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walktothewater

On The Likely Extent Of Falls In Irish House Prices

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“Looking at house price cycles across the OECD since 1970, we find a strong relationship between the size of the initial rise in price and its subsequent fall. Were this relationship to hold for Ireland, it would predict falls of real house prices of 40 to 60 per cent over a period of 8 to 9 years.”

http://www.esri.ie/UserFiles/publications/...um_SA_Kelly.pdf

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“Looking at house price cycles across the OECD since 1970, we find a strong relationship between the size of the initial rise in price and its subsequent fall. Were this relationship to hold for Ireland, it would predict falls of real house prices of 40 to 60 per cent over a period of 8 to 9 years.”

http://www.esri.ie/UserFiles/publications/...um_SA_Kelly.pdf

These days I generally keep my bearish mouth shut as I believe things are going to get nasty as the bubble deflates but I'm hearing interesting comments around the workplace on this report.

Some of the comments are:

"who is this loser anyway - betcha he didn't make any money during the boom"

or

"If this guy is any good, how come he's stuck in a university and not working for one of the big banks"

The complete disdain for someone in an academia is ironic as the government is pushing Ireland as

a future knowledge based economy based on research and development!

This bubble has not only distorted the economy but perceptions and values have gone completely out of whack as well.

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“Looking at house price cycles across the OECD since 1970, we find a strong relationship between the size of the initial rise in price and its subsequent fall. Were this relationship to hold for Ireland, it would predict falls of real house prices of 40 to 60 per cent over a period of 8 to 9 years.”

http://www.esri.ie/UserFiles/publications/...um_SA_Kelly.pdf

Those are the exact numbers I foresee. 40-60% down over the course of the next 5-10 years. A long trough but with most of the pain at the beginning of the crash.

The trigger will be the collapse of the credit markets IMO. Credit tightening will do Merv's job for him which is why I don't see much more in the way of IR hikes. It is why Ben is able to stand pat, no point throwing the odd bucket of water onto the sinking ship.

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This bubble has not only distorted the economy but perceptions and values have gone completely out of whack as well.

Ain't that the truth.

Problem is it is anybody's guess as to how much underlying damage it has done right across all sectors. The misallocation of human and financial capital is on scale I don't think we've ever seen before.

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These days I generally keep my bearish mouth shut as I believe things are going to get nasty as the bubble deflates but I'm hearing interesting comments around the workplace on this report.

Some of the comments are:

"who is this loser anyway - betcha he didn't make any money during the boom"

or

"If this guy is any good, how come he's stuck in a university and not working for one of the big banks"

The complete disdain for someone in an academia is ironic as the government is pushing Ireland as

a future knowledge based economy based on research and development!

This bubble has not only distorted the economy but perceptions and values have gone completely out of whack as well.

Criticism against the bears is commonplace and was seen with Paul Warburg and his comments against the market before the US 1929 SM Crash; it's all part of the course, just a little bit of history repeating.

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It's an interesting read, I was especially pleased to find some economic theory that actually explains bubbles, and why property bubbles are particularly likely (and dangerous).

Rational frenzies - when otherwise sensible people get carried away ...

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It's an interesting read, I was especially pleased to find some economic theory that actually explains bubbles, and why property bubbles are particularly likely (and dangerous).

Rational frenzies - when otherwise sensible people get carried away ...

Good Lord, wonders will never cease… Kelly’s report now makes RTE headlines!

http://www.rte.ie/business/2007/0703/houses.html

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Serious question here as I'm genuinely confused now. I do understand what real prices are, but with these kinds of falls, how is 40% - 60% likely to be achieved?

30% fall in nominal prices with 30% rise in wage inflation and 0% rise in general inflation (CPI/RPI) or some other combination?

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Serious question here as I'm genuinely confused now. I do understand what real prices are, but with these kinds of falls, how is 40% - 60% likely to be achieved?

30% fall in nominal prices with 30% rise in wage inflation and 0% rise in general inflation (CPI/RPI) or some other combination?

First things first. What’s inflation? Official Irish CPI is running ~5%. I’d reckon for Joe Punter it’s closer to Eurozone M3 growth, say ~10%. At rates of paper printing such as these it wouldn’t take very long for the real price to come down by 40%, even if nominal prices stay constant.

Speaking of prices: We’re seeing an immediate gapping down of the market right now – UK observers would do well to learn from the implosion happening here, “right before your eyes” as it were. Today’s market clearing prices are perhaps an average of 15% off those of June 2006. Granted these prices are not visible, but the situation on the ground is far worse than the TSB index suggests. However there has yet to be a substantial first leg down of capitulations by vendors; not quite a fully fledged buyers market just yet. That’s why I think we’ll see more large nominal declines in 2007 into 2008. 2008 onwards should be the start of the prolonged years of “heel digging” as Kelly suggests.

