"A floor in the market"

The lads over on the Pin have been discussing this particular sentence, in the context of its use by Brian Lenihan in front of the Oireachtas Committee last week.

Let’s take a closer look to what Mr Lenihan said, because this is really important. It goes to the core of his thinking, and the likely price levels he will announce next week.

“With regard to personal guarantees, they will transfer to NAMA. NAMA must be in the same position as the bank from which it takes over the loan.

I agree with the Deputy regarding foreclosure. If a flood of property is dumped on the market, it will be utterly unsustainable. That is one of the reasons we must establish NAMA and try to establish a floor in the market. We are very near it on the basis of the figures and data we have about the yield from property. The yield is at an all time high relative to the assets, which is a clear objective economic indicator that we are approaching the trough. We must banish our devils, the suggestion that we have further to go. That is part of the problem and the reason for the illiquidity in the housing market.”

Better yet, watch him say it:

Are we close to the trough? I would argue we are nowhere near the trough. The pinsters agree. Let’s take a look at some stats. Average Price of Houses by Quarter, Nationally. First up, new house prices since record began, in 2006 euros, up to the latest data available, Jan-March 2009, according to the CSO:

Notice the first property bubble started around 1996/1997 and peaked around 2001. The second started around 2002 and peaked in early 2007. According to the Mr Lenihan, “we are very near [the floor] on the basis of the figures”. Does it look like we are anywhere near the floor?

Ah you might say, that applies to new houses. What about second-hand homes? More stats from the CSO:

Again, does it look like we are anywhere near the floor? No. But Mr Lenihan thinks we are.

What do I think? Well I took that graph and painted on it (yes, really!). Prices will keep falling, and I don’t think even NAMA can stop it. This is completely unscientific, but I think it is based on sound reasoning (criticisms welcome):

The red line represents where prices might have gone had there been no bubble (tracking inflation largely?). The green lines represent our two bubbles. The orange line represents the most recent ESRI data I could find, representing where house prices are right now. Mr Lenihan thinks this line is the floor. It’s not.

The floor is likely close to the black horizontal line I’ve drawn, where the price declines continue for another 2 or 3 years, eventually meeting up with where prices would have gone had there been no bubble at all. But it’s likely lower than that, probably at or below €100,000 for an average house nationally. This is because on the downside (as prices fall) it tends to overshoot where prices would have gone normally (the red line).

Of course, if the average national house price is say €100,000, that means you would get apartments for €50,000, or large houses for €150,000. And everywhere in between, depending on location and all the other factors that impact on house prices.

But of course I could be wrong. Where do you think house prices are going?

Update: This post is being discussed on politics.ie. Do I have to emphasise that this is only my own view, based on other property bubbles I have looked at, and is a completely unscientifc study, that basically involves me speculating? I do not claim economics expertise, but when I see a graph like that, I see prices continuing to fall. If you believe I am completely wrong, then please correct me, I am entirely open to being persuaded. I am after all, doodling on a graph.