Irish Property Market chat II - *read mod note post #1 before posting*

hometruths

https://www.boards.ie/discussion/comment/118536256#Comment_118536256

Adding 3% to todays rates would be a very big deal to most FTBs. Enough to significantly reduce their budgets hence demand across all price points.

I take your point on oil in the near term, I don't think it will be $150 next year but I do think it will get there and beyond over the next decade, pulling prices across the board up with it. I think we'll see it over $100 this year.

Re supply chains, what I meant is the bottle necks caused by pandemic is likely to spell the end of JIT inventory for lots of businesses. Sure the bottle necks will eventually get sorted, but those who previously relied on JIT will be once bitten, twice shy. It's inflationary not because parts/components/stock are unavailable, but because they are available and customers will cover the carrying cost of that.

Timing belt

https://www.boards.ie/discussion/comment/118536072#Comment_118536072

This time last year central bankers around the world were warning that the financial world was not longer representing what was happening in the real economy. There was a big sell off but that didn't last long as the USA stepped in with more stimulus which send the message that it won't let the stock market crash and as a result you had a massive rally for the rest of the year which sucked in more and more cash as greed set in without any real fear. All that is happening at the moment is that an element of fear is back as investors don't know what the FED will do... Despite the FED signposting their intentions for a long time.

If you are suggesting that interest rates should have started to rise 5 years ago then you probably have forgotten that FED did raise rates by a small amount 4 years as the economy was strong and in this resulted in the economy grinding to a halt and the FED had to step and reduce rates again to prevent a recession.

SmokyMo

https://www.boards.ie/discussion/comment/118536256#Comment_118536256

Why are you so sure rates wont rise? Because it ll strangle economic growth?

What's more politicly damaging? unemployment or high inflation? I think latter.

Amadan Dubh

https://www.boards.ie/discussion/comment/118536317#Comment_118536317

If people think there is no quick fix to housing costs, raise interest rates to 3% and overnight you'll see a lot of properties coming to market.

hometruths

https://www.boards.ie/discussion/comment/118536341#Comment_118536341

Interest rates will rise irrespective of what happens in our property market.

Plenty of other quick fixes too though. If a few them coincide with interest rate rises we'll see a bit of a correction to put it mildly.

timmyntc

https://www.boards.ie/discussion/comment/118536341#Comment_118536341

Currently housing is such an attractive investment because price inflation & rental yield beats any bonds or savings available - were interest rates to rise, this would be a less attractive investment option, & many corporate entities may exit the Irish market (or downsize).

Near 0% interest rates is always going to lead to asset inflation somewhere - were rates to rise not only property prices but also stocks would likely see a big drop. There aren't many asset classes out there that wouldnt drop with a rise in rates.

MacronvFrugals

Irrespective of how true the statement is, this wont win the Taoiseach many votes!

https://twitter.com/gavreilly/status/1486311864921464834?s=20

Timing belt

https://www.boards.ie/discussion/comment/118536332#Comment_118536332

Inflation is forecast to be 4.4% this year and dropping to 2.4% in 2023. Unemployment in the Eurozone is still 7+% and until this drops to sub 5% it will influence interest rates. The USA and UK both have unemployment under 5% plus high inflation so they have no option but to raise rates to prevent a wage inflation spiral. The EU as a whole does not have this issue (although some countries do) and can wait longer before they would get into a wage/inflation spiral.

The ECB is not a political party or influenced by political parties so they will not care much if there policy is politicly damaging to any political party.

Rates will rise once the ECB start QT which will have an impact on all market rates (including mortgage rates) in the EURO but this will have no impact on the ECB base rate which I would expect to still be negative or close to zero by the end of the year regardless of inflation because undertaking QT will take the heat out of the economy.

If the ECB and all other economists have got there predictions on inflation wrong and it continued to be 4+% in 2023 then possibly we may see the ECB rate rise to 0.25% but I would only give that a 10% chance of occurring.

Any government would pick higher inflation over high unemployment any day of the week as the tax take increases and the real value of the debt they have falls.

Villa05

https://www.boards.ie/discussion/comment/118536318#Comment_118536318

Was it to actually prevent a recession or to prevent a stock market crash.

They are 2 different outcomes

Where is the inflation in the USA, housing?

