Housing slump in Ireland continues
July 26, 2012
Housing slump in Ireland continues
Ireland’s housing market remains in a deep slump, with the national residential property price index down by 15.27% (-16.77% in real terms) during the year to May 2012, according to Central Statistics Office Ireland. According to the Central Bank, house prices were undervalued by between 12% and 26% by end of 2011 - yet house prices keep falling.
The national average asking price for residential properties fell to €172,000 in Q2 2012, 53% below the 2007 peak of €366,000, according to Daft.ie. The asking price index fell by 13.9% during the year to June 2012.
The market in Ireland’s capital, Dublin, is much healthier. Dublin’s average asking price in June 2012 was €214,000, quite close to the average of €217,000 being asked in December 2011.
- In Dublin City Centre, the average asking price was down by 10.2% to €167,172 during the year to Q2 2012, 59.3% down from the peak.
- West County Dublin had the sharpest y-o-y fall, with average asking prices down by 19% to €165,598, 56.8% lower than its peak.
- North County Dublin’s average asking price was €207,850, 14.2% lower than the previous year and 52.9% down from the peak.
- In South County Dublin, the average asking price was €328,959, 11.3% lower than the previous year and 54.4% from its peaks, and if they do not substantiate the claim that Dublin is doing much better, perhaps amend the claim.
Ireland experienced one of Europe´s biggest house price booms. When the bubble burst in 2008, it was the world’s biggest property bust. The property downturn has continued for the past five years, with a sharp decline of 53% from the peak in Q1 2012.
The total number of properties on the market was 53,000 units in June 2012, down by 15.9% from its peak of 63,000 units.
The ECB’s decision to cut its key interest rate by 25 basis points to a record low of 0.75% in July 2012, is expected to push Irish rates down. However, despite low borrowing costs, lending for house purchases has been declining as Irish banks tighten their criteria. About 47.5% of all outstanding mortgages were in negative equity by end-2011, up from 31% in 2010.
Housing boom and bust
Ireland’s house price boom was one of the longest and biggest in Europe, with prices of second-hand homes surging by around 330% from 1996 to 2006. The average price of new houses rose by 250%, according to the Department of Environment, Heritage and Local Government (DoEHLG). Historically low interest rates encouraged variable rate mortgages.
HOUSE PRICE CHANGE 1996 - 2006
The housing boom was originally fuelled by strong economic growth, immigration, and generous tax incentives and grants from the government, creating a virtuous cycle of economic growth and house price increases. Low interest rates and loose credit conditions provided financing.
The situation slowly turned upside down since interest rate hikes started in 2006 and 2007, leaving borrowers in trouble of paying their debts, signalling a housing market crash. The 2006-2007 US subprime mortgage crisis leading to a global financial meltdown in 2008, has worsened the situation making it extremely difficult for Irish banks to recover from their losses.
According to Daft.ie, Ireland has experienced one of the most severe property crashes among modern developed economies. It has been longer than a typical housing market downturn, marking its 5th year of falling prices this year (2012), in contrast to the typical crash range of four and a half years suggested by OECD research. Ireland’s average fall of 53% from the national peak, was also much larger than the typical OECD ´house price crash´ fall in prices of 23%.
Lower interest rates; tighter lending
The European Central Bank (ECB) decided to cut its key rate by 25 basis points from 1%, to a historical low rate of 0.75% in July 2012. With this key rate drop, it is likely that the Irish interest rates will also decline. The average interest rate for initial rate fixation (IRF) of up to 1 year was 3.05% in May 2012, down from 3.30% in the previous year. Meanwhile, the mortgage rate for IRF of over 1 year was 4.39%.
Despite these low rates, lending for house purchase fell 2.5% during the year to May 2012, according to the Central Bank of Ireland.
Outstanding housing loans have been continuously declining, reaching €79.874 billion in the first quarter of 2012, down from €125.1 billion in Q1 2008. Residential mortgage lending has dropped from 64% of GDP in 2010, to just 51% of the country’s GDP by the end of 2011.
The lower mortgage lending was, in part, due to further tightening of credit standards for the third consecutive quarter and a decline in loan demand in Q1 2012. According to the latest ECB bank lending survey (BLS), more restrictive loan-to-value ratios and reduced loan maturities were observed during Q1 2012. Credit standards are expected to tighten further on loans for house purchases, while loan demand will remain unchanged in Q2 2012.
Rents are stabilizing in Ireland, and modestly rising in some places, especially the main cities.
The housing crash initially resulted in a huge expansion of offers to rent. From 6,200 units in August 2007, the number of properties for rent rose to more than 23,400 in August 2009. But now, the stock of rental properties is at its lowest level since mid-2008, at just above 15,000 units (April 2012).
Ireland’s rent index fell by 0.7% during the year to April 2012, according to Daft.ie, just a bit lower than the previous year’s 0.8% decline, but a massive improvement from May 2010’s 8.9% plunge. The national average rent last January was €813 per month, still far below its late 2007 peak of nearly €1,100.
Rents for Dublin and Cork were €16 per month higher than the previous year, while rents outside the main cities were down by €14 per month.
Rents in Dublin are rising modestly, but in 2012 are still almost 30% lower than the peak. In Q1 2012, the city centre, South Dublin City, and West County Dublin all enjoyed a rent increase of about 2% on the previous year. Rents in other parts of Dublin barely changed.
