The housing bubble has burst

lomb

MG wrote:

McWilliams puts his finger on it here and in the medium term this is a major threat to the economny especially when the bubble bursts and these skills will be needed to right the economy and will be lacking.

Thats where the young come into the equation, lets face it they are new blood and chomping at the bit to get in the running:D

lomb

jdivision wrote:

A lot of investors are buying for capital appreciation. Also you're taking yields based on the total cost of the mortgage when investors actually put in far less. If you put in 20 per cent of the price in the form of a deposit and you then experience house price growth of 10 per cent per annum you will more than double your money after two years, excluding rental income. That's why investors are still pouring into the property market.

Correct its called gearing, and doubling your money in a year or two is like hitting the jackpot in investing terms. considering if u leave it on deposit u lose 2 % a year in real terms, or double it in a year with 10% down, i think il take the latter option:D

D'Peoples Voice

jdivision wrote:

A lot of investors are buying for capital appreciation. If you put in 20 per cent of the price in the form of a deposit and you then experience house price growth of 10 per cent per annum you will more than double your money after two years, excluding rental income. That's why investors are still pouring into the property market.

jdivision, Don't ever become a risk manager with that attitude. To make a comment like that, you should add, if you experience house price growth of minus 10 per cent per annum, then you will lose 100% approx of your deposit after two years.

Remember thats why derivatives in financial markets are dangerous, gearing can go for you or against you! The novice always thinks it will go for them.
Just think, if prices did fall by 10% for two years, you would still owe 80%(approx - excluding repayments) of your original mortgage, but your house is also worth 80% (approx). That means that should you wish to move at a later stage, you would need another deposit.......

lomb

D'Peoples Voice wrote:

j if you experience house price growth of minus 10 per cent per annum, then you will lose 100% approx of your deposit after two years.

Remember thats why derivatives in financial markets are dangerous, gearing can go for you or against you! T.

but u still 'own' an appreciating asset that tracks inflation and proivides a rental return. comparing property to derivitives is not accurate. derivatives are a pure hedge gamble. if u lose u lose. with property if u lose, u lose in the short term, but the long term looks good.

if u can afford the payments and the inevitable swings in rates and the property in question is prime in that its location, price , and desirability or rentability and title is good u cant lose over over the long run.

JimmySmith

lomb wrote:

basically if a young person buys a house today, they will need to tighten their belts until inflation eats some of their debt. with it running at a compound 3% a year, in5 years a significant amount of it will be eaten up. thats why you can take a 35 year loan, and effectively just pay interest for the most part to the bank to use the asset. the day will come when you can accelerate4 the payments. time is a great friend to the mortgage holder.

Completely agree. I bought 6 years ago. Nearly killed me. Friends were telling me not to that there would be a crash. I nearly pulled out but went ahead anyway. Was skint for about 2 years. Now my property is worth 50% more than i paid for it and i pay less money for the mortgage than i would to rent even a 1 bed apartment. And now i make about 60% more take home pay than i did when i bought. With my bonus in June and my SSIA the mortgage will be completely paid off. Man am i glad i bought when i could afford it and not tried to time the markets.
Those same people that warned me not to buy are still warning people not to buy, because now they cant afford a house and are waiting for the crash to happen - still.
I'm also waiting for the crash to happen too, but if it deos i'll be trading up and buying another place.

jdivision

D'Peoples Voice wrote:

jdivision, Don't ever become a risk manager with that attitude. To make a comment like that, you should add, if you experience house price growth of minus 10 per cent per annum, then you will lose 100% approx of your deposit after two years.

Remember thats why derivatives in financial markets are dangerous, gearing can go for you or against you! The novice always thinks it will go for them.
Just think, if prices did fall by 10% for two years, you would still owe 80%(approx - excluding repayments) of your original mortgage, but your house is also worth 80% (approx). That means that should you wish to move at a later stage, you would need another deposit.......

