Four reasons for a property slump, can anyone think of reasons otherwise?

soma

Something that I rarely ever see discussed is the following:

People, when talking about Dublin prices, often point abroad and say "we are like paris, london, new york now - sky high city prices that the majority cant afford".

However there is one crucial aspect in which we differ from those cities and it's the nature of employment in those cities compared to our own. Those economies, while obviously sensitive to a degree to external factors and events, are largely based on indigenous home-grown businesses & industries.

Whereas we are the most globalised nation on earth - extremely sensitive and vulnerable to the whims of economies and events thousands of miles away. Yes the whole world is globalised to a certain extent, but london can withstand huge shocks to the system and yet battle on. A great example is IT, Im sure plenty of boards members suffered bigtime during the worldwide IT bust (2003 especially was a wasteland) however during this time london still provided good job propects and many irish developers went over there (considered it myself even tho i was very lucky and was never made redundant here unlike several of my IT mates).

What absolutely kills me is seeing Irish people pumps millions and millions into bricks and mortar (Im not including family home purchase here) instead of building up our indigenous industries.

If we dont have a strong jobs producing economy thru irish-based enterprise then in the long term we are setting ourselves up for a massive fall as those jobs will simply wander away to the next low cost tiger economy.

DublinWriter

whizzbang wrote:

who says you have to own a house anyway?!;)

For starters, security in old age.

Look at what's happening at the moment with OAP's having to sell significant equity in their houses, or even their house outright, to pay for long term care.

Do you think by the time we get to 65, and with a rapidly ageing population demiograhic, that this situtation will improve?

Remember that the countries were renting remains popular, such as the Nordic/Scanic countries, Germany, France, Belgium, etc, all have excellent public health systems.

I know it's a depressing thought.

whizzbang

DublinWriter wrote:

For starters, security in old age.

Look at what's happening at the moment with OAP's having to sell significant equity in their houses, or even their house outright, to pay for long term care.

Do you think by the time we get to 65, and with a rapidly ageing population demiograhic, that this situtation will improve?

Remember that the countries were renting remains popular, such as the Nordic/Scanic countries, Germany, France, Belgium, etc, all have excellent public health systems.

I know it's a depressing thought.

Security: I have a PRSA maxed out, I'd rather to not have to sell a house to fund my old age.
Demographic: I think I'll be working until 75 or 80 because of this, I am maxing out my PRSA as I know the government pension will be worthless.
Maybe I'll retire to France and use their health system! Long live free movement within the EU!

You are right though, we will all be screwed in 40 years time if the pensions system isn't sorted!

In reality I will buy a house in the next 10 years, just not now where the market seems to be topping out.

J

soma

DublinWriter wrote:

The first flaw in your arguement is that the cost of property, in the long economic term, only goes in one direction - up.

eh, sorry to bust your bubble there man, but property is like any asset known to man, it can go in both directions. e.g. Property in dublin commuter belt fell 0.1% in the last few months (miniscule I know, but still negates your 'point'), Japan prices having been falling for years, UK (except NI) prices are falling. Im also amazed when people stick to the mantra "property in ireland can never go down". We are in a brand_new_ballgame here, we've never had a 10 year economic boom before and we've never been unable to control our own interest rates before, quite simply all bets are off.

DublinWriter wrote:

The second flaw in your arguement is that you're assuming that interest rates will stay at their current historic low over the next five years. Oil prices hit an all time high today and the trend looks like it will continue, driving up inflation and interest rates in the long term.

Actually higher oil prices will help keep interest rates lower for longer. But aside from that, a 2% interest rate rise would make an absolute world of difference to the ability of alot of single income mortgage holders to make their monthly payments [e.g. thats close to a 300/mth increase on a 30 yr 250k mortgage], couples are more resilient (altho this can go out the window when children are entered into that equation).

DublinWriter

soma wrote:

What absolutely kills me is seeing Irish people pumps millions and millions into bricks and mortar (Im not including family home purchase here) instead of building up our indigenous industries.

True, but the operations of the 'big-boys' here are small-time, yet crucial, in terms of their overall global activities. Could you really see Microsoft relocating their Sandyford EMEA distribution hub in Bangalore given the rising costs of transport?

I also heard that Dell brought back a lot of their recently Indian-outsourced operations back to Bray after operational problems there.