Timing belt

https://www.boards.ie/discussion/comment/118536317#Comment_118536317

Even if rates rose by 3% it would do little to dampen demand from FTB's as the mortgage repayment cost is not the issue for them. In fact for most FTB's that are paying rent it would still be significantly cheaper to buy even if mortgage rates rose by 3%

I should add that the 3% is over a 5 year period and that is on the assumption that there were no shocks to the economy and that we had 5 years growth similar to what is in place today. If there was a shock to the economy or lower growth rates may only rise as little as 1% over the 5 year horizon.

The other thing to note is that even if rates did rise fast and quickly it would not impact the majority of mortgage holders as something like 90% of mortgages are fixed for 3-5 year period. So they would not initially be impacted by rising rates.

Timing belt

https://www.boards.ie/discussion/comment/118536311#Comment_118536311

Oil was one of the biggest contributors to inflation in 2021 and last years prices rises will be felt in a secondary bout of inflation in 2022 as the last years oil prices lead to higher prices in the shops of a wide range of goods this year due to higher input and transport costs.

You are right in saying Gas has increased in price more than oil and that will be felt consumers in heating bills and to a smaller extend in prices in the shops due to increased electricity costs (especially fertiliser costs). The main reason for this is that most of the manufacturing of goods takes place in China and there economy is not as exposed to Gas prices. But yet these goods do need to be transported and every boat/Plane/truck will all use Oil.

Timing belt

https://www.boards.ie/discussion/comment/118536694#Comment_118536694

It was because the economy stopped growing.

The inflation in the USA has become across the board as they reached full employment which lead to wage increases which lead to the broad based inflation as more money chases fewer goods.

Timing belt

https://www.boards.ie/discussion/comment/118536729#Comment_118536729

Some of the data can be found here:

https://www.cso.ie/en/releasesandpublications/fp/fp-trsi/therentalsectorinireland2021/landlords/

Rising rates would impact landlords as they would be able to get a similar return else where for a lot less effort so you would expect to see them exit the market and reduce the no number of rental properties available which in turn would push up rent prices or where that was capped by the RPZ the actual task of finding a property would be a lot harder.

Timing belt

https://www.boards.ie/discussion/comment/118536421#Comment_118536421

I don't think the REIT's and institutional landlords would leave the market because property is not a liquid asset and a lot of these investors are the likes of pension funds who will be interested in the regular cashflow. I would expect that new investments in properties would slow if investors could find a more liquid risk free asset that was paying an equivalent yield.

Villa05

https://www.boards.ie/discussion/comment/118536819#Comment_118536819

So the economy is overheating, raising rates is the natural weapon in such circumstance 3

UpTheSlashers

https://www.boards.ie/discussion/comment/118536506#Comment_118536506

He and his older brother have done fairly well out of blocking new housing developments around Cork City.

Timing belt

https://www.boards.ie/discussion/comment/118537005#Comment_118537005

The USA economy looks like it is overheating because of the tight labour market. And that is why they are signposting rate increases in march this year and looking to shrink it's balance sheet.

The issue with the USA raising rates is that tightening monetary conditions to deal with an overheating USA economy has ripple effects else where around the world as the dollar is the global currency. Just look at developing currencies who have issued Debt in dollars rather than in their own currency. These countries have to raise rates in their country regardless of economic conditions to protect their currency as they need to repay the debt in dollars. This in turn can cause deep recessions in these developing countries which will pull down global growth.

Villa05

Would the dollar be as strong if the stock market was correcting to more appropriate prices.

Timing belt

https://www.boards.ie/discussion/comment/118536341#Comment_118536341

Raising rates to 3% overnight would result in less demand in housing from institutional investors and may result in small Landlords exiting the market which would result in an small increase in the supply of houses for sale at the expense of renters who end up with a reduced supply of rental properties available.

The Demand for housing still exists and due to the fact that most mortgage holders are on a fixed rate it would not have an immediate impact on them so you wouldn't expect a uptick in properties for sale from mortgage holders running into financial difficulty. If anything they may put off selling their existing house and moving to a new a house if it resulted in them taking out a new mortgage.

Added to that the cost of financing projects by developers would increase which would push up their breakeven point which may result in less properties being built by the private the sector.

I have laid out my thought process and explained why I think there would only be a modest uptick in supply of houses for sale. So can you please elaborate on why you think overnight you will see a lot of properties coming to the market if rates upped up 3% overnight.

https://www.boards.ie/discussion/comment/118536853#Comment_118536853

When Landlord exit, most likely house is bought by someone. That someone under current circumstances is either :

1. A Tenant paying good rentals and hence can afford a house. He or she will vacate a house which will come back to market as rental properties OR
2. To other landlord who will rent it again. I'm sure he not gonna leave it vacant.

