Monday 22 January 2018

Home truths... May 17, 2006: The day the boom died

Professor Alan Ahearne arrives at the Oireachtas Banking Inquiry. Photo: Tom Burke
Professor Alan Ahearne arrives at the Oireachtas Banking Inquiry. Photo: Tom Burke
Mark Keenan

Mark Keenan

Alan Ahearn of NUI Galway caused surprise at the Oireachtas Banking Enquiry with his claim that Ireland's property crash started as early as summer 2006 - to the degree that one headline called it "Ireland's biggest secret". Popular wisdom holds that the crash began in 2007.

But Professor Ahearne is bang on the money - in fact, the precise date on which the crash started was Wednesday, May 17, 2006. The exact turning point was the auction of 21 Ailesbury Road, Dublin 4.

There had been an extraordinary run of record auction prices and, six months earlier, Gayle Dunne bought Walford on Shrewsbury Road for €58m - the sixth-highest price paid worldwide that year. Credit was loose and rent was incidental - most had their eye only on capital-value increases. A survey of Irish investors showed 80pc believed property to be the safest form of investment, with two thirds stating they'd reinvest.

But by Easter 2006 there had already been ominous signs. A series of rolling interest-rate hikes had begun to kick in and there would be six by the end of that year.

Meantime, vastly underestimated 'guidelines' had been causing problems.

A house guided at €2m would often go 'on the market' at €3m and sell at €4m. To fix this, then Minister for Justice Michael McDowell decreed that auctioneers would have to provide an Advised Minimum Value (AMV) - to be within 10pc of the true reserve.

Auctioneers claimed they were in a bind with guidelines - all forced to understate because all of their competitors were doing the same to fill auction rooms. The habit had become self-affirming because the public factored it in when bidding.

Some agents saw the AMV directive as a real chance to "clean the slate and start again" - to issue realistic guides - but others carried on with their usual tricks. The result was widespread confusion over price expectations. Number 21 was among the early properties sold under AMV.

A week before the May 17 auction, another Ailesbury Road house sold under the hammer for €9.6m from an AMV of €7m, suggesting AMV ineffectiveness.

When No 21 (then home of the insolvency expert John Donnelly), went under the hammer through Lisney, it had an AMV set at €12m. The auction opened but bidding was sluggish. The property didn't reach reserve. It was withdrawn and the market appeared to have its first big backfire. The next day a headline in this newspaper stated: "No takers for plush city pad at €12m." The house sold after auction for €12.95m - within AMV. But the deal was private so no one knew. Amidst the confusion, the purchasing public saw only the failed auction sale of a trophy home. It panicked those who had plans to sell a trophy home at some point in the future.

"Everything changed between the Easter and the summer," John O'Sullivan of Lisney told me afterwards. "It was downhill for the auctions from there."

Simon Ensor of Sherry FitzGerald said: "Those who had been toying with selling up saw the top of the market passing in front of them and decided to get out - all at once. That autumn we were completely swamped with top-end homes for sale."

By September private sale prices were quietly being cut in D2 and D4 but a number of red-herring issues meant market observers could not furnish solid proof.

First came the two-month summer lull when auctions stopped. When September arrived, all should have been apparent, but Justice Minister McDowell threw in a curve ball when he hinted he would seek the abolition of stamp duty in December's budget.

Home sales remained flat through September, October and November and by now it was obvious prices had stalled. But why would anyone buy before the budget if stamp duty could be saved by holding off?

The Budget came and went and stamp duty remained. But the market entered the long Christmas lull. Now it would take until early February, when the market usually revived, before the situation was clarified.

Covering the market at the time, I had been following the muddied proceedings right from that auction. To finally clarify what was going on, I engaged to conduct a two month price survey.

Its results showed that asking prices were clearly falling in Dublin. I ran my own first "bust" story in early March 2007 under the headline: "The First Evidence of Falling Prices" and accompanied by a graphic of a tombstone on which was written: "Ireland's property boom RIP." The following month, RTE screened its Boom programme, which highlighted the precipice into which the property market was falling, and into which it would ultimately drag the economy.

In 2013, No 21 came to market again. Today we can see clearly that it changed hands for €4.75m. Thanks to the property price register, all of us can now access every price paid on any street. Had we the price register back then, today we'd be talking of the property crash of 2006 - not of 2007.

Indo Property

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