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First things first. What’s inflation? Official Irish CPI is running ~5%. I’d reckon for Joe Punter it’s closer to Eurozone M3 growth, say ~10%. At rates of paper printing such as these it wouldn’t take very long for the real price to come down by 40%, even if nominal prices stay constant.

Speaking of prices: We’re seeing an immediate gapping down of the market right now – UK observers would do well to learn from the implosion happening here, “right before your eyes” as it were. Today’s market clearing prices are perhaps an average of 15% off those of June 2006. Granted these prices are not visible, but the situation on the ground is far worse than the TSB index suggests. However there has yet to be a substantial first leg down of capitulations by vendors; not quite a fully fledged buyers market just yet. That’s why I think we’ll see more large nominal declines in 2007 into 2008. 2008 onwards should be the start of the prolonged years of “heel digging” as Kelly suggests.

But is wage inflation going up at the same or even greater rate?

Does what I said before even make sense? Doesn't wage inflation and regular inflation (CPI/RPI) have to increase by the same amount in order for you to just break even on your spending power?

Anyone?

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First things first. What’s inflation? Official Irish CPI is running ~5%. I’d reckon for Joe Punter it’s closer to Eurozone M3 growth, say ~10%. At rates of paper printing such as these it wouldn’t take very long for the real price to come down by 40%, even if nominal prices stay constant.

go search the forum for threads on wage inflation. General inflation wont do it.

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But is wage inflation going up at the same or even greater rate?

Does what I said before even make sense? Doesn't wage inflation and regular inflation (CPI/RPI) have to increase by the same amount in order for you to just break even on your spending power?

Anyone?

“But is wage inflation going up at the same or even greater rate?”

For private sector not for about 2 years now. For the public sector yes, for now. I wouldn’t bet on this continuing much longer though.

“Doesn't wage inflation and regular inflation (CPI/RPI) have to increase by the same amount in order for you to just break even on your spending power?”

Yes. Wage inflation > price inflation is what made property such a run away success for the 50+ generation. The Chinese will ensure that doesnt happen again.

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“But is wage inflation going up at the same or even greater rate?”

For private sector not for about 2 years now. For the public sector yes, for now. I wouldn’t bet on this continuing much longer though.

“Doesn't wage inflation and regular inflation (CPI/RPI) have to increase by the same amount in order for you to just break even on your spending power?”

Yes. Wage inflation > price inflation is what made property such a run away success for the 50+ generation. The Chinese will ensure that doesnt happen again.

Thanks for the reply.

So by what you're saying is that Ireland are likely to see nominal falls of 40% - 60% because in your scenario, nominal falls = real falls?

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Those are the exact numbers I foresee. 40-60% down over the course of the next 5-10 years. A long trough but with most of the pain at the beginning of the crash.

The trigger will be the collapse of the credit markets IMO. Credit tightening will do Merv's job for him which is why I don't see much more in the way of IR hikes. It is why Ben is able to stand pat, no point throwing the odd bucket of water onto the sinking ship.

Yep. That my view as well but it is a real terms drop not a nominal drop of that size I am looking for. I suppose if inflation hit zero then it would be the same thing and devastating with it.

I guess the reaosn that there is a strong relation between the size of the upswing and the evential drop is that in each upswing, house prices become over valued by about the same amount in each cycle. I guess the down swing also produces a similar sized overshoot and eventual under valuation.

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The complete disdain for someone in an academia is ironic as the government is pushing Ireland as

a future knowledge based economy based on research and development!

This bubble has not only distorted the economy but perceptions and values have gone completely out of whack as well.

I suspect the Irish economy is a "smoke and mirrors" one like the UK. Its promoting itself as a tax haven for wealthy foreigners...

http://www.taxresearch.org.uk/Blog/2007/03...is-a-tax-haven/

I like this quote in particular:

“Microsoft boss Bill Gates struts the world stage as a philanthropist but uses Ireland for blatant tax avoidance.

“The Irish tax exiles, your friends, who also strut around in this country, raising funds for worthy causes, but if they paid their due taxation, those causes would be funded ten times over, without having to go with a begging bowl to them.”

What a suprise!

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These days I generally keep my bearish mouth shut as I believe things are going to get nasty as the bubble deflates but I'm hearing interesting comments around the workplace on this report.

Some of the comments are:

"who is this loser anyway - betcha he didn't make any money during the boom"

or

"If this guy is any good, how come he's stuck in a university and not working for one of the big banks"

The complete disdain for someone in an academia is ironic as the government is pushing Ireland as

a future knowledge based economy based on research and development!

This bubble has not only distorted the economy but perceptions and values have gone completely out of whack as well.

Whereabouts do you live, AI?

Yep. That my view as well but it is a real terms drop not a nominal drop of that size I am looking for. I suppose if inflation hit zero then it would be the same thing and devastating with it.

I guess the reaosn that there is a strong relation between the size of the upswing and the evential drop is that in each upswing, house prices become over valued by about the same amount in each cycle. I guess the down swing also produces a similar sized overshoot and eventual under valuation.

I agree, this is very likely.

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