House Prices Ireland Analysis Post-COVID-19

Contents

Will House Prices in Ireland Drop as a Result of the Coronavirus?

Will COVID-19 cause house prices to drop in Ireland? This is the question being asked by every would-be vendor / buyer, tenant, landlord, homeowner, investor, estate agent & bank in Ireland & beyond at present.

As a nation, we have suffered a shock the scale of which is unprecedented in living memory. The recessions of the eighties, the dot-com collapse, the much-hyped Y2K scare that never materialised, foot & mouth disease, MERS, SARS, 9-11, the property and financial markets crash of 2008 in hindsight all seem mild by comparison to the deadly global pandemic that has gripped the world at present.
In the initial stages in late January into early February as we started to hear words like “COVID-19” and “Coronavirus”, this was background noise as we rushed to work; this was happening in China and we got back to dropping the kids to school, filling in our mortgage application forms, booking holidays, going to viewings etc. We had no idea of what lay ahead.

They say that dealing with grief / loss has five stages: denial, anger, bargaining, depression and acceptance. A brief revisiting of Donald Trump’s quotes around this time show that he was very much in denial mode and if we’re honest, so were the vast majority of us, if we were even aware of it at this point.

As cases emerged at the start of the year in China, the majority of us didn’t pay too much attention

Donald Trump’s Initial Quotes on Coronavirus

As February drew to a close, the virus was now in Europe, getting closer to home and as a nation we were still hoping that we might get away without a case. Then on Saturday February 29th, we had our first confirmed case. The denial continued for most at this point “ah it was a student who was skiing in Italy; it’s an imported case.” Then a new word entered our daily vocabulary “community transmission”. For days, we kept going with business as usual – we didn’t have any community transmission; the virus was under control. We heard that a school in north Dublin closed as a precaution and University Hospital Limerick closed for three hours to do a deep clean as one of their staff was confirmed as being infected and had worked there while asymptomatic but infectious. For Newstalk Breakfast listeners, Shane Coleman vanished from the radio all of a sudden – we later learned that he had to quarantine as his children were students in the affected school. We all sat up in our seats a bit at this point and the bargaining began in earnest. “If this thing passes off, I’ll never complain about Brexit again!” “I don’t care who goes into government at this stage so long as this bloody virus doesn’t take hold!” We hadn’t given up on denial either though “well if Cheltenham is going ahead, how bad could it be?” Some even felt cancelling Patrick’s Day was a bit heavy handed; the full scale of what was ahead certainly hadn’t dawned on us yet.

As March progressed and we saw the carnage that the virus was starting to wreak on mainland Europe, we clung to denial as best we could “Ah that’s over in Italy, they greet each-other with kisses, they shouldn’t have went ahead with Milan Fashion Week as that brought loads of people in from Asia” etc.

The sense of unease in the country was mirrored in a distinct change in Donald Trump’s language as March progressed.

March 27th - Ireland Enters Lockdown

Then on March 27th, an Taoiseach Leo Varadkar put the country on lockdown and we all had to accept that what started out as something out in China, that evolved into something in Europe was now very much on our doorstep and Ireland wasn’t going to avoid the pain being suffered elsewhere.

Anger kicked in at this point as the reality of being forced to stay home dawned on us - “the bloody Chinese and their wet markets”, “the WHO is a shambles” became common refrains on Zoom calls. Irish can-do pragmatism shone through also: “I’ll paint the shed, I’ll do that online excel course, I’ll brush up on my French, I’ll take some well deserved time off and just spend time with the kids; this will be a short, sharp shock and it will pass” – we searched for the positives and vowed not to succumb to depression that lurked off in the uncertain future.

However, when the lockdown was extended on the 10th April, there was no amount of positive thinking and repeating “at least I have my health” that was going to stave off depression. We were angry and depressed now and as the lockdown has gone on, anxiousness, stress and fear have entered the equation. These emotions have been largely subdued by unprecedented government action to pay employers to keep people in work and generous COVID social welfare payments for those who have lost their jobs. But as things have rolled forward, questions such as will I keep my job, should we keep paying our rent, will it hurt our credit rating if we stop paying our mortgage, will the wedding go ahead as planned this summer, if it doesn’t will we be refunded etc all engulfed us as we sought to assimilate this new normal.

Trump’s cavalier nonchalant dismissals of February were now long-gone and he resorted to wartime rhetoric.

At the time of writing in late April, the nation is yearning for an easing of restrictions as currently planned for May 5th. We need to get back to work, we can’t bankrupt the nation, the elderly must cocoon, we can’t go on living like this seems to be the emerging mood as the economic realities of stopping an economy have started to sink in.