So this fallacy of LL existing will lead to less supply of rental homes, ain't sure how valid it is.

What am I missing here.

Timing belt

https://www.boards.ie/discussion/comment/118537494#Comment_118537494

The strength of the dollar has more to do with the real economy and overseas demand for US Treasuries as opposed to what is happening on the stock market.

A good example of this is where countries export goods into USA are paid in dollars.

If they fx the dollars back into their local currency then their local currency will strengthen to the dollar which will make it more expensive to export goods to the USA which will result in reduced demand and a slow down in the exporting countries economy.

To avoid this most exporting countries use the USD that they have been paid with to buy US bonds priced in USD. This is why the likes of China and oil rich countries own so many US Treasuries and why imported goods are generally so cheap in the states.

Timing belt

https://www.boards.ie/discussion/comment/118537607#Comment_118537607

rental properties normally have higher occupancy levels than a FTB buying a new house.

Put it this way if there are 2 couples renting a house.

The landlord decides to sell the property. one of these couples buys a house on the market...... net impact at housing supply at this stage is zero but once you take into account the other couple will need to find somewhere to rent you get a reduction in supply of rentals.

cnocbui

https://www.boards.ie/discussion/comment/118537607#Comment_118537607

"Around 20,000 landlords have left the rental market since 2016, according to Department of Housing officials.

There were 320,000 landlords in 2016 and recent figures show there are currently just over 298,000." https://www.independent.ie/news/20000-landlords-have-left-rental-market-since-2016-41281211.html

A decrease is a decrease. If all those properties were being bought by REITS and rented out by them, there would not be a net decrease, but that is unlikely.

PommieBast

https://www.boards.ie/discussion/comment/118536341#Comment_118536341

It would certainly push a lot of mortgages in the direction of default, but without a willingness to repossess them actually coming to market is another issue..

Bass Reeves

https://www.boards.ie/discussion/comment/118538074#Comment_118538074

https://www.boards.ie/discussion/comment/118536341#Comment_118536341

What a load of rubbish. The vast majority of buyers over the last 3-5 years ara fixing rates for a minimum of 3 years. Few of these will see a rise in interest rate in the medium term. People that bought 3+ years ago have seen there property rise by 25%+

On a 300k mortgage a 3% rise in rates is 450/month onto your mortgage. However anyone that has bought a house over the last 10 years is still way better off than someone that has remained renting. As well as that repossession of the family home in Ireland is impossible.

Investors that wanted to exit the market have gone to a certain extent. Even if tents fell 30-40% they would still cover most mortgages that are 5+years old.

Sorry lads no cheap houses unless a few nuclear bombs go off in Ukraine or Russia

Amadan Dubh

https://www.boards.ie/discussion/comment/118537534#Comment_118537534

Again, the demand for housing only exists at strong levels to a certain price point. However, based on the estimated cost of building it is pretty clear that the price point at which a lot of the BTRs are to be let is already above the affordable level for current demand. Unless we start to see wage rises or increased borrowing abilities then there will be no demand for new housing as people just won't be able to afford it. That is unless the State of FF and FG are happy to keep drawing on the magic money tree they seem to think exists for propping up the housing market.

If rates rose 3% tomorrow you would possibly have institutionals offloading properties they are holding vacant or else they would drop the asking rents for these places. And 3% rise in interest rates would still make property more attractive than bonds, particularly if demand as you say is so high. Small landlords have left en masse already so there is already a correlation between low interest rates and small landlords leaving the market. Mortgage holders might see a few hundred euro per month added to their monthly repayments and say "stuff this, now I'm cashing in" or else "I can't afford this anymore".

On inflation being less to do with supply and energy constraints and more to do with QE, this is a view also shared by Pangea Mortgage brokers, and is the reason why the ECB is going to destroy so many European citizens spending power by delaying taking action on inflation, being too wedded to traditional views and inflation trends of the past;

BreakingNews.ie: Inflation, not supply, is real issue in Irish housing market, says mortgage broker.

https://www.breakingnews.ie/ireland/inflation-not-supply-is-real-issue-in-irish-housing-market-says-mortgage-broker-1248383.html

We believe there’s a high probability that interest rates need to go up quite quickly, far more than what’s being predicted, so you could get 1.5-2 per cent within 12-18 months. That will change the dynamics of the housing market.

