Buying in a falling market

Plankmonkey

Oafley Jones wrote: »

:eek:
Please tell me this is a wind-up?

What the credit crunch has nothing to do with it? If the banks were to start loosening their lending criteria again houses would not become affordable to more people? Please explain to me what I am missing here. Are you suggesting the credit crunch is simply a coincidence and something to be ignored? :eek: :eek: Are you suggesting that the world markets could return to normality yet prices would still continue to decrease in Ireland because we have something else going on that different to the rest of the world? We're a special case?

Oafley Jones

Plankmonkey wrote: »

What the credit crunch has nothing to do with it? If the banks were to start loosening their lending criteria again houses would not become affordable to more people? Please explain to me what I am missing here. Are you suggesting the credit crunch is simply a coincidence and something to be ignored? :eek: :eek: Are you suggesting that the world markets could return to normality yet prices would still continue to decrease in Ireland because we have something else going on that different to the rest of the world? We're a special case?

You should read McWilliams book The Generation Game. I'm not his biggest fan -his eagerness to use crass generalisations and coin awful labels for them etc- but you'd pick up some ideas from it.

martian1980

Plankmonkey wrote: »

What the credit crunch has nothing to do with it? If the banks were to start loosening their lending criteria again houses would not become affordable to more people? Please explain to me what I am missing here. Are you suggesting the credit crunch is simply a coincidence and something to be ignored? :eek: :eek: Are you suggesting that the world markets could return to normality yet prices would still continue to decrease in Ireland because we have something else going on that different to the rest of the world? We're a special case?

In the ten years from1996 to 2006, Irish residential mortgage debt rose by 522 per cent per capita; in the US, the same debt rose by 103 per cent. This should tell you that we're a pretty special case

Firetrap

Sentiment.

gurramok

Plankmonkey wrote: »

Don't get me wrong, I'm not denying they're overpriced. I'm saying I take a different view on why they are overpriced.

My salary and the OH's salary have far out paced our repayments and the interest hikes. It was bloody tough to start with, but got easier as time went by.

A 30 year mortgage does not actually mean 30 years because you can pay off more as it becomes more affordable to you. If you don't then I guess you would be considered poor by todays standards or maybe you just prefer to spend the money on other things. I don't see where the argument that things were so much easier back in the day comes from. People are picking out figures and taking them out of context.

Edit: not to mention most couples come into a lot of money other than their salaries. Inheritence being the most common example.

Your missing something on inflation. We're in ECB now, target 2% inflation unlike our parents time so trying to inflate your way out of a jumbo mortgage these days won't work.

2006 was the year houses stopped selling en masse in this country with 100% mortgages still available, a full year before the credit crunch hit, explain that one sir.

Plankmonkey

gurramok wrote: »

Your missing something on inflation. We're in ECB now, target 2% inflation unlike our parents time so trying to inflate your way out of a jumbo mortgage these days won't work.

Inflation is way above the target 2%. Wages far outdo inflation in this country. And I'm not just talking about the yearly increases. People move jobs a lot more than they used to and with that come massive pay hikes. A lot of industries also give out bonuses on top of salaries.

To say our banks were giving out mortgages to people who could not afford them is to say we had our own subprime market fiasco here in Ireland. We did have sub prime lenders but it was small.

By and large, people who were given a mortgage could afford the repayments and still can. I'd argue that most defaulters are the unfortunate thousands now out of work. Mass unemployment correlates to an increase in defaulters. On top of that, banks will give you no leeway at all during the credit crunch.

gurramok wrote: »

2006 was the year houses stopped selling en masse in this country with 100% mortgages still available, a full year before the credit crunch hit, explain that one sir.

Good point. From what I remember the start of interest rate hikes started it. People stayed away and along came the credit crunch and those who only intended on waiting now find they need a deposit. But yes, based on that you could say we were in for a correction anyway. What would have happened were it not for the credit crunch? Probably no point arguing that one as no one can say.

gurramok

Plankmonkey wrote: »

Inflation is way above the target 2%. Wages far outdo inflation in this country. And I'm not just talking about the yearly increases. People move jobs a lot more than they used to and with that come massive pay hikes. A lot of industries also give out bonuses on top of salaries.

