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Column: What the Friday Firesale tells us about Ireland's property market

Last week’s firesale of distressed properties saw the temporary return of property fever. But when the frenzy passed, economist Ronan Lyons believes the auction left us with some useful new information.

Ronan Lyons

FRIDAY SAW the return of something Ireland hadn’t seen in a long time: a property frenzy. Not only were buyers at the Allsop’s firesale auction spilling on to the street, so many people showed up with cheque books that they set up a live relay in Doheny & Nesbitts for those who turned up to gawk.

Given that there were probably three hundred transactions a day at the height of the boom, the fact that less than a hundred makes such headlines may surprise some observers. However, what people are starved of in the property market right now is information. Sellers and owner-occupiers don’t know what their homes are worth, while would-be buyers only have asking prices to go on.

Therefore, the fact that the details of 65 residential property transactions around the country were public is indeed newsworthy. Not only that, it can also help us shed light where the property market is at the moment. Clearly, we shouldn’t try to be too precise based on just 65 transactions, and it’s worth remembering that the bulk of the deals were probably done without a mortgage.

Nonetheless, Friday’s auction can help us at least get a handle on three important questions. Firstly, it can help us discover how far prices have fallen from the peak. Secondly, we can calculate how the prices achieved at Friday’s auction compare to the current level of asking prices. And lastly, and perhaps most importantly, it shows us what market agents think is a fair “yield” – or relationship between rents and house prices – for residential property in Ireland.

How far have prices fallen from the peak?

As part of my research in Oxford, I have developed a model of property prices in Ireland during the period 2006-2010. While it has been developed for other purposes, it can actually be used to calculate what a particular property was worth in a given quarter, and how that changed over time. Using the information available on each of the lots at the auction, such as location, number of bedrooms and property type, it is possible to calculate the approximate asking price of each property at the top of the market in mid-2007 and at the start of 2011.

While the properties that went under the hammer are not a representative sample from around the country – there are no properties from Munster, for example – the typical asking price at the peak of the market was close to the national average: €375,000. The typical selling price at Friday’s auction was €140,000, which is a fall of 65 per cent from the peak.

This varied, obviously, by property – and there are outliers. One property in Renmore in Galway sold for a price that was barely 25 per cent below the typical asking price for similar properties in 2007 and about 18% above current asking prices. One would hope that there are individual circumstances about the property (or perhaps the buyer) that justify such a high price. At the other end, a three-bed semi-d in Mullingar sold for just €30,000, almost 90% below the peak of €230,000 for such properties. Perhaps it’s in a particularly bad neighbourhood.

What is the gap between asking prices and closing prices?

We can use the same information to work out the gap between the prices that sellers are advertising at the moment, and then compare that with the prices achieved last Friday. The typical asking price in early 2011 for the type of properties sold at Allsop’s auction would be just be €210,000, compared to the €140,000 achieved. This means that the gap between advertised prices and auction prices was a pretty significant 33%.

When discussing the Daft.ie Report, I am often asked what the gap between ask and close is and I have until now said we don’t know but that 10 per cent, or €20,000 on the typical property, was probably a good starting point. This suggests the gap is closer to €50,000.

Estimated peak and current asking prices for the firesale properties

Estimated peak and current asking prices for the firesale properties

The estimated peak asking price, estimated current asking price and the price actually achieved for each lot are in the graph above. The quickest way to find out which lot number corresponds to which property is to use NAMAWineLake’s table. (You can see the Raglan Road mews sticking out as Lot 34!) One thing to note is that current asking prices (the light brown line) are closer to the auction prices (red) than peak prices (dark brown): “average” prices may still have further to fall but it looks at though the bulk of the adjustment has been made.

What is the new relationship between rents and house prices?

Ultimately, as an economist, I believe that the relationship between rents and house prices is the true measure of whether a property market is in balance. The annual rental income as a fraction of the property price should look like an attractive savings rate on a deposit account: if the savings rate is 3 per cent or 4 per cent, those putting their money into property will probably want closer to 10 per cent, as a reward for the risk they are taking.

The property market bubble destroyed this fundamental relationship between rents and house prices. The yield went from an average of 8 per cent in 1998 and 1999 to about 3.5 per cent in 2006, as rents were static but house prices rose substantially.

The rich data provided by the auctioneer on rental income from the properties for sale in the auction means we can actually see what sort of yield people investing in property are looking for.  We can also use Daft.ie rental data to fill in the blanks where that is not known and come up with an estimated yield for the entire batch of Allsop properties.

The typical gross yield (12 months' rental income as a proportion of the price) at Friday’s auction was between 8.5 per cent and 9 per cent. The properties that are definitely investment properties – they have existing tenant contracts – have a median yield of 9 per cent. Those that look like owner occupier purchasers look like they were bought factoring in a noticeably lower yield, typically 6 per cent.

How can I use Friday’s results to find out what a property is worth?

This is very useful information for would-be first-time buyers and indeed anyone who wants to know the value of their property. Looking at a particular property, you can of course just wipe 65 per cent off what you think it was worth at the peak and you will get what it probably would have got at Friday’s auction.

A more scientific way – one I’ve gone through before in my rent-or-buy calculator – is to look at the annual rental cost for the property you’re interested in. If you want to come up with an offer similar to the owner-occupiers last Friday, divide that figure by 0.06. If you want to bargain hard and only offer what an investor would, divide that figure by 0.09.

So if you’re looking at a four-bed family home in the Dublin commuter counties, the monthly rent of €900 translates into annual rental costs of €10,800. Friday’s owner-occupier buyers would tell you to offer €180,000 (10,800 divided by 0.06). Friday’s investor buyers would tell you to offer just €120,000.

Read more like this at Ronan's blog >

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