Housing Bubble Bursting

gurramok

patrickolee wrote:

You would not be in negative equity land for 30-35 years and so could, if u wanted to, sell your property and pay off your loan. In 35 years, you might be paying 400,000 to convert your attic!

Cadbury's caramel.

We're in ECB land now, their target is 2% inflation per annum, we have 5% p.a. not like over 10-20% in our parents time.
Point being, that 400,000 will not be worthless in 30 years unless inflation returns to where it was in 70's/80's, it'll be still an awful lot of money to most people, not pocket change

aphex™

gurramok wrote:

We're in ECB land now, their target is 2% inflation per annum, we have 5% p.a. not like over 10-20% in our parents time.

Umm for years there was little or no inflation.

daveirl

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daveirl

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aphex™

daveirl wrote:

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Most of history? Before banking got to the scale of the 1990s (generating huge sums from nowhere and lending it out like not possible before)? Inflation was flat in this part of the world for most of time.

There was very little inflation 1930-1980 either.

A Random Walk

patrickolee wrote:

That's where that argument falls over... most people, if they have money, will either not invest it in high growth funds, or will simply spend it.

You can't make a realistic comparison between 2 scenarios if you make assumptions for one side of the scenario that suits your preconceived notions. I could say "I'm assuming you have on one side a renter, and on the other side a buyer of the same house. I'm going to assume that the homeowner spends 40 grand a year on home redecorating, because home owners are always spending money doing up their house".

Would you expect the normal 'renter' to outperform the endowment policy fund managers of yesteryear?

In a diversified index fund portfolio absolutely yes. Check out my blog as to why

A Random Walk

nesf wrote:

1) 100% more? How exactly do you mean. I look around at rents here (i.e. Cork city centre) there isn't that discrepancy between mortgage and rental rates.

I can only speak for Dublin where it's common to find rental properties where rents are half of the equivalent mortgage (even interest only). In "normal" countries, rents are often more than the mortgage! (we have a warped view of advantages/disadvantages of renting over here)

2) Regional variation plays a role. Rental rates are very geography dependent and the discrepancy between rental rates and mortgage rates varies quite a bit from region to region, especially as you go farther out into the suburbs.

Yes but again it's demand driven. In Dublin the economics of property have detached from rational analysis.

RuggieBear

The house i'm renting is worth 500k. What's the mortgage on that versus how much rent i should be paying?

gurramok

aphex&#8482 wrote:

Most of history? Before banking got to the scale of the 1990s (generating huge sums from nowhere and lending it out like not possible before)? Inflation was flat in this part of the world for most of time.

There was very little inflation 1930-1980 either.

Thats the 90's where it was low.

Have a look at the historic graph at http://dev.rte.ie/business/economyataglance/inflation.html

As can be seen, it was very late 80's when inflation was under control and has been maintained under 10% since.
From early 70's to the part of the late 80's where it significantly dropped, there were times where it was always above 10% and touched 20% in places!

daveirl

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Zambia

Handy chart House prices since 1998

http://www.rte.ie/business/economyataglance/houseprices.html

The_Conductor

RuggieBear wrote:

The house i'm renting is worth 500k. What's the mortgage on that versus how much rent i should be paying?

Allowing a real interest rate of 4.5% (reasonable for an interest only mortgage repayment) that would be 500,000 * 0.045 = 22,500 (annualised) and divided by 12 for a monthly rent of 1,875 (note that is to cover the interest component of the mortgage alone, and is exclusive of all other costs)- so realistically you would most probably be somewhere in the 2,200-2,500 per month for a like with like mortgage versus rent ratio.

I imagine you are not paying 2,500 per month in rent?

RuggieBear

smccarrick wrote:

Allowing a real interest rate of 4.5% (reasonable for an interest only mortgage repayment) that would be 500,000 * 0.045 = 22,500 (annualised) and divided by 12 for a monthly rent of 1,875 (note that is to cover the interest component of the mortgage alone, and is exclusive of all other costs)- so realistically you would most probably be somewhere in the 2,200-2,500 per month for a like with like mortgage versus rent ratio.

I imagine you are not paying 2,500 per month in rent?

Nope. I pay 1350 which is alot(:( ) but i'm very willing to pay that premium to live in a reasonably quiet,safe area and a 20 minute walk to work.

