ESRI says Irish houses undervalued up to 27% - Maybe or not?
By Michael Hennigan, Finfacts founder and editor
Aug 7, 2014 - 6:13 AM

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An article published today in the Economic and Social Research Institute's (ESRI) latest Quarterly Economic Commentary updates earlier analyses of Irish house price movements. 'Bubble, Bubble, Toil and Trouble,' [pdf] by Dr Kieran McQuinn, shows that Irish house prices at end of December 2013 were  undervalued by up to 27%, and in the absence of a significant housing supply response, are likely to continue to increase in the coming years.

The paper says Irish house prices still appeared to be undervalued at end - - 2013 with estimates of the undervaluation varying between 12 and 27%. The latter result is estimated with a model which places a significant emphasis on nominal interest rates. Excluding this specification suggests that the current rate of undervaluation at end 2013 in the market is in the range of 12 to 18%.

In a comparison of house prices with disposable income with other countries, McQuinn says: "Up to 1995 the Irish ratio was the lowest across the countries included and thereafter began to rise sharply as house prices increased. By 2007 both Spain and the UK had ratios which were broadly in line with the Irish rate; however, the Irish rate fell by a greater degree up to 2012 suggesting that Irish house prices became increasingly affordable by international standards."

Irish data used in a Dallas Federal Reserve Bank database is a hybrid of CSO and Department of Environment house price data.

Both data sets are derived from mortgage lending which in 2013 was at a 40-year low.

Last month Cathal Mac Coille, chief economist at Davy, said that cash buyers currently account for 50% of the Irish housing market.

Mac Coille also commented on the Dublin factor - - County Dublin has 28% of the total population:

Our analysis of the Irish property price register indicates that 23% of transactions in Dublin so far in 2014 were above the €400,000 level – up from 16.5% of transactions in 2012, and indicative of the frothy nature of the market. But liquidity is little better in Dublin, with transactions accounting for 0.9% of the housing stock in H1 , o r once every 58 years. Dublin accounts for 528,000 of the total Irish housing stock of 2 m homes. New mortgage lending for house purchase was just €539m in Q1 , of which €263m was to first - time - buyers. Rather than reflecting credit constraints , the lack of mortgage lending relates to the lack of properties on the market and competition from cash buyers. This is evident in the growing gap between mortgage approvals and actual lending. Cash buyers account for around 50% of residential transactions." reported last month that the average asking price for houses on sale in South Dublin County was €442,500 -  - a level above pre-bubble times.

According to Dallas Fed data, the Irish price/income ratio rose by 174% in the period 1995-2007 while it fell by 59% in the period 2007-2013.

We noted last May that according to the official Residential Property Register, houses on Glasnevin Avenue were already fetching €400,000+ and a plain 2 bed apartment in Sandymount Avenue in South Dublin fetched €375,000 - - 10 times average gross national income.

According to a survey by Douglas Newman Good, the average cost of a Dublin home stood at €349,000 at end June, a rise of €6,666 per month since the beginning of April, or €71,000 since June 2013.'s mix adjusted asking price nationally in Q2 was €190,000 versus €255,000 in Dublin.

The latest University of Ulster Quarterly House Price Index covering April, May and June showed that the average house price was £139,720.

In May 2014, the Office for National Statistics said London continues to be the English region with the highest average house price at £492,000 and the North East had the lowest average house price at £150,000. London, the South East and the East all had prices higher than the UK average price of £262,000.
Excluding London and the South East, the average UK mix-adjusted house price was £200,000.

The ONS said the average UK mix-adjusted house price in May 2014 was £262,000.

However, June data from the UK's Land Registry's House Price Index (includes all residential transactions including buy-to-let) shows an annual price increase of 6.4% which takes the average property value in England and Wales to £172,011 (€216,000).

The Institute for Fiscal Studies explains here [pdf] the methodology of the four main UK housing indices.

According to an OECD study [pdf] this year, compared with a price to income ratio base of 100, Ireland was at 92; Germany at 83; UK at 125 and Spain at 104.

With 470,000 people in receipt of employment-related welfare at the end of July and the two-thirds of the private sector workforce in SMEs, it's going to be a challenge for many people to get a mortgage in coming years.

Finfacts, May 2014: Dublin Housing Crisis: 75 item laundry list doesn't make a strategy

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