Yields are quite modest, and slightly improved from the previous year.
- The average rental yield across Ireland was 5.1% in Q1 2012, up from 4.0% in Q1 2011.
- Yields in Dublin are even higher, at 7.4% in the city centre. Yields in other Dublin counties range from 5.1% to 6.7%.
Oversupply remains; completions falling
Oversupply is estimated at around 110,365 units (April 2011) plus the 17,972 under-construction units reported by the Unfinished Housing Survey by the (DoEHLG), according to Rob Kitchin, director of the National Institute of Regional and Spatial Analysis. The overall vacancy rate (holiday homes included) is 14.5%, at around 289,451 units.
Around 9 local authorities have vacancy rates of more than 15% headed by Leitrim (22.26%), while South Dublin has a vacancy rate of only 5.37%.
Dwelling completions tripled during the house price boom to 93,000 units in 2006 from 30,000 units in 1995. However, by 2011 completions had fallen to 10,480 units. An even lower amount is expected in 2012, with only just over 3,000 completions reported from January to May.
New property measures
Ireland’s 2012 budget included new property-related tax measures:
- Stamp duty for non-residential property is now down to a flat rate of 2%, from its previous 6%, but the stamp duty arrangements for residential property remain unchanged. The new rate also applies to farmland.
- Gains from properties bought between December 7, 2011 and December 31, 2013 will be exempt from Capital Gains Tax (CGT) as long as the property is held for 7 or more years. The CGT exemption, however, would only be open to properties (residential or commercial) that had been previously acquired at the market peak (2005 to 2008).
- The Upwards Only Rent Reviews (UORR) provisions (imposing retrospective rent reviews into existing leases) were dropped.
- Mortgage interest relief was increased to 30% for first time buyers who took out their first mortgage from 2004 to 2008. The relief will be available from 2012 to 2017, and all mortgage relief will be abolished from 2018 onwards. First time buyers who purchase in 2012 can also avail a 25% mortgage interest relief, while non-first time buyers could avail it at 15%.
- Ireland’s standard VAT was increased from 21% to 23% starting January 1, 2012.
- A surcharge of 5% will be imposed on individuals obtaining property-based tax reliefs, if they have gross income higher than €100,000.
- On January 1, 2012, residential property owners are liable for the household charge on each residential property at €100, and it can be paid in installments.
Ireland succeeds in lowering deficit; unemployment skyrockets
Ireland may meet its vow to cut its deficit to the EU’s limit of 3% of GDP by 2015. According to the latest review of troika of international organizations (EU, ECB, and IMF) in July 2012, Ireland was able to meet the requirements of its 2010 bailout program. Ireland’s budget deficit was -31.2% of GDP in 2010, fell to -13.1% in 2011, and is likely to be lower in 2012.
The housing market collapse has left Irish banks with massive bad debt. In order to save the banking sector from collapsing, Ireland had no choice but to seek a €67.5 billion ($82 billion) bailout from the European Union (EU) and the International Monetary Fund (IMF) in November 2010. In exchange for that bailout, Ireland had to commit in putting a reign to its increasing deficit by undergoing through Europe´s harshest austerity program.
The country also spent around €80 billion to establish the National Asset Management Agency (NAMA) to acquire toxic loans, primarily with a view to improving the availability of credit in the Irish economy, and to remove uncertainty about non-performing assets on bank balance sheets.
The country now has an underlying deficit was 9.4%, lower than the EU target of 10.6% and the Government’s budget day estimate of 10.1%. According to Finance Minister Michael Noonan, Ireland is well on track to meeting the its 2012 deficit target of 8.6% of GDP. Estimates show that the preliminary general government deficit in this year (2012) is at 8.2%, though that is just the Department of Finance’s early estimate.
In June 2012, Ireland’s referendum on the EU’s fiscal treaty was passed with 60.29% of voters voting in favor. The referendum endorsing the European fiscal compact on May 31, 2012, resulted in the ratification of a treaty that sets out rules in controlling debt and deficit of euro zone members. This allows Ireland to have an access to the European Stability Mechanism, the euro zone’s permanent €500 billion ($618 billion) bailout fund.
However, despite having a better deficit outlook this year, EU, ECB and IMF are less optimistic about Ireland´s economic growth outlook. "Growth prospects for the remainder of 2012 and into 2013 remain modest, with weak trading partner growth dampening export demand despite further competitiveness gains," the troika said in a statement.
GDP was up 1.2% y-o-y to Q1 2012. Recent growth figures for 2011 have been revised - Ireland grew by 1.4%, double its initial estimate of 0.7%. The European Commission predicts 0.5% growth in Ireland’s economy for 2012.
The inflation rate was 1.1% in 2011, from -1.6% in 2010 and -1.7% in 2009, according to the IMF.
In June 2012, unemployment hit an 18-year high of 14.9%, its highest level since March 1994. The recent data suggests that unemployment may surpass the government’s 14.3% target for 2012. From 2000 to 2007, unemployment was stable at just 4.4%.
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- Housing slump in Ireland continues - July 26, 2012
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- Ireland's residential property still in deep crisis - August 27, 2011
- Ireland’s house prices plunge further as crisis deepens - December 21, 2010