Monday 18 December 2017

Shining a light on one sector that we all depend on for any recovery

The collapse in Irish property prices since 2007 has bankrupted both the banks and the State. Five years later, we still have no definitive record of property prices, writes George Garvey

We all know that property prices have collapsed and we all know the cost. Bailing out the banks, largely the result of bad property lending, has already cost the taxpayer €63bn.

But by how much have prices fallen? Incredible though it may seem, the answer is that no one knows for certain.

Unlike other jurisdictions, Scotland and England for instance, information on property prices is not published by the Property Registration Service, the state body which has overseen the operation of the Land Registry and the Registry of Deeds since 2006.

In Scotland the Registry of Scotland publishes details of all property transactions over £5,000 (€6,325), including the address of the property and the price paid, on its website every month.

Transactions

Since March 2012 the rest of Britain has followed suit. The Land Registry publishes full details of all property transactions in England and Wales, including the address and the price, on its website.

In England and Wales the Land Registry also publishes up-to-date monthly house price indices down to county or borough level based on the transactions which have been registered with it.

Compare this with the situation in Ireland.

Until the CSO commenced publication of its monthly house price index in May 2011 all anyone seeking to track house prices had to go on was the ESRI/Permanent TSB house price index and the Department of the Environment house price statistics.

Both of these measurements were not without their problems. The Department of the Environment housing statistics, which are based on mortgage drawdowns by purchasers, were only published quarterly and appeared many months after the period which they covered.

This meant that, in a rapidly changing market, they were of largely historical interest by the time they were published.

The ESRI/Permanent TSB house price index, which first appeared in July 1998 and covers house prices from 1996, attempted to address the shortcomings of the Department of the Environment house price statistics. It was published monthly and generally appeared by the end of the following month and was much more timely than the official house price figures.

Like the Department of the Environment statistics, it was based on mortgage drawdowns, in this case by Permanent TSB customers.

As Permanent TSB was either the largest or second-largest mortgage lender in the State for most of the period from 1996 onwards, this meant that the index was based on a representative sample of transactions and thus quickly came to be accepted, even by rival financial institutions, as an accurate barometer of Irish house prices.

Unfortunately, when house prices began to collapse in 2007, which was just when we most needed an up-to-the-minute gauge of prices, the ESRI/Permanent TSB index ran into serious problems.

While the volume of new mortgage lending by all of the banks shrank drastically, the problem was most severe with Permanent TSB, which had relied on the interbank markets to fund more than two-thirds of its loan book.

With the interbank market effectively closed to Irish banks, Permanent TSB was essentially out of the new mortgage lending business.

This made it progressively more difficult for it to compile the house price index. At the end of 2009 the index went from being published monthly to a quarterly publication schedule and ceased entirely in May 2011 when the CSO started publishing its own house price index.

The CSO house price index, which is basically the successor to the ESRI/Permanent TSB index, has many advantages over its predecessor, particularly the fact that it is based on mortgage drawdowns by customers of all lenders, not just those of Permanent TSB.

However, it too has its problems. It does not include cash purchases which now account for at least a third of all house purchases.

Estate agent Sherry FitzGerald has estimated that 36pc of the sales it handled in Dublin during the first quarter of 2012 were for cash. Other estate agents report a similar or even higher proportion of cash sales.

As the Allsop and other auctions of distressed properties show, cash sales are usually at lower prices than those where the property is being purchased with a mortgage, typically between 60pc and 70pc lower than the peak values recorded in early 2007.

By excluding cash sales the CSO house price index, which estimates that average national house prices are down by 50pc since 2007, almost certainly understates the true extent of the fall in house prices.

And that's not the only problem with the CSO index. With property transactions, whether for cash or financed by a mortgage taking so long to close, the index is a reflection of what was happening in the housing market six or even nine months previously.

At least buyers and sellers of houses now have access to an official index based on the majority of transactions. For anyone wishing to buy or sell commercial property the picture is even less satisfactory. They have to rely on two indices, both of which are published quarterly.

The index compiled by estate agents Jones Lang Lassalle is based on a sample of 32 properties, while the other, which is compiled by the Society of Chartered Surveyors, is based on a much larger sample of 287 properties.

The Jones Lang index tends to be published sooner than the Society of Chartered Surveyors index.

In practice both of them paint a very similar picture of the state of the commercial property market with Jones Lang estimating that prices have fallen by 64.9pc from their 2007 peak and the Society of Chartered Surveyors 65.2pc, a dead heat to all intents and purposes.

While both of the commercial property indices are highly regarded by market practitioners, the situation is clearly less than ideal. Greater transparency is urgently required.

So why can't we just follow the Scottish and English example and make sale prices, for both residential and commercial property, publicly available? This would allow buyers and sellers to make informed decisions.

We're getting there, but oh so slowly. The new Property Services Regulatory Authority (PSRA), the body which has been set up to regulate estate agents, will also maintain a register of house sale prices stretching back to January 2010. Would it not have made more sense to give this job to the Property Registration Authority with which all property transactions must be registered?

We were promised that the register would be up and running by mid-year but that deadline has now slipped to September at the earliest. Don't hold your breath.

The new register will finally lift the fatwa proclaimed by the Data Protection Commissioner, who in 2008 ruled that sale prices could only be published with the consent of both the buyer and the seller.

While no doubt well-intentioned, the DPC's move created enormous scope for unscrupulous estate agents to dissemble on sale prices (see panel).

Unfortunately the new register, whenever it eventually sees the light of day, only extends to residential property. Commercial property remains, for the time being at least, excluded. This exclusion has attracted the ire of Frank Daly, chairman of the country's largest property company NAMA.

In a recent speech to the International Governing Council of the Royal Institute of Chartered Surveyors, Mr Daly welcomed the proposed new register and stated that greater transparency would be positive for the housing market. This transparency would improve buyer confidence, he said.

Disclosure

If disclosure of residential property sale prices was such a good thing, then clearly so would the disclosure of commercial property sale prices be too.

"We favour extending this proposal to commercial property sale transactions because we believe that transparency would enhance the efficiency of that market also," said Mr Daly.

But will it happen and, if so, when? Even getting the register of residential property prices to its current stage has taken forever and a day.

The review group that originally recommended the creation of the PSRA was established by the then justice minister Michael McDowell as long ago as July 2004 but the commencement order actually setting up the PSRA on a statutory basis was only signed by the current Justice Minister Alan Shatter in April of this year.

At this rate of progress it could be well into the next decade before a register of commercial property prices sees the light of day.

While the register of residential property prices will finally allow purchasers and sellers of houses a clear view of sale prices it could be quite a while yet before a similar light is shone into the deeper recesses of the commercial property market.

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