Housing Bubble Bursting

the1andonly1

SimpleSam06 wrote:

You forgot interest rates and public sentiment. These are the other two things house prices are based on. Higher interest rates = less money being loaned, therefore the cash for higher house prices simply is not there. Talk of decreasing supply always seems to leave out the 110 - 150,000 empty houses in Ireland at the moment as well, not to mention overbuilding from this year, finished in a hurry.

Oh, I agree, I just didnt get around to mentioning them!!

DublinDilbert

the1andonly1 wrote:

Just a quick (i hope) post on how I think things might turn out

The economics of house prices, are based on supply and demand, so for house prices to change, one of those 2 variables will have to shift

The reason house prices are so complex, and hard to predict, is that they aren't based on 2 variables, they are based on many variables:-

Supply / Demand
Rental Yields
Interest rates
Market Sentiment
Employment

I'm sure there are many more too....

I was very surprised to hear the statement from AIB on Wednesday that some people could be in negative equity by the end of the year... The problem with market sentiment is this is peoples perception of the market and can change, and it looks like maybe it has changed....

People need houses, so people will continue to buy, but say 25% of the people who were going to buy hold off for a year... suddenly the demand drops, places get harder to sell ( which is definitively happening at the minute... )....

Based on this some developers will easy back a little on new completion ( even say they reduce completions by 25%).... When this happens there will be lay offs in the construction sector, not a huge amount, but enough... Alot of the foreign workers will then move on to some where else, this will free up a large amount of rental properties..

I guess what I'm trying to say is that life would be simple if it was just 2 variables, but it's not, and even worse all of the variables are interconnected...

the1andonly1

DublinDilbert wrote:

The reason house prices are so complex, and hard to predict, is that they aren't based on 2 variables, they are based on many variables:-

Supply / Demand
Rental Yields
Interest rates
Market Sentiment
Employment

I'm sure there are many more too....


I guess what I'm trying to say is that life would be simple if it was just 2 variables, but it's not, and even worse all of the variables are interconnected...

But are those variables you list (rental yields, interest rates) not components of supply/demand? I mean, if interest rates go up, surely that impacts on the demand side, as would a change in market sentiment, and employment...

Not saying that its simple though, just that all of the variables that are in play in this situation are really subsets of the supply/demand theory of economics.

EDIT: Spelling!

magpie

101 pages and still no apocalypse. Wake me up when the bubble bursts oh soothsayers.

A Random Walk

magpie wrote:

101 pages and still no apocalypse. Wake me up when the bubble bursts oh soothsayers.

No-ones forcing you to read this thread. If the "soothsayers" are wrong I'm sure you'll make a killing by buying up property right now. Best of luck.

SimpleSam06

the1andonly1 wrote:

Not saying that its simple though, just that all of the variables that are in play in this situation are really subsets of the supply/demand theory of economics.

How do you figure interest rates, set by the ECB, are a subset of supply or demand of the Irish property market?

SkepticOne

the1andonly1 wrote:

But are those variables you list (rental yields, interest rates) not components of supply/demand? I mean, if interest rates go up, surely that impacts on the demand side, as would a change in market sentiment, and employment...

I would agree with that. It is all supply and demand although there can be lot of issues contributing to these factors.

SkepticOne

SimpleSam06 wrote:

How do you figure interest rates, set by the ECB, are a subset of supply or demand of the Irish property market?

Mainly demand. If you jack up interest rates demand drops and prices fall.

thewing

Interest rates don't cause property crashes, unless they're exorbitant as in the mid-80's(18%)

Supply and Demand will - the key thing is employment - live register figures are climbing steadily and there is more and more news of job-cuts.People can't afford to pay their mortgages/buy new houses then you'll see a crash

The rate rises will become a factor post the 5.25% mark, thats when the market should feel a pinch with quite a number of people taken out of the loop.

SimpleSam06

SkepticOne wrote:

Mainly demand. If you jack up interest rates demand drops and prices fall.

It was the subset aspect I was querying...

SkepticOne

SimpleSam06 wrote:

It was the subset aspect I was querying...

Sorry, misread your question.

the1andonly1

SimpleSam06 wrote:

It was the subset aspect I was querying...

