Of Interest Only

This report from todays Indo, on growing concerns of the consequences of lax lending by Irish Banks.

A MORTGAGE crisis is looming for first-time buyers over the aggressive marketing of interest-only and 100pc mortgages by banks and building societies, the Consumers' Association said yesterday.

Figures in a research report by Davy Stockbrokers estimated recently that up to four out of every 10 mortgages sold to first-time buyers are now 100pc homeloans. The report also found that the average first-time buyer was being offered a 35-year mortgage in a bid to counteract rapidly rising housing prices.

Yesterday, chief executive of the Consumers' Association Dermott Jewell said the promotion of 100pc and interest-only mortgages was "dangerous and an accident waiting to happen". "We were promised by the financial industry when these products were introduced that they would only be offered to a certain few. That is certainly not the case now."

The words closing, stable, and door spring to mind. Ho hum.

A Miscellany of Housing Stats

Housing Completions

1998 42,000
1999 45,000
2000 48,000
2001 52,000
2002 56,000
2003 66,000
2004 75,000
2005 81,000
2006 100,000 (est)

Housing Loan Approvals

2000 80,858
2001 69,062
2002 93,136
2003 97,888
2004 104,305
2005 120,637

The Sixth Housing Land Availability Survey June 2004.

12,500 hectares of zoned serviced land in the state with an estimated yield of 367,000 housing units.

National House Building Cost Index 2004.

2.8% year on year. Below general Inflation.


Sources: (CSO, DOE)

Extreme Home Staging

It seems Americans are hard wired to produce the tawdriest marketing schmaltz conceivable.
But this story of ‘extreme home staging’ is so gag worthy that I’m almost reluctant to repeat it here. So if anyone has a particular aversion to ‘lifestyle’ peddling, please navigate away from this blog, you have been warned.

NEW YORK (CNNMoney.com) -- Home sellers long ago discovered that small touches could boost selling prices - fresh flowers, the smell of freshly baked cookies. Now a real estate developer, Centex of Dallas, is adding in beautiful people.

The experiment in what's called "staging" is simple: Home buyers enter a home and see not just furniture but real people - actors - playing out the life they might lead there. "Staged model homes tend to be sterile and dry - this was a way to put the heartbeat back into the home," said Jim Garfield, spokesman for Roddan Paolucci Roddan, Centex's publicist.

In one performance, the 'model' family spent about three hours pretending it was Mom's birthday. They baked a cake, sang happy birthday and the children drew and framed a picture - of a Centex house. The original cast included a former Baywatch hunk, Jaason Simmons, in the role of Dad.

"It's physically manifesting somebody's dream," said Garfield.

Amanda Larson, a marketing director for Centex, says the idea came about when she sat down with Roddan's creative people and worked out an idea to make the visiting-a-model-home experience "more interactive and more
memorable."

http://money.cnn.com/2006/07/03/real_estate/

I warned you didn’t I.

This ‘extreme home staging’ will no doubt hit our shores as the market slows. Expect to encounter actors in pristine show homes in Mullingar, possibly partaking in a game of familial Monopoly, the child exclaiming, ‘Mammy, Daddy I landed on the Glens Executive Housing Development in Mullingar, I’ve won, I’ve won!’

No Iceland, not Ireland.

The Financial Times reports on the troubled economy of an island nation in the North Atlantic.

Geir Haarde, Iceland's new prime minister plans to cool his country's overheating economy with a series of reforms aimed at ensuring that the island-nation avoids a hard landing. The comprehensive action plan includes measures to tame a booming housing market, curb wage inflation, improve financial regulation and rein in public spending. "We have given ourselves some breathing space," he told the FT.

Iceland has been the focus of international attention since February when investors, including many hedge funds, concluded the economy was dangerously overheating and withdrew funds, triggering a 30 per cent depreciation in the currency.

