Ever hear the one about the statistician who drowned in a lake, average depth 12in? Averages can be elucidating; they can also be infuriating.
Central Statistics Office (CSO) data suggest house prices rose by 2.3 per cent between 2005 and 2020 while average incomes, over the same period, rose by 32 per cent. The yo-yoing effect of the crash and the acceleration in property values post-2013 lie hidden beneath the surface of these numbers.
However, if you push back the base year to 2000, capturing more of the Celtic Tiger era, and using approximate data from the Department of Housing – as the CSO house price numbers don't go back that far – house prices rise by 84 per cent while average income rises by 102 per cent over the 2000-2020 period.
The arbitrary nature of these examples may – in part at least – explain how the European Commission can produce a report indicating that house prices here are 17 per cent undervalued. It's not that bean counters in Brussels are living in a parallel universe, it's just their snapshot of the Republic's housing market – they look at the period from 2013 to 2021 – is too narrow and they are using average household income variables that hide huge disparities and don't bear the same relationship to housing that they once did.
For much of the 20th century, incomes and house prices shadowed each other, and they still exert influence, but there has been a decoupling process for a variety of complex reasons. The commission’s study found house prices across the EU27 area rose 32 per cent between the second quarter of 2013 and the second quarter of 2021. In the Republic they were found to have risen by 85 per cent, the second-fastest rate in the EU27.
According to the commission, the sharp growth in house prices is being driven by “sustained demand backed by economic growth, historically high household savings and low interest rates”, while supply has been affected by “limited construction activity”.
Despite such sharp rates of growth – and even though the fundamentals behind house price growth may be strong – the report suggested house prices were overvalued in about half of EU countries. But, not so in the Republic. It suggested that prices here were 17.1 per cent undervalued.
"Simple valuation indicators used by the commission and the European Central Bank (ECB) point at still undervalued Irish property prices in 2020 in view of average household income growth and to the long-term average of house prices," said a commission spokesperson.
Numbers vs reality
Without getting into the nitty gritty of data underpinning the report, the findings regarding the Republic only makes sense if you abide by aggregate income variables and long-term ratios between income and house prices, which are no longer relevant.
The Irish economy spits out numbers that bear little relationship to the real feel on the ground. We’re all well versed in how GDP (gross domestic product) bigs up the economy.
The Republic now is a bigger, more diverse economy with more people working than it was in the 1990s. Consequently, aggregate earnings have been dragged up. But within these aggregates there is more topography; larger disparities in income and purchasing power than there used be. Using long-term income trends is problematic as a result.
Similarly when it comes to housing, the multiple of income people now borrow to buy homes has changed, fuelled by low interest rates, financial real estate investment and, prior to the 2008, lax borrowing criteria by banks. All of which have stretched traditional income/house price ratios.
In the early 1990s, house prices were a little over three times average industrial earnings; now they are between seven and nine.
With the changes in the economy has come increased wealth, which is most clearly illustrated through the so-called “ bank of mum and dad”, whereby a certain cohort can jump the confines of their own earnings to buy homes, further weakening the relationship between income and house price.
The latter perhaps explains while the Central Bank’s strict macroprudential rules, while anchoring house prices to an extent, still run alongside significant levels of house price inflation. Put simply, some buyers aren’t constrained by income. Houses here are undervalued only when these trends are overlooked.
Central Bank report
Last week, Central Bank governor Gabriel Makhlouf, while publishing the regulator's latest financial stability review, said "the fundamental problem we have is not the price of houses, it's the supply of houses".
It’s hard not to view that as an incomplete analysis. Few would disagree with the supply angle, but do we really believe that the current uptick in supply – even stretched out over five or 10 years – is going to deliver affordable price points?
In the Central Bank’s report, it notes price-to-rent and price-to-income ratios in many Organisation for Economic Co-operation and Development countries are higher than they were before the 2008 financial crisis. “However, lending standards in the US and in most parts of the euro area are more prudent than before the global financial crisis, guarding against some of the most significant risks that have emerged historically when both asset prices were rising fast and lending standards loosened materially,” it said.
Cold comfort for those off the bottom of the ladder.