I think any major companies that could have outsourced would have done so by now. Intel have invested millions in their recently opened Fab-7 plant as part of another 10 year commitment to manufacturing chips in this country.

However, it is depressing to see the government throwing some €30 million at the failed MediaLab vanity project, when they could have funded 30 indigenous start ups with a million each.

MorningStar

whizzbang wrote:

Cheers for the reply MonrningStar, you make a lot of good points.
My only real disagreements are as follows:
1. SSIAs, I think people are over stating how much of an effect these will have on the property market. I think the average payout will be about €12K, so even if you have two people together that will not go far towards a €350,000 house! it might cover stamp duty and leval fees and the bus home

A couple has two SSIAs at the limit, with the riskier options that is €50k. Some parents did it for their kids also. I know a couple who have 4 going on through family etc... A lot bigger risk than people think. A lot of people living at home with these things. Even if it just covers stamp duty that means they can borrow more.

whizzbang wrote:

2. By my calculation I save €20k if the house prices stay the same, I wouldn't bother waiting if I thought that was all I would save. In reality I think prices will drop so I could end up saving a lot more! I'm really going to make my decision over the next year or so. The prices seem to be leveling off at the moment so it would be a bit silly of me not to wait to see if they manage to stay level or start to decline.

J

So basically you think prices will drop even though your reasons for this belief are at least questionable. Nobody is sure but why bother asking if you have already made up your mind? Your argument to wait has been used constantly for the last 15 years eventually it will be right but that' won't help you personally. Property is a long term investment and you should look at it that way. Your decission and renting for life is a valid option if you want

DublinWriter

soma wrote:

eh, sorry to bust your bubble there man, but property is like any asset known to man, it can go in both directions. e.g. Property in dublin commuter belt fell 0.1% in the last few months (miniscule I know, but still negates your 'point')

My 'point' is to look at the long-term picture, 10, 20, 30 years. Since when has the value property ever fallen in those kind of time windows? What happened in the last few months is not indicative of any long term trend.

soma wrote:

Japan prices having been falling for years, UK (except NI) prices are falling. Im also amazed when people stick to the mantra "property in ireland can never go down".

You're confusing property prices with property growth rates. Property prices have *never* gone into reverse in the UK, except briefly during the currency-crises there in the early 90's.

However, property growth rates are falling in the UK, but are price overall is still on the rise. The official rate was a growth of .2% for last month alone.

whizzbang

MorningStar wrote:

A couple has two SSIAs at the limit, with the riskier options that is €50k. Some parents did it for their kids also. I know a couple who have 4 going on through family etc... A lot bigger risk than people think. A lot of people living at home with these things. Even if it just covers stamp duty that means they can borrow more.

So basically you think prices will drop even though your reasons for this belief are at least questionable. Nobody is sure but why bother asking if you have already made up your mind? Your argument to wait has been used constantly for the last 15 years eventually it will be right but that' won't help you personally. Property is a long term investment and you should look at it that way. Your decission and renting for life is a valid option if you want

I read somewhere that €12k was the average SSIA payout, I doubt there are very many people waiting on €50K payouts. I'd say it would be in the 100's if even that.

I am looking at growth rates in house prices, as you can see over the last 3 or 4 years the rate of increase in house prices has slowed, April 03 -> April 04 was 13% growth, April 04 -> April 05 was 6.5%, it looks like the growthrate for the year 2005 will be 5%. Once the growth rate goes below the inflation rate houses will be a losing value in real terms... they don't need to get to 0% growth.
http://www.finfacts.com/biz10/irelandhouseprices.htm
take a look at the year on year price increases.. if thing keep going the way they are we will be down to zero growth very soon, maybe a year or 18 Month. Do you think prices will stay growing even though the rate of growth is constantly decreaseing?

whizzbang

DublinWriter wrote:

What happened in the last few months is not indicative of any long term trend.

followed by..

DublinWriter wrote:

However, property growth rates are falling in the UK, but are price overall is still on the rise. The official rate was a growth of .2% for last month alone.

sorry, couldn't resist!

in reality you have to look at year on year figures, month on month is not reliable as summer is usually slower than teh rest of the year etc...

DublinWriter

whizzbang wrote:

Do you think prices will stay growing even though the rate of growth is constantly decreaseing?

Yes, because we are coming out of a property 'boom', a totally abnormal growth in the price of property. Just because things are beginning to normalise back to normal levels of growth doesn't mean that's an indication that the trend will go into reverse.

