Thursday, July 12, 2018

Irish real house prices up 175% in 50 years, UK +405%, Germany -1%

Irish real [consumer price index (CPI) inflation-adjusted) house prices rose by 175% in 1971-2016 (45 years); British prices rose by 405% in 1967-2016 (49 years) and German prices fell by -1% in 1968-2016 (48 years), according to the Bank for International Settlements — the BIS was founded in 1930 and is located in Basel, Switzerland. It is often called the "central bank for central banks."

The BIS has been tracking house prices since 1989, initially 18 advanced countries including Ireland. Data are supplied by national central banks, that may come from the national statistics offices or other credible sources.

Over 48 years 20 advanced economies (Austria and Portugal were added more recently to the database), had an average real price rise of 173% while nominal prices rose by 2,124%.

The average percentage changes per year were 6.8% and 2.2%.

Ireland had a nominal price rise of 3,589% since 1970 (the base year) and a real rise of 175%. UK nominal and real prices increased 6,036% since 1967 and 405%, while Germany’s changes were 255% and -1% since 1968.

In the house bubble period of 1995-2007, nominal prices rose 337% in Ireland; 233% in the UK; 226% in Spain; 153% in France; 82% in Italy, and 116% in the US. German prices fell 7.3%.

In June this year a housing conference in Dublin sponsored by the Economic and Social Research Institute (ESRI) — an independent but publicly funded think-tank — was told by Kieran McQuinn, an ESRI research professor, that Irish nominal house prices rose by 431% from end 1995 to end 2007 period. The Irish prices come from a house price database that has been maintained by the Federal Reserve Bank of Dallas since 2011.

The chart below shows that the Fed data broadly coincides with my BIS data for the UK, Spain, France, Italy, the US, and Germany but not Ireland.

House price data provide a rough guide and there are challenges in compiling indices within countries and in seeking to have comparable cross-country information. Few countries produce median prices which provide a mid-point where 50% of a sample is above and below the median. The mean or average can be distorted by the number of expensive houses transacted.

According to Eurostat, in 2016 houses accounted for 92.5% of housing stock in Ireland; 33.5% in Spain; 84.8% in the UK; 68.4% in France; 47.3% in Italy; 41.6% in Germany and an EU28 average of 57.5%.

The Federal Reserve Bank of Dallas uses data that is consistent with single-family houses tracked by the Federal Housing Finance Agency. Each country’s house price index is seasonally adjusted over the entire sample period and rebased to 2005 = 100. Real values are computed using the personal consumption expenditure deflator — the Fed bank's real data is confusing as some real values are above the related nominal values, where deflation has not existed.

Ireland nominal prices sourced from BIS 1995=100

UK nominal prices sourced from BIS 1995=100

Norway nominal prices sourced from BIS 1995=100

Irish bubble house price rises

Not only do houses dominate the housing stock but from the start of the Irish property bubble in the mid-1990s, the prices of second-hand (pre-owned) houses overtook the prices of new units. In 2000 the difference in both national and Dublin prices was about 12%. By 2006 it was 22% and 25% respectively.

The difference between the BIS and Federal Reserve Bank of Dallas Irish data may be related to the jump in expensive properties that were acquired by the nouveau riche.

Even the cost of a typical management level house in Dublin, Ireland in 2006 could have bought 9 similar houses in Houston, Texas, 3 in Amsterdam, 2 in Sydney and almost two in Tokyo, according to a survey by the US real estate firm Coldwell Banker.

The Central Statistics Office (CSO) publishes price data submitted by mortgage lenders and it’s old series began in 1975 with the average cost of a new house at €13,250 which in December 2016 euros was €90,750, while the cost of a new house in 2016 was €313,500.

In 1995 the national average cost of a new house was €78,000 (second-hand cost was €74,300 and respective costs in Dublin were €86,700 and €89,000).

In 2007 the national average cost of a new house was €322,600 (second-hand cost was €377,800 and respective costs in Dublin were €416,000 and €495,600).

The 1995 new house price in 2007 euros was €115,000.

Based on official Irish published data on new house prices, in the period 1995-2007, there was a real price rise of 181% and a nominal rise of 314%.

In the period 1995-2007, CSO data show that the weekly gross pay of an industrial worker rose 20% in real terms and 77% in nominal terms.     

Residential property a good investment?

IMF's Global House Price Index

The data suggest that over time, residential property provides positive investment returns (although the cost of quality improvements to keep a house in line with the standard of new builds — for example, energy insulation, extensions, modern flooring and so on — are treated as day-to-day expenses). Economists at the BIS noted that the biggest single-year nominal increases in advanced economies ranged from 16% in Germany to over 50% in Italy in 1974. The biggest single-year declines ranged from 2%, also in Germany, to 19%, Ireland, in 2009.

"One striking feature of house price growth is its persistence. With the exception of Germany, Portugal and Switzerland, advanced economies have seen nominal house prices growing by an average of at least 6% per year for 40 years or longer. In the United States, for instance, this resulted in a 13-fold increase in nominal house prices over a period of 47 years; in Norway, in a 77-fold increase over 66 years," according to the BIS.

