House prices undervalued by up to 26%, says bank


Irish house prices were undervalued by between 12 and 26 per cent as of the end of last year, the Central Bank claims.

Property prices could rise suddenly and significantly if the causes of the undershooting in prices were removed should the finding of new research by the bank be correct.

The main reasons cited for the continued fall in prices are a lack of investor confidence, negative future house price expectations and an uncertain macroeconomic outlook.

Additionally, “the requirement for substantial deleveraging within the Irish financial system and the associated issue of mortgage credit availability are also considered as significant reasons for the decline” according to the report.

The bank’s researchers use four separate models to assess property prices. One model found that prices were 26 per cent below what economic fundamentals in the economy would warrant. Two other models found that prices were 16 per cent to 18 per cent undervalued. A fourth model suggested that they were under valued by 12 per cent.

The bank notes the affordability of housing has improved very significantly, particularly for first time buyers.

It also notes that rents relative to property prices have risen back to levels last seen around the turn of the century, a period before the bubble in the property market began to inflate.

Since the peak in 2007, residential property prices have declined by almost half. This decline is one of the largest ever recorded the bank said, basing its comparison of four decades of data from across the Organisation of Economic Cooperation and Development.

Only Japan has experienced a larger decline in prices.

Surveying 10 other international examples of very large declines in house prices, the average duration between peak and trough is six years. The decline in Ireland has been on-going for five years.

The most extreme protracted declines took place from the late 1980s in Switzerland and Japan. In the former case, property prices fell for 10 years, in the later case they continue to fall.

The report notes that just 11,000 new mortgages were issued last year, down from ten times the number in 2006.

The Construction Industry Federation said it agreed with the Central Bank's findings saying their figures "tallied wtih indications from within the building industry."

“While the Central Bankmodels suggest that Irish house prices have overcorrected by up to 12 to 26 percent, sales prices of new homes today are less than actual construction costs," said CIF director Hubert Fitzpatrick.

“The Federation’s projection is that the Irish housing market will require about 25,000 new homes on an annual basis. Yet construction activity for 2011 saw a little over10,000 new homes produced and it may fall to as low as 8,000 units in 2012.  The availability of mortgage credit is one of the major stumbling blocks inhibiting transactions inthe housing market.”

“This comes at the sametime when significant improvements in affordability have evolved. It took 26 per cent of income to service a mortgage in 2006, compared to 13 per cent in 2011.”

“The availability of mortgage credit and purchaser confidence will be key factors in influencing purchaser activity in the months ahead,” said Mr Fitzpatrick.