Sorry, bad wording more than anything else, what I meant was that high(er) interest rates will lower demand, i.e that those factors that DublinDilbert listed are causes of lower demand rather than completly seperate from the supply/demand equation. Subset was probably the wrong word, my bad :rolleyes:

conor_mc

thewing wrote:

Interest rates don't cause property crashes, unless they're exorbitant as in the mid-80's(18%)

Supply and Demand will - the key thing is employment - live register figures are climbing steadily and there is more and more news of job-cuts.People can't afford to pay their mortgages/buy new houses then you'll see a crash

The rate rises will become a factor post the 5.25% mark, thats when the market should feel a pinch with quite a number of people taken out of the loop.

Doesn't the current situation across the Atlantic not disprove that particular myth?

US employment is still strong, but house prices are crashing. Rates are hardly exorbitant at 5.25% either.

Lets face it, a load of amateurs saw the opportunity to make a quick buck, became "investors" for a few years and now rate rises have simply cut off the supply of greater fools to further jack up the price. Cue prices reverting to fundamental values because a sizable segment of demand has disappeared. It doesn't need high unemployment unless the growth is based on fundamentals, in which case it's not really a bubble.

The_Conductor

the1andonly1 wrote:

Sorry, bad wording more than anything else, what I meant was that high(er) interest rates will lower demand, i.e that those factors that DublinDilbert listed are causes of lower demand rather than completly seperate from the supply/demand equation. Subset was probably the wrong word, my bad :rolleyes:

I'd qualify that statement. Higher interest rates will lower demand *at current market levels*. Each .25% rate rise knocks 30k off people's borrowing capacity. So its not that inherent demand thats lowered- inherrent demand remains a constant- however the level at which this inherent demand is met, is reduced.

Back on topic again- the second hand market appears to be in freefall- its down about 30% in the last 3 months and shows no signs of recovery. Increased interest rates, no prospect of favourable stamp duty reforms, statements that there is no prospect of further mortgage interest relief inducements- because of worsening government finances, means the only market still open for business is the FTB market (bouyed by generous kit-outs by developers- one developer in Portlaoise is advertising 50k kit-outs on the back of Dublin Buses at the moment....... (Bellingham, I believe)).

So..... the first-time buyers are having a field-day with freebies like no-one has ever seen before, and everyone else is stuck (pretty much), you can't borrow the money you need to upgrade, and even if you could- sellers are still totally unrealistic in their expectations.......

Even worse than all those amateur landlords with the BTL properties, are all those who have spent silly money on their first apartments with the intention of trading up. Those poor souls are stuck, are so so stuck, and thats not going to change for a long long time.......

When is realism really going to hit people?

miju

i reckon reality will hit people when the stamp duty excuse is shown to be a complete red herring when the government make the changes in the next couple of weeks.

after the stamp duty levels are changed then theres no excuse left just the cold hard reality of whats to come

SimpleSam06

miju wrote:

after the stamp duty levels are changed then theres no excuse left just the cold hard reality of whats to come

In fairness the cold hard reality will only hit them when the cold hard reality hits them, which I reckon is Q1 2008, with the year on year reports...

DublinWriter

thewing wrote:

Interest rates don't cause property crashes, unless they're exorbitant as in the mid-80's(18%)

Obviously you're not old enough to remember the whole 'Black Wedneday' crises in the UK in 1992. Interest rates went up 4 times in one day, triggering a massive property crash in the south-east of the UK that didn't recover until the late 90's.

My take on the whole will it/won't it argument is that it's only applicable to property investors.

Why? For first time buyers, the best time will be always 'now' if you intend to hold onto your property for 5+ years as your primary residence. I've seen people make the same old hold-out arguments back when the dot.com crashed pulled everything down with it around 2001 and they are now completely locked out of the property market, starting to hit their 30's and still living at home with their parents.

Most people approach buying their first home as if they were buying a couple of hundred shares in Microsoft. It's the completely wrong attitude to take.

Don't forget that we will be seriously running out of oil in the next five years. This will lead the same type of hyper-inflation that happened in the early 1970's. If you don't believe me, then look at what happened in the last two years when everytime someone in OPEC coughed and the markets went through the roof.

I think it's the best time for first time buyers in Ireland to buy is right now because of all the political parties playing fast and loose with promises about stamp-duty that have artifically driven prices down.

