Prime Time - 5th July 2012

Thursday 05 July 2012 12.25
Prime Time - 5th July 2012

Donogh Diamond blogs ahead of tonight's report on property prices:

“Anecdotal evidence” is an expression that pops up a lot in discussions of property prices, which it probably shouldn’t, since it’s almost a contradiction in terms. An “anecdote” is a tale to tell in an after-dinner speech or to your mates in the pub. It is, at best, one step up from a “shaggy-dog story”. It is not far from the antithesis of “evidence”; something tangible, something checkable, something that in other circumstances might be the basis for taking away someone’s liberty.
But in discussions of property prices, we seem to ignore all this and set great store by “anecdotal evidence”. So much so that during our late lamented boom, a lot of us used it as the basis for giving away our wealth.
And for a few months now there has been anecdotal “evidence” that property prices in Dublin might just be rising. Not just “not falling”, but actually rising. People tell tales of getting involved in bidding wars (okay, bidding skirmishes), stories of queues outside viewings, of houses being sold within weeks of going onto the market, rather than months.
These anecdotes related specifically to houses, not so much apartments. And even more specifically they related to houses in the traditional suburbs of Dublin, that is the Castleknocks and Glasnevins, the Cabinteelys and Kilmacuds, rather than the Edenderrys and Goreys that were the Dublin suburbs of the boom.
Now anecdotes can’t always be wrong, and just recently there has been the beginning of official information beginning, in the most tentative of ways, to confirm them. Central Statistic Office figures suggest that house prices in Dublin really are rising, if only marginally. Reports from the property websites Daft and My Home seem to point in the same direction. An ESRI Report suggested that there may be significant “pent-up demand” from Under 35s who are growing weary of sharing rental properties, or living like overgrown teenagers with their parents.
Unfortunately for people living outside major urban commuters belts, there seems little good news. Towns and villages all over the country are still ringed by empty and half-empty housing estates. And most analysts see little possibility of that vast oversupply being soaked up in the foreseeable future.
A Central Bank report indicated that property prices may be under-valued by up to about 25%. But that concept of “undervalued” involves working out what “fair value” is. And it’s pretty irrelevant if no-one is prepared to pay it (or if the banks aren’t prepared to lend to people to pay it).
But if you are interested in whether the price being asked for a property represents “fair value” one generally-accepted method is to calculate it is to use rental returns – in other words, what annual return this asset would generate as an investment, and its price should be based on that return.
So here’s one really simple calculation (no, it is really simple, I swear) to use to work out the fair value of a property.
Check what the average rent per month similar properties generate. Let’s say it’s €900 per month. Then you have to decide what a good percentage return per year might be. If you think property is quite a low-risk investment you might pick say, 5%. If you think that it’s a higher-risk investment (and most people do) you might think you’d need 6% or 7% (and if you could get maybe 3% by just putting the money on deposit in a bank you’d have to bear that in mind) to make it worthwhile. Let’s say you decide you need 6%. You then multiply the monthly rent (€900) by 11 to get the annual rental income (not by 12, you leave out one month to take account of the costs of being a landlord and the fact that the property will occasionally be empty). So your annual rental income is €9,900. That should be 6% of a fair price for that house. So divide the annual rental income (€9,900) by 6 to get a 1% of the fair price, and multiply it by 100 to get what you see as the fair price for that house, based on a 6% return. And a fair value for that house turns out to be €165,000.
It’s not a perfect calculation, of course. If you knew that house prices were just about to soar, you would be prepared to pay far more. But you don’t, none of us do. And in the absence of the gift of prophecy, it’s not a bad starting point.
Of course with almost 15% unemployment, a cloud of uncertainty hanging over Europe, and crippled banks, it’s hard to see what might fuel any “soaring”. And if there is a European cataclysm, there might be another cliff for prices to fall off that we haven’t even spotted yet.
But there is now some real indication that prices of houses in Dublin are rising. And there is the “anecdotal evidence”. And anecdotal evidence might be right, I mean you’d expect it to be, at least half the time. Back in autumn 2006 the auction rooms were almost empty, and anecdotal reports of houses being withdrawn at auction, or receiving no bids at all at, made it into the media. If you were one of the people who paid attention to that sort of “anecdotal evidence” back then, you might have saved yourself a fortune.
Donogh Diamond
Prime Time on House Prices, RTÉ 1, 21:30