House prices resemble 'dotcom bubble'

Irish house prices resemble technology shares prior to the dotcom crash in 2000, according to an analysis by Davy Stockbrokers

"On valuation grounds, Ireland's housing market bears some resemblance to the bubble period in equities in the late 1990s," according to a report, Davy on the Economy, published yesterday.

When Irish investment properties are valued using the method normally applied to equities - the ratio of the price to earnings - the values are questionable, argues Davy. ...

"The annual gross rental yield on a typical investment property is around 3 per cent, translating to a price earning (P/E) ratio of more than 30... In an equity market context, a P/E of over 30x could only be justified if there was an expectation of a substantial jump in earnings in the not so distant future," according to the analysis.

Such an outcome is unlikely given that rents have been declining for two years and in some parts of Dublin have fallen by 20 per cent, says Davy

"Irish houses are now priced on a high multiple of future rents. Unlike the dotcom stocks of five years ago, where at least there was the promise of a huge and growing future earning stream, earnings (i.e. rents) on houses are actually declining," argues Davy.

But Davy concedes that a crash in prices is still unlikely given that mortgage and debt service levels in general "look manageable for the time being". They also point out that an economic recession - which would push up unemployment - is unlikely in the short term.

But the merits of investing in property against such a background are finely balanced and can only be justified by the prospect of significant capital appreciation.

"That is a tall order, given where prices have come from," Davy suggests.

Looking ahead to next year's Budget, Davy estimates the Minister for Finance will be able to increase spending by €1.5 billion while keeping the general Government deficit below 1.5 per cent of GDP "and comfortably within the 3 per cent ceiling contained in the Growth and Stability Pact".

"A portion of these funds will undoubtedly be used to partially reverse the real increase in bands and credits that occurred over the last two years," predicts the broker.

Davy remains optimistic about the outlook for the economy and believes a number of domestic factors will allow the Republic to weather the slowdown in the global recovery. These include strong tax receipts, credit growth and labour market data.

"All in all, the various influences have been sufficient to upgrade our forecast for GNP growth to 4.6 per cent this year (up from 4 per cent) and 4.2 per cent for next year (up from 3.5 per cent).