Dan White: The property bubble is not going to last
Don't be lulled by talk of a recovery in the housing market – it's all a facade, much like Potemkin's pretty villages
THE eight per cent rise in average Dublin house prices over the past 12 months revealed by the CSO last week needs to be taken with a very large pinch of salt.
With the banks cutting back on mortgage lending yet again and only tiny numbers of properties changing hands, any sustained recovery in the housing market is still a long way off.
Last Tuesday, the CSO published its latest house price index. Not surprisingly, it was the CSO's assertion that average Dublin house prices had risen by eight per cent in the 12 months to July that attracted the most attention. While this was good news for anyone trying to sell a house or apartment in the capital, the news from the rest of the country was not so good, with average prices outside of Dublin falling by 1.5 per cent over the same period.
While, after more than five years of falling prices, any bit of good news from the housing market is welcome, it might not be a good idea to declare the property price crash over just yet. For a start, the CSO house price index only includes properties that were bought with a mortgage. While virtually all homes were purchased with a mortgage during the boom years, this is no longer the case.
Figures published by the Irish Banking Federation on Thursday revealed that while 2,852 mortgages were drawn down during the second quarter of 2013, 5,642 houses and apartments changed hands.
In other words, cash transactions now account for just under half of all purchases.
Unfortunately, these cash transactions are not being captured by the CSO figures. However, going on the evidence of auctions of repossessed properties where the majority of deals are for cash, it would appear that prices are down by 60 per cent or more rather than the 50 per cent indicated by the CSO data.
Doubts about the reliability of the CSO figures are only part of the problem. Even if every house was being purchased with the aid of a mortgage, a far bigger obstacle to gauging the true state of the housing market is the fact that transaction volumes, either with or without a mortgage, have virtually dried up.
According to the IBF, just over 10,000 houses and apartments changed hands in the first half of this year. While this was up more than 10 per cent on the total for the first half of 2012, it would be a brave man who would bet on the increase being sustained into the second half of this year. The number of housing transactions in the second half of 2012 – more than 15,000 – was artificially swollen by a number of tax breaks for first-time buyers that expired at the end of last December.
Far more likely is that the number of houses and apartments changing hands this year will be somewhere between the 18,000 recorded in 2011 and the 24,000 for last year, probably not much more than 20,000. What this means is that, at current levels of activity, each one of Ireland's almost two million houses and apartments can expect to change hands once every 100 years. That's clearly not a sustainable situation. And why have transaction volumes evaporated to virtually nothing? Blame the banks.
Despite expensive advertising and PR campaigns designed to get us to believe the opposite, the brutal truth is that even based on the IBF's own figures, mortgage lending is still falling, down another one per cent to €518m in the second quarter of 2013 compared to the same period last year. The IBF's claims that mortgage lending was up quarter-on-quarter are completely irrelevant, not to say disingenuous, as the first quarter is traditionally by far the quietest time of the year for the housing market.
So far this year the banks have approved €850m of new mortgages. Barring a sudden and unexpected increase, it is hard to see new mortgage lending for the full year going much over €2bn, a 95 per cent reduction on the €40bn lent in the peak year of 2006.
Given the reluctance of the Irish banks to lend, even to good customers, and the obscene interest margins they are gouging from their variable rate borrowers, it hardly comes as any surprise that a number of overseas banks, most notably the South African lender Investec, are looking at entering the Irish mortgage market.
So no credit and tiny transaction volumes on the one hand, but an apparent price recovery, at least in the better Dublin suburbs, on the other.
What the blazes is really going on in the Irish housing market?
Looking at the current situation, it's hard not to be reminded of 18th Century Russian statesman Prince Grigory Potemkin, chief minister and sometime lover of Empress Catherine the Great. Whenever the Empress got it into her head to journey through her vast territories, Prince Potemkin would travel a few days ahead of her constructing 'villages' that were in reality no more than facades, populated by suspiciously well-dressed and fed 'villagers', thus ensuring Her Majesty a rapturous reception wherever she went.
While the Russians may have had Potemkin villages with an attractive facade concealing the poverty that lay behind, we in Ireland have a Potemkin property market, where the facade of an apparent increase in prices conceals the reality of tiny volumes and virtually no mortgage credit that still stands in the way of any sustained recovery.