The worst case scenario for property price growth is that it will only track inflation.

DublinWriter

soma wrote:

eh, sorry to bust your bubble there man, but property is like any asset known to man, it can go in both directions. e.g. Property in dublin commuter belt fell 0.1% in the last few months

...because people have been priced out of Dublin and in the meantime property in Meath/Kildare is sky-rocketing.

Just look at the phenominal jump in house prices in the last 12 months alone in places like Ashbourne and Dunshauglin.

soma

Something to remember is the phrase "Rent is dead money".

This phrase is correct but it needs ammeding.

"Rent is dead money, and so is mortgage repayment interest".

Let's pretend Im gonna buy a property in dublin for 300k (270k mortgage). Now I strongly dislike apartments (most are dreadfully built in ireland, unlike the continent) so bear in mind this 300k just bought me a house in a pretty dodgy suburb, i.e. Im now living somewhere I dont like.

Let's say I get a 30 yr 270k mortgage with my bank, AIB, who actually do the second cheapest variable rate APR, 3.35%.

My monthly repayment is 1190 - mortgage relief = 1150.

If the first year I pay : 8952 in mortgage interest (i.e. dead money)
5319 towards the principal (i.e. real money saved)

If instead I rented a nice 2 bed apartment with a friend, and lets say we had high tastes (we each could easily rent for waaaaaaaaaay cheaper in other parts of the city) and decided to rent in dublin4, so we get the 2-bed apt for 1200 quid, so it costs me 600/mth.

In the that year I pay : 7200 in rent (i.e. dead money)
save 6600 - [by not paying mortgage (1150-600) * 12]

So Ive paid out less dead money, and saved more.

Bear in mind, these calculations dont include any kind of monthly life assurance, house insurance, interest rates rising or money spent on maintenance. And bear in mind Id be paying alot of rent, I could easily rent in the "dodgy dublin suburb"
that I just bought in for about 300-400/mth easy enough.

if I did that, lets say 400/mth

In the that year I pay : 4800 in rent (i.e. dead money)
save 9000 - [by not paying mortgage (1150-400) * 12]


In the future, if interest rates stay the same, then u will be paying less and less interest each year. However, interest rates minus inflation are virtually zero, so you have to expect them to rise in the coming years.

The only situation that makes the above a good deal for the home owner is if house appreciation continues at very high year on year levels. Will this happen? its certain possible for some areas but not for all, are u telling me in two years someone will pay 400k to live in tallaght/finglas/clondalkin..?

When you can rent, for less than the cost of mortgage interest alone - then you really wanna evaluate your situation.

Dont get me wrong, Id really love to own a house - but the maths at the moment are very disconcerting.

MorningStar

whizzbang wrote:

I read somewhere that €12k was the average SSIA payout, I doubt there are very many people waiting on €50K payouts. I'd say it would be in the 100's if even that.

There are a lot of people who are in for the full amount and couples have two. Practically every property expert agrees that they will effect the market. It's just degrees of. Every financial expert agrees that prices will go up on many goods and specifically cars, hoildays, home improvemnets and houses.

whizzbang wrote:

if thing keep going the way they are we will be down to zero growth very soon, maybe a year or 18 Month. Do you think prices will stay growing even though the rate of growth is constantly decreaseing?

Location, location, location! You can keep on building all you like but there will still be a limited supply in many locations particularly in Dublin. Fuel prices will never go down in the long term so a good property will last and beat the market. Don't try to use complex financial theory on something that esentially is a simple supply and demand curve. It depends on how and where you plan to live.

soma

DublinWriter wrote:

Could you really see Microsoft relocating their Sandyford EMEA distribution hub in Bangalore given the rising costs of transport?

I also heard that Dell brought back a lot of their recently Indian-outsourced operations back to Bray after operational problems there.

Actually the (Irish) company Im contracting for just outsourced a whole bunch of development and support to their new office in bangalore! :eek:

DublinWriter wrote:

However, it is depressing to see the government throwing some €30 million at the failed MediaLab vanity project, when they could have funded 30 indigenous start ups with a million each.

excellent point.

soma

DublinWriter wrote:

...because people have been priced out of Dublin and in the meantime property in Meath/Kildare is sky-rocketing.