Yes, in Ireland inc, its been hovering around 3-5% pa since the boom started and around 1-2% in the 90s.

I'm not sure when you took out your mortgage, but inflation here was in double figures in the late 70s/early 80s hence my reference where people were able to afford mortgages taken out back then(for now) due to high inflation.

These massive pay hikes have not really materialised in the last maybe 4 yrs, they were usually 5% pa for alot.

I can't see how peoples wages will continue to rise at that pace given we're entering recession, a whole different ball game.

House prices rose 270% in the bubble, wages did not, i think for wages it was circa 33% hence prices did and do not reflect proper values (someone may correct me on that wages rise stat.)

Plankmonkey wrote: »

To say our banks were giving out mortgages to people who could not afford them is to say we had our own subprime market fiasco here in Ireland. We did have sub prime lenders but it was small.

Yes, thats where the crux is, how do we define whats 'safe' lending as to opposed to wreckless lending.

We didn't have ninja mortgages as widespread as the US but those 100% and giveaway topups that were handed out were alarming.

Plankmonkey wrote: »

By and large, people who were given a mortgage could afford the repayments and still can. I'd argue that most defaulters are the unfortunate thousands now out of work. Mass unemployment correlates to an increase in defaulters. On top of that, banks will give you no leeway at all during the credit crunch.

I'd agree to a certain degree. I know people who fork out 40-50% of their net income on a mortgage. It ain't right and i would not call that affordable.

Others have defaulted through:
-interest only mortgages switching to full mortgages when honey moon period was up
-3yr and 5yr fixed mortgages taken out pre '06 on 2% ECB + retail offers which have now doubled payments for consumers

The mass unemployment has not happened yet in the states. People defaulted en masse due to honeymoon interest rate periods been reset to 'normal' rates.
So i wouldn't put mass unemployment as a vital factor. People will still have jobs, its what they earn to afford mortgages that counts.

Plankmonkey wrote: »

Good point. From what I remember the start of interest rate hikes started it. People stayed away and along came the credit crunch and those who only intended on waiting now find they need a deposit. But yes, based on that you could say we were in for a correction anyway. What would have happened were it not for the credit crunch? Probably no point arguing that one as no one can say.

This is where we bears disagree as to reasons why people stayed away. I say they stayed away because of high prices. A 100% mortgage over 40yrs could not even help buyers afford so they along with sentiment stayed away.
Then a yr later the credit crunch hit us so a double whammy for buyers.

If the credit crunch did not happen, prices would still have fallen because its a classic bubble.
Prices fell between mid '06 and mid'07 and our own bubble would of deflated anyway yr on yr.

SimpleSam06

Plankmonkey wrote: »

Surely there will be a bounce once confidence has returned to the economy and people rush in (once the media have announced that prices have bottomed out). I'm not suggesting there will be a return to the crazy days, but there's bound to be an initial surge,

Actually a lot of property discussions mention what is known as a "dead cat bounce", where exactly what you describe takes place. It does not signal the bottom of the market however, just a bump in the slope downwards.

Plankmonkey wrote: »

especially as once the ball is back in the sellers court, there's going to be a lot of hurt and bitter vendors out there. You're likely to see a very unfavourable market for buyers.

To be honest anyone that is taking broad market conditions personally is going to have their ass handed to them one way or the other, so I wouldn't worry about "hurt" sellers.

Plankmonkey wrote: »

I think there is also an assumption that prices are plummeting because they were overpriced. People could afford houses, even 2 or 3 for some people. So how were they over priced?

No, here you are conflating affordability with value, two different things. I could afford a box of matches at €50 per box, so could a lot of people, but that wouldn't be good value. The market bottom will be reached when affordability and value draw together.

Plankmonkey wrote: »

every generation can say houses were expensive when they bought them.

There are degrees of ease, however. While it might never be easy per se, it will certainly get easier.

Plankmonkey wrote: »

Wait 10-15 years and inflation reduces your payments to peanuts. I'm not denying that they are now over priced, because lending terms have tightened and there is an oversupply.

As other posters have mentioned, the aim for the ECB is 2% inflation. The ECB is strongly influenced by the German economy, and rightly so given its importance to Europe, and the Germans are terrified of inflation. Our own inflation is nowhere near what it was in the past, also.

