Contents
Intro
As Covid-19 increasingly moves into the rear view mirror, the property market, and life in general, is slowly returning to normal, many find themselves asking what is the new normal for the Irish property market. Is work from home here to stay and if so, does that spell the end for city centre living and the associated knock-on impact on pricing for centrally located apartments. Will office prices stagnate and contract as the demand reduces as the days of every employee coming to the office five days a week are now gone? Will the famous pent-up demand of savings amassed during Covid result in a short-term sugar rush as that demand descends on a diminished housing stock, driving prices ever higher. In this piece, we look to untangle these issues and make some predictions for the future.
How Did We Do With Our Last Prediction?
Before we set out our short and medium term predictions for the housing market, it is worth revisiting the last prediction we made in October 2020 in the midst of Covid. They say that economists assume everything except responsibility so it is important to see if our previous prediction held any water before we make a new one.
You can read the full article, published in October 2020, here.
In short, we predicted slight softening in the short term followed by firmer prices as we moved into 2021 which wasn’t too far off the mark. So where to from here?
Patrick Boyle on Property
Patrick Boyle is a professor of finance at King’s College London & Queen Mary University of London; he founded and sold a hedge-fund, Palomar Capital Management. Suffice to say, Patrick is an expert on finance! In the below video, he recounts a meeting he had with Grovesnor Property Group where they outlined that their long run prediction for residential house prices is that they will grow in line with inflation less maintenance costs. This seems obvious when pointed out. Residential property is bought by people with jobs and the salaries of those jobs are used to pay for the property; the rate of property price growth is as such linked intrinsically to salary growth. As salary growth can only be expected to keep pace with inflation over time, that should be our long-term expectation of house price inflation from here. However, a long run is made of a multitude of short-runs that can go up and down dramatically with the rapid rises being evened out by sharp falls over time. So our long term prediction for house prices is that of the Grosvenor Group but what about the short term?
Pent Up Demand Driving Prices Higher
Massive warchests have been built-up during Covid with all of the usual activities on which people dissipate their savings largely cancelled for most of 2020 and the first half of 2021. These savings are being spent on one of the few things that can still be bought during a pandemic - a property. This increase in buying power has descended on a property market starved of supply owing to closed building sites and cautious second-hand buyers wary of coming to market during a pandemic. This asymmetry between depleted supply and super-charged demand has driven house prices upwards in the first half of 2021. Prices are up on average 13% year over year in the most recent Daft report. This will start to level off as the savings are spent and supply slowly returns but this will take years not months. Elevated prices are here for the medium term.
Macro-Prudential Rules
Despite repeated requests from developers and various other vested interests to relax these, the Central Bank has held firm. There is no doubt that in the absence of these rules, prices would have increased considerably more than they actually have in light of the recent demand spike and restricted supply. These rules are definitely smoothing the amplitude of the price fluctuations over the years, preventing the full impact of the market from driving prices upwards on the way up so that when the market does soften, it has far less to fall than would otherwise have been the case. Despite the ongoing pressure to relax these rules, it seems unlikely the Central Bank will bend and they will stay in place as a sensible measure to protect borrowers from themselves; had these rules been in place in the lead up to the 2008 peak, prices would never have gone so high and a lot of pain would have been avoided; in this instance, we have learned from past mistakes.
Shared Equity Scheme
Alas, what the right hand gives, the left hand takes; the macro-prudential rules have kept prices in check as a sensible measure to protect buyers from over-borrowing. Cue Fianna Fail with a clever work-around to effectively circumnavigate these rules and allow home-buyers take on substantially more debt than the previously stated 3.5 times salary.
This is due to come on stream in the coming months; you can read more about the scheme here. It is a demand stimulation measure in that it takes the existing demand and gives it more buying power, pouring petrol on the fire so to speak. Ceteris paribus, prices will go higher as a result of this measure. It seems like the government gave up trying to convince the Central Bank to relax the macro-prudential rules so came up with a clever work-around to achieve the same goal. If the banks can’t lend beyond 3.5 times salary, then the government will.
Home-buyers will have the State offering a 10% tax rebate via the Help to Buy Scheme up to a €30k maximum towards the deposit and an interest only equity loan of up to 30% of the value of the property secured against the property being purchased. The State is bending over backwards to assist first-time buyers get out of expensive rentals into home-ownership. In so doing, they are increasing the buying power of this cohort and every single credible commentator has predicted this will drive prices higher. Those waiting for prices to soften before they can get involved when there’s blood on the streets have a long wait ahead; while they wait, they dissipate their savings on rent.
Work From Home……...but What Home?
There is no doubt that WFH is very much here to stay with a host of large employers allowing their staff to work from home indefinitely. This is bad for office space and good for house prices as people look for bigger homes where they can have a home-office. The future of city centre apartments is more uncertain with city dwelling losing much of its luster.
However, the full impact of this has yet to be felt. Initially WFH meant from a home in Ireland. But increasingly it is being broadened to include any country you wish. With non-Irish workers in Ireland now being offered the opportunity to work from their home country, will many stick around for the weather? An exodus of workers to their home countries would reduce a large pool of affluent buyers from the market and would, all else being equal, have a depressing impact on prices. Predicting how many will stay or how many who have already left will not come back is impossible. We will have to see how it plays out but the concept of a geographically neutral knowledge worker is not in Ireland’s interests as more would be likely to leave than we would gain from Irish people moving home.
