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Academic Argues House Prices Could Fall By Up To 60%

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A UCD academic has argued that house prices could fall by up to 60% in real - or inflation-adjusted - terms in Ireland, if a pattern he has found in other countries is repeated.

Professor Morgan Kelly has looked at almost on OECD economies since 1970. His study, published in the ESRI's quarterly economic commentary, shows that the larger the initial boom, the larger the subsequent bust.

Professor Kelly says that if this pattern held in Ireland, house prices adjusted for inflation could fall by 40% to 60%, with larger falls at the top and bottom of the market. But he adds that house price collapses are usually slow, so the most likely scenario is a drop of 6-7% in average selling prices over a period of eight or nine years.

AdvertisementProfessor Kelly says reducing stamp duty will not change this. 'So long as there is a large stock of unsold houses and falling prices buyers have an incentive to wait for further decline to occur,' the report says.

He says the main reason to be worried about this is the effect on building activity, as house building currently account for 15% of the economy's GDP. Professor Kelly points out that 85% of building workers are Irish, and the effect of a slowdown on employment and government finances is likely to be substantial.

The Irish Home Builders' Association has rejected Professor's Kelly's report, claiming it is inaccurate and questioning his research methods.

The IHBA argues that Mr Kelly ignored economic, social and demographic factors that have driven, and which it believes will continue to drive, the Irish housing market.

Interesting stuff - it seems his research is based on a range of countries and economies: evidently he doesn't believe the line about US and other economic slow-downs having no bearing on us.

Your thoughts?

TD

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Is that you with the whip?

But is you read the paper it really only amounts to a 6% fall as it happen over a long period. House prices will never fall by 60% in real terms, unless there's a world war or environmental disaster. If they did fall by 60% the UK would be see a financial melt down, you're savings would vanish as the banks wouldn't let you access your money.

Just think about it 975 billion pounds has been borrowed against property, a collapse would hurt

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Your thoughts?

That he's a professional economist without any vested interest who has apparently done a thorough study.

Full paper here: http://www.esri.ie/UserFiles/publications/...um_SA_Kelly.pdf

we find a strong relationship between the size of the initial rise in price and its subsequent fall.

Makes sense. Haven't we just had the biggest ever rise in prices? It follows that we will also have the biggest ever fall.

edit: this may be the 70% reference:

Typically, real house prices give up 70 per cent of what they gained in a boom during the bust that follows. This is a remarkably robust relationship, holding across very different OECD housing markets over more than 30 years.
Edited by LargelyIgnorant

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Professor Kelly says that if this pattern held in Ireland, house prices adjusted for inflation could fall by 40% to 60%, with larger falls at the top and bottom of the market.

iirc we are starting to see this with flats in the uk

looks like your average traditional 'family' home - ie something that you can actually 'live' in - will fair well out of the fall...

Edited by dnd

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Professor Kelly rocks: http://www.ucd.ie/economics/staff/mkelly/

From http://www.ucd.ie/economics/staff/mkelly/papers/housing3.pdf

First we need to dispose of the transparent myth that the boom in Irish house prices simply reflects the strong fundamentals in the market. To see that this is false we need only look at what has happened to rents.

If fundamental demand for housing were strong we should have seen rents rise along with house prices. In fact, while real house prices doubled since 2000, rents have remained more or less static. You can rent a million Euro house in Dublin for well under €2,000 a month. Were you foolish enough to buy it, the interest alone on the mortgage would cost over €4,000.

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where the hell has this academic been all this time - tending to his beard.

He pops up now after we have been in one of the biggest booms ever for the last 5 years. Academics like to take their time but jeez

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. If they did fall by 60% the UK would be see a financial melt down, you're savings would vanish as the banks wouldn't let you access your money.

Why exactly?

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Agreed, I don't see that house prices crashing would cause a financial meltdown. Debt is real; the banks would see the same amount of money being paid on mortgages already taken out as they would if the prices didn't crash. They'd make a bit less on new mortgages, but they'd know that up front and could allow for it.