Plankmonkey wrote: »

The key here is forget about the housing market, and keep an eye on the global financial situation. A new US president for 2009, prices must be near the bottom there too, so positve news coming from the US will have a knock on (just as negative news had a knock on). Bad news from the banking sector is getting scarcer and scarcer too. These are the factors people should be considering, not whether prices have dropped to 2001 or 2002 levels or any other level for that matter. Its not 2001, its 2008.

You are dead on correct in the latter part of the statement, in that lending levels are key to the price of property, but I find your sunny outlook on future financial conditions to be a little optimistic. There are a lot of rumblings coming down the wire about the Alt-A and Prime mortgage default levels in the US, which threaten to knock the subprime crisis into a cocked hat. No amount of government thumbs in the leaky dams will slow that down if it cracks.

Also there is the long term effect of the current financial crisis to consider, as others have mentioned the banks no longer trust one another. It takes a long time for the effects of these problems to be properly felt, for example the great depression happened years after the Wall Street crash.

There are going to be some badly burned fingers by the time the smoke has cleared, and it will be a long, long time before banks put themselves in this position again, or are allowed to by government regulation.

ZYX

gurramok wrote: »

House prices rose 270% in the bubble, wages did not, i think for wages it was circa 33% hence prices did and do not reflect proper values (someone may correct me on that wages rise stat.)

I don't know the exact figure but wages rising 33% does not make sense. If we take it that the boom lasted from 1995 - 2005 that means you are saying wages rose 3% a year. As I say I don't know the exact figure but surely it was higher than that. After all during this period we went from a low/medium pay economy (in Western terms) to one of the highest paid in the world. Also in the time tax rates were seriously reduced, thereby increasing tax home income

SimpleSam06

ZYX wrote: »

I don't know the exact figure but wages rising 33% does not make sense.

He's referring to the average industrial wage in the private sector 2001 to 2006, a period typically referred to as the "boom". If you look at the average wages from the CSO, 1998 to 2006,, you will see that it jumps (for industrial workers) from €428.82 a week to €624.45. Other sectors are similar to this, excluding the public sector which had earnings growth closer to 65% from '01 to '06.

House prices on the other hand for the same period went from €87,000 in 1996 to over €300,000 in 2006, a better than 300% spike in prices.

jmayo

Plankmonkey wrote: »

Inflation is way above the target 2%. Wages far outdo inflation in this country. And I'm not just talking about the yearly increases. People move jobs a lot more than they used to and with that come massive pay hikes. A lot of industries also give out bonuses on top of salaries.

Can i ask what sector you work in because I know a few that have wage freezes and the workers are damm glad to just hang onto their jobs.

Plankmonkey wrote: »

To say our banks were giving out mortgages to people who could not afford them is to say we had our own subprime market fiasco here in Ireland. We did have sub prime lenders but it was small.

Banks and lending institutions were handing out loans of all sorts and mortgages to almost anyone. 100% mortgages, mortgages based on rental income from rent a room schemes was reckless.

Plankmonkey wrote: »

By and large, people who were given a mortgage could afford the repayments and still can. I'd argue that most defaulters are the unfortunate thousands now out of work. Mass unemployment correlates to an increase in defaulters. On top of that, banks will give you no leeway at all during the credit crunch.

Do you believe that the "credit crunch" is only temporary and we will some day return to the days of 100% mortgages and no real savings record ?

Plankmonkey wrote: »

Good point. From what I remember the start of interest rate hikes started it. People stayed away and along came the credit crunch and those who only intended on waiting now find they need a deposit. But yes, based on that you could say we were in for a correction anyway. What would have happened were it not for the credit crunch? Probably no point arguing that one as no one can say.

Ah yes the old deposit and people actually having to save for things are alien concepts to those that left school and college post mid 90s.

ZYX

I have been thinking about when will market bottom out. I know most people here will say we are nowhere near the bottom but if we look at a few points which seem to be the accepted view in this forum.