Fears of an economic meltdown have since dissipated. But the central bank acknowledges that growth will "go down rather quickly" next year and external economic developments could still trigger a sharper-than-expected correction. The economic boom was driven by the liberalisation of the housing market, tax reductions and overseas investment in power and aluminum projects. The effects of these factors were exaggerated due to the small size of the economy of Iceland which has a population of just 300,000.

As part of his reform package, Mr Haarde, has reduced the amount the Housing Finance Corporation - a state owned body that controls around 40 per cent of the mortgage market - is able to lend to borrowers. He is considering abolishing it in future, he said.

The prime minister has separately reached an agreement with unions to moderate wage claims and end a policy of broad tax reductions and replace it with a reallocation of tax benefits to the less wealthy. Mr Haarde has also halted government spending on some infrastructure projects and is prepared to suspend future spending if needed, he said.


http://www.ft.com/cms/s/0e635268-0c8b-11db-8235-0000779e2340.html

Tech Bubble Looks Like a Picnic

The Wall Street Journal has this interview with Kenneth Heebner. “To get a lay of the land, we tracked down Kenneth Heebner, who since 1994 has managed the $1.2 billion CGM Realty Fund. It has the best 10-year record of all real-estate-focused mutual funds, according to fund tracker Lipper Inc.”

“WSJ: How is the housing market? Mr. Heebner: A significant decline in prices is coming. A huge buildup of inventories is taking place, and then we’re going to see a major [retrenchment] in hot markets in California, Arizona, Florida and up the East Coast. These markets could fall 50% from their peaks.”

“WSJ: What has you so concerned? Mr. Heebner: I’m worried that more people will default on their mortgages. Risky mortgages..have been widely used in the last two years. Some people got 100% financing for their homes. It made the tech bubble look like a picnic.”

“As housing prices fall more people will be under water, and these people are just going to walk away from their homes. They are going to say, ‘I’m outta here.’ You’re going to see increasing foreclosures over the next several years. As [home] prices come down, it will create a difficult environment for home builders.”

“WSJ: What data have you most worried? Mr. Heebner: We’re seeing a huge increase in inventories of unsold homes. The role of incentives in selling a home is increasing so the weakness doesn’t show up immediately in list prices. Large price declines will follow in inflated markets.”

PRTB ?

Following the discovery of a couple of hundred thousand empty homes by Census enumerators recently. I was less than shocked when I unearthed the following statistics published by the Private Residential Tenancies Board.

At the end of 2005, the number of registrations with the PRTB was 83,983 and this was in respect of 53,070 landlords and 150,518 tenants. At 3 March 2006, the number of registrations with the PRTB was 88,593 and this was in respect of 55,685 landlords and 160,251 tenants.

So, as far as the government is concerned, out of an Irish population of 4,200,000, only 160,000 are private sector tenants. Only 88,593 private sector rental properties exist in the state, about 7-8% of the housing stock. When you consider that agents believe that investors purchase roughly 40% of new build output, (running at 80,000 units currently) the disparity between the PRTB’s figures and the probable actuality is remarkable.

There is something remiss in the Irish property market, we have tens of thousands of empty homes, and a private rented sector that barley exists (statistically). Poor Bertie Ahern is labouring in a qualitative information desert, hence his bad tempered fits when pressed on the issue of Irish housing. Shirty Bertie hasn’t a notion, no one has.

http://www.prtb.ie/pubregfStats.htm
http://www.prtb.ie/pubregister.htm
The second link provides a county by county breakdown of PRTB registered properties.

Global Property Cycle Turning

From MarketWatch. “Evidence is mounting that the global property cycle is turning down, as rising interest rates and heightened inflationary pressures combine to put the brakes on demand for real estate, according to a Morgan Stanley report.”

“‘Due to deflation shocks, global inflation has been low, which allowed major central banks to keep interest rates very low, in turn fueling property,’ economist Andy Xie said. ‘As inflation picks up simultaneously around the world, interest rates are rising everywhere, and the property boom is turning into a bust.’”

“Unlike in previous property cycles, Xie said institutional property investors have been active in shifting capital between different cities, leading to the rare situation where prices gained in unison around the world.”

