At the risk of oversimplifying, the worst appears to be over
ECONOMICS:What do the trends governing the property market indicate now in the midst of a deep recession?
“ In my view, the market is bottoming out. This is not to suggest a remarkable recovery, rather a stabilisation and a return to a property market serving society, rather than society serving the property market
FOR OVER a decade, Ireland was property obsessed. For most people, their home is their single greatest investment. While a minority may have pondered an inevitable end to the bubble, for most, they were simply glad to see the worth of their property rise.
However, we haven’t forgotten about property, rather we now obsess about peaks and troughs. Accurately predicting the precise peak or trough of a market is an inexact science. Only with hindsight is it really possible to identify such landmarks.
However, we can look for trends. For any property market such trend lines should lie primarily in the performance of the economy and in the forces of supply and demand.
So where are we in the economic cycle?
Last year was spent in the eye of the storm. The latest available figures show the economy endured a collapse in GNP of 11.3 per cent in the 12 months to quarter three. The number of people unemployed rose to 12.5 per cent by December 2009. Retail sales fell by 12.9 per cent in the year to November last.
At a first glance, such figures paint a truly dismal picture. Notwithstanding this, a key ingredient in the future performance of any economy is consumer sentiment. The KBC/ ESRI consumer sentiment index improved moderately as the year progressed and, by December, consumer sentiment was modestly higher than it had been 12 months previously.
This was a reasonably surprising trend given the economic conditions. Paradoxically perhaps, it would appear that consumers sensed the storm was so bad that it would ultimately bring the date of recovery forward.
What other trend lines should we look at in terms of economic performance? Granted, GNP collapsed in 2009 but with each passing quarter, the pace of decline moderated. Looking at retail sales, the figures for the year to January 2009 reveal a reduction in the volume of retail sales of 26.6 per cent. By November 2009, this annualised figure had fallen to -8.2 per cent.
Although the decline continued, retail activity appeared to fare better relatively when benchmarked against the opening months of the year. In contrast, unemployment rose month on month for the duration of 2009, but that is not unexpected. The labour market typically lags the general economy in cycles such as these.
Looking outside Ireland, some green shoots emerged in the international economic environment. Germany, France and Japan came out of recession in the second quarter while the euro area and the US emerged from recession three months later. While still fragile, such indicators should help provide an international environment with economic momentum for 2010 and beyond.
So what does this all mean for our economy? Well, at the risk of oversimplifying, the worst appears to be over, provided the Government delivers another responsible and tough budget next December. In overall terms, our economy will contract in 2010 but growth will be restored as the year progresses.
The ESRI predicts average growth of in excess of 5 per cent per annum between 2011 and 2015. If that happens it would mark a phenomenal recovery. GNP per capita would be restored to 2007 levels by 2013. Unemployment should stabilise in 2010 with unemployment levels falling in the following years to 6 or 7 per cent by 2014/15. In sum, it would have to be viewed as a radical transformation for Ireland from where it was transfixed in 2009.
So what could this mean for the property market? The Irish residential market has endured the “perfect storm” in the past three years and it has taken its toll. From the market peak in 2006, the Sherry FitzGerald Index indicates that Dublin house second-hand prices have fallen in real terms by 45.7 per cent, while the national market has contracted by 40.2 per cent.
Akin to the economy at large, the trends in the property market during 2009 were interesting. The average price of a second- hand home fell by 9.5 per cent in Dublin and 8.3 per cent nationwide during the first three months of 2009. By quarter four, the quarter on quarter reduction had fallen to 4 per cent in both instances.
Affordability has been significantly enhanced by the low interest rate environment and falling prices. Our own affordability index shows that many first-time buyers are now paying 50 per cent less of their net income on their new home than they would have done at the height of the market.
Furthermore, in key urban areas, supply is tightening. Listed second-hand stock for sale in Dublin has fallen by more than 60 per cent from its peak in the first half of 2007. In the new homes market, approximately 26,800 new houses were completed in 2009, compared to in excess of 93,000 in 2006; projections for 2010 suggest a further fall of 50 per cent on 2009.
In my view the market is bottoming out. This is not to suggest a remarkable recovery, rather a stabilisation and a return to a property market serving society, rather than society serving the property market. The indications to this effect outlined above are augmented by anecdotal evidence on the ground.
Even with difficult weather conditions, our Dublin offices noted healthy viewing activity from January 4th. For the first time in almost three years, we have an economically operational marketplace between vendors and purchasers.
Demand is most concentrated in the regional centres where, interestingly, supply is tightest. Rural locations with an excessive supply of starter homes will take longer to notice recovery – especially for starter homes.
Ireland is well poised for a recovery. We have faced our worst day and taken the necessary corrective action. The days of the Celtic Tiger may be behind us but valuable lessons have been learnt. We can anticipate a more mature, resilient housing market.
Marian Finnegan is chief economist with estate agent Sherry FitzGerald