Stamp duty is a red-herring. Any reductions will be automatically pocketed by sellers and builders.

Do-more

DublinDilbert wrote:

I was very surprised to hear the statement from AIB on Wednesday that some people could be in negative equity by the end of the year...

I'd be very surprised if many of those who bought on 100% mortgages in the last year are not in negative equity already! Especially those who bought 1 bed apart-o-boxes.

On the bright side, I see a 4 bed detached around the corner from me that is pretty new to the market and asking €510,000 has a SOLD sign on it this evening. It'll be interesting to find out what it actually made. I was going to take a photo of it for posterity, something to show the grankids and all that!:D Perhaps we should start a "Today I saw a SOLD sign and took a photo" thread, but then again it probably wouldn't get many posts!

I heard one news report on Weds quoting the AIB report as saying "we'll be in negative equity by the end of the year, but this is still the "Soft landing"" You don't work for the AIB by any chance Gurgle?

jobless

DublinWriter wrote:

I think it's the best time for first time buyers in Ireland to buy is right now because of all the political parties playing fast and loose with promises about stamp-duty that have artifically driven prices down.

Stamp duty is a red-herring. Any reductions will be automatically pocketed by sellers and builders.

are you not contradicting yourself with these two statements?
Its a fact that the market had stalled before stamp duty was even mentioned by anyone.... it was only mentioned because the market HAD stalled.

Advising people to buy now is bad advice.....they have nothing to lose waiting a year or two...

SimpleSam06

DublinWriter wrote:

Why? For first time buyers, the best time will be always 'now' if you intend to hold onto your property for 5+ years as your primary residence.

You mean someone that doesn't mind trudging through the next thirty years hanging on to their property come hell or high water, no matter how dubious it may be. Yes, a lot of people could do that. Not much of a life, though, especially if they plan on having children or doing, well, anything...

DublinWriter wrote:

I've seen people make the same old hold-out arguments back when the dot.com crashed pulled everything down with it around 2001 and they are now completely locked out of the property market, starting to hit their 30's and still living at home with their parents.

Not everybody was making those arguments. One of those not making them was me.

DublinWriter wrote:

Don't forget that we will be seriously running out of oil in the next five years. This will lead the same type of hyper-inflation that happened in the early 1970's.

You obviously haven't been keeping up with the latest developments in alternative fuels, especially with regard to bio-butanol harvested from algae channels, which has almost the exact same characteristics as petrol, and an enormous yield per acre. In the time it will take for fuel shortages to become an issue, we can be well and truly weaned off the oil teat.

The inflation of the 1970s is regarded as initially caused by an increased supply of money that occurred following the US exit from the Bretton Woods gold standard, not oil.

DublinWriter wrote:

If you don't believe me, then look at what happened in the last two years when everytime someone in OPEC coughed and the markets went through the roof.

What on earth are you talking about?

DublinWriter wrote:

I think it's the best time for first time buyers in Ireland to buy is right now because of all the political parties playing fast and loose with promises about stamp-duty that have artifically driven prices down.

Yikes, you really might consider reading a bit more of this thread.

SkepticOne

DublinWriter wrote:

Obviously you're not old enough to remember the whole 'Black Wedneday' crises in the UK in 1992. Interest rates went up 4 times in one day, triggering a massive property crash in the south-east of the UK that didn't recover until the late 90's.

In fact the crash was well underway by the time of the currency crisis. See graph below.

SkepticOne

thewing wrote:

Interest rates don't cause property crashes, unless they're exorbitant as in the mid-80's(18%)

Supply and Demand will - the key thing is employment - live register figures are climbing steadily and there is more and more news of job-cuts.People can't afford to pay their mortgages/buy new houses then you'll see a crash

The rate rises will become a factor post the 5.25% mark, thats when the market should feel a pinch with quite a number of people taken out of the loop.

I think it is dangerous to think that specific events will trigger a crash. At the end of the day all crashes are caused by the same thing. In order for the bubble to develop in the first place a continuous stream of buyers attracted to rising prices needs to be exist. The more the prices rise the more buyers are attracted. Inevitably, the supply of buyers dries up and the market crashes.