"In the Eurozone now, we have records, the highest inflation ever. That’s not the result of temporary lockdowns or the Suez Canal issues and stuff like that, the primary reason is the amount of money that’s been put into the economy. I think the big story of this year is that inflation is going to continue to increase and eventually rates could have to get jacked pretty high and that’s going to have real implications for people’s mortgages.

Amadan Dubh

https://www.boards.ie/discussion/comment/118538275#Comment_118538275

In reality it could be more like 4 or 5% for mortgage interest rates like what we had in 2005-2008 when the dust starts to settle and three years in a twenty five or thirty year mortgage is nothing.

The labour shortage will take a long time to sort out as it isn't just general low paid labour that's in demand but skilled labor that won't be easily imported. There's road to run with inflation even with some minor interest rate increases.

At the same time, when they eventually cave in, I think the ECB will jump on the Ukraine skirmish as a justification for interest rate increases rather than admit that it completely misjudged the inflation being experienced. The narrative will be that the prolonged inflation experienced post-covid was due to additional issues caused by the Ukranian conflict which resulted in higher energy prices blah blah blah just don't admit that the QE was excessive and misdirected.

Timing belt

https://www.boards.ie/discussion/comment/118538495#Comment_118538495

Why in gods name would the ECB blame the Ukraine for a justification for interest rate increases...... What is your thinking here as the prospect of a war would only encourage the ECB not to raise rates because of pending economic damage. What is happening in the Ukraine hasn't resulted in higher energy prices it has the potential to but gas prices are down from there highs of last year and trading at levels seen back in august last year.

The biggest driver of inflation and house price increases this year will be wage inflation and this will be the trigger that will make the ECB start monetary tightening.

Timing belt

https://www.boards.ie/discussion/comment/118538489#Comment_118538489

You are right that demand for housing only exists up to a certain price point. But you fail to take into account that the price point is rising year on year due to increases in wages.

e.g.

Wage growth in 2019 was 3.6%, 2020 was 5.5% and last year around 7%.

if a couple on a 100k could have borrowed 350k at the start of 2019 and wages increased with average wage growth it would mean that by the end of 2021 they would have been able to borrow 409k and would explain a increase in prices of 12.5% between the start of 2019 and the end of 2020

Explain the logic of institutional investors offloading property and exiting the market if rates rise. Any institutional investors that were playing the property market sold on property in 2020 and 2021 to pensions funds etc who were looking for regular cash flow, a good yield and a low risk asset. Likewise why would any landlord (institutional or small landlord) reduce rates during a time of inflation and a shortage of rental properties.

A 3% increase in rates would result in the market value existing bonds in circulation dropping massively and significant looses to investors that have not managed their interest rate risk. Banks and insurance companies should be relatively ok as they are risk adverse when it comes to rates and will 99% of the time mitigated the risk on a long Bond by as asset swap or an interest rate swap. The sector I would have concerns for is the funds sector as we have seen an increase in risk appetite as they have opted for long Bonds with a higher yield.

A 3% rise would take the heat out of institutional investors buying more property as the differential between property yields and a other low risk investments would narrow.

With regardless small landlords leaving the market and it's correlation with low interest rates all I can say is that there is a big difference between correlation and causation. Low rates actually encourages small landlords to not to exit because of the lack of alternative investments with a similar risk due to the low interest rate environment.

Why would a mortgage holder 'cash in' or say 'I can't afford this anymore' and sell his property because rates are rising? Where will the mortgage holder live because the rent will be more than his mortgage repayments even after the rate rise.

On inflation all I will say is that article is designed to scare people and get them in his door so he can get commission on selling them a long fixed rate mortgage.

Bass Reeves

https://www.boards.ie/discussion/comment/118538495#Comment_118538495

Sorry first if all it was 3% not it's 5%.lads are picking figures out of there a4se as the saying goes. A 5% rise in interest interest rates would see Irish interest rates above the 2010 crisis. It took three years from 2008 to get to that back then highest rate was less than 6% and the country was on its knees at that stage.

Now you are saying we will go to over 7% for house mortgages. These rates would have to rise right accross the EU not just Ireland. The interesting thing it s in the 2008-12 period EU central bank rate never went above 1% I think. It was the interbank rate that banks were lending to each other was killing us.