Value of property

Got thinking about this after reading the Sean Fitzpatrick book....

You might believe a property is worth what someone will pay for it and that its as simple as that, but during the boom the availability of money drove up the value of property and now during the recession its the unavailability of money is dictating the value of property so therefor there can never be an objective value of residential property because it is always dictated by the availability of finance.

McTigs

mariaalice wrote: »

Got thinking about this after reading the Sean Fitzpatrick book....

You might believe a property is worth what someone will pay for it and that its as simple as that, but during the boom the availability of money drove up the value of property and now during the recession its the unavailability of money is dictating the value of property so therefor there can never be an objective value of residential property because it is always dictated by the availability of finance.

More a case of the restriction on credit causing everyone to eventually cop on for a minute 3 or 4 years ago.

The value of property is still what someone is willing to pay. The buyer will (or certainly should!) take many things into consideration when deciding what a property is worth to them. Anybody who decides what they are willing to pay for a house based on the finance available to them is looking at it all the wrong way.

I am not talking about it from the point of view of an individual property buyer but am looking at residential property in general, Leaving aside people who fund their purchases without a mortgage most people will need some sort of loan and no matter what they think the property is worth.... its the availably of finance that will dictate what they can pay and therefore its the availability or lack of availability of credit in the form of a mortgage that is dictating the value of property.

McTigs

mariaalice wrote: »

I am not talking about it from the point of view of an individual property buyer but am looking at residential property in general, Leaving aside people who fund their purchases without a mortgage most people will need some sort of loan and no matter what they think the property is worth.... its the availably of finance that will dictate what they can pay and therefore its the availability or lack of availability of credit in the form of a mortgage that is dictating the value of property.

Do you honestly think that if the banks were giving out mortgages like they were five years ago that we would be back to 2006 prices?

There is no question that a lack of finance is holding a few ill advised eager beavers from buying right now but looking at "residential property in general" a lack of available finance is only one of many reasons why prices are are not stablising.

JoeyJJ

Yeah I'm not sure the availabilty of credit is the overriding factor. I have a loan approval for far above what I am willing to spend in the house about 2 weeks old ready to go. However there is no way in hell I am ever going to take the full amount no matter how much I like a house. I will probably draw down 70-75% of what we were offered. If I do buy soon which may or may not happen.

Other factors for me are more important, the unknown cost of credit in the coming years, Unemployment, Emigration, Empties (depending on area and property).

Treehouse72

mariaalice wrote: »

Got thinking about this after reading the Sean Fitzpatrick book....

You might believe a property is worth what someone will pay for it and that its as simple as that, but during the boom the availability of money drove up the value of property and now during the recession its the unavailability of money is dictating the value of property so therefor there can never be an objective value of residential property because it is always dictated by the availability of finance.

Let there be no doubt about it: The No. 1 factor determining property prices is credit availability. It has always been thus. All the rest - sentiment, yield, location, disposable income, migration patterns etc. etc. - is distinctly secondary to the overwhelming importance of access to finance.

That is why so many of us can be so confident that property prices will continue to tank: it is objectively and without any shadow of a doubt true that the Irish lending landscape - the size of the baking sector and the amount available for them to lend - will be tiny in future years compared to the bubble. Therefore, it is literally IMPOSSIBLE for house prices to rise to those levels again. Some poor deluded folk still think that a bit of buoyant sentiment or wage increases might kick-start things again, not realising that those things simply do not matter when placed beside massive importance of the lack of credit.

alb

mariaalice wrote: »

Got thinking about this after reading the Sean Fitzpatrick book....

You might believe a property is worth what someone will pay for it and that its as simple as that, but during the boom the availability of money drove up the value of property and now during the recession its the unavailability of money is dictating the value of property so therefor there can never be an objective value of residential property because it is always dictated by the availability of finance.

A property is still worth what someone will pay for it, by definition. What you're noticing is that 'what someone is willing to pay' depends in many cases on how much they can borrow.

You make it sound like everyone would be willing to pay more if there was more finance available. This isn't true. There are still many people with 100,000e in cash who don't need finance and they choose not to buy any number of properties for sale, because they are not worth the asking price (to them).

Patrickof

True, value is what someone is willing to pay.

But in a normal functioning market, which we don't have at the moment, the cost is also a consideration. The oversupply of empty units means that cost is irrelevant in the current market but in a normal situation a builder will not build properties if he can not recover the cost of the build.

The major factors are (and some are set, some are variable):

Site Cost - very variable, the major variant throughout the boom
Materials - well defined and usually fairly consistent
Labour - again, well defined but getting cheaper if pay agreements are modified
Profit margin - no point in building if this can't be realised - was the other major variable throughout the boom
Taxes - well defined

This method of valuation is (funnily enough) known as the cost or residual method.

Houses shouldn't be any different than any other product, the sale price is (should) be the cost + a profit margin, or the supplier goes out of business.

Stanagley enough there is a piece in the times property supplement today saying that lack of finance is a big factor in the residential property market at the moment but then the piece also say they have sold nearly all the apartments in a development in Templogue which are priced at 270k...that seem a bit contradictory to me.

antiskeptic

McTigs wrote: »

Do you honestly think that if the banks were giving out mortgages like they were five years ago that we would be back to 2006 prices?

Of course we would.

People don't change in essence so the fundamentals of why they chased the dream then will have them chase the dream next time round. That's why property bubbles occur again and again.

D1stant

antiskeptic wrote: »

Of course we would.