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Agreed, I don't see that house prices crashing would cause a financial meltdown. Debt is real; the banks would see the same amount of money being paid on mortgages already taken out as they would if the prices didn't crash. They'd make a bit less on new mortgages, but they'd know that up front and could allow for it.

Thats what I thought.

If we woke up in the morning and by some nice miracle houses were half the price,,, what else would change and why?

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Superlative report..

That's going straight in the "I told you so" file, no doubt to be dusted off and brandished in a few months time :lol:

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Agreed, I don't see that house prices crashing would cause a financial meltdown. Debt is real; the banks would see the same amount of money being paid on mortgages already taken out as they would if the prices didn't crash. They'd make a bit less on new mortgages, but they'd know that up front and could allow for it.

It depends whether they crash in real or nominal terms (the OP specified real terms).

Nominal terms: the price in pounds goes down by 60%. Negative equity, defaults/bankruptcies, huge losses for banks and/or whoever has bought the obligations.

Real terms: price in pounds can remain stable but value is eroded through 60% general inflation. Debtors are off the hook but savers and sterling are screwed.

Seems to me to be a choice between systemic bank failure and hyperinflation... which is preferable, I wonder? :unsure:

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Thats what I thought.

If we woke up in the morning and by some nice miracle houses were half the price,,, what else would change and why?

Most banks would do ok - they'd wait until their reserves built up again and buy assets on the cheap. The problem is that just about all new money coming into the economy is from lending. The lack of new money would hit everyone, including business. This could lead to a spiral resulting in a depression, hence the recent Bank of International Settlements warning. The real problem comes if when interest rates are dropped so many people have got burnt they refuse to borrow.

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Thats what I thought.

If we woke up in the morning and by some nice miracle houses were half the price,,, what else would change and why?

Because so many people have taken on debt on the assumption that prices would rise: MEWing, IO mortgages, 100+% mortgages etc. Since their repayment plan was based in increasing asset values, they would be effectively bankrupt (no prospect of ever repaying the loan). All this debt currently appears as a plus on the balance sheets of the people who lent the money in the first place; the holders of the debt might or might not be crippled by the resulting holes. (Note that the holder of the debt might be your pension provider).

The consumption that's been fuelling the economy would also evaporate, leading to job losses, more cutbacks, and a spiral of decline. This is not to say that house prices shouldn't fall, just that there will be fallout that will affect all of us, not just the people with mortgages.

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It depends whether they crash in real or nominal terms (the OP specified real terms).

Nominal terms: the price in pounds goes down by 60%. Negative equity, defaults/bankruptcies, huge losses for banks and/or whoever has bought the obligations.

ang on neg eq yeah but why sudden defaults/bankruptcies,?

If people were paying their mortgage why (just because there house was worth less) would they suddenly not be able too?

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ang on neg eq yeah but why sudden defaults/bankruptcies,?

If people were paying their mortgage why (just because there house was worth less) would they suddenly not be able too?

You're right in that if they have a secure job and can comfortably afford the repayments, they won't have a problem (unless they lose the job, which they might--see below).

The problem arises with those who have over-extended themselves in the expectation that the debt will be inflated away. They may be able to afford to repay the loan at their current rate fix, food and energy costs, and employment prospects--but all those look set to worsen. Employment prospects, in particular, tend to spiral downward in a recession (less employment = less demand = less employment). Where they have IO mortgages things are even worse, because their repayment plan (even if they can maintain it) was never designed to repay the principal.

The one thing that keeps the above people solvent is the fact that their debt is backed by a matching asset. A house price collapse will change that. Then the knock on economic effects kick in and make their position even worse.