SkepticOne

RuggieBear wrote:

Nope. I pay 1350 which is alot(:( ) but i'm very willing to pay that premium to live in a reasonably quiet,safe area and a 20 minute walk to work.

A 2.7% yield. Easily beatable with other forms of invesment and with less risk. You can see why investors are leaving the market in droves and prices are dropping.

nesf

SkepticOne wrote:

A 2.7% yield. Easily beatable with other forms of invesment and with less risk. You can see why investors are leaving the market in droves and prices are dropping.

2.7% yield if the investor bought recently. If they both the place 5 or 6 years ago then the yield might be healthier.


It's odd though, there are similar rents here for properties far far cheaper (as in 300 odd thousand not 500 odd thousand).

nesf

A Random Walk wrote:

I can only speak for Dublin where it's common to find rental properties where rents are half of the equivalent mortgage (even interest only). In "normal" countries, rents are often more than the mortgage! (we have a warped view of advantages/disadvantages of renting over here)

That's strange, down here in the apartment market rent varies from 900 to 1300 a month (or thereabouts) for 2 bed apartments (in the city centre) and the discrepancy is mostly down to age of building and location and whether they were built as student apartments originally. The thing is apartment prices atm vary between 295K and 350K (varying along with age, location etc like the rental market) which puts the mortgage repayments not that far away from the rents themselves. The two aren't perfectly in line with each other but they aren't that far apart either tbh.

A Random Walk wrote:

Yes but again it's demand driven. In Dublin the economics of property have detached from rational analysis.

I can't comment really because I've never paid much attention to prices in Dublin outside of occasionally flicking through the property section in order to feel better about the prices down here.

SkepticOne

nesf wrote:

2.7% yield if the investor bought recently. If they both the place 5 or 6 years ago then the yield might be healthier.

Yield is calculated at the current market price.

conor_mc

nesf wrote:

2.7% yield if the investor bought recently. If they both the place 5 or 6 years ago then the yield might be healthier.

Yield is based on the current market price, not the price 6/7 years ago. It's used to compare investments, so you're comparing the return on the investment property versus what you'd earn if you were to sell up today and stick the proceeds in a deposit account (or any other investment vehicle).

nesf

SkepticOne wrote:

Yield is calculated at the current market price.

conor_mc wrote:

Yield is based on the current market price, not the price 6/7 years ago. It's used to compare investments, so you're comparing the return on the investment property versus what you'd earn if you were to sell up today and stick the proceeds in a deposit account (or any other investment vehicle).

Apologies, I was thinking about it backwards.

conor_mc

nesf wrote:

That's strange, down here in the apartment market rent varies from 900 to 1300 a month (or thereabouts) for 2 bed apartments (in the city centre) and the discrepancy is mostly down to age of building and location and whether they were built as student apartments originally. The thing is apartment prices atm vary between 295K and 350K (varying along with age, location etc like the rental market) which puts the mortgage repayments not that far away from the rents themselves. The two aren't perfectly in line with each other but they aren't that far apart either tbh.

Assuming the 350k apartments are 1300p.m., that doesn't compare very favourably with a 92% mortgage (322k) @ 4.5% which will cost you €1630 a month, with further interest rate rises to come. You'll have to stump up 18k of your own cash, plus another grand or so a year for management fees too.

And all for what - so you can buy a €400 slice of an asset every month that is probably depreciating at a rate of €400 a month.....

HashSlinging

internal memo from Ken Mc Donald ?

nesf

conor_mc wrote:

Assuming the 350k apartments are 1300p.m., that doesn't compare very favourably with a 92% mortgage (322k) @ 4.5% which will cost you €1630 a month, with further interest rate rises to come. You'll have to stump up 18k of your own cash, plus another grand or so a year for management fees too.

And all for what - so you can buy a €400 slice of an asset every month that is probably depreciating at a rate of €400 a month.....

Yeah I don't disagree, but it's not comparable to the gap that's being talked about in the Dublin market, which was my point. Plus, if you are an owner occupier you need to add interest relief onto that which makes it look a bit more favourable (260 or so a month for a married couple, 130 for a single person etc decreasing as time went by).

Editted due to error.

