[Article] Time to get out of Rental Property?

The_Conductor

From Sunday's Irish Independent

THE word on the street is that a lot of investors who bought property in Ireland over recent years are getting nervous. At least that's the word on the streets of Galway, but the same is almost certainly true in other places across the country.

With interest rates on the rise, it's little wonder that folks are getting anxious. For the first time in a long time, many investors have begun to talk openly about cashing in their chips by selling their property investments.

The question I most often hear is no longer, "Is this a good time to buy an apartment to rent out?" but rather "Is this a good time to sell the apartment I bought a few years back?" Experience from other countries suggests that most investors here will get the timing wrong and will hold on to their investment properties for too long.

It is, alas, human nature to think that we can successfully predict the exact turning point of a housing cycle. By definition, very few investors get out at the peak, and most investors are left holding the baby as house prices drop.

The optimists, mostly from banks and real estate agents, will tell you that Ireland's housing market this year will pull off the long wished-for soft landing, with house prices stabilising but not falling. Unfortunately, the optimists don't have history on their side.

I can name no fewer than 44 episodes of house price booms that ended in busts in industrial countries since 1970. (I produced a study of these episodes when I worked at the Fed, America's central bank.)

Can anyone point to a single soft landing? In truth, a soft landing in the housing market is like the proverbial free lunch. There ain't no such thing. Housing markets just don't work that way.

The optimists will argue that house prices will be supported this year by continued strong growth in our economy and incomes. But this is a classic example of circular thinking. Forecasts of strong growth this year are based on the assumption that the housing market remains robust.

The reality is that growth in incomes is mainly coming from the property boom - and not the other way round. In turn, the buoyant economy is attracting floods of immigrants to our shores, mostly from eastern Europe. Many of these people will leave when the housing market goes sour. So who will investors rent their properties to, once that happens?

The optimists will protest that the increases in interest rates will not be large enough to damage our property market. Nice try, but no!

By the middle of this year, interest rates will probably have doubled from their level in late 2005. How high will interest rates go? The answer depends largely on how sustainable the nascent recovery in Germany's economy proves to be.

Most experts are very upbeat on Germany's economic prospects, and last week saw further positive economic data from that part of the world. Good news for the Germans, but bad news for Ireland's property market, because a resurgent German economy will make the European Central Bank more worried about inflation and therefore more inclined to hike interest rates. To be sure, interest rates in Europe will not go up by as much as they have done in the United States, where the housing market crashed last summer.

But try telling an investor here - whose monthly mortgage payment is now greater than the rent he receives - that higher interest rates don't hurt. That investor is now bleeding cash each month from owning investment property.

The scary thing is that he's not alone. Over recent years, one in every three new houses and apartments was bought by investors, often using interest-only loans. When interest rates were very low, rental income typically exceeded mortgage payments by a bit. However, as interest rates rose over the past year or so, that small margin disappeared and then turned negative.

Unless investors expect significant increases in house prices in the future, owning property for rent now looks like a losing bet. In the same way that a haemophiliac can bleed uncontrollably as a result of the slightest cut, even moderate interest rate increases can cause Ireland's investor-heavy housing market to bleed to death.

And there's the rub. Ireland's property market has only sentiment keeping it at the current dizzying heights. Nothing else.

It is pulling itself up by its own bootstraps. Investors are now in a game of second-guessing when other investors will decide to sell and bank the money they have made on property.

Given the rising number of sweaty palms around, an early exit looks like the smart move.

Alan Ahearne is a former senior economist at the Federal Reserve Board in Washington DC. He now lectures in economics at NUI, Galway

Alan Ahearne

miju

and to add to the woes of the property investor , the glut of properties from people cashing in their chips ( which is already well proven as having happened ) after a short price spike given shortage of rental supply they'll have major downward pressure on their rental yields with over supply in both the rental / for sale markets

really is a double edged sword that they wont win either way

chump

what ever happened to daftwatch miju?
Haven't been able to access it for a while...

purple'n'gold

The banks have every right to be worried about inflation, we should all be worried. And the government is causing most of it. (Inflation)

miju

chump wrote:

what ever happened to daftwatch miju?
Haven't been able to access it for a while...

i didnt develop daftwatch chump , if i'm not mistaken the credits for that go to whizzbang

chump

thanks miju,

it's the strangets thing - i cannot access the website at all from home, ntl connection, but it accesses it no problem at work - doesn't matter what browser!

miju

im on NTL at home and have the exact same problem but can get it in work no bother at all , if i was a paranoid man ..............

CiaranC

Here is a thread over on Broadband which will shed some light. Its a known NTL issue for several weeks.

Smoggy

"Article: Time to get out of Rental Property"

I have been trying to put this in words to the missus and was struggling. This article sums it up perfectly.

And to boot its from a respected source.

miju

CiaranC wrote:

Here is a thread over on Broadband which will shed some light. Its a known NTL issue for several weeks.

didnt know that , nice one Ciaran

l3rian

use a proxy to view daftwatch on ntl

click tools, internet options, connections, lan settings... tick the boxes, insert:

address: 128.112.139.82

port: 3124

or choose one from this list... http://nntime.com

seamus

Smoggy wrote:

And to boot its from a respected source.

Well I wouldn't consider the Indo to be a "respected" source.

Still a decent enough article though.

The_Conductor

seamus wrote:

Well I wouldn't consider the Indo to be a "respected" source.

Still a decent enough article though.

Lol....
I know what you mean though.

Smoggy

"Alan Ahearne is a former senior economist at the Federal Reserve Board in Washington DC. He now lectures in economics at NUI, Galway

Alan Ahearne" as the former senior economist is who I was talking about, rather than the Indo.