1. Property prices will fall 40-50%,
2. Apartments and/or bad locations will fall most, possibly 70% or more
3. Permanent TSB house price survey way underestimates house price levels, so prices have probably fallen over 20% already.
4. Inflation should be taken into account which means real price fall already is 30%

So my question is, if you get a good deal on a decent house in a decent location, say 10% below current market value are you buying at bottom of market?

ZYX

SimpleSam06 wrote: »

He's referring to the average industrial wage in the private sector 2001 to 2006, a period typically referred to as the "boom". If you look at the average wages from the CSO, 1998 to 2006,, you will see that it jumps (for industrial workers) from €428.82 a week to €624.45. Other sectors are similar to this, excluding the public sector which had earnings growth closer to 65% from '01 to '06.

House prices on the other hand for the same period went from €87,000 in 1996 to over €300,000 in 2006, a better than 300% spike in prices.

I forgot to say thanks for that simplesam.I just noticed reply now. I thought 33% was way too low. So 70% or so would be more accurate for period 1996-2006. However a jump of 213,000 in house prices from 87,000 to 300,000 is less than 250% (still well above wages) not 300%

astrofool

It's actually about 350%.

ZYX

astrofool wrote: »

It's actually about 350%.

How do you work that out. Were SimpleSams figures wrong? Otherwise €87,000 to €300,000 is a rise of €213,000 which is a rise of 244.82%

esmeralda

Rising interest rates may put the actual price of the house down, but isn’t the cost of buying it exactly the same as if the interest rates had remained low (even if you do manage to scrape together a 20% and only have an 80% mortgage)? What’s better about paying 1,000 Euros for a house that costs 200,000 at low rates rather than 1,000 Euros a month for a house that cost 250,000 at high interest rates? Surely the only person to benefit from lower house prices resulting from higher interest rates is the body who those interest rates are paid to and people who don’t need to ask for a loan to buy – i.e. very rich people. Meanwhile the vast majority of house buyers are paying exactly the same as if house prices hadn’t fallen and the house seller is receiving less money.

Also surprised to see so many people against 100% mortgages here (although I can see why banks are against them at the moment). Having to save up a deposit does instill housebuyers with more discipline and might save some of them from the horrendous situation of negative equity, but different people have different circumstances. Speaking as someone who due to my country of residence could only access an 80% loan when I finally managed to buy 5 years ago, I can tell you that paying a rent and trying to save whatever was left month after month, year after year wasn’t much fun. I could have bought far sooner with a 100% mortgage, saving me a lot of money and frustration. Fine if you can crash at your parents while you save or they can help you with the deposit, especially if you’re sharing the cost with a partner, but not so good when for whatever reason you are a single person who can’t live in the parental home.

Senna

ZYX wrote: »

How do you work that out. Were SimpleSams figures wrong? Otherwise €87,000 to €300,000 is a rise of €213,000 which is a rise of 244.82%

87,000 x 3.44 = 299280

So just above 344%

Senna

esmeralda wrote: »

Rising interest rates may put the actual price of the house down, but isn’t the cost of buying it exactly the same as if the interest rates had remained low (even if you do manage to scrape together a 20% and only have an 80% mortgage)? What’s better about paying 1,000 Euros for a house that costs 200,000 at low rates rather than 1,000 Euros a month for a house that cost 250,000 at high interest rates? Surely the only person to benefit from lower house prices resulting from higher interest rates is the body who those interest rates are paid to and people who don’t need to ask for a loan to buy – i.e. very rich people. Meanwhile the vast majority of house buyers are paying exactly the same as if house prices hadn’t fallen and the house seller is receiving less money.

Also surprised to see so many people against 100% mortgages here (although I can see why banks are against them at the moment). Having to save up a deposit does instill housebuyers with more discipline and might save some of them from the horrendous situation of negative equity, but different people have different circumstances. Speaking as someone who due to my country of residence could only access an 80% loan when I finally managed to buy 5 years ago, I can tell you that paying a rent and trying to save whatever was left month after month, year after year wasn’t much fun. I could have bought far sooner with a 100% mortgage, saving me a lot of money and frustration. Fine if you can crash at your parents while you save or they can help you with the deposit, especially if you’re sharing the cost with a partner, but not so good when for whatever reason you are a single person who can’t live in the parental home.