Things like rate rises, job cuts, uncertainty over stamp duty etc. are all red herrings really. At most the effect the timing of the crash but they are not the cause of it. The crash itself is inevitable once there is a bubble.

dragonkin

SimpleSam06 wrote:

You obviously haven't been keeping up with the latest developments in alternative fuels, especially with regard to bio-butanol harvested from algae channels, which has almost the exact same characteristics as petrol, and an enormous yield per acre. In the time it will take for fuel shortages to become an issue, we can be well and truly weaned off the oil teat.

I wouldn't count on algae coming along to save us, probably best discussed in green issues though
http://www.theoildrum.com/node/2531

In conclusion it seems that while their intentions may be heroic, GreenFuel and De Beers have promised way more than they can possibly deliver. I am so confident of this that I would love to extend a familiar $1000 bet on this.

DublinWriter wrote:

Don't forget that we will be seriously running out of oil in the next five years. This will lead the same type of hyper-inflation that happened in the early 1970's.

Nobody knows that is is actually what will happen, who's going to buy a house in the middle of the country if it costs €50 to drive to the nearest town and seeing as how the vast majority of first time buyers homes do not have good public transport (developers didn't like that idea) this is especially likely.

Have a look here for somebody's take on what might happen with regards hyperinflation but there are hundreds on theories http://www.energybulletin.net/3701.html.

SimpleSam06

dragonkin wrote:

I wouldn't count on algae coming along to save us, probably best discussed in green issues though
http://www.theoildrum.com/node/2531

Indeed. From their mission statement:

dragonkin wrote:

This real and tangible crisis of supply and demand is now inevitable.

Thats a balanced scientific point of view alright. I could throw back five links for every one of yours, but this is the wrong forum...

dragonkin

SimpleSam06 wrote:

Thats a balanced scientific point of view alright. I could throw back five links for every one of yours, but this is the wrong forum...

I thought the article was very good, the points were carefully worked out and most facts supported. Obviously the medium is biased but what medium isn't.

Anyway people can make up there own minds it always good to hear the two sides of the story.

As an aside here is a fascinating bit of information, http://www.theoildrum.com/node/2186 it's a tall order to replace oil completely, but we'll come through somehow.

Now back on topic....

TCollins

dragonkin wrote:

Nobody knows that is is actually what will happen, who's going to buy a house in the middle of the country if it costs €50 to drive to the nearest town and seeing as how the vast majority of first time buyers homes do not have good public transport (developers didn't like that idea) this is especially likely.

I agree with you completely here. If you cant get public transport to and from work, make damned sure you are within 20 miles drive of work or you're going to be skint from the petrol costs.

I have a mate who lives in Gorey and works in south Dublin.
Trains from Gorey are not an option. The service is rubbish and only any good if you work near the train station.
And its nearly 2 hours on the train from Gorey to Pearse station.

he drives about 60 miles to and from work.
60 * 2 * (18cents per mile roughly, probably more like 20, but i'll take 18) = €108 a week on petrol just driving to work

48 * 108 = €5184 a year on Petrol. Nuts. Better off paying an extra €500 or so a month on a mortgage closer to where he works.

Gorey is so overrated its unbelievable. The only thing going for it is that it has a road to Dublin for all the commuters and petrol wasters. Then people go on about the new motorway there. I think its just an excuse to spend even more money on petrol.

People are going to have to learn to live within 20 miles of where they work in future as petrol will just kill them.

I really dont think people appreciate the cost of petrol at all. It should be mandatory that each and every person buying a house calculates their petrol consumption in a year and what it costs them. This should be stress tested as it can have even more of a cost increase than mortgage interest rates.
For example a 10 cent per litre increase in petrol is going to cost my mate more than a .5% interest rate increase over a year.

