PETER STAFFORD looks at the reports analysing the economic collapse, the role of the property sector, and how improvement might occur.
One of the last tasks of the outgoing government was to commission a series of reports on the causes and consequences of the collapse in the Irish economy. Many of these reports have now been completed, and when read together they give an interesting picture of what led to the sudden and dramatic collapse.
One theme that runs through them all is the over-reliance on the property sector, both as a source of exchequer revenue and as a form of economic activity. A regular narrative is that Irish banks, funded by cheap European money and low interest rates, recklessly lent money to developers and builders to finance property projects, which were then sold to individuals who had taken out mortgages they could never afford to repay, funded by the same banks. Successive governments failed to broaden the base of tax in Ireland, so that when the international banking crisis, coupled with our own domestic banking crisis, shocked the housing market, its impact on the wider economy was greater than in most other countries, where the basis of economic activity and tax was wider than was the case in Ireland.
Ireland’s poorly constructed local government system benefitted from the billions of Euro of development contribution income as these construction projects commenced, while the national exchequer benefitted from stamp duty from each transaction. In terms of residential property, when mortgage holders found themselves unable to keep up repayments and developers were unable to repay their loans, house prices collapsed. On the commercial side, potential occupiers of commercial property decided not to move into new, larger premises; the result was an oversupply of offices and shops and, again, the banks suffered.
Ireland has always been extremely heavily reliant on the property market as an income to the State. The gradual erosion of annualised property taxes in favour of transaction-based taxes meant that during the Celtic Tiger, when both volume of transactions and prices saw annual increases, central and local government were significant beneficiaries. In the first four months of 2007, the State collected €1.1 billion in stamp duty from the transaction of commercial and residential property, and this accounted for 8.25% of all taxes raised during that period. In the UK, for example, stamp duty accounted for less than 4% of all taxes each month.
To demonstrate the impact of the housing crash on exchequer receipts, in the same first four months of 2011, stamp duty receipts were one-tenth of 2007 levels, at only €1.7 million, and accounted for only 1.8% of all tax. Perhaps one of the painful lessons of the collapse in the housing market is that Ireland will implement the recommendations of the Commission on Taxation report in 2009, and reform how local governments are funded, and properly assess whether an annualised tax on property (rather than a one-off tax on the transaction of property) would prevent shocks to the international economy having such a devastating impact on the exchequer.
We will never truly know what has happened to house prices in Ireland until the Government produces its long-promised property database. In the meantime, a number of commercial agencies and others have used the scarce existing data to make assumptions about the rate of decline in prices and, from there, to make predictions about future trends. Elsewhere in this edition of the Surveyors Journal, Frank Harrington has written on how practitioners use these reports in their professional lives.
According to a Standard and Poor’s report in May 2011, Irish house prices had fallen by 33% since the end of 2010, which is the largest decline in Western Europe in recent times. Covering much the same period, Savills suggests a cumulative decline of 45%, while the Permanent TSB/ESRI Index in 2010 suggested that a 40% decline had already taken place. Standard and Poor’s report, based on incomplete and dated information, has been rightly criticised as presenting an inaccurate picture of a much more complex reality.
In January 2011, the IAVI/SCS Annual Property Report suggested a decline of 55% but warned that as the market was no longer acting in a uniform way, but seemed to be fracturing into smaller micro-markets, a national house price figure was relatively meaningless. Indeed, since then the market has continued to fracture, and it is likely that anyone who wants to pinpoint a specific date on which the Irish housing market reached the bottom will be disappointed.
The decline in prices means that affordability has improved, and latest DKM figures suggest that the average first-time buyer now spends only 12.9% of their disposable income on mortgage repayments. Nonetheless, while banks remain reluctant to lend, and consumers remain sceptical about future trends, few seem willing to take the plunge.
At the same time as house prices have fallen, the volume of housing transactions that are taking place has also declined significantly. Indeed, many in the industry would argue that during a period of economic crisis, it is more worthwhile monitoring changes in the number of transactions rather than house prices. It is likely that any recovery in the market will be signalled by an increase in transactions, rather than an improvement in prices.
According to Karl Deeter of Irish Mortgage Brokers, in 2007, a total of 158,000 mortgages were approved in Ireland. In 2010, there were only 22,000. While not all transactions involve mortgages (e.g., cash buyers), mortgage data give us a good picture of consumer sentiment surrounding the housing market. Again, this is the sort of data that is already gathered by a number of organs of the State, but is not released in any meaningful way. Details of transactions should be captured by the proposed residential property database, and published.
The property market continues to change with dramatic frequency. Prices and transactions are important indicators, both for assessing the health of the property sector, and also the wider economy. Until this data is captured and published in a timely and transparent way, the health of the sector will never be properly understood.