Meath/Kildare is the Dublin commuter belt - it fell by 0.1%.

soma

DublinWriter wrote:

The worst case scenario for property price growth is that it will only track inflation.

That is an amazingly optimistic view of a "worst case scenario" !!

Gegerty

I Haven't read the whole post but just a comment about house prices. It won't be long before we see flat pack houses like they have in the states and also the low cost, dirt cheap material being used to make houses affordable in the UK (you can get a decent size house for £60K) is bound to make its way over here. When this happens you'll see less people wiling to pay the outragous rents we see today, promting some landlords to sell up. I doubt it will be on a major scale though.

Also we already have an affordable housing scheme, it will be interesting now to see if renters will be taking the 100% mortgages along with the affordable housing deal. It's a nice way to get out of the renting trap.

DublinWriter

soma wrote:

Meath/Kildare is the Dublin commuter belt - it fell by 0.1%.

Really? A friend of mine bought a 4-bed semi outside Asbourne last year for 235K, he had it valued recently at 275K.

I've been watching prices in Dunshauglin closely, what you could have had for 250K last year will now cost you 310K+

....but I'm sure you're right *g*

DublinWriter

Gegerty wrote:

and also the low cost, dirt cheap material being used to make houses affordable in the UK (you can get a decent size house for £60K)

Er, where in the UK can you get a decent sized house for £60K?

Exactly.

soma

DublinWriter wrote:

Really? A friend of mine bought a 4-bed semi outside Asbourne last year for 235K, he had it valued recently at 275K.

I've been watching prices in Dunshauglin closely, what you could have had for 250K last year will now cost you 310K+

....but I'm sure you're right *g*

Yes it's "me" who comes up with the stats, it's actually the permanent tsb / ESRI House price index report.

Taken from :
http://www.permanenttsb.ie/news/default.asp?nid=518

Commuter Counties: - Louth, Meath, Kildare & Wicklow

House prices in the commuter counties of Dublin fell slightly by 0.1% in June 2005, down from growth of 1.3% recorded in June 2004. Growth in the first half of this year has been relatively strong in the Commuter counties, up 3.0% to June 2005. The equivalent growth rate to June 2004 was 4.5% for Commuter counties.

House price growth in the commuter counties year on year to June 2005 was 4.5%, down from that recorded in May 2005 (5.9%) and June 2004 (11.4%). The price of a house in the commuter counties in June 2005 was euro279,268 up from euro267,265 in June 2004.

My original posting referred to that statistic & that statistic alone.

MorningStar

soma wrote:

Meath/Kildare is the Dublin commuter belt - it fell by 0.1%.

But Dublin house prices have risen! The commuter belt will get smaller again when fuel prices go up. Effectively to live in the commuter belt will end up being more expensive as running a car increases. Considering the length of time it takes to built public transport it can only get worst. People worry about commuter times yet don't consider the increasing costs of transportation. The next generation won't want to own a car or commute for 4 hours a day. For every 15 minutes of a commutepast 30 minutes apparently you lose an hour of personal time.

Zaph0d

DublinWriter wrote:

You're confusing property prices with property growth rates. Property prices have *never* gone into reverse in the UK, except briefly during the currency-crises there in the early 90's.

What is your source for this statement?

UK Property prices adjusted for inflation (real house prices) fell during three periods since 1957

-28% 1973-1978
-17% 1979-1982
-34% 1989-1996

source

soma

DublinWriter wrote:

Er, where in the UK can you get a decent sized house for £60K?

Exactly.

He's talking about timber framed houses (and other material that dont require as much use of expensive "wet trades" as traditional houses), this does not include the cost of the land. (i.e. often the major cost).

I think the figure of GB£60k comes from the fact that the brittish government ran a kind of competition for companies to see who could build quality cheap homes and an irish company (I think it was 'century homes') put one up for about eur90k.

soma

MorningStar wrote:

But Dublin house prices have risen! The commuter belt will get smaller again when fuel prices go up.

Goddamit man my post referred to the commuter counties! Don't make me have to come over there and thump you.. j/k

Gegerty

soma wrote:

He's talking about timber framed houses (and other material that dont require as much use of expensive "wet trades" as traditional houses), this does not include the cost of the land. (i.e. often the major cost).

I think the figure of GB£60k comes from the fact that the brittish government ran a kind of competition for companies to see who could build quality cheap homes and an irish company (I think it was 'century homes') put one up for about eur90k.

