Property market's no house of cards
PROPERTY holds a fascination for Irish people. Everybody has a view on it, much of it garnered from the property supplements of the newspapers or from their own experiences in the marketplace.
There is a deep-rooted desire by most Irish people to own their own home, stemming partly from our ancestors being dispossessed, as well as a practical belief that monthly outgoings are better going on mortgage repayments rather than paying rent to a landlord. There is also the widespread desire to create a bricks and mortar nest egg or pension for the future.
The market has become much more complex and sophisticated in recent years and a broad brush approach of generalisations can no longer be applied to it. In the last 10 years, there have been persistent inaccurate and negative predictions put out on the health of the market: these did no favours to aspiring home owners who held back and invariably ended up paying much more than they could have first bought at.
Since the start of this year the hysterical negativity has risen to a crescendo from some quarters, lacking balance and an appreciation of the intricacies of theresidential market. Price moderation is mistaken for weakness, when in fact it represents maturity and long-term sustainability.
The residential market in spring of last year was overheated and dangerously so. Fortunately, sanity has been restored to it and today's market compares very favourably with the more stable markets of 2004 and 2005. It makes no sense to compare it to the inflationary market of 2006.
A much-publicised recent survey on the market implied that since asking prices had dropped in certain locations around Ireland it meant that prices and values had dropped. Based on this outlandish concept, if all sellers decided to put up the asking prices by say, 50 per cent, values and prices would have risen by this amount.
Recently, the stock market declined by 9 per cent in a matter of days - something that never happened to the property market here. Were the vultures out to take it apart? Not at all, the stockbrokers get wheeled out on the talk shows and manage to explain it all away.
They then get asked yet again for their opinion on the housing market - something they know nothing about as evidenced by their abysmal track record on it over the years - in which they have a vested interest to destabilise and, surprise, surprise, they are allowed free rein to put the boot in again with their flawed and biased analysis. When will estate agents get called in to pontificate in the same way on the stock market? Never is the answer, and rightly so.
There have been steady sales in numerous new home launches that have taken place so far this year with good demand from first time buyers and people trading up. Selling 30-150 new homes at a launch is solid activity and the absence of queuing hysteria is to be welcomed.
The exemption from stamp duty on most new homes is a good attraction for owner occupiers as are improving standards in design, construction and insulation in new houses and apartments, widening the gap further between new and second hand properties. Two thirds of first time buyers now favour a new home over older properties.
The auction market is, as expected, slower than this time last year but it should be remembered that auctions represent only 4.5 per cent of all residential sales.
Surely it is in everyone's interest that price growth generally in 2007 will be less than 5 per cent rather than the 15-25 per cent of last year, depending on location.
Some areas where supply is very strong will have no appreciation this year and may decrease by a few per cent. Asking prices on second-hand properties in some areas are being reduced, but in many cases they were unrealistically pitched in the first place.
Fortunately, most developers decided not to increase prices since mid-2006, which has been very beneficial for first time buyers.
The December Budget personal taxation measures and the doubling of mortgage interest relief for first time buyers, coupled with increased competition between financial institutions, has improved affordability, even allowing for the interest rate increases which now appear to be close to their peak. We are very lucky now to have interest rates of just 3.75-4 per cent. This is very low compared to the 10-16 per cent that prevailed in Ireland in previous decades.
Another myth that should be dispelled is that repossessions are high in Ireland. They total less than 50 in the last year between all the banks, compared to 17,000 in the UK.
The CSO figures show that 88,000 new homes were completed in Ireland in 2006. The difficulties being encountered at Local Authority and Bord Pleanala levels in obtaining planning permission for new developments, along with equilibrium having been reached between supply and demand in many non-Dublin locations, and property related tax incentives being phased out, ensures that completions are unlikely to exceed 80,000 in 2007.
Incredibly some commentators predict that this will bring prices down when again the opposite is the case with a supply reduction naturally underpinning prices. The principles of supply and demand dictate this.
There are bizarre, irresponsible predictions from some quarters that housing completions will be down to 50,000 this year. This reflects a serious misjudgement as well as perhaps an element of wishful thinking. If it were to happen, and it certainly will not, the ensuing shortage of product would cause prices and rents to rise dramatically.
The supply constraints need to be resolved, in order to improve accessibility for first time buyers and young families to the property market in the medium to long term.
The significant reduction in new starts in Dublin is not surprising, as it is a direct result of the hostile planning environment which has caused planning permissions to halve from 24,000 in 2004 to 12,000 in 2006, when the demand in Dublin points towards a requirement closer to 30,000 per annum.
The direct consequence of this supply shortfall can be seen in the latest figures on the rental market, which show that rents for two-bedroom homes in Dublin 2 increased by 20 per cent in the last year, while in Dublin 18 they increased by 19 per cent, reflecting the strong tenant demand and shortage of properties on the letting market.
Failing an immediate reversal of the planning permission scenario this shortage will develop into an accommodation crisis in Dublin which over the next three years could force rentsup by over 60 per cent in certain locations.
Investors play a vital role in purchasing residential properties and placing them on the rental market. They will obviously be active in the Irish market in the years ahead as they see the attractive returns in areas of short supply, close to good transport. Currently investors account for around 25 per cent of new home purchasers and despitereports to the contrary,this number is not decreasing.
Politicians won't face up to the root cause of rising rents and rising prices, namely the shortage of supply caused by an inefficient and anti-development planning system.
This is by far the single most pressing issue in the Irish property market and needs to be tackled immediately if we are to avoid any future periods of rapidly rising prices that will make it even more difficult for young people and families to buy their first home. Instead they come up with populist theories such as land hoarding by developers which clearly does not exist.
Surveys show that land which is zoned and has services is being developed as soon as planning permission is obtained.
Government interference by imposing controls over building land will actually be counterproductive, the same as any previous interference with the property market, such as the Bacon measures.
Building land has fallen in value since last autumn, with several lots failing to find buyers and this could continue throughout this year as the market reacts to changing conditions and to the fact that the intrusion into the land market last year by some institutional and private non-developer buyers caused prices to rise unnecessarily.
As one who has been involved in the Irish property market for 40 years and has experienced every type of market scenario, I am totally convinced that the market is currently in good shape and that anyone buying now will do extremely well in the years ahead. There is no better investment than Irish property at present, and I believethat I will be proved right in this conviction.
Why do we allow scaremongers and doomsayers with unfounded pessimism and unbridled negativity dictate our thinking and blunt consumer confidence? The Irish economy is the envy of the world. Job creation is phenomenal with more than 7,000 new jobs being created each month - despite the gloomy attention given to periodic job losses in some sectors.
Unemployment stands at 4.1 per cent, the lowest in Europe; there are 750,000 more people in the workplace than a decade ago. We have revitalised cities and towns, a conveyor belt of entrepreneurial business people operating successfully on a world stage, a rich cultural and artistic heritage, a vibrant talented young population, rising by almost 100,000 per year, confident in their own and their country's destiny. We should be celebrating our success on a daily basis. In any event, the Irish love affair with property will continue undaunted despite the knockers.
Ken MacDonald is MD of
Hooke & MacDonald, specialists in the sale of new homes.