Derivatives are a gamble, property at this stage is not. Demand is huge, supply can't keep up with it, the population base is at a stage where housing is in huge demand, interest rates are extremely low (and even the forecasted interest rate rises will mean they are still low) and there is no prospect of a property crash. at this stage. Most of the people talking down property as an investment are stockbrokers who have an ulterior motive in telling people to invest elsewhere, i.e. with them. I'm not an investment expert but I would think property is a safe bet for at least three more years. The recent OECD report backs this up. Stockbrokers constantly go on about property being a bad investment but most of them have private client divisions that are involved in investing significicant sums in it. Ungeared commercial property returns last year were 20 per cent, meaning most people who invested had a return of 60 per cent when gearing was taking into account. Residential returns are not as high but property has been a good investment for those who bought over the last 10 years, and in my opinion continues to be over the next three years.
Further I said most investors who are buying are doing so for capital appreciation. That is not my "attitude", that is the reality of what's happening. I'm not necessarily saying that people should do that, individual circumstances and all that, but I'm just pointing out why flocks of people are still investing in property despite a 3% per cent return in some areas.

lomb

jdivision wrote:

but I'm just pointing out why flocks of people are still investing in property despite a 3% per cent return in some areas.

as low as 1% in some places for prime residential houses and they are still buying but not for classic rental type units. commercial yields are just under 5% at the moment, and are still seen as offering value as they can be let hassle free on long term leases if in a good location etc.

i was reading derek quinlin bought a house in ballsbridge the other day for 7 million euro and he has zero intention of living there. obvioulsy sees it as being worth 10 -11 in 2 or 3 years? sounds like a crazy plan , but frankly i think the man knows what hes doing as he wouldnt have got to this point if he didnt. also even if he dropped a few million i doubt it would trouble him.

i think alot of it is just speculation but there is real value out there if u look and u know what to look for.

MG

On the subject of demographics and future demand, they are often quoted as reasons why the party will continue. Actually, if you look at the chart of births by year it looks like indigenous demographics have peaked. The average age of the first time buyer is supposedly 29 but demand for housing will generate earlier when someone moves out of home either to owned or rented population. As births peaked in 1980, these people would be 25/26 today and just at this point of creating demand. Using births as a proxy for indigenous demand, look at how much it will fall in the next 10 -15years. It will require a further acceleration of immigration to prop up current demand levels. When people are quoting “favourable demographics”, “young population” etc, I doubt they have ever actually looked at the stats.

Year ‘000 births
74: 69
75: 67
76: 68
77: 69
78: 70
79: 73
80: 74
81: 72
82: 71
83: 67
84: 64
85: 62
86: 61
87: 58
88: 55
89: 52
90: 53
91: 53
92: 51
93: 49
94: 48

MG

I heard on the radio this morning that John Hurt is moving back to England. He said that when he moved here and went to the pub people were having conversations about art & theatre (???) but now they talk about property!

Reminds me of the Joe Kennedy line about avoiding the Wall Street Crash because he sold all his stocks when a shoe shine boy started giving him share tips.

lomb

that table shows things will be support the market till 2014, also there will be a pent up demand for property for those who cannot get on the ladder. it could be the rental market will slow in years to come, there will be vacant apartments etc, then these will be sold to owner occupiers who had a pent up demand.

MG

lomb wrote:

that table shows things will be support the market till 2014, also there will be a pent up demand for property for those who cannot get on the ladder. it could be the rental market will slow in years to come, there will be vacant apartments etc, then these will be sold to owner occupiers who had a pent up demand.

Actually what it tells us is that annual supply currently exceeds marginal indigenous demand and that marginal indigenous demand will continue to fall but not actual current demand due to the situation being reserved a few years ago. At current rates historic excess demand will be fulfilled in 2-3 years (based on achieving the EU average housing units). Once supply fulfils historic hangover demand, the market will not have sufficient indigenous demand to continue at current supply levels unless there is mass continuous immigration. As housing supply accounts for about 8% of the economy, overcapacity is bound to have a negative effect.

