Market Musings 25/9/11
One of the spin-off benefits from the Rugby World Cup is that the early starts for fans in this part of the world means a extra few hours each weekend to get on top of things! So, what has been grabbing my attention since my last update?
We saw another “distressed property auction” in Dublin. While I wish the buyers well, my own instinct is that Irish house prices have further to fall. This is a view shared by Danske Bank (which owns National Irish Bank and Northern Bank). While some people have pointed to the high single digit yields properties at these auctions are clearing at as evidence of the “firesale” prices available in the Irish market, I would point out that an analysis that stops and ends at implied rental yields takes no account of the current elevated cost of borrowing. Nor does it take any account of the restricted credit supply in the market. Nor does it take into account the fewer government incentives for buyers relative to previous years. Nor does it take into account the fact that the domestic economy is still contracting. Nor does it mention the fact that taxes are going up this year and next year (at least). Nor does it mention the fact that you can buy equivalent properties in many advanced European economies for a lot less than what the so-called “distressed” properties here went for. Nor does it mention the fact that unemployment and emigration continue to rise. So, caveat emptor.
Speaking of buildings in Ireland, the latest government proposals on retrofitting insulation are positive for the likes of Kingspan. While I’m normally aghast at any government “incentives” – you only have to look at the property market to see how this can go horribly wrong – I think an expanded insulation scheme is a big win-win for Ireland at this time. For three key reasons. Firstly, Ireland has an army of unemployed builders to install the stuff. Secondly, as we import the vast majority of our energy, anything that will cut our import bill is a plus. Thirdly, we manufacture a lot of insulation here. You’ll note that these benefits stand in marked contrast to the previous Fianna Fáil administration’s bright idea of giving people grants to buy new cars – none of which are manufactured here.
Mike Bergen had some interesting comments about the Chinese housing market:
- A 100 square meter apartment in China currently costs around 17 times average disposable income, according to Deutsche Bank
- HSBC estimates that China’s housing stock is worth ~350% of GDP, in line with Japan’s residential real estate in 1990
- Economist Stephen Green of Standard Chartered suggests that around 50% of China’s GDP is linked to the fate of the property market.