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Posts tagged ‘Professor Brian Lucey’

House prices set ‘to fall further’


Just a few days after the Minster of Finance told us  the Nation, that the property prices have bottomed out .

we now get this report and again this shows that this Man cannot count and must be on something from the countless Head shops around the country!

IRISH TIMES reporters

House prices could continue to fall for a further 18 months, TCD finance professor Brian Lucey has warned.

The prediction came as property website Daft.ie published data that showed that although the property price crash is slowing, it is not yet over.

The latest Daft.ie house price index showed that asking prices fell by 3.4 per cent in the first three months of 2010, which represents the smallest quarterly fall in almost two years. The average house price nationally has now fallen by one-third from the peak in May 2007 to €234,000.

However, commenting on the report, Prof Lucey said that a total fall of 50 per cent is likely. Based on this assumption and average price declines since the peak, the market will not bottom out for another 18 months, he predicted.

Price falls in early 2010 were steepest in Dublin’s commuter counties, Galway city and north county Dublin.

In Dublin city centre, average prices have now fallen 44.2 per cent since the peak to €238,926. This is the sharpest decline experienced in any region.

The length of time that properties spend on the market has risen slightly in all parts of the country, including Dublin where it increased from four to five months. However in Connacht and Ulster, properties sold in the first quarter had been on the market for a 15-month average.

“Buyers are clearly factoring in further deflation,” Prof Lucey said.

Overall, the stock of houses available for sale has fallen by about 5 per cent since the middle of last year. However, in Dublin, the stock has declined by a more significant 20 per cent, which indicates that the overhang of unsold properties may be clearing in the capital.

“Furthermore, the news that almost one in three properties listed in January is either ‘sale agreed’ or sold suggests that those who price their properties keenly will find a buyer,” commented Daft.ie economist Ronan Lyon.

Prof Lucey said the fact there is no real-time or even monthly house price index produced by a Government agency is “unconscionable”. “We are, as a nation, steering blind, not to mention dumb, on the seas of house price deflation,” he said.

He added that based on the Daft.ie figures, the emerging problem of negative equity will deepen, which in turn will act as a bar “to labour mobility, to discretionary expenditure, and ultimately to economic growth”.

Meanwhile Fine Gael’s Kieran O’Donnell said the figures show the Minister for Finance’s claim that prices had reached rock bottom is “dangerously misguided”.

He said: “The reality is that thousands of people are already stuck in negative equity because of the property bubble stoked by Fianna Fáil. Many have lost their job and now face losing their home.

“This is a truly disastrous situation.

“For Minister Lenihan to be encouraging more young people to enter the housing market at such a risky time is downright irresponsible,” Mr O’Donnell added.

Reckless expectations, not competition


This is a lengthy post – to reflect the importance of the issue at hand. And it is based largely on data from Professor Brian Lucey, with my added analysis .

The proposition that this post is proving is the following one:

Far from being harmed by competition from foreign lenders, Irish banking sector has suffered from its own disease of reckless lending. In fact, competition in Irish banking remains remarkably close (although below) European average and is acting as a stabilizing force in the markets relative to other factors.

I always found the argument that ‘too much competition in banking was the driver of excessive lending’ to be an economically illiterate one. Even though this view has been professed by some of my most esteemed colleagues in economics.

In theory, competition acts to lower margins in the sector, and since it takes time to build up competitive pressure, the sectors that are facing competition are characterized by stable, established players. In other words, in most cases, sectors with a lot of competition are older, mature ones. This fact is even more pronounced if entry into the sector is associated with significant capital cost requirements. Banking – in particular run of the mill, non-innovative traditional type – is the case in point everywhere in the world.

As competition drives margins down, making quick buck becomes impossible. You can’t hope to write a few high margin, high risk loans and reap huge returns. So firms in highly competitive sectors compete against each other on the basis of longer term strategies that are more stable and prudent. Deploying virtually commoditized services or products to larger numbers of population. Reputation and ever-increasing efficiencies in operations become the driving factors of every surviving firm’s success. And these promote longer term stability of the sector.

Coase’s famous proposition about transaction costs provides a basis for such a corollary.

This means that in the case of Irish banking during the last decade, if competition was indeed driving down the margins in lending (as our stockbrokers, the Government and policy analysts ardently argue today), then the following should have happened.

  1. Banks should have become more prudent over time in lending and risk pricing,
  2. There should have been broader diversification of the banks lending portfolia, with the bulk of new loans concentrating in the areas relating directly to depositor base – corporate and household lending, and a hefty fringe of higher-margin inter-mediation lending to financial institutions, and
  3. Banks would be seeking to ‘bundle’ more services to differentiate from competitors and enhance margins.

In Ireland, of course, during the alleged period of ‘harmful competition’ exactly the opposite took place. Let me use Prof Brian Lucey’s data (with added analysis from myself) to show you the facts.

Firstly, Irish banks became less prudent in lending – as exemplified by falling loans approvals criteria, and by rising LTVs:

Lending to private sector as % of GDP was ca 50% in 1995, reaching 100% in 1998 and rising to 300% in 2009Vast increases in lending to developers: in 1997 there were €10bn lent out to developers against €20bn in mortgages; in 2008 these figures were €110bn and €140bn respectivelyOver the time when lending to private sector rose 600%, mortgages lending rose 550%, our GDP rose by 75%

Secondly, banks reduced their assets and liabilities diversification (charts 1-3 below) setting themselves up for a massive rise in asymmetric risk exposures. .

On the funding side, out went customers deposits, in came banks deposits, foreign deposits and bonds and Irish bond s

Full article link http://trueeconomics.blogspot.com/2010/03/economics-21032010-reckless.html

articel by  Dr. Constantin Gurdgiev

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