Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Market Musings 25/9/11

with 3 comments

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.
Regular readers of this blog will be aware of my grave concerns about the Chinese property market. Those new to this site should watch this YouTube video – which reveals that China has 64 million empty apartments – to see just how bad the situation is.
The Irish Times’ Ciaran Hancock had a spot-on article about the outlook for Irish broadcasters. The same bleak outlook applies to Ireland’s saturated newspaper market.
We had the latest rumblings regarding Greece overnight. I would share my old friend Makro Trader’s view that a collapse of the single currency will be avoided. This would cause complete chaos (some have even suggested civil war), and I think policymakers will deploy all necessary means to contain the problem. However, it’s hard to see a solution that doesn’t involve more debt being loaded onto the sovereigns (bearish for government bonds), inflationary monetary policies (bullish for gold and bearish for cash) and banks taking big write-downs (bearish for banks). Hence, it’s no surprise that I continue to advocate that investors stay defensively positioned as we move into Q4.

Written by Philip O'Sullivan

September 25, 2011 at 8:06 am

3 Responses

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  1. It must be noted that using rental yields for house prices does not make any sense given the dominance of owner occupiers in housing markets, particularly in Ireland. I think that prices will fall further for many of hte reasons that you have stated, but most importantly the restriction of credit to potential buyers. This credit situation is likely to get worse rather than better given the state of teh Irish banks and international credit markets.


    September 25, 2011 at 8:24 am

    • Absolutely James. I didn’t rank the reasons I gave for why I feel prices will continue to go down, but certainly what I termed the “restricted credit supply” is chief among them. You probably saw my recent blog about how LTVs for new mortgages in the first half of this year in the UK ranged from 60-70%, and given how much worse things are here it’s unsurprising that most of the purchases made by my friends so far this year have been for cash.

      Regarding the yields, I believe that they do play a role, but as you say this has to be viewed in the context of all of the fundamentals of the market. Relying solely on yields, as some property pundits here are fond of, to reach conclusions on the market is certainly an inadequate approach in my view.

      Philip O'Sullivan

      September 25, 2011 at 8:34 am

  2. […] call that we may be nearing the bottom of the market here. Readers of this blog will know how extremely pessimistic I am about Irish house prices. So, clearly, the starting positions for Ronan and I are rather different! I would disagree with […]

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