"Another way to appreciate the persistence of house prices is to contrast the length of their upswings and downswings. We define an upswing (downswing) as a period of nominal house price increases (decreases) sustained in an individual country for three years or more. Based on this definition, periods of upswing accounted for nearly 80% of the advanced economy sample. The upswings lasted on average 13 years; with the longest one, in Australia, still continuing after half a century."

"By contrast, downswings accounted for only 8% of the advanced economy sample. They lasted on average five years, and the longest one, in Japan, lasted 13 years. In emerging market economies, upswings accounted for two thirds of the sample. They lasted on average eight years, and the downswings four years."

Recent German price rises

According to a 2018 Deutsche Bank report on German housing:

During the current real-estate cycle, i.e., from 2009 to 2017, house prices have risen 80% in large metropolitan areas (A cities) and c. 60% in B and C cities. In 2017, the number of newly completed residential units looks likely to have risen to more than 300,000 for the first time in the current cycle; in 2018, it might climb to 335,000. However, assuming that there is demand for at least 350,000 new apartments, the gap between supply and demand should continue to widen in both years. As demand remains high, upward price pressure will continue. This suggests that prices and rents will rise further in all major cities. Overvaluations are rising, and the risk of a price bubble on the German housing market is increasing. The price uptrend is likely to continue for several years to come, at least in most major cities in Germany.

UK's persistent failure to build enough housing units

The Economist reported in 2017: 

The ratio of median house prices to earnings in England hit 7.7 in 2016, its highest recorded level. In the past four decades, house prices have grown by more in Britain than in any other G7 country (US, Germany, Japan, UK, France, Italy, Canada). Home ownership has been falling for more than a decade, after rising for most of the past century. In London housing is outlandishly dear: before the Brexit vote sent the pound tumbling, it was the priciest city in the world for renters…What makes Britain’s housing squeeze maddening is that, unlike many other problems, something can easily be done about it. Britain needs to get building. The consensus is that, to keep prices in check, it must put up 300,000 houses a year, double what it erected in 2015-16. Mr Corbyn says the answer is a huge expansion of public housing, like the one in the Wilson and Callaghan governments in the 1970s. This would be expensive, especially if such housing was let at below-market rates. And few Britons aspire to rent from the council for life."

The number of second-hand housing units coming on the market has halved since the 1980s.  

The Financial Times reported last January that the number of homes changing hands in London had dropped by one-fifth in four years. However, transactions were up 13% in the North West, and 9% in both the West Midlands and Yorkshire and the Humber.

Research by York University last year suggested foreign buyers of these homes were not all cash buyers: more than half of overseas buyers of new-build homes had used mortgages to fund London purchases, it found.

About 50,000 fewer new-build houses come to market each year now than in the 1980s.

The Economist says that since 1981, the share of households with one occupant has risen from 20% to nearly 30%. Singletons are less likely than those with children to need extra space, so they may not need to move up the housing ladder.

The average amount of stamp duty charged per residential transaction has risen by 30% in real terms (though recent changes have lightened the load slightly for some).

However, with real average earnings unchanged in 12 years, Britons’ squeezed living standards are also a factor. The Economist said that a paper by Neal Hudson and Brian Green, two property analysts, found that people can only move up the housing ladder if they have the money to pay the estate agents and have enough for a deposit.

Finfacts reports:

Irish Housing Crisis: It’s time for radical solutions — Part 1the Irish development land valuation racket

Average Irish housing size lowest of EU's rich countries — Part 2 the taboo on high rise

AirBnB under siege in Europe- accounts for 50%+ of Dublin rentals

First Modern Economy: Myths on tulips & most valuable firm in history — The average inflation-adjusted (real) cost of a rich person’s home in the same location in Amsterdam only doubled in the 380 years 1628-2008 while in 1928-1973 period, the ratio of the nominal value index to the real index is 10.7. The real index value had peaked at 358.7 in 1732/33. The index had moved ahead of the 18th-century peak in 2008, just before another slump.  

Hectare of agricultural land costs €24,000 in Ireland, €6,000 in France — According to research by German-based economists on house price trends since 1870 in 14 developed economies including, the US, UK, Germany, and France, inflation-adjusted house prices have tripled since the start of the last century but most of the rise has occurred since 1950. The economists say that about 80% of the increase in house prices in 1950-2012 was due to land prices.

Dublin house prices exceed levels in Brussels and Frankfurt

When County Dublin's land prices rocketed 530% in 9 years— In November 2015, Jason Furman, President Obama's chief economic adviser, in a speech cited zoning restrictions that add as much as 50% to the cost of a house. Paul Krugman, the New York Times columnist, has said that “this is an issue on which you don’t have to be a conservative to believe that we have too much regulation.”

House ownership exclusion rising in UK, Ireland, elsewhere 

Dysfunctional development land systems in UK and Ireland - Part 1

Dysfunctional development land systems in UK and Ireland - Part 2