2021 Irish Property Market chat - mod warnings post 1

SpencerJC wrote: »

Last year was a strange one for sure. I think there are a lot of people who have been quietly saving (I know a few) and some of these deposits will come on stream this year. It's unfortunate, but a lot of people who were penalised financially by corona may not have been in the market anyway, lot of pub workers, retail etc. With the supply issue and banks continuing to lend, I don't see prices in Dublin dipping, more likely to go up imo. The biggest threat to housing prices is inflation. With all the money being pumped into the economy, at some point we will likely see inflation and interest rates go up. Falling house prices will follow when it becomes more expensive to borrow. Either way as a buyer, I don't see the environment getting much better (In Dublin). Other side of the coin is with 3.5 lending limits, how high is the ceiling

Yes you are correct that a rise in rates would cause a havoc on the property market. It would also kill all other asset classes as they have already repriced for a low interest rate environment for the next few years.

A lot of people were expecting inflation to come through in this months CPI especially in USA as the USD has been dropping in value and making imports more expensive. The market was full sure we would see inflation with the yield on the 10yr Treasury rising dramatically up to 1.18 only for the CPI to deliver modest to weak inflation and the yield dropping back to 1.08. There are a lot of signs that we will not see the economy boom without further intervention by governments. Even the additional 2 Trillion by Biden may not be enough to see inflation. As for Europe it faces even harder headwinds to see inflation as the majority of its inflation from previous QE came from a weaker EUR and with the USA doing an extra 2 Trillion it will make the EUR stronger to the dollar and lower the chances of inflation in Europe in the short term.

Timing belt wrote: »

Yes you are correct that a rise in rates would cause a havoc on the property market. It would also kill all other asset classes as they have already repriced for a low interest rate environment for the next few years.

A lot of people were expecting inflation to come through in this months CPI especially in USA as the USD has been dropping in value and making imports more expensive. The market was full sure we would see inflation with the yield on the 10yr Treasury rising dramatically up to 1.18 only for the CPI to deliver modest to weak inflation and the yield dropping back to 1.08. There are a lot of signs that we will not see the economy boom without further intervention by governments. Even the additional 2 Trillion by Biden may not be enough to see inflation. As for Europe it faces even harder headwinds to see inflation as the majority of its inflation from previous QE came from a weaker EUR and with the USA doing an extra 2 Trillion it will make the EUR stronger to the dollar and lower the chances of inflation in Europe in the short term.

But wasn’t the low inflation problem over the past ten years (30 years?) due to an oversupply of both workers and goods from e.g. China. No amount of QE would have increased prices in such a scenario. Hence all that extra QE money going into either property or public sector wages/pensions instead of rising prices.

With supply issues now becoming apparent across all sectors, inflation could ramp up very quickly.

Inflation was always a supply side issue and central banks have never been able to control it no matter what nonsense they’ve bring spouting over the past 40 years.

Once it starts, central banks will do their usual interest rate rises quickly while not realising they have absolutely no impact on inflation levels. Of course, unless they ramp up interest rates to 20%. But interest rates rising to only 4% (I think 1% would do it) would destroy all value added to the property market since 2012 in very short order IMO.

L1011

PropQueries wrote: »

But wasn’t the low inflation problem over the past ten years (30 years?)

If you think Ireland has had low inflation for 30 years, you weren't paying attention for about more than half of them.

PropQueries wrote: »

With supply issues now becoming apparent across all sectors, inflation could ramp up very quickly.

with two of the side effects being:

1) decreasing the value of a rather large amount of debt many nations have just acquired.

2) increasing property values

PropQueries wrote: »

But wasn’t the low inflation problem over the past ten years (30 years?) due to an oversupply of both workers and goods from e.g. China. No amount of QE would have increased prices in such a scenario. Hence all that extra QE money going into either property or public sector wages/pensions instead of rising prices.

With supply issues now becoming apparent across all sectors, inflation could ramp up very quickly.

Inflation was always a supply side issue and central banks have never been able to control it no matter what nonsense they’ve bring spouting over the past 40 years.

Once it starts, central banks will do their usual interest rate rises quickly while not realising they have absolutely no impact on inflation levels. Of course, unless they ramp up interest rates to 20%. But interest rates rising to only 4% (I think 1% would do it) would destroy all value added to the property market since 2012 in very short order IMO.

If the ECB deposit rate went to 0% it would crush all asset prices and the EU economy would be in bits as 90% of companies would go bust because of the amount of debt they have and would not be able to afford the debt servicing costs. Governments would be in the same boat... so we would have mass unemployment in both private and public sectors. So anyone hoping that rate rises will make things more affordable through lower asset prices is only looking at half the picture. What the economy needs is inflation accompanied by real economic growth. If we don't see this because of lack of inflation or to much inflation then it will end in economic pain.

