Property market recovery is about raising activity -- and stable prices
A question I'm often asked is when are we going to see the property market 'pick up'? Some who ask this mean, 'when will we see property prices at levels anything like 2007?'
But we need to remember that the price level is not the indicator of a healthy market -- in fact, rapidly rising prices are a tell-tale sign that the property market is in an unhealthy bubble.
It is instead a sustained increase in the level of transactions that will mean the market has "picked up". Back in 2005, there were almost 40,000 first-time buyer mortgages given out -- I think we all agree now that this was an unhealthily high level of transactions.
However, we have now gone to the other extreme. In 2011, there were only 6,300 first-time buyers, in a country that generates probably between 25,000 and 30,000 new households every year.
Recovery will be seeing that number of transactions roughly treble over coming years. And that's about credit and confidence.
But even if the number of new mortgages does treble, we should not necessarily expect any big increase in house prices.
In fact, we should hope prices don't increase. If there's one clear lesson from economic history, it's that in healthy markets house prices do little more than match inflation.
This is a hugely important message for people holding off on putting their property on to the market at the moment. The average house in Ireland has fallen in value from €375,000 at the peak to roughly €150,000 now.
There appears to be an attitude on the part of some would-be sellers that 'if I wait a few years, my property will be back up at €200,000 or €250,000'.
This forgets that what may seem like a small difference on the way down is a big difference on the way back up. If house prices increase by 2pc a year on average once they've stopped falling, €200,000 is 15 years down the line from €150,000.
A return to peak prices is a full five decades away -- we should forget about what things were worth 'back in the day' and start thinking in terms of our new reality.
What is that new reality? Well, whether one couple can afford a house is determined by how their mortgage repayment compares to their disposable income.
With an average mortgage rate of 6pc over the coming generation, a 90pc 30-year mortgage on a property worth €150,000 would translate into a mortgage repayment of €800, which seems sustainable for a couple earning €55,000 a year -- or just over €3,000 in disposable income a month.
Ultimately, though, the value to society of a house is not determined by what one couple can pay for it. The fundamental value of property is determined by the value of the services it offers to residents. To see these amenities, we can look at rents.
The multiple of a house price over the annual rent is an easy way to see how overheated a market is. Aggressive buyers look to pay 10 times annual rent, while families are often happy to pay 15 or even 20 times rent.
In the boom years, though, people were paying 50 times the annual rent to buy a house.
Getting people thinking in terms of rental multiples when bidding is probably the single biggest step towards thinking in terms of our new reality -- and also the best possible precaution against negative equity and future bubbles.