So over the past few weeks, we and the president of America, have been on a rollercoaster of emotion that has included everything from denial to forcing ourselves to look on the bright side to depression as the sinking realities started to bite. As the easing of restrictions now come into view, people are asking “what does all of this mean for the price of houses in Ireland?”

Thanks for the History Lesson – Are Houses Prices Going to Crash or Not!

In a word: no.

The reason I took the time to run through the above history of events is to contextualise the melting pot of uncertainty in which we are operating. Amidst all the noise, people have come to various conclusions about what this means for house prices. A sizeable cohort of people have more cash on hand as the lockdown eases than they would have had in the absence of a lockdown. Yet many of these buyers who were sale agreed pre-COVID have now started to try to slash their offers in the hope of bagging a bargain. Vendors aren’t impressed, aren’t biting, the properties are being relisted and so the buyer loses out on a property that they can afford and that they want to live in; they are being too clever for their own good on occasions.

What the bargain hunters are forgetting is that vendors only sell their property at fire-sale prices if they are distressed i.e. if they can’t keep up their mortgage payments, their lender receives on the asset (which usually takes years) and then the property goes on the market via a receiver. A receiver is only concerned with getting back what their client (the lender) is owed and so sets a low reserve at auction; such properties are typically bought by professional buyers who feel there is some value to be had. But guess what: no one’s distressed at present. This is what the bargain-hunters are forgetting. The banks are not putting anyone under pressure at the moment so when presented with a lowball offer, the non-distressed vendor politely declines and either waits for a better offer, stays put or rents the property to the thousands of people who needed somewhere to live before COVID and still do now – the housing shortage hasn’t gone away you know.

OK So No Crash but they Must Go Down a Little Bit – Right?

Amidst all the chaos, queues in shopping centres, online retailers being sold out of hand sanitizer, virtual pints on Zoom, the kitchen table being the new office, it can be hard to think clearly but here goes.

Let’s go back to first principles here. What determines the price of houses or anything for that matter. Supply and demand. Right. But it’s not as simple as that. Consumer sentiment plays a huge part and so does affordability. In the last housing boom in the early 2000s, as annual housing unit output topped 90,000 per annum (remember that?), we had plenty supply but consumer sentiment hit euphoric levels and “buy low, sell high” was replaced with “buy high and sell even higher!” as we all became Johnny Ronan and started to build out our “property portfolio” funded by cheap, no money down mortgages. So even though there wasn’t an acute shortage of accommodation, prices went up and up fuelled by booming consumer sentiment and endless supplies of cheap credit. However, you can only avoid underlying economics for so long and ultimately the market corrected sharply with disastrous consequences from which we had only recently fully recovered.

So what are the fundamental underlying economics of the Irish property market at present and have they been changed by the Coronavirus?

Supply:
The virus has shuttered building sites across the country so there will be less units built this year than there would have been had the virus not happened. Builders will inevitably delay projects not already underway which will further curtail supply. While we were on course to get upwards of 25,000 units, we will now be lucky to see 18,000 completions this year. This has echoes of the doldrums of around 2013; consumer sentiment was on the floor, the builders were wiped out, the banks were terrified to lend to them and this lack of supply set the foundations for the subsequent strong price inflation that we saw as the decade progressed. So right at the time that we need builders to keep building, many will inevitably cut back and thereby undermine the great strides that had been made to get the market into equilibrium.

There has been much made of an anticipated surge of Airbnb properties returning to long term rentals as tourism temporarily dries up. The numbers here are small and not significant enough to drive rents and by extension the value of the properties themselves downward.

So the virus has actually reduced supply which, ceteris paribus, pushes prices upwards.

Demand – It Hasn’t Gone Away You Know.

If you needed somewhere to live before COVID, you need somewhere to live today. Demand has not been reduced by Coronavirus notwithstanding some who returned to their home countries as the seriousness of the situation intensified. These were offset by Irish people who returned from abroad for fear of being locked out of their home country – they can’t live with their parents forever.

So supply has gone down, demand has stayed largely the same but yet we have people making lowball offers as if we had massive oversupply and large scale distress in the market? The reason must be that people are banking on weak consumer sentiment and/or diminished buying power amongst this demand to drive prices lower. Let’s explore this theory.