“‘Innovations in the global financial system have led to a rising correlation of property markets to each other and central bank-policies. It has essentially turned deflationary shocks of the past 10 years into a global property bubble,’ Xie said.”

“He cites some telling statistics to illustrate his point. The value of U.S. housing has risen to 173% of gross domestic product in 2005 from 135% in 2000. And in Australia, housing values rose to 347% of GDP in 2005 from 271% in 2000.”

Bollywood does Banks

I've just finished making my short film in India (its cheaper). The film is a tale of the murky world of Irish banking. I'm afraid that I couldn't afford English speaking actors so it's in Urdu, but with subtitles. I've attached a short clip to give a flavour of what I hope to be this summers blockbuster.

http://www.grapheine.com/bombaytv/play_uk.php?id=724918

Binge There Done That.

Its always fascinating to get outsiders view of your country and the Jerusalem Post’s perspective is probably as detached as any. The author of this piece was tasked with finding examples of successful small nations, which might offer Israelis clues as how to grow their own economy, Oy vey!

Two more different nations than the Swiss and the Irish would be difficult to imagine. If they can both achieve success, and maybe even happiness, by going their own different ways - then good luck to both of them. The real question is whether the Irish approach can hold up over the long term - and the answer is quite likely negative. The Irish are flush with the cheap and easy money that the single currency has provided them, thanks mainly to German frugality, and they seem intent on blowing it. In addition to flashy spending of the usual sort - the rate of ownership of BMWs and Mercedes in Ireland is higher than in Germany - they are hooked on a crazed binge of property buying. This encompasses both their own real estate - so that derelict barns in remote country villages fetch six-figure euro prices - and others' too, especially in the developing East European countries, from Poland down to Bulgaria.

Meanwhile, with regard to its infrastructure, Ireland itself remains decades, in some respects generations, behind its West European peers. Israel, itself a laggard, is a paragon compared to the ballyhooed Irish (remember Bibi's extolling of Irish achievements?). Their road network is like ours was 15 years ago, before we began spending money on it, and their rail network seems to be unchanged from 50 years ago. As for Dublin airport, the old terminal at Ben-Gurion on a bad day in August was a positive experience, by comparison.

Fine houses, fancy cars no roads. That's short-termism run amok, a feel-good formula leading nowhere. The Swiss may not know much about feel-good fixes and they may be unfriendly and cold, but they are the world experts on protecting and enhancing the wealth they steadily accrue. As ever, they are much the safer bet.

http://www.jpost.com/servlet/Satellite?apage=1&cid=1150355504324&pagename=JPost%2FJPArticle%2FShowFull

The Lights are off and there’s nobody home.

Astoundingly, enumerators undertaking the latest census have stumbled across 275,000 vacant homes.

The Irish Independent (19.6.06) reported that 300,000 homes across the country will not be included in the latest census because there was no one at home to accept the census form.

‘Following inquiries among neighbours, postmen and women and apartment block management companies, the vast majority of those dwellings - some 275,000 - were identified as being vacant.’

The government uses the data collected in the Census to inform policy decisions, such as infrastructure development, education and health care provision, strategic and local land use policy, even constituency boundaries. The census asks questions regarding the composition of housing accommodation; number of bedrooms, type of utilities, floor space etc. It seems that following the completion of the census we will have very sketchy or no information on 15% of the housing stock, (that 15% is sufficient to house 800,000 people based on the average household size by the way). So the census of 2006 will be unsound, more a sample than a census.

But a much more disturbing aspect of the discovery of these tens of thousands of ‘ghost homes’, is the revelation that we have more homes than we need. The housing vacancy rate in the UK is about 3% and falling while In Ireland it is 15% and probably rising (given that we will churn out an additional 90,000 units this year). It matters not one jot, incidentally, how many of these properties are available and on the market to buy or let. The fact is that they are there and can arrive on the market at any time.

