House prices

Ken writes:

According to the Economist, Ireland’s house prices are still over-valued by 19.9%. I think this is an under-estimate. The Economist compares the ratio of rents to house prices to draw up a property bubble league table and despite of the dramatic drops in house prices in some parts of Ireland, it still comes out in the top ten most over-valued places.

I suspect the straight comparison rent to price ratios underestimates how over-valued the Irish market is because Irish rents are so high. For any given ratio of rents to prices, high rental costs (as a proportion of the average persons disposable income) will entail high house prices. Which makes them ‘over-valued’ relative to the average wage. At the top of the bubble, the mean new house price in Dublin was more than 10 times the mean annual wage and the mean second-hand price was more than 16 times the annual wage. I guess I think that over the long term it’s basically unsustainable to have large sections of the population paying a third or more of their disposable income in either rent or mortgage repayments, but there is a specific reason to think that Irish rents will come down, which would make the ratio of rents to prices more overvalued (until the house prices came down as a consequence).

According to Sarah Carey in this opinion piece in the Irish Times, the Irish Government shells out 500 million euros each year in rent supplement, subsidising the rental cost of 96 thousand private residential tenancies, which is more than half of the domestic rental market. This is a very generous provision given that Ireland is insolvent and you can only see it being cut. The Government is clearly a big player in the residential tenancies market and the rent supplement currently serves as an artificial floor in the market by putting a minimum value on what the poorest 96000 families can pay. If the rent supplement was cut, the landlords would have no option but to charge less and it would have a knock-on effect. Incidentally, even families that don’t get the rent supplement get some tax relief of a few hundred euros a year on rental expenses.

So rents will fall over 2011, in my opinion, as a result of a change of government policy and Ireland will climb the property bubble league table once more unless house prices fall further.


3 thoughts on “House prices

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