Demand only supports pricing if it is demand with finance. When Elon Musk was reducing the price of one of his Tesla Models, he explained to analysts that this was because there was so much demand for the model. The analysts struggled with this; if there is so much demand, “why don’t you raise prices Elon” they quipped. Mr Musk explained that many people who wanted to buy a Tesla (demanded one) couldn’t afford to so by reducing the price, he could make his model available to these people who heretofore couldn’t afford one and drive sales higher. If you have a four-bed detached property in Dundrum for sale for €600,000, there are tens of thousands of people demanding this property – those who can actually afford to back up their demand with money, and so support the price, is a small sub-set of this group. So while demand has not changed, has the buying power of these would-be home buyers been hurt by Coronavirus? The answer here is that it depends.

Has Buying Power Been Hurt by the Coronavirus?

If you have retained your job, as hundreds of thousands have, your personal balance sheet has been strengthened by the virus. Your income has stayed un-changed but your outgoings have been decimated. Petrol, lunch at work, health and car insurance (these companies are issuing rebates), rent / mortgage moratoriums, pints, meals out etc have all reduced to nought. Your planned summer holiday has been cancelled. There is a very large cohort of Irish society who have more money now than they would, had no virus occurred.

In this video from Michael O’Leary, he points out the elephant in the room “we don’t really have any expenses anymore.”

But while Ryanair has no revenue, those who have stayed in work have not seen any hit to their income. The difference goes to their personal bottom line; this bottom line is what finances deposits for property purchases.

So these people who were planning to buy before this all kicked off and have retained their jobs will be out in force once restrictions lift. Many will get an unwelcome surprise when they have to bid against each-other for the properties they want – the anticipated bargain basement prices will not materialise. So supply will be down, demand unchanged and in fact for many, they are financially stronger than before – so prices will go up? Not quite.
There is of course a large group of people who have lost their jobs. These can be divided into those for whom this is a temporary situation and those whose jobs won’t return post-COVID. For the former, the government has largely insulated them from feeling the full impact of the current situation and once they return to work, they will go back to full salaries. You could argue that the reduction in take home pay, if any, is largely offset by the cessation in any meaningful outgoings meaning that they largely net out at where they would have had the virus not happened.

For those whose jobs are gone and not coming back, they will not be out buying property in the weeks after restrictions lift. Bar owners, managers, retailers, restaurateurs, hotel managers, pilots / cabin-crew etc who had planned a property purchase this year have had a halt put to their gallop. They will ultimately return to the workforce, which was at capacity before the virus hit and will return there relatively quickly as the competitive advantages that Ireland still has (English speaking, part of EU, business friendly, low corporation tax, education system) are still intact and these will serve as the catalysts for returning those who want to work to work as things gradually return to normal. So these people represent a reduction in the buying power of the demand side of the equation. Will the reduction in relevant demand (ie people with the money to act on their demand) be offset by the group who will emerge from the virus enhanced financially? That’s hard to say and time will tell.

Our Prediction

A recent article in the FT said “Buying agents, who act for purchasers, remain sceptical of any forecasts that lend a spurious precision to imponderable forces.” It is a fair point that any precision of forecast, given the amount of imponderables at present doesn’t, reflect well on the forecaster. That said, here goes.

We entered the crisis with house prices starting to level off as supply eventually started to come into line with demand. Homelessness lists had started to inch downwards after years of increases - the market had started to find its level. The virus will substantially reduce supply this year but demand remains the same. The buying power of this demand is stronger for those who have retained jobs, about the same for those temporarily laid off and temporarily weaker for those who have lost jobs that won’t return. On balance, we expect that there will inevitably be some short-term softening of prices as even strong buyers remain cautious. By weaker, we mean less than 5% of what the property would have sold for pre-COVID; any discount greater than this and the vendors just won’t sell as they don’t have to sell as they aren’t distressed and have other options such as renting.

There will be no crash as no lowball offers will be entertained as no one is distressed. Vendors presented with lowball offers will rightly sit tight or rent until those smelling blood on the streets realise that to buy low, you need either oversupply or distressed vendors and we have neither at the moment. As we move gradually back to normal throughout the summer, the stunted supply will start to bite as confidence starts to return. Those who lost their jobs will have found alternate employment and their plans will have been delayed not abandoned and they will start to return to the market. These dynamics will be supportive of prices firming as the year progresses.

So if you were in the market for a property, still have the money and can afford it, you may get a slight Covid discount in the short-term to compensate you for stepping up while others wait and see. But those expecting fire sale prices will be disappointed and those who wait for “things to return to normal” before committing to a purchase will have to pay for this certainty in the form of rising prices once things do get back to normal...as they eventually will.

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