Yeah I don't know where exactly, I saw it on Sky news a couple of months back. The government are trying to encourage developers to use low cost materials.

Culchie

Zaph0d wrote:

What is your source for this statement?

UK Property prices adjusted for inflation (real house prices) fell during three periods since 1957

-28% 1973-1978
-17% 1979-1982
-34% 1989-1996

source

Is that because the price of property fell, or that inflation rocketed ?

Culchie

Zaph0d wrote:

What is your source for this statement?

UK Property prices adjusted for inflation (real house prices) fell during three periods since 1957

-28% 1973-1978
-17% 1979-1982
-34% 1989-1996

source

I took your years of property 'decline' and looked up new houses in UK as a whole

1973 - £11088 1978 - £20283
1979 - £21658 1982 - £33471
1989 - £71495 1996 - £70210

2005 - £164342

MorningStar

Zaph0d wrote:

What is your source for this statement?

UK Property prices adjusted for inflation (real house prices) fell during three periods since 1957

I love vodoo math and economics. Unless a loaf of bread costs the same as a house it is unrealistic. Houses do not fit in with inflation like food stuffs and cost of living. Property ownship is more of a social issue than economics. They aren't mutually exclusive but economic theory acknowledges this. The theory there would effectively mean houses will end up free. Take figures out of there correct use and you can miss the point like in the Simpson where disco Stu points out record sale went up 400% in the 70s.

lomb

whizzbang wrote:

I'm happy for you that your house to let will be paid off (10 year mortgage?), I couldn't afford a house in 98 and I can't afford one now.

I'm looking at it like this.

I pay rent of $575 a Month

Option A
Buy Appartment now
Pay €1,796 a month mortgate (€400,000, 30 years, 3.5%)
Let say €1450 per month of that is interest for first 5 years
After 5 years I have paid out €107,760
Of which €87,000 is interest
and €20,000 is paid off the principle

I finish paying the mortgage and pay a total of €646,624.35

Option B
I wait 5 years,
Pay €575 a month on rent = €6,900 a year
Save €350 a month (difference between mortgage and interest)
After 5 years time I have paid out €34,500 in rent
I have saved €20,000

I get a 25 year mortage on €380,000 (400,000 - 20,000)
Total repayments for which total to €570,710.87
Add on the rent I spent in the 5 years waiting €34,500
Add on the €20,000 I saved
Total outlay of €625,210
€20,000 less than if I bought now.

The only reason this makes sense is that I believe that 5 years time house prices will be less than now. So I am effectivly paying €34,500 to put off making the decision so I can see if I'm right.

Seeing as rents are a lot less than paying the interest on a mortgage it is currently worthwhile to continue to pay rent to put off buying a house to see if prices decrease. If rents rise significantly I have to buy as the number no longer work out, if house prises rise significantly I have to buy as number dont' work out. If house prices drop (which I think they will), or stay level I'm in the money

Ireland is not immune to Negative Equity!

for some reason people think we are!

J

so what u are saying is u are going to take a gamble, and can i ask what if u are worng? have u factored that into ur figures?

homeOwner

IMO property prices will not go into decline but increases will come inline with inflation pretty soon. I think the market is off the boil already in some areas.

Anecdotal eveidence: there is an second hand apartment in dundrum that has been on sale for over 8 months and I would have thought it was highly sellable (maybe because there is a glut of apartments being built there now demand is less than supply, surely this will also bring rent down in the area).... a work collegue has been looking at a house in dublin that seems to be underpriced for a quick sale and is the only person who has put an offer on it at asking price(maybe because it is summer). I know two people who are in the process of selling their investment apartments to buy something overseas and there has been very little interest in them and no offers yet. It just seems that there is not the same frenzied buying there was a few years ago.

I am really worried about what is going to happen when Spencer dock is finished, someone told me there is going to be 5000 apartments in the complex. Surely that alone will provide all the rental needs in the city centre for a while or at the very least reduce rent in the area. I also heard planning permission has been given for a huge development of apartments beside leopardstown business park including a 17 storey tower block. Can the city really cope with that many new properties over the next 3 years? It scares me that they are building so many apartments in dublin. I'm no economist but it simply has to affect rental prices. My point being that it will not become feasible for the average person with a bit of spare cash to buy investment properties as rent will not cover mortgage thus slowing everything down.