Corporation Tax / Ireland Inc
Ultimately, when you buy a property in Ireland, you are investing in Ireland Inc. You are betting that people will continue to live and work here thereby creating a steady pool of buyers. If Ireland continues to be successful as a country, our property market will continue to be robust.
The constant international pressure for corporation tax harmonisation is an ongoing threat as like the footloose tech-workers who may choose to work from home, in a home not in Ireland, there is no getting away from the fact that a key ingredient in Ireland’s success in attracting FDI is our tax advantage. There are of course many other things that we have going for us: English speaking, skilled workforce, clusters of successful companies already based here with strong roots, part of the EU, pro-business stable government etc but losing our tax advantage would not be ideal and may deter some marginal, would-be investors from basing themselves here.
As mentioned however, the established companies that we already have, have put down strong roots here and are going nowhere and the wins keep coming. When one sees the Chinese social networking company, Tiktok, employing over 1200 people in Dublin, it would seem foolish to short Ireland Inc or by extension, its house prices.
Ramp Up of New Builds
Supply will ramp up again from the current depressed levels to somewhere closer to equilibrium which, depending on who you listen to, is circa 30,000 units per annum. The boom and bust that led to the 2008 peak and the subsequent collapse that continued well into 2014 was driven by speculative investment by out of control banks (Anglo) to developers building thousands of houses in places where no one wanted to live. This can’t and won’t happen again any time soon. Banks are terrified of development finance (once bitten...) and developers, when presented with even the remote prospect of falling prices, will reduce output to protect the value of their land-banks. The knocking of the Sextant pub in Cork is a good example. You can read the article here but the take-away is that developers will only build if prices are strong enough to deliver an acceptable return; if the return isn’t there, they will sit on the land (or build something else) until prices rise to such a level to deliver a return. Builders won’t over-build as it’s not in their interests to do so.
What About a Buyers’ Strike?
David McWilliams suggested in this article that the property buyers of Ireland should go on strike, by which he meant they should withdraw from the market, bid on no properties until prices had fallen to “reasonable” levels. Below is a flavour of the article.
“The property market’s suppliers have gone on strike. Stay away from a market like this because it holds no value.”
This is factually inaccurate; building sites were shut owing to Covid-19. In fact, the Construction Industry Federation lobbied the government extensively to allow them to build.
“Aspiring buyers should respond to this year’s property supply strike by instigating a buyers’ strike. Staying away from the market for a year or two would give much better value, and the more people wait, the bigger the bargains. At the moment, young buyers are being abused by the market, mocked by an industry that has failed to provide homes for Ireland’s 30-somethings. They need to take back control.”
Mooting a buyers’ strike as the solution to high prices ignores the cost of waiting. Depending where you are in Ireland, monthly rental costs will be in the region of €1500. Since his article was published in March, those buyers who took the advice to go on strike have incurred rental costs of circa €4500 and counting. Should they wait “a year or two”, the cost of waiting will be €18-€36k; the strikers will need prices to fall by this amount just to break-even. And what happens then when the strike is called off? No demand will have gone away; it just went on strike. So the equilibrium price post-strike will be precisely the same as had the strike not happened at all. In fact, if the strike had come to pass, developers would of course stop building until the strike was called off which would exacerbate the problem the strike was supposed to solve.
“Only the extremely well paid (or those with wealthy parents who will pay down not just the deposit but a large chunk of the principal) have any hope of acquiring their own place.”
The government will give first time buyers tax rebates of up to €30k to purchase a new property. So to buy a property for €350k, the buyer will need to save €5000. You don’t need to be “extremely well paid” or to have wealthy parents to save this amount of money.
“Imagine a generation embargoing the market until prices and value come back to reality? When the price of homes becomes stable and affordable relative to income, then the prohibition on buying might be lifted.”
The economics of this don’t add up; pausing demand doesn’t reduce prices. Those who were in a position to buy but who took the advice and went on strike are nursing losses on unnecessary rental payments of approaching €5k and counting. As prices have actually gone up in the meantime, their buying power has been depleted now also: the strikers have lost on the double.
Conclusion
To attempt to predict house prices from here, one would need to study and make predictions on a range of issues including demographics, supply, the impact of work-from-home, whether macro-prudential rules are here to stay or will be softened, the effect of the shared-equity-scheme and a host of other imponderables.
It sounds trite and probably not the answer that readers of this article are looking for but we generally subscribe to the views of Charlie Munger in that the time to buy a house is when you need one. Successfully predicting when the market is going to rise or fall is an exercise that few, if any, can do consistently. Those who do it successfully once often confuse luck with skill e.g. those who bought bitcoin years ago often consider themselves investment gurus. Those who have made profits would be well advised to accept their windfall as good fortune, bank it and don’t try to repeat the trick. I digress!
Those who sit on the sidelines waiting for things to “calm down” will burn through thousands of Euro of rental payments while they wait and wait……..and wait. Even if prices do soften 5% at some future point (it is very hard to envisage that happening in any sort of realistic timeframe), the rent paid between now and then will almost certainly exceed any saving accrued by waiting; of course if the market goes up or sideways, there is a serious cost to waiting. As Buffett says, if you have the “down payment” and you find the house you like, it’s often best to just “get the job done.”