Nah. Sure theres a herd mentality, but the herd is definitely hiding in the bushes for the forseeable future

Lack of credit is actually a good thing for now. It stops people making disastrous mistakes. When the banking/economy has levelled out, NAMA has cleared its debt - it will be time then to think about buying. But I dont think we'll see another boom for at least 2 decades

As for the cost+profit argument - thats fine for new builds - there aint a lot of them as the herd is spooked and there is an oversupply of mostly badly built, badly located houses

I do see an contrdictory issue though. Well built, spacious (older) houses in central good locations are not dropping as much (in Limerick at least). These are not in NE and the sellers can generaly ride the storm. They are only coming up for executor sale and holding price pretty well. Any views from people as to what will happen to that particular sub-market?

magneticimpulse

D1stant wrote: »

Nah. Sure theres a herd mentality, but the herd is definitely hiding in the bushes for the forseeable future

Lack of credit is actually a good thing for now. It stops people making disastrous mistakes. When the banking/economy has levelled out, NAMA has cleared its debt - it will be time then to think about buying. But I dont think we'll see another boom for at least 2 decades

As for the cost+profit argument - thats fine for new builds - there aint a lot of them as the herd is spooked and there is an oversupply of mostly badly built, badly located houses

I do see an contrdictory issue though. Well built, spacious (older) houses in central good locations are not dropping as much (in Limerick at least). These are not in NE and the sellers can generaly ride the storm. They are only coming up for executor sale and holding price pretty well. Any views from people as to what will happen to that particular sub-market?

I know people blame the Banks/Government on the Irish Crisis. However I think it was the Irish herd mentality which really got us into this mess. Nobody put a gun to anybodies head to force them to buy property. Many people made disastrous choices.

Suddenly everyone thought they were an economist...from any joe blog in the street. They were very close minded and didnt actually look at what if scenario's such as interest rates increase etc.

I know some of us have studied Business in school. But I think it should be really important now to educate everyone in school about Finance, how to manage it etc etc. Ireland didnt have to worry 10 years ago as credit was unheard off...even credit cards were not so common. People really need to educate themselves in the basics. Money doesnt grow on trees...and people should really only purchase what they can pay upfront in cash!! If you cant do it, then you obviously cant afford it. That is not any bank/politcians fault, its up to the person to be educated enough to make a choice!

Snakeblood

magneticimpulse wrote: »

I know people blame the Banks/Government on the Irish Crisis. However I think it was the Irish herd mentality which really got us into this mess. Nobody put a gun to anybodies head to force them to buy property. Many people made disastrous choices.

Suddenly everyone thought they were an economist...from any joe blog in the street. They were very close minded and didnt actually look at what if scenario's such as interest rates increase etc.

I know some of us have studied Business in school. But I think it should be really important now to educate everyone in school about Finance, how to manage it etc etc. Ireland didnt have to worry 10 years ago as credit was unheard off...even credit cards were not so common. People really need to educate themselves in the basics. Money doesnt grow on trees...and people should really only purchase what they can pay upfront in cash!! If you cant do it, then you obviously cant afford it. That is not any bank/politcians fault, its up to the person to be educated enough to make a choice!

What I don't get when people say 'It's the herd mentality so it's all peoples fault' is that banks acted like a herd racing to lend money to anyone, at rates of interest that would punish the banks, politicians acted in a herd ignoring the warning signs. Why is it only the people who get blame? They trusted their politicians and banks because they were the ones with the power to ensure that Ireland didn't go off the rails, and they failed.

I agree on the finance education part though.

Treehouse72

Snakeblood wrote: »

What I don't get when people say 'It's the herd mentality so it's all peoples fault' is that banks acted like a herd racing to lend money to anyone, at rates of interest that would punish the banks, politicians acted in a herd ignoring the warning signs. Why is it only the people who get blame? They trusted their politicians and banks because they were the ones with the power to ensure that Ireland didn't go off the rails, and they failed.

I agree on the finance education part though.

People want it every way. One the one hand they demand more say in the democratic process and yet on the other they either show utter disinterest when pubic matters are put to them or, worse, make awful decisions when actually offered the chance to engage. Hence the charge that Irish people became a herd ignorant and arrogant barstool economic geniuses is a fair one. They were wrong, wrong, wrong and wrong again.

The blame in order goes: FF Government, then the people, then the banks. And given it was the people who empowered the government, they are lucky not to be No. 1 in that triumvirate of cretinism.

Godge

Treehouse72 wrote: »

Let there be no doubt about it: The No. 1 factor determining property prices is credit availability. It has always been thus. All the rest - sentiment, yield, location, disposable income, migration patterns etc. etc. - is distinctly secondary to the overwhelming importance of access to finance.

That is why so many of us can be so confident that property prices will continue to tank: it is objectively and without any shadow of a doubt true that the Irish lending landscape - the size of the baking sector and the amount available for them to lend - will be tiny in future years compared to the bubble. Therefore, it is literally IMPOSSIBLE for house prices to rise to those levels again. Some poor deluded folk still think that a bit of buoyant sentiment or wage increases might kick-start things again, not realising that those things simply do not matter when placed beside massive importance of the lack of credit.

I agree to a large extent. But as well as the availability of credit, there is the issue of the cost of credit. While interest rates have remained at a low of 1% (unseen and unheard of), variable and fixed mortgage interest rates have increased while trackers have disappeared, never to return.

If you want to see where prices should end up, take an average salary (say €50,000) and assume 30 -40% goes on repayments, assume a mortgage rate in the region of 5 - 7% for the lifetime of the mortgage (35 years), work out what that would repay, add 10% for a deposit and you should get the price of a bog-standard three bedroom house in a new estate somewhere in west Dublin or north Dublin, with good public transport links, once credit availability has returned to normal. In the meantime, if you have the money or the credit, wait until prices drop further as they are not yet at this level and take advantage of your money or credit and buy below this price.

I haven't worked it out fully but I would expect that it would mean borrowings of around €175,000 and a house price in the region of €190,000. That is how low prices will have to fall if everyone wants to own a house.