Thursday 19 April 2018

Home Truths: When prices are rising and falling

Ultimately, the market decides what a house is worth
Ultimately, the market decides what a house is worth
Mark Keenan

Mark Keenan

Dublin vendors currently in the process of selling their homes may wonder why their properties are stubbornly refusing to shift months after they have brought them to market.

They might reflect that this seems particularly odd given the figures cited three weeks ago by the state's own CSO house price barometer (stating Dublin prices were up 0.2pc in May). Odder still given this week's news from that Dublin prices have just increased by 2.3pc.

Both barometers seem to indicate that prices remain solid in the capital.

And as the spring to summer selling season draws to a close, many unsuccessful vendors will be very vexed indeed with their estate agent who recently called to advise cutting the asking price for their property by €20,000 with a view to launching a renewed sale campaign in the Autumn.

Chances are, those receiving such a call will have already given that pesky estate agent a piece of their mind, reminding them that the same house down the road which sold for more money before Christmas is nowhere as good - "we have the granite-topped island kitchen unit, we have the solid gold bath plugs, we have the hand-crafted and bespoke widgerydigits".

Ultimately of course the market decides what a house is worth, not the biased vendor. Experience shows that when the market changes, vendor expectations can take around six months to adjust. In fact, vendor expectations consistently lag market reality whether prices are going up or whether they are going down.

Barometers based on asking prices are therefore, in truth, nothing more than a vague indicator of vendor sentiment. Even at that, they are shaky because tactics differ between vendors' estate agencies - some deliberately ask more to come down and some ask less to come up. Most accurately then, asking prices are a barometer of opening sales pitches, of introductory starting points in what is usually a lengthy negotiating process.

So why does the media continue to report asking-price-based barometers as if they were the gospel on true prices being paid?

In response to this week's asking-price survey, the national broadcaster RTE headlined: "National house prices up 1.7pc" - one regional paper reported "Cost of four-bed semi in Louth rises by 1.5pc," and "House prices in Wexford fell" said another. For reasons outlined above, strictly speaking, no they're not (if you mean prices actually paid), no it didn't and no they didn't. The wording is important. If we're talking about cost, we're talking about what is actually paid, not what is being asked.

Using asking prices as a guide when the market is changing direction is especially dangerous. At the moment the prices (actually paid out) for average houses in most parts of Dublin are most likely falling because of the Central Bank lending measures introduced at the start of this year.

This may be a temporary situation, especially given parallel figures showing a fall-off in home building activity and fast increasing rents. But for now, prices are falling in many locations.

I am biased here, but the first evidence of falling Dublin prices came with the publication on Monday of the Irish Independent/Real Estate Alliance Average House Price Survey which showed that Dublin prices have fallen by 5pc and in some upper middle-class locations, by up to 7pc.

This barometer is based on real time up-to-the-minute sale agreed prices as clocked by a nationwide network of 60 estate agencies. It has its own failings, namely that it is based on a smaller survey set than other barometers, it excludes homes other than semis, it is opinion based and it comes from a vested sector. But it does take cash sales into account and it is bang up to date.

The Government's own barometer, the CSO statistics, doesn't take cash sales into account (which make up around 50pc of purchases in some areas right now), and it runs at around three months behind because it is based on mortgages drawn down (a process that takes months to occur, long after a sale is agreed).

The property price register, absolutely vital and generally reliable, is itself unfortunately around three months behind the market because of the lag in self registration of data.

Experiences in other countries show the same problems. In February, one of the UK's top two price barometers showed house prices rising while the other said they were falling. The UK's barometers are also a mixture of lagged state statistics and asking price barometers.

Given that we are heading into another Budget, it is vital policy makers and market observers, as well as punters, see every property barometer for what it is, and realise the limitations of each one. The alternative is that we have property consumers and governments making key decisions based on foggy headline sentiment.

And we know where that gets us.

Indo Property

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