Interest rates were historically low, they were not at a normal rate, they weren't going to stay at that level forever. Its better to be able to afford the mortgage repayment at the higher rate of interest, and then its a bonus if rates drop. Were as people were purchasing at the maximum amounts available at the low rate and are now under more pressure seen rates have risen.

100% mortgages for all was irresponsible lending from banks, that does not mean that it didn't suited some people and was a good choice for others. But in the majority they were given out so people could stretch there budgets as far as possible and pay the peak bubble price.
If someone was taking out a mortgage of €1000 per month, with a net wages of 4000K per month (single wage) on a 25 year mortage, all with a 100% mortgage, then there is no problem, but people took them out on 40 year mortgages with repayments of 40-50% of a joint net wage, all at the low interest rates, now that irresponsible.

gurramok

You own more of that house with an 80% mortgage than a 100% one and pay less over the lifetime of the mortgage hence 100% mortgages are a bad buy(including rosk of negative equity straight away)
A higher interest rate(within reason) on a lower sum is better than a lower interest rate on a higher sum in this bubble as that higher sum usually involved longer terms(extra 10 yrs at least) and less capital being paid off at the start of the mortgage years.

ZYX

Senna wrote: »

87,000 x 3.44 = 299280

So just above 344%

That means 300,000 is 344% of 87000. That is not the question. The point is how much has property risen. It has risen 213,000. 213,000 is 244.82% of 87,000. So property has risen 244.82%

ZYX

gurramok wrote: »

A higher interest rate(within reason) on a lower sum is better than a lower interest rate on a higher sum in this bubble as that higher sum usually involved longer terms(extra 10 yrs at least) and less capital being paid off at the start of the mortgage years.

Depends totally on the sums involved and on interest rate. Interest rates have doubled, so prices need to halve for the higher rate to be better.
I feel like a maths teacher this evening.

The_Conductor

ZYX's figures are accurate.

If you get a chance Wonnacott and Wonnacott - "Introductory Statistics" is an excellent introduction to calculating and interpreting statistics. Mann- "Applied Biometrics" is also a good introduction.

S.

gurramok

This link is where i got the 270% figure from. Contrast to the 30% rise in consumer index.

It's to 2005 so the figure would be higher to 2006 as we know house prices still rose from 2005 to 2006!

http://www.finfacts.com/irelandbusinessnews/publish/article_10006275.shtml

SimpleSam06

ZYX wrote: »

That means 300,000 is 344% of 87000. That is not the question. The point is how much has property risen. It has risen 213,000. 213,000 is 244.82% of €87,000. So property has risen 244.82%

Then again, if you tell someone that prices were €87k, then they jumped 250%, people will automatically think "oh, prices topped out at €217,500", as in multiply the baseline by 2.5, which is patently incorrect.

What I said (verbatim) was that prices had spiked better than 300%, which is correct, in that a house will cost you 3.44 times more now than then, a rise far and away higher than wage rises can explain. True, prices have risen by a smaller percentage than 344%, but thats not what I said.

As they say, lies, damned lies, and statistics. And in this case, semantics and context. I can see how you might interpret my comment differently though. Also, I think we can all agree that this is a Bad Thing.

ZYX wrote: »

Depends totally on the sums involved and on interest rate. Interest rates have doubled, so prices need to halve for the higher rate to be better.

Its not quite as simple as that. For example...
Mortgage got for €400,000 over 30 years at 4%, 5% deposit making it €380,000:
€1814 per month

Mortgage got for €300,000 over 30 years at 5%, 15% deposit making it €255,000:
€1368.90 per month

For a total saving of €160,236 over the lifetime of the mortgage. Even if interest rates go to 6% on your lower repayments, you still save €102,564. These figures better reflect market conditions over the last few years to the current date, I feel.

Also just on a point of interest, nothing to do with the discussion really, when I was poking around looking for a mortgage calculator, I came across this page:

All Irish Permanent International’s lending products have been withdrawn.

Thats the entire content of the Irish Permanent mortgage calculator page.

ZYX

SimpleSam06 wrote: »

Then again, if you tell someone that prices were €87k, then they jumped 250%, people will automatically think "oh, prices topped out at €217,500", as in multiply the baseline by 2.5, which is patently incorrect.