On another note i was having another interesting property discussion with my landlord about interest rates going up. Says he feels sorry for those who are skint and find it difficult to get the extra together, but that it doesnt really effect investors in the way that it effects FTBs (Tax deductions for interest paid for investors), so he doesnt notice an interest increase at all.
Its rents that he is more concerned with, not interest rates. Also said he isnt really bothered about capital appreciation, though he would like some. Says he is very comfortable with what he makes and makes enough money elsewhere not to have to care too much about more money coming in. He doesnt need the money (as he has only a mortgage on 4 out of the 12 houses he owns, and only has this for tax reasons) from the houses so will not sell them at all. They are for the children and grand children 20 or 30 years in the future. I wanted to buy the one we're in

I would be careful about lumping all of the investors into the same circumstances. Each individual investors circumstances are wide and varied. But Interest rises seems to be a non issue to all of them i've spoken to who do have a mortgage outstanding. And none of them are worried about capital appreciation as they are in it for the long term.
I think we should credit investors in general with more brains and more money than we usually credit them with.

gurramok

TCollins wrote:

On another note i was having another interesting property discussion with my landlord about interest rates going up. Says he feels sorry for those who are skint and find it difficult to get the extra together, but that it doesnt really effect investors in the way that it effects FTBs (Tax deductions for interest paid for investors), so he doesnt notice an interest increase at all.
Its rents that he is more concerned with, not interest rates. Also said he isnt really bothered about capital appreciation, though he would like some. Says he is very comfortable with what he makes and makes enough money elsewhere not to have to care too much about more money coming in. He doesnt need the money from the houses so will not sell them at all. They are for the children and grand children 20 or 30 years in the future. I wanted to buy the one we're in

That landlord thinks everything is going to be rosy for next 30 years.

Its a risky business relying on the rental market to pay for his multi mortgages for next 30 years as there will be a glut of rentals out there in the coming year with downward pressure on rents imho.

Thats what crashes do, houses get cheaper and then present people renting can afford to buy hence less people around to fill the rentals, nevermind what happens to the economy(the migrant part)

His personal circumstances to help pay a mortgage could also change, he maybe forced to sell depending on how he earns his money elsewhere

Excellent post about the commuters, many of them just don't realise the conclusion you came to!

TCollins

gurramok wrote:

That landlord thinks everything is going to be rosy for next 30 years.

I actually made that point to him. He doesnt expect things to be good all of the time at all. He made the point to me that there will be ups and downs, but investors (big and small) arent as exposed as i was making out to him at all.

gurramok wrote:

Its a risky business relying on the rental market to pay for his multi mortgages for next 30 years as there will be a glut of rentals out there in the coming year with downward pressure on rents imho.

I dont think rents are going to go down a lot at all (if they do). Even if they went down to levels of 10 years ago, its not as bad to an investor as we might think.

gurramok wrote:

Thats what crashes do, houses get cheaper and then present people renting can afford to buy hence less people around to fill the rentals, nevermind what happens to the economy(the migrant part)

I believe the economy and property prices are tightly linked.
If people cant afford houses (no jobs or whatever) they have no choice but to rent

gurramok wrote:

Excellent post about the commuters, many of them just don't realise the conclusion you came to!

I really think its more important to stress test on petrol prices than interest rate hikes even. Areas outside Dublin are so overvalued right now its disgusting. However, i dont believe that Dublin County out to maybe 20 miles from the city centre (balbriggan, Naas, Bray) are overvalued at all. As long as the main center of population is in Dublin, the market will stand up oyt to that distance.
Once people in general wake up and smell the petrol and figure out that this will effect them more than interest rates they will have no choice to get real about commuter towns beyond 20 miles.

And this is just the cost in their pocket, never mind on their time commuting.
Unlike interest rate which may come down or stabilize in the future. Petrol will increase at a rapid rate for many decades to come.

chump

priceless ... By Brendan Keenan in the indo

The markets' general bet is that there will be one more rise, and rates will peak at 4.25pc. But there are significant bets on 4.5pc, and a few that yesterday would be the last in the current tightening cycle, which began with rates at 2pc last November.

Where does he get it?

Also Axel Weber has stated recently enough that he isn't too happy with the code-words employed by the ECB is signalling rate increase - so Brendan Keenans take on it

The question has been raised by a couple of Council members, most recently by the influential president of the Bundesbank, Axel Weber.

The most intriguing speculation is that, if the hawkish Mr Weber is raising the question of what do to when normality is restored, he must think that normality is not far away.

TCollins

Someone been readin my posts.

http://www.askaboutmoney.com/showthread.php?t=56565

Good analysis of the numbers though.

This should put some reality into the actual monetary costs commuting, never mind the time travelling.