the house price. Outside the cities, site costs can represent up to 40% of the house price. For the country as a whole, site costs may now constitute 42.5% of the house price, an increase of almost 30 percentage points on the pre-boom position. In Dublin that increases to 50%. Overall the Irish figures are grossly out of line with the rest of the developed world."

In the US land accounted for 20% of the total cost of a house. In Denmark the figure is similar while in Portugal the land factor drops to 15%.

Finfacts 2008: Irish Farmers and Sacred Cows

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