What I said (verbatim) was that prices had spiked better than 300%, which is correct, in that a house will cost you 3.44 times more now than then, a rise far and away higher than wage rises can explain. True, prices have risen by a smaller percentage than 344%, but thats not what I said.

I'll agree with you if we follow the same lohic for wages. So houses "spiked" more than 300% and wages "spiked" more than 150%.

SimpleSam06 wrote: »

Its not quite as simple as that. For example...
Mortgage got for €400,000 over 30 years at 4%, 5% deposit making it €380,000:
€1814 per month

Mortgage got for €300,000 over 30 years at 5%, 15% deposit making it €255,000:
€1368.90 per month

For a total saving of €160,236 over the lifetime of the mortgage. Even if interest rates go to 6% on your lower repayments, you still save €102,564. These figures better reflect market conditions over the last few years to the current date, I feel.

Of course you are forgetting to include inflation. If we assume a very low level of inflation of just 2% on average for next 30 years. The house bought at €300,000 after 30 years is worth €540,000 and the house bought at €400,000 is worth €724,000. So while the dearer house would cost €160,000 to buy over the lifetime of the loan, it would be worth €180,000 more.
On a related theme, banks try to induce people to use their products by using SimpleSam06's logic. They ignore inflation and say how much someone will save by paying off loans early. The reality is if inflation is higher than the interest rate you are being offered, try to get a 100%, interest only mortgage. It will save you money.

ZYX

SimpleSam06 wrote: »

Also just on a point of interest, nothing to do with the discussion really, when I was poking around looking for a mortgage calculator, I came across this page:

Thats the entire content of the Irish Permanent mortgage calculator page.

So what. Are you confusing Irish Permanent with Permanent TSB?

The_Conductor

ZYX wrote: »

So what. Are you confusing Irish Permanent with Permanent TSB?

Irish Permanent International is the international arm of Permanent TSB, and would have been involved in the provision of mortgages for overseas properties (mostly Spain/Portugal, but also elsewhere).

ZYX

smccarrick wrote: »

Irish Permanent International is the international arm of Permanent TSB, and would have been involved in the provision of mortgages for overseas properties (mostly Spain/Portugal, but also elsewhere).

You forgot to say "to the British Market"

The_Conductor

SimpleSam06

ZYX wrote: »

I'll agree with you if we follow the same lohic for wages. So houses "spiked" more than 300% and wages "spiked" more than 150%.

Ah, but I didn't say anything about the percentage rise of wages. I simply gave the figures. You are attacking a position I didn't take.

ZYX wrote: »

Of course you are forgetting to include inflation. If we assume a very low level of inflation of just 2% on average for next 30 years. The house bought at €300,000 after 30 years is worth €540,000 and the house bought at €400,000 is worth €724,000. So while the dearer house would cost €160,000 to buy over the lifetime of the loan, it would be worth €180,000 more.

First off, you are making the basic and very much mistaken assumption that house prices track inflation. They don't, that would have been the point of the boom and ensuing crash. Secondly you are making unfounded assumptions about the market in 30 years time, which you have no idea about, nor has anyone else.

While property may end up roughly tracking inflation in a few years, the devaluation it is currently undergoing makes buying now a foolish move at best, unless you are very sure what you are doing (long term family home, safe employment).

Your mortgage repayments on the other hand, are very much trackable with regard to interest rates, so having a smaller loan, even at higher interest rates, will save you enormous sums of money in real terms, as the figures from my previous post underscored.

Also you seem to have missed the point that someone taking out a large loan will be hammered six ways from Sunday with interest rate rises. The poor stump who took out the €380k mortgage at 4% is now repaying €2278 a month at 6%, one hundred and fourty four thousand euros more than he thought he'd be paying at the start.

ZYX wrote: »

So what. Are you confusing Irish Permanent with Permanent TSB?

Could you point out to me where I said that, like a good man?

smccarrick wrote: »

Irish Permanent International is the international arm of Permanent TSB, and would have been involved in the provision of mortgages for overseas properties (mostly Spain/Portugal, but also elsewhere).

Its still interesting to see such a stark milestone of the zeitgeist, I think.