More proof, if proof were needed, that our country is in the grip of a speculative asset bubble, that is now approaching Tulipmania magnitude.

The Sunday Times Loves This Blog (kinda)

I was shocked, nay verily stunned, so I was, when I opened my Sunday Times (Ireland) Homes (Section 6), (ST(I)H(S6) and quickly leafed through the property porn to ‘The Market’ section, the only part worth reading. There in ink, not flickering pixels, but good old ink was a reference to this ever so humble blog. Niall Toner, the author and a man who has recently risen highly in my estimation (this morning) wrote these hallowed words in relation to this blog.

‘It makes for an entertaining and occasionally informative look at the market’

Alas Niall also made reference to tents and peeing and armchairs where amateur economists may be found lounging, no doubt resting after all that peeing. And lamentably moan and rant also got a look in. But hey, ain’t no such thing as bad publicity, so thanks Niall for the name check. This particular bear promises not to maul those sheep who have recently noticed a certain, aah….. cognitive dissonance, when pondering the current property mania.


But enough of blogs. Niall makes reference in his section to the fall in clearance rates at last week’s auctions. ‘Fewer than one in four houses put under the hammer actually sold last week’. At one Linsey sales room last Tuesday, nobody at all turned up to bid on three properties on offer’. That’s a pretty good definition of the sound one hand clapping makes for all you Buddhists out there. Has the selling season come to an unseasonably early end? Is the lure of Paraguay v Serbia and Montenegro on the telly stronger than the urge to buy the most expensive real estate on Earth? Have the boys in Bonn in the Bundesbank, put the willies up the buying public? Trees don’t grow to the sky I suppose, but if we are seeing a top, will the lure of 2% net yields be enough to keep investors interest in the market?

What am I talking about? There are no investors in the Irish market. There are speculators who have bet the house (literally in many cases, through equity release on their principle residence) on capital escalation; investors became extinct years ago. What happens next? well look no further than Las Vegas, Phoenix, Florida, The Spanish Costas, New England, or indeed Japan in 1990 for clues.

Yield is Real

The concept of yield, (an expression of the return the annual income of an asset provides measured as a percentage of it's current market value), is a fundamental investment tool, used to analyse individual investments and to compare alternative investment opportunities.

To explain further. An investment yielding 20% will pay €20 per annum for every €100 invested, whereas with a 5% investment the return will only be €5 for every €100 invested.
Obviously the investment returning 20% is more attractive than that returning only 5%. But hold your horses. Yields tell us more than what return an investment will make.

A high yielding investment reflects higher risk. In order to attract money which would otherwise go to safer investments poorer quality investments must offer some type of compensation. Usually a higher yield. Risk is measured in horse racing in a similar way, the betting market odds, a dead cert offers poor returns, a rank outsider offers the possibility of fantastic returns.

In the Irish residential investment market at present yields are very low, somewhere between 2-3% per annum net on capital employed. This would seem to suggest that the risk involved is very low, but this is not the case. The risk is probably higher now than at any time in the past few decades.

The American Budget Deficit

I thought I'd write something about the American budget deficit. What is there to say about the deficits ? Well they are big, very big, very very times 9 trillion big. Rest assured that that's big, get out your calculator and play around with that figure, .....awesome. Rather than type a thousand words on the subject, I thought I'd use some graphic representations of the big daddy deficit.

Go to Google type in deficit and read about what is likely to be the the precursor for a rather fraught decade coming our way soon.

The Investment Cycle

This chart suggesting the various phases of the Investment Cycle was published in 2000. If you think about the run up in the commodities and oil markets over the past 18 months it begs the question; are we approaching the 'growth expectations peak' ?

A Chill in the Air

The US property market seems to be rolling over, as this report from Theledger.com suggests.

The Federal reserve are in a difficult position. They are likely to increase interest rates again today in defense of the dollar, but rate tightening is putting pressure on the housing bubble and indebted American consumers. I think this is whats called being caught between a rock and a hard place.