This brings me back to my earlier point that all house price drivers have all peaked and are likely to fall back and house prices with them.

jdivision

There are very few areas of property where indigenous supply currently matches demand. Much of it is for seaside resort type schemes that are of little interest to people. In Dublin there's an annual shortfall, which is why price rises in general are higher there.

ronbyrne2005

jdivision wrote:

There are very few areas of property where indigenous supply currently matches demand. Much of it is for seaside resort type schemes that are of little interest to people. In Dublin there's an annual shortfall, which is why price rises in general are higher there.

dublin is where all the immigrants are coming to so i'd say the indigenous demand in dublin would be met if there was no non indigenous demand for renting or buying.

Pa ElGrande

As eveyone knows there is no housing bubble in Ireland, but you had better hurry the price of that first house is €250,000 and rising and those cheap lock-in rates won't be around for long.

D'Peoples Voice

jdivision wrote:

Derivatives are a gamble, property at this stage is not.

Define the word gamble. You say derivatives are a gamble, why, all they are is a financial instrument deriving it's value from the underlying asset. They are only a gamble if the future price of the underlying asset is uncertain. Is the underlying future price of a house uncertain?

jdivision wrote:

Demand is huge, supply can't keep up with it

lets look at year on year growth of the average house prices (Ptsb/ERSI figs) at mid-year stage,
July 1997 14.07%
July 1998 24.76% (lower interest rates because of EMU)
July 1999 20.20% (catagion of lower interest rates introduced in 1998)
July 2000 21.06%
July 2001 14.12%
July 2002 4.52% (distorted figure because of Bacon 3)
July 2003 15.60% (distorted figure because of U-turn in Bacon 3)
July 2004 11.08%
July 2005 6.23% (distorted figure - after part abolishment of stamp duty so could have been lower otherwise)
July 2006 10% (I estimate based on contagion carrying over from 2005's part removal of stamp duty & FUTURE EXPECTIONS of SSIA's policy holders driving market higher)
July 2007 7%
July 2008 2%
July 2009 0.5%

Removing the distortions, you can't deny that supply is not catching up with demand. July 1998 24.76% compared to July 2005 6.23%.

jdivision wrote:

I'm not an investment expert but I would think property is a safe bet for at least three more years.

In economics we have a theory that says if people know the future price in say 3 years may be lower initially expected, then we start building that into the price we are willing to pay today. However not all buyers are logical thinkers, so I agree with you.

jdivision wrote:

The recent OECD report backs this up. Stockbrokers constantly go on about property being a bad investment but most of them have private client divisions that are involved in investing significicant sums in it.

Agree 100%, just ask any car salesman about the reliability of Dublin Bus.

jdivision wrote:

Further I said most investors who are buying are doing so for capital appreciation.

Correct, as we know capital appreciation can only continue until people are willing to pay the price. How many of the buyers today are choosing 100% mortgages; getting loans from their parents; struggling to comtemplate higher interest rates; can afford higher prices.

The fact is no-one can say that they are expecting capital appreciation if they are not expecting higher future rents, because it's illogical. Your house can only be worth what you can sell it for in the future. In 3 years times, why would someone buy an expensive property off you if they CAN'T expect future price apprecation. Remember every price has a margin for future price appreciation built into it.

What will happen is, mortgages and rents have to come back into line, so that means either rents rise or mortgages fall, but in an increasing interest rate environment, mortgages can only fall if the principal is lower.

daveirl

This post has been deleted.

dochasach

jdivision wrote:

Derivatives are a gamble, property at this stage is not. Demand is huge, supply can't keep up with it, the population base is at a stage where housing is in huge demand, interest rates are extremely low (and even the forecasted interest rate rises will mean they are still low) and there is no prospect of a property crash. at this stage.

Look back at bullish comments in some of the U.S. "bubble blogs" from a couple of months back and you'll see many fearless quotes just like this. Even those of us who knew South Florida, Las Vegas, Washington D.C., NYC and most of California were in a bubble were surprised at how quickly things turned. So far, prices have only dropped dramatically in a few areas, but unsold inventory is up 400% YOY in places where a few months ago, supply couldn't keep up with demand. The problem is whenever a market runs up as fast as it has in Dublin, some of the demand is from speculators. If price increases slow, those speculators will run for the exit. This market certainly has a strong speculative base. Very few immigrants or first timers can buy a home here and house prices have long ago outstripped increases in average income. Yet rents have fallen in real and inflation adjusted terms for several years. Since rentals absorb the lions share of immigrants, the fact that rents are not keeping up with house prices should be a warning that much of the demand is from speculators who are happy to let a house sit empty, as long as it rises X% a year. Our castles are being built upon a foundation of quicksand.

Yes I would have predicted a fall 5 years ago (when it would have been less harmful) and even now it wouldn't surprise me if the bubble hung on for another 6-18 months but it cannot go on forever. I'd put an absolute upper limit at 2009 when E.U. countries with a much better income/cost ratio must open their borders to labor from the accession states. If the upward price pressure here continues, many new immigrants will just leave.

Good for you if you've made a few quid on propety (so far), but hey, let's be careful out there. There is always risk and the sooner people realize this, the more likely they are to keep any gain that they've made.

lomb

as long as u can make the payments(factoring a percent or 2 for rates) and u are happy with the place theres no risk, but theres risk in waiting. even if the price dropped it wont make any significant difference to mortgage payments, whereas if and when it rises it will become unaffordable. there was a golden period when professionals in dublin like teachers, doctors, civil servents, it jobs were able if they had a job to buy a decent house in a nice area. those people today are lucky if they can buy an indecent house in a newer unmature area.
today nice houses are the preserve of old money and successful businessmen and i cant see this change tbh.

Pengil

So I've read all your comments and the linked articles. We sold a property 18 months ago, made 180K and are now renting a house we couldn't affford to buy. Rent is 1400 per month. We're looking at houses every weekend between 500 and 650K. If we bought now and then the market slumped I would die. So do you keep renting and hope that the worst happens or buy and resign yourself to the massive repayments?

Also - Why is it that the growth figures on paper and per the ERSI look so wrong? We looked at houses this time last year for 500K in D14. Houses in the SAME ROADS this year are over 100K dearer! It is vendors panicing and trying to get as much as they possibly can because they fear this is the pinacle?

Pengil

And Now This:

Ireland.com
Mortgage repayments to rise after ECB rate move
Last updated: 02-03-06, 13:16

Householders face another increase in homeloan repayments after the European Central Bank (ECB) raised interest rates by 0.25 percentage points to 2.5 per cent today.

The new rate is the highest level in almost three years, and the widely expected 0.25 percentage point rate hike is the second ECB credit tightening in three months.

Mr Trichet told the European Parliament last week that markets were "perfectly sensible" in pricing in higher rates. Other policymakers repeated his call for "vigilance" on inflation, an ECB signal that a rate rise is close.

German data showed retail sales shot up in January in the euro zone's largest economy, providing some long-awaited evidence that consumer spending may be reviving.

The country's Ifo index touched a 14-year high in February, and similar French and Belgian indices rose too.

So far, ECB policymakers have given little guidance beyond March, saying only they will respond to economic data as needed to ensure the ECB delivers on its mandate of getting consumer price inflation just below 2 per cent. Currently the rate is above target at 2.3 per cent.

The ECB also said it lifted rates on its marginal lending facility, used in emergencies by banks short of overnight cash, to 3.5 per cent, and its deposit facility, which accepts excess cash from the market, to 1.5 per cent.

lomb

Pengil wrote:

We looked at houses this time last year for 500K in D14. Houses in the SAME ROADS this year are over 100K dearer! It is vendors panicing and trying to get as much as they possibly can because they fear this is the pinacle?

u are always going to face massive repayments that eat most of your income for a few years anyway. thats life i suppose. i dont think the market is going to slump IN DUBLIN and i dont think anyone who knows the facts does either. outside dublin they could well be right, who knows?

OwenM

lomb wrote:

.......................... i dont think the market is going to slump IN DUBLIN and i dont think anyone who knows the facts does either. outside dublin they could well be right, who knows?

You think house prices in dublin could not slump but could slump elsewhere first?
I would like to know what you base that on?
I think the tiniest market correction will hit dublin the hardest because it has had the greatest gains.

Pa ElGrande

OECD - Economic Survey of Ireland 2006
http://www.oecd.org/document/48/0,2340,en_2649_201185_36157872_1_1_1_1,00.html

The Irish housing market is very buoyant. The housing boom is driven by strong economic growth, dynamic demographics and low interest rates. However, large tax advantages and relatively lenient credit policies by banks have also played their part, and prices may have become overvalued.

...may have become overvalued?

daveirl

This post has been deleted.

dochasach

dochasach wrote:

...a bubble were surprised at how quickly things turned.
So far, prices have only dropped dramatically in a few U.S. cities, but unsold
inventory is up 400% YOY in places where a few months ago, supply
couldn't keep up with demand.

Whoops, I may have exaggerated. Property inventory is only up 389% over 6 months in San Diego and prices are down 9%:
http://www.benengebreth.org/housingtracker/location/California/SanDiego

Inventory is up over 200% and condo prices have dropped 18% in parts of south florida.
http://www.sarasotaherald.com/apps/pbcs.dll/article?AID=/20060301/BUSINESS/603010337/0/NEWS&Page=2

If anyone is interested in seeing what a bubble deflation looks like, browse the recent article links in http://thehousingbubbleblog.com. Then convince yourself that Dublin is unique enough to defy the laws of economics which crashed upon other cities. Is Dublin's land shortage more severe than than that in Honolulu or Manhattan? Is our population density higher than it is in Tokyo, Hong Kong or Shanghai? Is Dublin more of a center of economic growth than Silicon valley, Amsterdam, London and Washington D.C.? Is our climate more desirable than that of San Diego, Los Angeles, Sydney, Miami and Orlando? I hope so, because the cities I've listed here have experienced rapidly rising property inventory and have or soon will experience property deflation.

Based on what I see in other bubbles, I would look for these signs:

1) Pump and dump. Prices rise even faster near the end. Sellers (especially heavily leveraged speculators) transfer their own panic to the buyers and then bail out.

2) Supply and demand curve breaks down. Supply and prices rise together for a while as buyers and sellers are in a state of denial.

3) In places with many wealthy sellers (or property cartels), prices can defy gravity for a while even while inventory rises rapidly: http://www.sarasotaherald.com/apps/pbcs.dll/article?AID=/20060301/BUSINESS/603010337/0/NEWS

4) Days to sell increases (unfortunately I don't think this information is publicized here in Ireland)

5) After a seemingly frenzied sellers market, you notice that many of the newly constructed homes are empty. You look at the houses at night and see that very few have the lights on. Many may be owned by speculators. Many may have "for lease/rent" signs on them.

6) Housing demand caused by population increases (immigration...) fails to have much upwards pressure rent prices but is blamed for the increase in house prices. Are the new immigrants as allergic to renting as the Irish?

Those who think I'm being a pessimist rather than a realist, just listen to your mortgage company or estate agent or check out this blog: http://thereisnohousingbubble.blogspot.com

Until Irish property prices fall back to reality (or wages rise to meet property reality), I'll be renting. I'll be paying half what I would if I 'owned' the same house. I'll have the choice to move if I find a better job, want a better school for my children, rents continue to fall or too many skangers are on my doorstep.

The renter's biggest "risk" is that rents will stop falling and rise more than 200% to exceed the cost of "renting" money via a home mortgage. Recent trends and the number of speculative investors make this very unlikely.

