Irish Property Value Stabilization in 2008
Even the most optimistic and upbeat property developers in Ireland must now be accepting that the sales values of new and refurbished properties returned in the residential market in 2006 and early 2007 were unsustainable. It is hard to believe that some of these practiced entrepreneurs are a little shocked at the realization that property prices can not rise and rise at rates far in excess of general domestic inflation levels.
As a nation, Ireland should be proud that it was able to combat and overturn its historic residential housing shortage within a single decade since the year 2000. This achievement was even more commendable when one adds that the country also catered for thousands of their own returning Irish emigrants plus economic immigrants from fledgling eastern EU states spurred on by tales of Celtic Tiger riches for all. The building boom needed extra foreign workers to complete the developers' ambitious plans in record time, and the workers in turn needed new homes to live in, temporarily at least in many cases.
The speed of building was great for the developer. Mass production leads to the lowest possible site costs and outgoings. The rapidly rising population of newcomers to the Irish state is initially opted primarily for short-term leasing of new homes. Rental imports for landlords and developers went into overdrive. In a booming economy, property values tend to get ascertained from the forecast rental capacity of a housing or commercial unit rather than a calculation based upon the cost of the land plus "bricks & mortar". This scenario is fine if rent inflation stays in line with general price increases for the domestic consumer. But Ireland's property market overheated and got out of sync with the general economy.
By 2004 & 2005, new house buyers had to accept valuations driven up by comparisons to potential rental income from equivalent tenants. The banks and mortgage brokers were happy to lend large sums for the purchases of property which appeared certain to have ever-increasing capital value. With big mortgages readily available, house sales in prime urban areas were closed at prices now an incredible three times higher than market rates of the late 1990's. House prices in the emerging rural locations followed suit.
A national growth market was well established and builders large and small invested in development sites nationwide. The banks could freely lend to developers knowing that regular sales kept the cash circulating, and house-buyers were content to take on high mortgage repayments in the knowledge that their investment was sound (according to the lenders and their own economic commentators).
In hindsight, it is obvious that the "boom" had to end somewhere. When saturation point is reached in terms of supplying the housing demand, sales naturally decrease. Then extra sales are forced or encouraged by offering discounted sale prices. Before you know it (as first seen in Ireland last year) the market value for a commonly available property type falls for the first time in years. Most buyers are not fools, and the next wave of sales is affected by the demands of customers seeking out improved bargain offers. The developers should not be shocked to realize that just as they were happy to support the rapid escalation of property prices (while lining their pockets) they are now the primary instigators of house price reductions and the much-needed re-stabilization of the property market In general. They certainly can not blame the consumers and lenders who bought into their grand schemes in previous years.
As an example I can summarize the exploits of one typical Irish property developer who, while remaining nameless, is honest enough to quote a few facts and figures. In 2003, after dabbling in a few small but successful self-build schemes, an opportunity presented itself to buy some land with imminent planning permission for residential homes. The land alone would be a good investment as it was forecast to almost double in value in a matter of 2 or 3 years when surrounding plots were developed. So the land is purchased and our investor is soon persuaded by local success stories to fund the building of a couple of upmarket large family homes.
By 2004 he can report that a total outlay of just over EUR500,000 per unit buys him a highly salable asset worth EUR1 million when finally presented to the market in early 2005. A fantastic profit margin which would have been difficult to match anywhere in the Property world. However, his financial advisors are quick to tell our developer that desirable high-end property values are forecast to rise by around 40% per annual for the foreseeable future. If he holds on to his new developments for a year or so, maybe getting some short-term rent into the bargain, these units costing half a million euros to build would zoom into the EUR1.5 million plus category during 2007, making him a Millionaire (in theory). He could now borrow even greater sums and expand his property development empire.
When 2007 arrived, our developer was rushed to see similar-sized homes selling for as much as EUR2 million. He borrowed even more money and developed more sites, dazzled by his accountant's reports of unexpected wealth. Almost undetected at first, the boom then faltered. A few sellers in the market needed quick cash and sold their assets at a little less than previous peak values. A trickle of cut-price offers became the market-place norm. Our "millionaire" developer had never actually sold a property in the boom years. His stock had to be re-valued at realistic 2008 rates, tax bills paid off and big loans repayments were eating away at his bank balance. He had no option but to dispose of a few units …… and quickly.
Not long ago, our developer and multiple property owner had been a typical key player in hiking up and relying on house valuations in a market of high demand. Now he is instrumental in seeking a much fairer price for his commodity. After a couple of sales, he is still a comfortably wealthy man. But he can not afford any more investment in an uncertain market. So there will less build completions for a few years as he and his fellow boom-time developers cool off and invest in other places. When new home demand is high enough again in Ireland, the cycle will begin once more, only this time the pace of development will not be so hectic. Steady growth will lead to a much more stable and secure Irish housing market in years to come.
Residential building output in Ireland has fallen by one third in the last 12 months. That figure demonstrates how "over-developed" the property market had become, driven on by over-zealous financial investment. The market simply overheated in a fairly unique set of circumstances, so the corresponding cooling-off period will probably take a little longer than we all hoped. House sale price reductions have lessened on my website in the second half of 2008, so there is evidence that stability has commenced in the Irish property market. A sustained period of stable, sensibly priced Irish homes will help everyone in the longer term.