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

You are correct that 10 year treasuries are hitting 2% but with inflation at 7.5% in the states it means the real interest rate is -5.5%

And we know investors were prepared to pile into property when the real interest rate was -2% so even allowing for inflation to drop to 4% we have the same conditions as in the past year or so. We also know that unless countries follow the US with raising rates they will need the buy US treasuries to help protect their currencies which will put downward pressure on yields.

if you look at the data for the last auction you can see this with 75-80% of buyers being overseas and primarily dealers reducing their holding of 10 year which would indicate that they are hedging against the yield falling in the short term.

Im trying to follow your logic. Is your hypothesis that Irish rental yields will prove inflation proof long-term whereas if you buy a ten year Treasury you're guaranteeing yourself a real loss?

I guess my theory is, why would I plough money into "riskier" Irish property for 6% and taking illiquidity and downside risk instead of just banking my 2% p.a. for doing nothing. I guess if I'm a German pension fund with a 25 year horizon the illiquidity doesn't bother me. Will rents or property keep going up? Suppose none of us know the answer to that.

This is before we even get into potential impacts of quantitative tightening (if this even happens) on lower grade corporate debt - ie if inflation and less easy money is sloshing around making it harder for companies to raise money, is it going to pose risks for lower grade corporates? Will investors need a greater compensation for taking that risk and causing spreads to widen against US treasuries?

Yield curve is starting to look quite flat also. Will investors keep ploughing in the money to new apartments? I have my doubts on that one but happy to be proven wrong if the supply does come and brings down housing costs

Ah here this is ridiculous. 410 for a 2 bed has to be worse than any of the celtic tiger mayhem.

interest rates might be the black swan event. That they have to go far higher than anybody seriously considers now. Thing is just, I can’t see it happening in welfare Europe even if that mean massive inflation and a drop in the Euro. Hence property is still a decent investment. At least better than cash.

If you assume house prices and rents have a correlation with inflation as there is no substitute product, take into account that their is a shortage of supply and strong demand. Then the main risk to the housing market is an economic downturn that leads to emigration or large scale unemployment.

If there is an economic downturn then you are equally exposed holding bonds as to holding residential property. Therefore in the short to medium term I believe that investors will still be attracted to residential property. The rental yield would need to drop by 1.5% or rates would need to increase by 2.85% (or some combination of both) to heavily impact demand and have people decided to rent rather than purchase.

The way I see it is that house prices have the potential to rise 8-9% if rents remained flat or for rent to drop by 8-9% before we would see a slow down in investors entering the market based on todays economic conditions.

Even if the stock market fell by 80% and as a result saw investors attracted to it for the potential returns I don't think it would directly impact the institutional investors buying property as the majority of these are not speculative investors and instead are investing for a steady cashflow over a long period.

Even if asset values did fall like after '08 they will more than likely recover over the long term in the same way the stock market does. And for this reason I don't see a Fire sale of properties from non-speculative investors if property prices fell for a year or two. Where I think the pain would be felt is in the financing of new builds as these funds are more a speculative investor and will follow the market for the best return they can get whether it be property, bonds or shares.

What do you think about commercial property? Are we already looking at the ghost estates of the 10s boom in all those glossy buildings or is the commercial property sector outlook as promising as the agents allude to in their outlook reports?

Commercial property has been a particularly buoyant area with less complications compared to residential investment up until just before the pandemic. Also noting the Grafton St write downs by Iput in the amount of 26% back in late 2020 https://www.irishtimes.com/business/commercial-property/grafton-street-landlord-cuts-high-street-property-values-by-26-1.4393537

It depends on what area of commercial property you are looking at.

residential property is playing a a bigger part In commercial property but we have already discussed this.

The warehousing and industrial estates are in high demand and seeing growth as businesses hold more stock following Brexit and supply chain issues.

Office space is still in demand and I think there will be a lot of churn as companies consolidate offices spaces on the back of hybrid working resulting in more availability of smaller office space.

Retail space have an uphill battle as they had before covid but overall commercial property seems in demand

word is already out that ecb are looking at 2 interest rate rises later in the year - the proverbial s#!¥3 will hit the fan here once debt repayments rise on top of the current inflation spiral

10y is already near 1%. Governments don’t fund themselves on floating 3m rates. Inflation will keep pushing until rates are at 4% and the entire “needs based welfare state” is history. High commodity prices need demand destruction not just higher rates.

The IT and Indo starting to drum up the herd to feed the inflation beast with clickbait articles on interest rate rises. I've seen several articles now almost stating the ECB will raise rates soon and what that means. Inflation expectations are going to continue to increase with this talk of rate rises being needed to calm the whole thing; people will believe that the price of everything is going to keep going up until rates rise which of course will convert into a reality where inflation continues and the herd feels that rate rises are necessary. Hysteria and fear are probably the appropriate follow on reactions to a sustained period of irrational exuberance.

Here's two articles from today feeding the narrative that the cost of everything will keep going up and interest rate rises will be necessary.

The only way irelands bonds will fall is when big tech falls.

Yes not sure how I would be talking about yield falling now? Also why do you think irelands risk of default is so low now...

Two interest rates hikes would be 0.5-0.75%. it's quite possible we will have three this year. Maybe 1%. On a 300k--25 year mortgage that is 100/month. However rates are fixed for 3-5+years by 90% of borrowers. Anybody with 10+years paid will have a chunk paid off so you are down to 60-70/month.

Most mortgages have dropped by 1-2% over the last 3-5 years as competition from the likes of Advant money forced them down.

It will effect discressionary spending more, the loan for a honeymoon, wedding, special holiday ( family trip to Disney), car loans and house extensions. This is where it is supposed to dampen inflation.

The better half pays the ESB bill. She is running around making sure we turn off lights etc.

Renters have been seing increasing costs of this level for a decade on lower incomes, yet not a peep out of government. Really is quiet stark how different sections of society are treated

In Wexford you can rent a former classroom for 275 blips a month