Graham wrote: »

with two of the side effects being:

1) decreasing the value of a rather large amount of debt many nations have just acquired.

2) increasing property values

Property prices would drop as rates would need to rise to deal with the inflation.

Timing belt wrote: »

What the economy needs is inflation accompanied by real economic growth.

This

Timing belt wrote: »

Property prices would drop as rates would need to rise to deal with the inflation.

Only if there were interest rate increases at a time when a reasonable level of inflation would be good for many countries.

Inflation would cause prices to increase (i.e. inflation) before consideration was given to any requirement to control inflation.

Timing belt wrote: »

If the ECB deposit rate went to 0% it would crush all asset prices and the EU economy would be in bits as 90% of companies would go bust because of the amount of debt they have and would not be able to afford the debt servicing costs. Governments would be in the same boat... so we would have mass unemployment in both private and public sectors. So anyone hoping that rate rises will make things more affordable through lower asset prices is only looking at half the picture. What the economy needs is inflation accompanied by real economic growth. If we don't see this because of lack of inflation or to much inflation then it will end in economic pain.

Good point. But that’s where my theory on the influence of our low debt to gdp Eastern European eurozone members comes into play.

I don’t believe they will allow inflation levels to hit anything above 4% before forcing the ECB to raise rates.

They have as much to lose from allowing inflation to run out of control as we (and the few other eurozone countries with a debt problem) have to gain from such a scenario IMO

Browney7

Graham wrote: »

Only if there were interest rate increases at a time when a reasonable level of inflation would be good for many countries.

Inflation would cause prices to increase (i.e. inflation) before consideration was given to any requirement to control inflation.

Ordinarily if inflation increases there would be less demand for sovereign debt or investors would require higher returns so yields/interest rates would increase - although the ECB printing money and buying all the debt it can get it's hands means all bets are off on this front

Graham wrote: »

Only if there were interest rate increases at a time when a reasonable level of inflation would be good for many countries.

Inflation would cause prices to increase (i.e. inflation) before consideration was given to any requirement to control inflation.

you are correct the economy needs inflation as long as it is coming from growth
(Pull Inflation)... If it is push inflation as prop is suggesting with the increase coming from the supply side then we could see stagflation.

The EU will tolerate inflation over 3-4% for longer than a year before they start raising the official interest deposit rate. Where the problem comes is that the market doesn't use this rate and instead will price of the yield curve on Germany's bonds and then price adjust via the CDS spread to each of the other EU countries. So if we do see inflation the yield on both government and private issuance of debt will lead to an increase in debt servicing costs for both which will be paid for with job cuts unless these companies/governments are making more than the cost of the inflation.

Browney7 wrote: »

Ordinarily if inflation increases there would be less demand for sovereign debt or investors would require higher returns so yields/interest rates would increase - although the ECB printing money and buying all the debt it can get it's hands means all bets are off on this front

Government's need to issue the debt for them to buy or you end up with liquidity issues on the bond market. Its not even a sledge hammer with a nail it is more like trying to do brain surgery with a JCB

PropQueries wrote: »

Good point. But that’s where my theory on the influence of our low debt to gdp Eastern European eurozone members comes into play.

I don’t believe they will allow inflation levels to hit anything above 4% before forcing the ECB to raise rates.

At the end of September, Christine Lagarde all but said an inflationary policy may be appropriate in the face of Coronavirus debt and years of below target inflation.

“In the current environment of lower inflation, the concerns we face are different (than in 2003) and this needs to be reflected in our inflation aim,” ECB President Christine Lagarde said at a press conference on Wednesday.

She spoke of a wider debate happening on whether central banks should commit to explicitly make up for inflation misses when they have spent some time below their targets.

Graham wrote: »

Christine Lagarde has already all but said an inflationary policy may be appropriate in the face of Coronavirus debt and years of below target inflation.

They are forward guidance comments which was the signal for investors to reprice to a lower rate environment for at least the next 2 years... The fed did the same thing and since the start of the year we saw the market ignore the comments with yield rising because they believed that inflation above 2% would come through in the Jan CPI. when it failed to deliver the yield dropped.

Central banks can provide forward guidance but the market will do what it thinks based on what their expectations are.

PropQueries wrote: »

Good point. But that’s where my theory on the influence of our low debt to gdp Eastern European eurozone members comes into play.

I don’t believe they will allow inflation levels to hit anything above 4% before forcing the ECB to raise rates.

They have as much to lose from allowing inflation to run out of control as we (and the few other eurozone countries with a debt problem) have to gain from such a scenario IMO

They have no say it is the economic powerhouse of Germany and France that will dictate it.

Browney7 wrote: »

the ECB printing money and buying all the debt it can get it's hands means all bets are off on this front

Uncharted territory indeed.

