ANALYSIS:Oversupply, the lack of mortgage financing and the cost of borrowing are all playing a part as property prices continue to decline
THE GOOD news on the property market: July’s monthly fall in homes prices was the second smallest this year. The bad news: a single month is not enough to suggest that the deteriorating trend over the course of 2011 has been arrested.
The average monthly fall in prices over the first seven months of this year was 1.4 per cent. The average of the 12 months of 2010 was 0.9 per cent.
The accelerating underlying rate of price declines up to the middle of this year is cause for concern. And delving deeper into yesterday’s figures gives no reason to believe any segment of the market has been immune.
The chart shows declines in prices from January to July ranged from 6-11 per cent. That has added to the already massive declines registered among every market segment since 2007, with apartments now less than half peak prices and most other properties, regardless of location, down at least 39 per cent.
Many factors are likely account for the renewed weakness.
On the supply side, a large stock of unsold homes exists, and there is little sign that inroads are being made into that. According to property website daft.ie, the number of unsold properties up to the second quarter of the year remained stubbornly high, with hardly any reduction over the past three years.
On the demand side, almost every factor is working against price stabilisation. The numbers at work continue to decline and real incomes are stagnating, at best. Yesterday’s figures showing a growing number of people who are unable to service their mortgages are further evidence of these depressing trends.
The lack of new mortgage financing is another factor weighing on the market, with the latest figures to June showing that bank lending for property purchases continues to fall.
The cost of mortgage financing has been yet another factor in putting people off borrowing to buy property, even for those who are in a position to persuade a bank to lend to them.
The European Central Bank’s perplexing decision to increase interest rates twice this year looks like more of a mistake with each passing day. The hikes were justified by an increase in the headline rate of inflation caused by higher commodity prices. But with those increases partially reversed and a real risk of renewed recession, even the inflation hawks of Frankfurt are likely to be dissuaded from further tightening. It is even possible that this year’s increases could be reversed.
If almost all of the drivers of demand are weak, the psychology of buyers in a market in which prices are falling is almost certainly influencing price developments. Any form of deflation tends to feed off itself, with potential buyers postponing their purchases in anticipation of even lower prices.
When will the Irish property market reach bottom, and how low will the low-point be? Given all the dynamics, it is very difficult to see the market stabilising until next year at the earliest. If the current (2011) rate of decline continues for another 12 months, prices would fall by close to 15 per cent from their current level.
Under the central scenario underpinning the EU-IMF bank rescue, a further 21 per cent decline is anticipated before the market hits bottom. Under the worst-case scenario drawn up by legions of foreign consultants, a further 29 per cent decline could take place, bring the cumulative fall from the peak to 59 per cent (it now stands at 43 per cent).
By this metric, there is still some way to go before the bank bailout costs would be pushed up yet again.