Look at the sub-prime re-evaluation happening in the USA. It's not (as far as I'm aware) driven by a wave of defaults, more by the growing perception by creditors that a. the debtors are not good for the debt and b. the asset on which the debt was secured is not worth enough. If the creditors thought the houses could be sold to recover the amount owed, there would be no problem.

Edited by huw

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The study is about house prices potentially falling IN IRELAND - don't necessarily assume that what happens there will automatically happen in London.

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yeah but you just made all that up!..................... weird speculation

I stand by what I said just because house prices halve doesnt mean anyone is out of a job and does not affect anyones ability to pay any debt!

The VERY reason for borrowing in the first place, for anything, is because you cannot afford it at that moment in time so opt to pay over a period of time.

Just because the thing you bought halves in value ..changes nothing, your ability to repay today, yesterday or tommorow has no bearing on its value be it up or down!

You say people would lose their jobs! ......................once again I say, why?

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yeah but you just made all that up!..................... weird speculation

I stand by what I said just because house prices halve doesnt mean anyone is out of a job and does not affect anyones ability to pay any debt!

The VERY reason for borrowing in the first place, for anything, is because you cannot afford it at that moment in time so opt to pay over a period of time.

Just because the thing you bought halves in value ..changes nothing, your ability to repay today, yesterday or tommorow has no bearing on its value be it up or down!

You say people would lose their jobs! ......................once again I say, why?

Because current UK prosperity is based on borrowing. Whatever happens, that can't continue indefinitely, but a property crash would bring both lenders and borrowers down to earth overnight. Take away our current willingness to fund consumption through sky-rocketing debt, and jobs will certainly go.

Here are some counter-questions for you:

Why do banks insist on sending a valuer around, instead of relying on the borrower's (current) ability to pay?

Why are mortgage rates cheaper than credit cards or personal loans?

What will happen to the banks' lending policies, if they find that debts they thought were secured on property turn out to be mostly unsecured?

If the banks decide to tighten their lending, what will happen to demand in the UK economy?

What will happen to a borrower with an IO mortgage at the end of the term, if the house has fallen in value by 60%?

What will happen to the lender?

Why are the Bear Stearns hedge funds in so much trouble?

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yeah but you just made all that up!..................... weird speculation

I stand by what I said just because house prices halve doesnt mean anyone is out of a job and does not affect anyones ability to pay any debt!

The VERY reason for borrowing in the first place, for anything, is because you cannot afford it at that moment in time so opt to pay over a period of time.

Just because the thing you bought halves in value ..changes nothing, your ability to repay today, yesterday or tommorow has no bearing on its value be it up or down!

You say people would lose their jobs! ......................once again I say, why?

Nelly you are a bit front to back there, it is not the fact that the houses have halved, it's the environment in which it has happened. People borrow too much, then interest rates rise and those people can no longer afford their repayments. This causes an increase in supply and a drop in demand causing the house prices to correct. This credit tightening combined with loss of equity means that people will cut back on spending to focus on their debt obligations. This means less consumer demand and thus long story short.. people lose jobs.. (these people struggle to pay their mortgages... etc etc ad infinitum).

Historically house price crashes always go hand in hand with an economic down turn.

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The study is about house prices potentially falling IN IRELAND - don't necessarily assume that what happens there will automatically happen in London.

It's a study of 40 developed world house price boom and busts. If you read it, it as applicable here as in Ireland.

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Interesting stuff - it seems his research is based on a range of countries and economies: evidently he doesn't believe the line about US and other economic slow-downs having no bearing on us.

Your thoughts?

TD

I predict house prices will fall up to 100%. Please note "up to" includes the figure zero.

Actually, I predict thjey WILL drop 100%. Just give it a couple of billion years, you'll see.

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The study is about house prices potentially falling IN IRELAND - don't necessarily assume that what happens there will automatically happen in London.

I'm afraid that completely misses the point - he cites his example in Ireland based on his research on a range of nearly 40 countries and economies since the early 1970s; his research seems pretty robust and global, not local.

TD

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