The Central Bank, in their latest report entitled ‘Why are Irish House Prices Still Falling? have concluded that current houses are under-valued by between 12 and 26 per cent.
As over-valuation of house prices in the boom years can be largely attributed to questionable banking practices, it is no surprise that this report was met with some level of skepticism. In fact, on RTE Radio 1 this morning, eminent economist David McWilliams suggested that the timing of this report might have something to do with the fact that that house prices are now close to the ‘worse case scenario’ values that were forecast. In essence, further price/value falls would make a further bailout inevitable.
To make its point, the report suggests that the national average house price of €160,000 should in fact mean that the house is worth €210,000 is a healthier economy ie. in a functioning market. The reality is, we are not operating in a functioning market.
I firmly hold true that land or property is only ever worth what today’s buyer is willing to pay.
The report looked at “fundamentals” but neglected to take into consideration existing levels of over-supply nationwide. Obviously this is a vital factor, together with demand.
One point made by the Central Bank, I fear, will prove correct in time. That is, once credit begins to flow more freely, or if further lenders enter the market (which is highly likely and even probable), then house prices will start to increase. It is at this point that buyers will need to take control of the market and focus on true value, which is very different to so-called market value or asking price.
It is not clear how the Central Bank came up with this information. Apparently four different models were used, explaining the four different figures of under-valuation; 12 per cent, 16 per cent, 18 per cent and 26 per cent.
The model below (kindly borrowed from http://namawinelake.wordpress.com/ ) shows the levels of under-valuation reached upon by the Central Bank: