The housing bubble has burst

jdivision

daveirl wrote:

This post has been deleted.

I think it's a very Irish thing to want to own a home. I don't know anywhere else where the same desire is. I don't know why, maybe going back to the Land League days. If you do want to buy now and don't want to wait check up about affordable housing. The income limits can be very high (e52,000 in DUblin city council area) and my mortgage isn't that much higher than my rent was. You're right though, I don't know why so many people aren't happy renting. The whole concept of "dead money" I suppose

D'Peoples Voice

Pengil wrote:

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?

The figures compiled by the Ptsb/ESRI are part of a hedonic suryvey, that is, they adjust for the fact that not every house is the same. Some newer houses may have better insulation, better building standards, access to services, or older houses may be better located. The french back in the early 50's came to the conclusion that you can't just get a lot of different houses, and say they all grew X%, so that's the average growth, they found there are different factors involved, so these must be taken into account. Hence the pstb/ESRI is the ONLY reliable survey, the rest use simple calculation techniques that are flawed, and I include the DOE survey in that.

As regards waiting, everyone has a price that place on risk. In investments, people should look at 'risk-adjusted returns' not just 'returns'. For example comparing the return on a 'term deposit' to one on an 'investment property' is unfair unless you account for the additional risk invovled in the investment property. That's perhaps easier said than done, because how do you calculate the risk involved in buying a house, but there lies the problem. People speak of the 10% growth in houses compared to 3%+ in Northern Rock, but how would the risk adjusted returns compare?

dochasach

D'Peoples Voice wrote:

The figures compiled by the Ptsb/ESRI are part of a hedonic suryvey, that is, they adjust for the fact that not every house is the same...
...Hence the pstb/ESRI is the ONLY reliable survey, the rest use simple calculation techniques that are flawed, and I include the DOE survey in that

Even once you've come up with a good measurement system, you just can't predict the future price of any asset from the past trends. Though I did find this interesting: http://www.physorg.com/news11164.html
The probability of large price fluctuations (outside what would be expected from "random" gaussian distribution) increases just before a crash.

Hmmmmm.

TomF

My brother just sent me this article from Friday's Financial Times.


Soaring cost of homes turns spotlight on renting
By Christopher Swann in Washington
Published: March 3 2006 02:00 | Last updated: March 3 2006 02:00

John, a chiropractor in Los Altos, California, has just committed the financial equivalent of heresy. To the surprise of many of his friends, he has defied the cult of home ownership, selling his historic five-bedroom house in favour of renting.

"I don't feel that house prices can support more appreciation and will probably drop back for the next few years, so it seemed the right time to cash out," he says. "We pay about 40 per cent less in rent than our mortgage and don't have to spend a cent on repairs."

John's decision may fly in the face of conventional wisdom but in many US property hotspots the financial logic of renting is becoming increasingly compelling. For those unlucky enough to have missed the stunning appreciation of house prices over the past few years, the rationale to buy now is shaky at best.

An exhaustive survey of the US housing market by HSBC - "A froth-finding mission" - has highlighted the appeal of renting in many parts of the US.
"It's fairly common to say that renting is like throwing money down the drain, but people forget that there is a lot of that in owning too," says Ian Morris, an economist at HSBC. "There is not a lot of difference between paying rent to a landlord or interest to a bank."

Even taking account of the generous tax subsidy that allows Americans to deduct their mortgage interest payments from taxable earnings, new homeowners are paying an increasingly hefty premium over renters. The annual cost of home ownership in Los Angeles, for example, is now more than double the cost of renting.

LA homeowners have long been paying more than renters, says Mr Morris, but the premium for owning is now 40 per cent more than its average over the past three decades. The figures for many of the other leading US property markets are no less alarming.

In response to such figures, defenders of the property market make the following points. First, homeowners not only reap capital gains when their property rises in value, they also accumulate equity each month through their principal payments. Second, while rents climb higher, the real value of mortgage payments, which are typically fixed, are eroded by inflation and eventually disappear once the capital is repaid.

HSBC's research shows that even removing capital repayments from mortgages, new homeowners in many areas will still be left paying a large premium. In San Francisco or Honolulu, annual ownership costs are 68 and 73 per cent greater even on an interest-only mortgage - a riskier mode of borrowing that has become popular in richly valued property markets.

To make property ownership in many of these markets worthwhile, owners would need to see extremely strong house price rises over the next seven years. Taking into account the added risks of home ownership, HSBC has calculated that prices would need to rise by 10 per cent a year in Palm Bay Florida, 8.5 per cent in Washington DC and 8.2 per cent in Denver - far more than the 20-year averages. The chance of falling real home prices is less outlandish than most assume. Those buying a house in Washington DC in 1989, when prices started to slide in real terms, would have had to wait until 2001 to see a capital gain.

There is even a chance that such calculations are slightly skewed in favour of home ownership. These figures assume that home owners are deducting mortgage interest payments from their taxes and that they pay a marginal rate of 30 per cent. However, only a third of Americans itemise their tax deductions and thus fail to take advantage of the tax break. In addition, many living in California or New York are caught by the Alternative Minimum Tax - a parallel tax system for high earners. This tax system eats into the tax deduction for housing, further chipping away at the benefits of home ownership.

The benefits of home ownership do eventually reassert themselves if you hold on to houses for long enough, even in the most highly priced markets, says Mr Morris. Assuming house prices remain steady, you would need to hold a house in LA for 11 years before the costs equalled those of renting. In Washington DC it would take 12 years to break even.

"Buying remains an obvious choice in large swathes of the US, but in the high-value areas the logic has swung decisively in favour of renting," says Mark Zandi, chief analyst at Economy.com. "Given the high transaction costs in the US, it may only make sense for many if you have a horizon of 10 years or more."

The number of Americans coming to a similar conclusion has been on the rise. According to the confidence survey from the University of Michigan, close to 30 per cent of Americans now think it is a bad time to buy - higher than at any point since the early 1980s.

Even so, housing experts say the temptations of home ownership will remain irresistible. "Home ownership remains a potent symbol of success in America," says Nic Retsinas, director of the Joint Center for Housing Studies at Harvard University. "Renters tend to have lower social status in the eyes of many Americans."

It is easy to assume this is natural. But it is much less the case in, for example, Germany, where homeowners are often considered spiessig or petit bourgeois. Even Hans Stimmann, head of Berlin's city planning department, has chosen to rent rather than buy.

In the US, the cult of ownership is such that John's gamble of selling his house and waiting for prices to fall is unlikely to become a popular punt. But it may pay off.

Pa ElGrande

Sunday Business Post
Eamon Quinn
http://www.sbpost.ie/post/pages/p/story.aspx-qqqid=12401-qqqx=1.asp

Dublin house prices are overvalued and cannot be justified by the higher incomes paid in the capital compared with those in other cities, according to a survey.

The Bull's turning bearish on house prices...?

Sunday Business Post
David McWilliams
http://www.sbpost.ie/post/pages/p/wholestory.aspx-qqqt=DAVID%20MACWILLAMS-qqqs=commentandanalysis-qqqsectionid=3-qqqc=5.2.0.0-qqqn=1-qqqx=1.asp

So for every €100 we earn, we are borrowing €180.This is the highest level in the world and, as it is growing at 30 per cent per annum (or about €55 billion), it is also growing the fastest.

The reason the economy is growing strongly, tax revenues are so buoyant, unemployment so low and house prices so high is because we are mobilising so much credit.

IMHO, there are some shocking numbers in the McWilliams article and are definately not sustainable, with interest rates rising we are running toward a definate crash in the domestic economy.

miju

the irish property market HAS to undergo a serious price correction sometime soon, seriously

me and my missus have the guts of a €35k deposit saved and we're gonna keep on saving it and the reason???

we're average joes on average wages but we can't afford a mortgage at current prices and i know a few pals who are in similiar boats, i think there comes a time when people have to say enough is enough and are not willing to work themselves into an early grave and only seeing their family at weekends trying to pay too heavy a mortgage

i means lets face it wages aren't increasing anywhere as near as fast as house prices

there's a great book i've read a few times called dot.con all about the internet bubbles and previous bubbles (like the tulip bubble and the exploration bubble) goes through all the phases/attitudes of bubbles and by my reckoning we're in the final phase of this one

lomb

renting has a cost too. if u bought a modest house or apartment, i cant see it costing much more than renting tbh. at least u have security then even if the house or apartment doesnt increase in value (unlikely). we probably are in the final phase except its going to last another 3-4 years..

miju

lomb wrote:

renting has a cost too. if u bought a modest house or apartment, i cant see it costing much more than renting tbh.

aye but renting is cheaper, so what we've been doing is putting aside the money we're saving on not paying a mortgage in the bank which is cheaper as said how and ever the difference between rent/mortgage prices equals just under 35k (for us) after 2 years of saving the difference and we'll continue to do so as the savings we're making are massive (a few other couples we know are doing this as well)

lomb wrote:

at least u have security

your just as secure (if not more due to not paying repairs, service charges etc etc) in a rented accomodation

lomb wrote:

...even if the house or apartment doesnt increase in value (unlikely). we probably are in the final phase except its going to last another 3-4 years..

you've just contradicted yourself, on one hand you've said it's unlikely they'll stop rising and then finish by saying this final phase will last another 3-4 years so by that i'm taking you think the bubble will deflate at that stage?

it doesnt matter if it's another 3-4 years away it will happen, and people who are priced out of the market will just keep saving and saving towards their first property and when the deflation comes (and it will) most will buy then, on a side note i think the SSIA could be the undoing of the property market, as i think most will accept the fact that ALOT of FTB are planning on using theirs as a deposit which IMH and non-expert opinion is going to lead to the property market getting white hot over the next year and I'd imagine prices really sky rocketing over that time at which stage a hell of alot of people will be majorly priced out of the market = less buyers = massive deflation (altough by how much is anyones guess but the generally accepted figure by some anylysts is about 40-50% which would bring prices back to around the 180-200k mark which again IMHO is affordable, correct and a stable price

ronbyrne2005

miju wrote:

aye but renting is cheaper, so what we've been doing is putting aside the money we're saving on not paying a mortgage in the bank which is cheaper as said how and ever the difference between rent/mortgage prices equals just under 35k (for us) after 2 years of saving the difference and we'll continue to do so as the savings we're making are massive (a few other couples we know are doing this as well)



your just as secure (if not more due to not paying repairs, service charges etc etc) in a rented accomodation



you've just contradicted yourself, on one hand you've said it's unlikely they'll stop rising and then finish by saying this final phase will last another 3-4 years so by that i'm taking you think the bubble will deflate at that stage?

it doesnt matter if it's another 3-4 years away it will happen, and people who are priced out of the market will just keep saving and saving towards their first property and when the deflation comes (and it will) most will buy then, on a side note i think the SSIA could be the undoing of the property market, as i think most will accept the fact that ALOT of FTB are planning on using theirs as a deposit which IMH and non-expert opinion is going to lead to the property market getting white hot over the next year and I'd imagine prices really sky rocketing over that time at which stage a hell of alot of people will be majorly priced out of the market = less buyers = massive deflation (altough by how much is anyones guess but the generally accepted figure by some anylysts is about 40-50% which would bring prices back to around the 180-200k mark which again IMHO is affordable, correct and a stable price

when you have enough saved for a deposit start putting the money you save each month into a pension,its the best investment you can make at present.

daveirl

This post has been deleted.

TabulaRasa22

miju wrote:

aye but renting is cheaper, so what we've been doing is putting aside the money we're saving on not paying a mortgage in the bank which is cheaper as said how and ever the difference between rent/mortgage prices equals just under 35k (for us) after 2 years of saving the difference and we'll continue to do so as the savings we're making are massive (a few other couples we know are doing this as well)



your just as secure (if not more due to not paying repairs, service charges etc etc) in a rented accomodation



you've just contradicted yourself, on one hand you've said it's unlikely they'll stop rising and then finish by saying this final phase will last another 3-4 years so by that i'm taking you think the bubble will deflate at that stage?

it doesnt matter if it's another 3-4 years away it will happen, and people who are priced out of the market will just keep saving and saving towards their first property and when the deflation comes (and it will) most will buy then, on a side note i think the SSIA could be the undoing of the property market, as i think most will accept the fact that ALOT of FTB are planning on using theirs as a deposit which IMH and non-expert opinion is going to lead to the property market getting white hot over the next year and I'd imagine prices really sky rocketing over that time at which stage a hell of alot of people will be majorly priced out of the market = less buyers = massive deflation (altough by how much is anyones guess but the generally accepted figure by some anylysts is about 40-50% which would bring prices back to around the 180-200k mark which again IMHO is affordable, correct and a stable price

Rent is pretty much dead money, at least if you have a mortgage you are investing in your own future. You make a good point about the SSIA though, if the property market heats up any further a crash is, while not inevitable, highly likely. There are a lot of other factors to consider as well, not leaast the international factors which influence the ECB interest rates. For example, China is loosening up its currency regulations, which means Chinese goods are going to get more expensive, and European goods will become more attractive.

The biggest problem with Ireland is not a lack of land, its a lack of planning permission. Planning is angled towards developers, speculators, and investors, not towards actual home owners. There's plenty of land in this country; I mean, lets take a look at the Philippines, for an extreme example. 80 million people and less square mileage than Ireland. 20 grand will get you a very comfortable house with a few acres on top of that, and heres us with a humble 4 million people. For something closer to home, I invite everyone to take a look at France, see what a hundred grand will buy you - you'll be amazed. The contrast between these countries and Ireland is immense.

daveirl

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TabulaRasa22

daveirl wrote:

This post has been deleted.

Yes I did read the thread, and you're taking just as much of a risk investing in whatever as you are investing in property; some people say the boom might go on for years to come. The appreciation in your property price would more than equal whatever you might gain from short term investments.

Besides, there isn't that much of a difference in rent and mortgage repayments if you don't mind renting out a couple of rooms for a few years, by which time inflation will have taken away the pain. And negative equity is only an issue if you are investing in property as an investment, not as a home. Granted many people want it both ways, but if push comes to shove, you still have your house.

daveirl

This post has been deleted.

TabulaRasa22

daveirl wrote:

This post has been deleted.

Well maybe I should have put an IMHO in there too, its really just an opinion. Rising interest rates will cause a lot of pain if they continue, but falling house prices will only damage speculators, and you won't catch me shedding any tears for them. Anyway the point of my post was that the situation in this country when it comes to housing is very artificial; how long house prices continue to rise depends on how long these artificial conditions can be maintained. As I said, there is a lot of land in this country, so it could carry on for an awfully long time to come...

TabulaRasa22

And just a quick follow up to underline my point, take a look at this...

http://www.french-property.com/

Stone cottage with a courtyard, €107,000

http://www.french-property.com/properties/property_detail/cid/13/pid/188526/ifp/1/tid/1/show/all

Five bedroom detached house, €118,000

http://www.french-property.com/properties/property_detail/cid/26220/pid/167087/ifp/1/tid/2/show/all

I don't know about anyone else here but my French classes are coming along nicely.

useruser

TabulaRasa22 wrote:

Well maybe I should have put an IMHO in there too, its really just an opinion. Rising interest rates will cause a lot of pain if they continue, but falling house prices will only damage speculators, and you won't catch me shedding any tears for them. Anyway the point of my post was that the situation in this country when it comes to housing is very artificial; how long house prices continue to rise depends on how long these artificial conditions can be maintained. As I said, there is a lot of land in this country, so it could carry on for an awfully long time to come...

Wrong! What do you suppose all those people who bought cr*p "starter homes" 2 hours commute from their jobs are going to think of the fact that they will be stuck in the same hovel for the next 20 years? That's right folks, the property ladder is an illusion - you will never trade up to that house you really want.

The (IMO) inevitable crash is going to be a social and economic disaster for this country and our friends in the Dail are doing absolutely nothing to prevent it (bar perhaps listening to their pals in the construction industry bleat on about how our "unique demographics" and "special economy" will see us alright in the end.)

TabulaRasa22

useruser wrote:

Wrong! What do you suppose all those people who bought cr*p "starter homes" 2 hours commute from their jobs are going to think of the fact that they will be stuck in the same hovel for the next 20 years? That's right folks, the property ladder is an illusion - you will never trade up to that house you really want.

The (IMO) inevitable crash is going to be a social and economic disaster for this country and our friends in the Dail are doing absolutely nothing to prevent it (bar perhaps listening to their pals in the construction industry bleat on about how our "unique demographics" and "special economy" will see us alright in the end.)

Well it may set them back a bit, but over the course of 5 to 8 years inflationary rises should enable them to rent that house out and square away a bit of money for the dream home without too much difficulty. They would at least have options, unlike the speculators who are righteously (and rightfully) hammered.

ronbyrne2005

if rent is dead money then what is mortgage interest? mortgage interest is the rent you pay on the amount you borrow to buy a house.
how can house prices continue to rise much further when incomes arent rising much and rents arent rising either which indicates a good supply??

as for investing in pensions instead of buying a house and risk,investment in a pension can have sero risk if you want by investing in government bonds etc,plus if you opt for more risky investments you are well diversified but a property is not.
if you are prepared to share with friends you can rent in a nice area for 400 euro a month and write off a bit against income tax,then you use the money you save by not having a mortgage to invest in a pensions with their great tax beenfits and choose the investment risk you want,pensions outperform property over 30 years hands down.

Uncle Chenzo

Not to piss on your chips ron, but how long could you live with your mates before getting liver damage, etc. I've just left the big smoke, and gone country. Saving a packet, and i commute!! Less stress, more life. Not to sound too heavy.

ronbyrne2005

Uncle Chenzo wrote:

Not to piss on your chips ron, but how long could you live with your mates before getting liver damage, etc. I've just left the big smoke, and gone country. Saving a packet, and i commute!! Less stress, more life. Not to sound too heavy.

i hear what your saying but im only replying to the guy earlier that said rent out rooms to pay your mortgage and i was saying you can similarly save money renting with other people if you want to be in a house ,they dont have to be your drinking mates,find a few boring professionals!!

miju

TabulaRasa22 wrote:

Rising interest rates will cause a lot of pain if they continue,

if i'm not mistaking the ECB have indicated that rates will rise by at least 1% over the next year, nearly sure it was the indo / sky news i heard but can't remember exactly

TBH i'm by no stetch of the imagination a financial whizz so I dont know how much an effect a 1% rise would have on your average €350,000 mortgage would anyone care to fill me and the rest of boards in

ronbyrne2005

miju wrote:

if i'm not mistaking the ECB have indicated that rates will rise by at least 1% over the next year, nearly sure it was the indo / sky news i heard but can't remember exactly

TBH i'm by no stetch of the imagination a financial whizz so I dont know how much an effect a 1% rise would have on your average €350,000 mortgage would anyone care to fill me and the rest of boards in

well funnily enough its 1% of 350k ! thats for a new mortgage so an extra 3500euro a year if rates rise by 1%,they have already risen by a half a percent so only another half to go! theres 100billion outstanding in mortgages so a one per cent rise in interest rates costs the economy one billion in extra interest which affects spending in shops etc but ssia's should smooth that out

miju

feel a bit dumb now asking that question so about €300 extra per month, it quite a hike, the 1% i heard is actually ON TOP of the hike already AFAIK,

even if it's not on top of it that's €300 extra per month by the end of the year, obviously thats not going to affect most people but one of my girlfriends, friends that will be affected and mean alot more overtime / pressure / strain i'd wonder how many other around the country would be in the same boat

JimmySmith

daveirl wrote:

This post has been deleted.

You're thinking about this in the here and now rather than over a period of time. Thats just plain wrong.
Here is an example of my situation and its one of several others i know about.
My mortgage is only €400 PM.
It will be zero when i get my SSIA paid off.
I could have rented cheaper than what i pay for my mortgage 6 years ago, but i didnt. I paid the extra to have the security of my own home.
My wife did the same 7 years ago. Her house is now rented and the mortgage will be cleared in June too.

Buying a house should not be thought of as something you do today and it costs x amount a month. It should be thought of as costing x amount a month over y years. Inflation has certainly eaten my debts ferouciously.
Had we invested the difference in mortgages and rent it would not have earned even 10% of our assets now, although the family home is not really an asset unless we sell it and rent.

Now, while it wasnt my opinion that rent was dead money 6 years ago, it certainly is my view today.

FrankGrimes

if you're gonna talk figures at least get them right. use this calculator to get more accurate figures: http://www.jeacle.ie/mortgage/

D'Peoples Voice

JimmySmith wrote:

You're thinking about this in the here and now rather than over a period of time. Thats just plain wrong.
It should be thought of as costing x amount a month over y years.
Now, while it wasnt my opinion that rent was dead money 6 years ago, it certainly is my view today.

No offence, but that's like a novice investor being reluctant to invest in tech stocks, but undertaking the gamble in 94 and then in late 1999 claiming that it's definitely worth it. the period you invested in has produced a better return than practically any other 6 year period in history.
As you say, you can't look at these things in the present, it's the future you should concern yourself with. Currently we are building more houses PER YEAR now than we did over 3 years in the 1970s. Supply is catching demand rapidly. Why else would different banks/estate agencies be predicting a fall in output? You only cut back on supply if you feel you are beginning to match demand, just look at OPEC!
The problem will be in demand!
I still fear the rising costs of childcare and energy costs for young families.
Add pensions costs to that, and then ask them if they can pay a mortgage.
The massive rise in Debt in this country is telling us we are living for TODAY!
As regards interest rates affecting people, we must remember that although people are stress tested for their mortgage repayments; credit card debt & personal loans are not always stress tested for up to 2% increases. That's something the Government should be asking the banks to do. But Government taxes depend on personal consumption, so i see a double edged sword for the Government, do they reduce personal indebtness or taxation?

miju

thanks for that link, so on your average 350k mortgage (assuming 20k deposit) over 25 years at 3.2% costs €1,696.38 per month so a 1% hike (without taking into account the banks rates as someone said earlier) equals €1,886.30 an extra €189 per month possibly sometime around the end of the year which is still unwanted extra financial pressure

now after that if the ECB started hiking up again by say 0.25% that's €1995.41 and if they went higher again by 0.10% that's hit the €2015.59 per month mark and i suppose after that who knows, course that's guess work on my part, now correct me if I'm wrong but the ECB announce rates every 6 months or so that should bring it towards the end of 2007 which will possibly result in an extra €319.21 per month coupled with the usual rises in bin charges, esb, childcare, food, fuel and personal loans (not taking into account the possible interest rises on them also) etc over the course of a year and a half odd.

who knows how much extra you could be paying so IMHO that could not only price even more people out of the market (there's a good few now IMO) it could also possibly cause people not to be actually have enough to pay the bills and negative equity (i think) and therefore defaulting and more houses going on the market / people trading down leading to a downfall in the prices leading to more negative equity / investors looking to offload which leads to further deflation and CORRECTION (cos i reckon that's what'll happen rather than a crash as such) of house prices

like i said i'm no financial whizz by any stretch of the imagination so this is a bit of an educated guess jobbie, but the future doesn't really bode well IMO,

i'd actually like to compare my figure above to the average industrial wage, but after googling it i've not had any luck, does anyone know the figure for the average wage i think it's somewhere around the €27k mark

daveirl

This post has been deleted.

MG

JimmySmith wrote:

You're thinking about this in the here and now rather than over a period of time. Thats just plain wrong.
Here is an example of my situation and its one of several others i know about.
My mortgage is only €400 PM.
It will be zero when i get my SSIA paid off.
I could have rented cheaper than what i pay for my mortgage 6 years ago, but i didnt. I paid the extra to have the security of my own home.
My wife did the same 7 years ago. Her house is now rented and the mortgage will be cleared in June too.

Buying a house should not be thought of as something you do today and it costs x amount a month. It should be thought of as costing x amount a month over y years. Inflation has certainly eaten my debts ferouciously.
Had we invested the difference in mortgages and rent it would not have earned even 10% of our assets now, although the family home is not really an asset unless we sell it and rent.

Now, while it wasnt my opinion that rent was dead money 6 years ago, it certainly is my view today.

Ever listen to that guy who speaks really quickly at the end of radio ads for investment products? -
“Past performance may not be a reliable guide to future performance”