A buyer's biggest risk is that ARM interest rates rise enough to force him/her to live on ramen noodles and spam (or foreclose) or that prices will fall enough to wipe any equity, so the "owner" can't even pay off their loan if they are forced to sell the house for a different job or for other personal reasons. In this case the renter is way ahead, he/she still has a down payment for a new (less expensive) house plus interest plus whatever he saved per month vs buying. On the other hand, in the case of negative equity, the owner is either stuck in his house or he must sell at a loss, and lose his entire down payment and still owe a monthly payment on a house he no longer owns! This is why an owner occupant should care about negative equity!

I certainly hope the bank and estate agents explain this possibility, however remote it may be.

lomb

dochasach wrote:

On the other hand, in the case of negative equity, the owner is either stuck in his house or he must sell at a loss, and lose his entire down payment and still owe a monthly payment on a house he no longer owns! This is why an owner occupant should care about negative equity!

I certainly hope the bank and estate agents explain this possibility, however remote it may be.

if u think the irish will sell for less than they paid u are nuts. theyl hang on and hang on but they wont sell. its in the irish mentality.

Pengil

dochasach wrote:

Until Irish property prices fall back to reality (or wages rise to meet property reality), I'll be renting. I'll be paying half what I would if I 'owned' the same house. I'll have the choice to move if I find a better job, want a better school for my children, rents continue to fall or too many skangers are on my doorstep.

This just makes sense to me at the moment. I think the worm is definitely turning. We've been looking now for a year and it's unreal how much the asking prices have increased in the last few months. It feels like panic selling. AND for the first time in a year we are finding that there aren't enough hours in a Saturday to see all the houses for sale...

lomb

Pengil wrote:

This just makes sense to me at the moment. I think the worm is definitely turning. We've been looking now for a year and it's unreal how much the asking prices have increased in the last few months. It feels like panic selling. AND for the first time in a year we are finding that there aren't enough hours in a Saturday to see all the houses for sale...

If it was panic selling the prices would be dropping, a house i viewed as i had some spare time, a terraced house on cowper road with no front garden or parking, and a small back garden, mid terraced house which had a guide of 1.3 million sold yesterday at auction for 2.25 million!
go to www.lisney.com and click on recent house sales, i dont think there is panic selling, maybe buying but not selling..

daveirl

This post has been deleted.

dochasach

lomb wrote:

if u think the irish will sell for less than they paid u are nuts. theyl hang on and hang on but they wont sell. its in the irish mentality.

This is not irish mentality, it's human nature! No one would sell for less than they paid if they have a choice.

This is why you see prices continuing to rise on their own momentum in the U.S. while hundreds of thousands of homes remain unsold: http://news.yahoo.com/s/ap/20060227/ap_on_bi_go_ec_fi/economy

This is why when the Tokyo property bubble deflated, it continued deflating slowly for 15 years until today some property is worth only 25% what someone paid for it. Everyone thinks, "surely this is rock bottom and whenever I sell, I'll get more than I paid!" (This is probably the same person who thought "Surely there is no top and even if there is, I am nowhere near it!")

Incidently, for those who wonder whether Dublin 4 or other desireable areas will always go up/remain stable. That all depends on the speculator to occupancy ratio. In Tokyo it was true that property in the suburbs became unsellable as soon as property in Tokyo center became affordable. But in the U.S., the decline seem to be the most severe in large cities. Even New York mayor Bloomberg has admitted that the bloom is off the NYC housing "boom." (http://www.localnewsleader.com/brocktown/stories/news-00128485.html)

The Irish do have an advantage over those in other parts of the world. Our unusually strong affinity towards "owning" property (i.e. renting money from the bank to pay for our dwelling), our young buyers with unusually poor negotiating skills and ham-handed pro-land baron government meddling means that our property bubble will probably last longer here than in other frothy parts of the world. We can learn from what we see beyond the pale and hopefully use it to minimise our personal loss, should Ireland eventually succumb to the laws of gravitational economics.