Saturday, April 26, 2014

26/4/2014: It's a long... long... long... road to house prices recovery...

It is a virtually impossible task forecasting long-term price movements in property markets for small economies, like Ireland. The reason is that there are simply too many moving parts all with huge volatility built into the numbers. Take for example normally stable time series such as population. In the case of Ireland, wild swings in terms of net migration over the recent years saw 2006-2008 annual average net immigration of 80,300 per annum switching into a net annual emigration of 31,633 per annum in 2010-2012. While total change in 2007-2013 population in Ireland was 108,000, net migration swing was 111,930. You get the point: what we think the potential demand might be is not an exact science and in the case of Ireland it is not really much of any science whatsoever.

So setting aside actual economic models, what can we say about future property prices trends?

We can do a couple of simple dynamic exercises. Suppose that we are getting back to pre-crisis ‘normal’. This can mean pre-2001 rates of growth in prices or it can mean Celtic Garfield rates of growth. Many would say ‘The Bubble days are over’. So they may be. But suppose they are not. Suppose the rates of growth that prevailed over 2004-2007 are to return. The logical question is: if the boom were to come back, how long will it take property prices to recover? This is obviously a wildly optimistic scenario. But let’s entertain it, shall we?

Below I provide a table of estimated years by which current (end of 2013) prices indices for Irish residential property are likely to recover their real (inflation-adjusted) peak values consistent with pre-crisis years. In other words, the table shows years by which we can expect the crisis effects to be finally erased.

Take 3 scenarios:

Scenario 1: assume that from now on, average annual growth rates for property prices run at their 2004-2007 averages and that inflation averages 1.5 percent per annum (CPI). Adjust the pre-crisis peak for inflation that accumulated between 2007 and present.

Scenario 2: assumes the same as Scenario 1, but adjusts inflation expectation forward to 2 percent instead of 1.5 percent.

Scenario 3: assumes the same as Scenario 1, except we also take into assume average rates the average for 2004-2007 and 2012-2013 to reflect the popular argument that 2012-2013 years growth rates reflect ‘recovery’ in the markets, aka a departure from the crisis.

The last line in the table shows the average duration of the period of recovery – averaged across 3 scenarios. This means that the average is ‘geared’ or ‘leans’ more heavily toward Scenarios 1 and 2 which are by far much more optimistic than Scenario 3.

Do note that all three scenarios are wildly out of line with what we should expect in the long run from the property prices – appreciation at inflation + 0.2-0.5 percentage points margin.

Click on the table to enlarge

Key takeaway:

You might think we are in a recovery, but be warned – even under very unrealistically optimistic price growth projections – the effects of this crisis are likely to prevail well beyond 2025 in Dublin and beyond 2030 nationwide. Now, enjoy the property supplements and financial ‘analysts’ op-eds telling you that everything is going on swimmingly in the markets…
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