Zambia

anon 4000 wrote:

---

From: Ken MacDonald [mailto:ken@hookemacdonald.ie]
Sent: 18 April 2007 16:27
To: mick@ellen.ie
Subject:

Pure Fiction IMO

Unless they really dont want anyone to mention the Elephant in the room

The_Conductor

RuggieBear wrote:

Nope. I pay 1350 which is alot(:( ) but i'm very willing to pay that premium to live in a reasonably quiet,safe area and a 20 minute walk to work.

1350 is a lot, yes. However if the house you are renting is worth 500k- then irrespective of what you are currently paying to rent it, your landlord is loosing money on you as a tenant (unless your rent was in the region of 2,200- 2,500 per month). Rents have lost their fundamental ratios with asset prices.

ixoy

smccarrick wrote:

1350 is a lot, yes. However if the house you are renting is worth 500k- then irrespective of what you are currently paying to rent it, your landlord is loosing money on you as a tenant (unless your rent was in the region of 2,200- 2,500 per month). Rents have lost their fundamental ratios with asset prices.

Well is the landlord losing money if he bought the place 15-20 years ago? He's only losing money if he bought the place recently.

I've noticed that new apartments in Grand Canal Dock area are closer to 2k p.m. This, I assume, reflects the fact that these mortgages are substantially higher, having been bought recently.

Definetely tho', rents are not 50% of mortgage repayments in any where I've looked. Less, yes, but not by half. Interesting our apartment's rent is not going up when the lease is taken over by a new tenant and it didn't rise last year either. 1500 pm seems very cheap for a 3-bed in Smithfield Mkt so maybe they're fearful of a flood of rental properties.

RuggieBear

I reckon it used to be the landlords family home or something like that and he probably inherited it. The house is just round the corner from Grand canal Dock on Bath Avenue. Tbh, I guess the Landlord undervalued the rent by at least 300-400 euro as it is old and a little dated. it's an old 1950's corpo house.

conor_mc

ixoy wrote:

Well is the landlord losing money if he bought the place 15-20 years ago? He's only losing money if he bought the place recently.

I've noticed that new apartments in Grand Canal Dock area are closer to 2k p.m. This, I assume, reflects the fact that these mortgages are substantially higher, having been bought recently.

Two things:

If the landlord bought the place 15-20 years ago, he'd do better selling it and sticking the profit in a deposit account. Less risk, less stress, less hassle, zero work involved. More profit.

Secondly, mortgages have nothing to do with rents. There is no connection. The market determines the price, and if GCD is more expensive it's because there is more demand to live there (it's close to city centre, but with a less frantic feel due to nearby canal walks etc., plus its beside a dart station, and there is always the D4 address). The market doesn't care what your mortgage costs you.

Fr0g

daveirl wrote:

This post has been deleted.

http://www.box.net/shared/6s121gj70v

Ok there you go its about 3.8 MBs

ronbyrne2005

ixoy wrote:

Well is the landlord losing money if he bought the place 15-20 years ago? He's only losing money if he bought the place recently.

I've noticed that new apartments in Grand Canal Dock area are closer to 2k p.m. This, I assume, reflects the fact that these mortgages are substantially higher, having been bought recently.

Definetely tho', rents are not 50% of mortgage repayments in any where I've looked. Less, yes, but not by half. Interesting our apartment's rent is not going up when the lease is taken over by a new tenant and it didn't rise last year either. 1500 pm seems very cheap for a 3-bed in Smithfield Mkt so maybe they're fearful of a flood of rental properties.

Four words for first highlighted point, opportunity cost of capital.

Regarding price of rent versus buying, dont forget all the costs of ownership which further increase the gap between buying and renting. These costs include insurance, maintenence( plumbers electricians and household appliances are pricey!), management fees etc. As rent is cheap relative to house prices you can rent a much better place in a better location closer to your work than you can afford to buy which gives you a better quality of life and less transport costs and wasted life hours commuting.

ronbyrne2005

conor_mc wrote:

Two things:

If the landlord bought the place 15-20 years ago, he'd do better selling it and sticking the profit in a deposit account. Less risk, less stress, less hassle, zero work involved. More profit.

Secondly, mortgages have nothing to do with rents. There is no connection. The market determines the price, and if GCD is more expensive it's because there is more demand to live there (it's close to city centre, but with a less frantic feel due to nearby canal walks etc., plus its beside a dart station, and there is always the D4 address). The market doesn't care what your mortgage costs you.

Exactly, lack of economic understanding around here!