Elsewhere, for the first time in nearly a decade, you can smell the anxiety. The
listing agent for a four-bedroom home on Scripps Trail in San Diego informed
other agents in the multiple-listing service that a "very, very motivated seller
will entertain all reasonable offers" and "will help with closing costs." The
house was listed in September at $810,000. After a previous price cut, the
seller is now willing to entertain offers as low as $685,000.The seller bought
the house for $730,000 in 2005, according to county property records, for what
the listing agent said were investment purposes.

http://www.theledger.com/apps/pbcs.dll/article?AID=/20060509/ZNYT01/605090404/1001/BUSINESS

Sherry Fitzgerald Report Spring 2006

The latest Sherry Fitzgerald Residential Market Report for Spring 2006, published last week, contains the usual sunny appraisal of the future prospects of the housing market. However the report contains truly astonishing information on the composition of buyers of new homes. In the Spring of 2004 Sherry Fitzgerald reported that 57% of new homes were purchased by first time buyers, with investors buying 13%. The latest report has first time buyers buying 33% of new homes, while investors mop up 40% of new home output.

Given that rental growth is flat at best the growth in the investment market is hard to explain.






http://www.sherryfitz.ie/webdataex/articles/278.pdf

What's Hot and What's Not

The deflation in property prices in the Spanish Costas continues, largley unheraldeded in the media in Ireland or the UK. The once red hot market, which reached a peak in 2002, is now seldom mentioned (well not in polite conversation). It seems markets in Cyprus and Croatia are feeling the pinch also. Prehaps these forgotten markets illustrate the likley fate of other hotspots which presently consume the attention of the fly to let hoards.

SUR In English

General News

Desperate property owners start to lower asking prices to speed up sales

Almudena Nogüés

Flats are taking 32 months to sell

Some owners are accepting offers 30,000 euros below their original price

After seven year long real estate boom with prices reaching exorbitant levels, sales are starting to slow down. Some owners, tired of seeing the “For Sale” sign outside their home for months on end, are finding themselves selling for sums way below what they had originally hoped for, and sometimes even less than the amount quoted on the official valuation.

Professionals claim that one of the main causes of this present situation is that much of the demand has already been satisfied while other potential buyers have been priced out of the market. The threat of rising interest rates has helped to slow down sales along with the fact that “it would have been impossible to keep up the recent rate of evolution of the market for much longer”, explains the national director of the MC estate agency, Juan Felipe Muñoz. Now it is taking an average of 32 months to sell a property.

While experts are avoiding using the word “crisis”, they admit that those people who bought properties in order to sell them on again are now finding it hard to turn the bricks back into cash. Owners can no longer use the amount fetched by a neighbouring property as a guideline as this “often leads to disappointment”, pointed out the president of the School of Real Estate Agents, Cayetano Rengel. “The time when studios fetched 250,000 euros could not go on forever”, he added.

“Now an owner in a hurry to sell has no choice but to lower the price. Someone asking 300,000 at first might easily drop the price to 230,000 after several months have gone by without finding a buyer”, point out sources from Unicasa. Similarly Juan Carlos Cuevas, the manager of a Tecnocasa franchise, said that he is seeing “brutal cuts” in prices. “It’s quite normal for an owner to drop between 18,000 and 30,000 after less than three months”.

Not contented with the usual classified advertising, owners are also seeking new ways of finding a buyer. Over recently months we have seen an increase in advertisements appearing everywhere, from car windscreens to lampposts and letter boxes.

Meanwhile the Association of Madrid Property Developers and international financial analysts predict that the slump in the market could reduce employment in Spain by two per cent by the middle of 2007 and reduce the Gross Domestic Product by 1.3 per cent.

http://www.surinenglish.com/noticias.php?Noticia=8239

Boston Boom Ends.

News from the US on the continuing slowdown in the once frenetic housing market.