I understand the ECB monetary policy review was postponed from last year to mid this year. Part of the review "will consider whether the ECB’s inflation aim should be reformulated and over which time horizon prices should be stabilised"

Timing belt wrote: »

Government's need to issue the debt for them to buy or you end up with liquidity issues on the bond market. Its not even a sledge hammer with a nail it is more like trying to do brain surgery with a JCB

Isn't that what's already happening?

"ECB to gobble up more debt next year than governments can sell"
FT Last October

Timing belt wrote: »

They have no say it is the economic powerhouse of Germany and France that will dictate it.

But will the German pensioners tolerate much higher inflation with no increase in deposit rates to offset the costs?

I think Germany will be more aligned with their Eastern European neighbours than France on this one.

Just because France, Italy, Ireland and one or two others have dug themselves into a hole by believing they can continuously borrow to meet the unrealistic expectations of their public sector class, doesn’t mean the other members (who are in the majority) will tolerate it much longer. Especially if they begin to see inflation begin to run out of control IMO.

PropQueries wrote: »

But will the German pensioners tolerate much higher inflation with no increase in deposit rates to offset the costs?

The German intolerance for inflation has shown several signs of softening recently, no doubt influenced in no small part by German debt.

The German administration has just released their €130 billion economic stimulus package, the most prominent measure of which is an unconventional fiscal policy in the form of a sudden drop in VAT. The aim is to create a future path of increasing sales taxes by increasing prices and hence stimulating inflation

Vox EU last June

PropQueries wrote: »

But will the German pensioners tolerate much higher inflation with no increase in deposit rates to offset the costs?

I think Germany will be more aligned with their Eastern European neighbours than France on this one.

Will the German people tolerate job losses and mass unemployment and businesses going bust so the pensioners can have a deposit rate?

Just because France, Italy, Ireland and one or two others have dug themselves into a hole by believing they can continuously borrow to meet the unrealistic expectations of their public sector class, doesn’t mean the other members (who are in the majority) will tolerate it much longer. Especially if they begin to see inflation seat to run out of control IMO.

They are not in a majority as there would be economic pain in all EU countries if this happened. They would all go through what Ireland did after 08. Now imagine the knock on impact to USA, China etc and the pressure that would come from them and all this will happen because of a few small EU countries.

Graham wrote: »

Isn't that what's already happening?

"ECB to gobble up more debt next year than governments can sell"
FT Last October

yes this is happening but if they over cook without issuing new debt then you will have shortages in specific Bonds which was what happened in march and investors started using other assets for collateral and set off a chain reaction in the markets. Hence the announcements of Trillions to calm things down and get markets moving again.

Timing belt wrote: »

Will the German people tolerate job losses and mass unemployment and businesses going bust so the pensioners can have a deposit rate?

They are not in a majority as there would be economic pain in all EU countries if this happened. They would all go through what Ireland did after 08. Now imagine the knock on impact to USA, China etc and the pressure that would come from them and all this will happen because of a few small EU countries.

Good point. But then, IMO, interest rates would have to increase much much sooner but by a smaller amount to nip it in the bud before it gets a chance to take off too much.

If they allow inflation to get to a level where they would need much larger interest rate increases to rein it in they would definitely destroy the economy.

There's a consensus forming that a few years of catch-up inflation might be desirable.

I think the question is more 'how do we make it happen' rather than 'how do we stop it'.

Graham wrote: »

There's a consensus forming that a few years of catch-up inflation might be desirable.

I think the question is more 'how do we make it happen' rather than 'how do we stop it'.

Spot on... we are still seeing deflation in the economy not to mention inflation and the EU revised there forecasts for inflation down in January because of more lockdowns etc...

Timing belt wrote: »

Spot on... we are still seeing deflation in the economy not to mention inflation and the EU revised there forecasts for inflation down in January because of more lockdowns etc...

I think we may finally see some upward pressure on inflation when the assorted vaccination programs reach that tipping point where things start to open up again.

After what's likely to have been 1.5 - 2 years of restrictions I expect a period of almost euphoric boom as populations make the most of their re-found freedom. Service industries, tourism and retail quickly bouncing back.

The effect this will have on property remains to be seen but I'd be surprised to see much (if any) downward pressure on prices.

Villa05

Timing belt wrote:

They have no say it is the economic powerhouse of Germany and France that will dictate it.

Will Germany tolerate inflation eating away their savings

Villa05

Graham wrote:

I think the question is more 'how do we make it happen' rather than 'how do we stop it'.

Put FF in charge of the controls

hometruths

Graham wrote: »

There's a consensus forming that a few years of catch-up inflation might be desirable.

I think the question is more 'how do we make it happen' rather than 'how do we stop it'.

Agreed, but I think there is a danger of the question moving quite quickly from how do we make it happen to how we do we stop it?

If inflation starts rising, it could rise quite rapidly when things open up. At that stage CBs may be in a bit of a bind, as raising interest rates will cause a lot of problems.

I agree this is bullish for property.