Sunday 27 May 2018

Houses are a great long-term investment

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By Ronan Lyons

'Buy land", Mark Twain is supposed to have said, "they're not making it any more!" The same is true of older houses. However many Edwardian or Victorian homes the country has now, that's as many as we will ever have and indeed that number may dwindle over time. So what does the history of Dublin's housing market over the last century tell us about old houses as an investment?

The good news is that Ireland is blessed with lots and lots of data relating to housing and land over the last few centuries.

The bad news is that much of this remains untouched, in the Registry of Deeds and the Land Registry, waiting for researchers to unlock its secrets. Some of the research I've been undertaking since starting at Trinity three years ago has been examining the history of housing in Ireland. In particular, because Dublin has such a substantial fraction of old housing stock, it is a natural case study, not just within Ireland but globally, for long-run trends in the housing market, including prices.

The anniversary of the 1916 Rising, 100 years ago today, is a good time to search the archives in the Registry of Deeds and compare those records with the Property Price Register, to see how much prices have changed.

To do this, we need to focus only on those streets where dwellings are, more or less, the same now as they were in 1916. Certainly, extensions, renovations and general maintenance may be contributing to some of the increase, but this can be accounted for.

Older streets may be somewhat biased towards higher-income areas, with much of the older housing stock in Dublin built for those on above-average incomes.

Nonetheless, it's possible to pick streets in Rialto, Ringsend and Drumcondra, which would have been home to those on relatively modest incomes a century ago. Combining all these areas, then, can give a fuller picture.

The table, above, takes a number of transactions that took place in 1915 and 1916 and pairs them with sales over the last two years. So, for example, 5 Clifton Terrace in Monkstown was traded for £275 in 1915 and again for €1.6m in 2015. On the face of it, this looks like a six thousand-fold increase in price. But two important adjustments are necessary.

Firstly, the 1916 amounts are in pounds and so need to be converted into euro. This is a relatively simple exercise: just multiply by 1.27. The second, and trickier, adjustment is to convert that amount from a century ago into today's terms. This is what economists refer to as real, rather than nominal, prices.

The best evidence we have, combining work by economic historians and the official consumer price index, is that the general price level has increased by a factor of 64 in the last 100 years. This means the price of £275 in 1915 is the same, in purchasing power, as roughly €22,000 today. Clearly, 100 years is a very long investment horizon - but the case of Clifton Terrace suggests an average annual increase in house prices of 4.4pc. This, however, is one of the largest increases seen in real house prices for the sample of transactions.

In Whitworth Road in Drumcondra, No 73 sold for £410, a figure equivalent to €33,000 today. Its neighbour, No 71, sold recently for €325,000, suggesting a real increase in the house price just under 10 times. This converts to an average annual increase of 2.3pc.

These are the extremes. A more typical increase, at least in the handful of areas shown, is St Clement's Road, Drumcondra. There, 100 years ago, No 8 sold for £230, nearly €19,000 in today's terms. No 7, nest door, sold recently for €500,000, suggesting an almost 27-fold increase in prices in that area. There has been a similar level of increase in property values in Clontarf, Ballsbridge and Ranelagh.

In all areas shown, house prices have increased significantly in real terms in the last century. Much of that increase is concentrated in the last two decades. This, though, is really just the first step in the research. It is one thing to measure house price changes but it is significantly more valuable to explain why, and why one area sees greater values than another.

Perhaps a clue for future research comes from the experience of two neighbouring streets in Portobello. The value of a house in Longwood Avenue has increased from about €50,000 to about €725,000 since 1916. During the same period, homes on Windsor Terrace, which are much smaller, have increased in value from about €10,000 to about €640,000.

If indeed it is the land that is valuable, and not the structure, then we would expect to see cheaper homes in good areas rise proportionately more than more expensive ones. To answer this definitively, we will need much more data, but at first glance, perhaps Mark Twain was right all along.

Ronan Lyons is assistant professor of economics at Trinity College Dublin and author of the Reports

Sunday Independent

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