The Boston Globe has this update. “After five red-hot years, home sales have cooled north of Boston and across the state. Gone are the days of multiple bids, price run-ups, and fast sales. Falling prices, rising inventory, and longer selling periods are now the norm, industry watchers say. ‘We’re at a turning point,’ said John Bitner, chief economist at Eastern Bank of Lynn. ‘The upward movement has definitely turned the other way. It’s a buyer’s market.’”

“Home sales in Massachusetts dropped 8.4 percent from January to March, compared with the same period last year, and 13 percent over the last 14 months, according to a report issued last week by the Warren Group. In March, home sales and prices dropped 1.5 percent, with the average selling price falling to $325,000 from $330,000 in March 2004.”

“The slowdown has left a glut of homes sitting idle, and hundreds of homeowners waiting impatiently for the chance to downsize, trade up, or move closer to family or even out of state for a job. Currently, 2,279 single-family homes are for sale north of Boston, a 48 percent increase over April 2005, when 1,538 homes were listed.”

“Eric and Denise Kerble of Swampscott put their spacious Colonial on the market in January for $399,900, betting it would sell fast in a seaside town where the average price tag on a single family house is at least $100,000 more. Now, after more than 100 days without an offer, the Kerbles have dropped their price to $394,900.”

“The couple paid $206,000 for the gray, 1,586-square-foot house eight years ago, outbidding several other prospective buyers. They said they have since spent more than $25,000 on upgrades.”

“‘We hope this does the trick,’ said Denise Kerble. ‘Lots of people have looked
at it, but nobody takes the next step.’

The Kerbles are one of the many Massachusetts families living in limbo, trapped in a suddenly stagnant real estate market that has forced them to put their dreams on hold.”

“In Middleton, competition from new homes for sale on East Street prompted Patrick and Susan McIntire to drop the price on their Colonial that they first listed at $419,900 in November. The house is priced at $399,900, but still has received no offers.”

‘We don’t want to give our house away,’ said Susan McIntire, who hopes to find
a house with more land in New Hampshire. ‘We’ve put a lot of sweat into it. But
it’s also very frustrating trying to sell a house now. There are more places to
live than people looking to buy.’”

“Local realtors say the falling prices and longer marketing periods show the market has come back down to earth after years of skyrocketing sales. With inventories climbing, sellers no longer can name their asking price. ‘Things are much more realistic now,’ said Claire Dembowski, a broker in Swampscott, who is also the listing agent for the Kerbles’ house. ‘Sellers had the advantage for a long time, but now the cycle is going the other way.’”

Credit Where It's Due.

The rate of expansion in residential mortgage debt in Ireland is astounding. Figures from the Central Statistics Office show that the rate of growth reached 29.4% in February, with €2.91 billion borrowed. However this is not a record that honour falls to the month of December last, when €3,500,000,000 was borrowed, in one month. That's a hard figure to get your head around, so think about it terms of one Euro coins. A one Euro coin weighs 7.5 grams and has a diameter of 23.25 mm. If the banks doled out mortgage debt in coinage they would have had to transport 26,250 tonnes of it last December alone; enough to fill nine hundred three axel trucks. Laid side to side 3,500,000,000 Euro coins would stretch around the globe a little over twice.

While the monthly mortgage debt creation figures are breathtaking, the rate at which this debt is growing is mind-boggling. As house prices rise the amount of debt required to buy increases. In 2002 the rate of growth was 11%; in 2003 12.9% , in 2004 23%, in 2005 26% and the latest figure for this year is 29.4%. As the debt rises ever higher the trajectory steepens more and more.

House Price Inflation Highest Since 2000

The latest TSB/ERSI House price index released today shows house prices rising at their fastest rate since 2000. The rise expressed as a percentage is a fairly useless statistic as people are paid in Euros not percentages. The monthly rate for March nonetheless was 1.3% , and a spokesman for the TSB suggested that inflation will moderate later in the year. (he hopes)

Ironic that the vested interests always refer to the non-occurrence of a crash as evidence that the bear case is flawed. It could equally be said that the much vaunted soft landing is pretty conspicuous by it's absence.





http://www.rte.ie/business/2006/0427/houses.html