Where is this going?

Where is this going?

When will property prices bottom out? Does it matter?

We often talk about the idea of price and cost being two different things. This week we want to ask you if you think about property in terms of ‘price only’ or as a ‘relative cost’.

So is a decision to buy or not based upon how much a house is going for or how much you would have to pay as a mortgage versus the cost of renting?

MyHome recently did some a consumer sentiment survey showing that….

  • Long term renting at one address still hasn’t become the norm as it has in Europe with only 8.7% of respondents stating that they are in the same property for more than 6 years.
  • 80% of renters intend on purchasing a home
  • 97.7% of them will be first time buyers

What we can tell you from within the mortgage finance market is that irrespective of a person’s intentions, it may be nigh impossible to obtain financing in many cases.

So we ask you….

  1. Would it be better if banks had higher rates and were more willing to lend?
  2. Are you waiting until prices hit a certain point? If so what price in what area is your magic number?
  3. Are you going to rent long term, if so then what kind of lease do you have?
  4. Have you considered Tax Relief at Source or potential Site Value Tax in your estimates of costs?

We look forward (as always!) to a good debate!

Karl (@karldeeter on Twitter)

Karl Deeter is the Operations Manager at Irish Mortgage Brokers in Dublin 2. http://www.mortgagebrokers.ie
There are 25 comments for this article
  1. David at 2:58 pm

    @Karl Thanks for responding. I may have to wait but if you look at the hard rule of ecomonics house prices ultimately have to follow the baseline inflation rate.

    This has not happened and if you follow the inflation and house price indexes from 1996 as the base line you find that the houses need to drop that 73%.

    The price rise has been pretty consistent across areas and types of property in Dublin and so can be used to estimate peak and subsequently base line value. The only thing that is going to change the calculation is if inflation increases.

  2. Patrick at 7:03 am

    demand will push these site values up when banks lend. Then building cost must be factored when we need to build. Building will only re start when the cost will be covered. Thus scarcity and price increases will happen first. It’s inevitable.

  3. Patrick at 7:00 am

    1. Banks are shrinking all over the globe att the moment. That will not go on for ever. Then lending will recommence.
    2. Try renting a property in Dublin 246 rents are going up because of scarcity.
    3. Ireland is less urbanised than other countries of similar stage of development. That will increase demand in the cities where service growth will re emerge
    4. Look at the need to build schools to cope with the population boom. The baby boomers of the 60s are not going away. Population will increase. That means empty units will fill or be torn down due to bei g poor quality.
    5. Regulation will take many of the pre 63 units out of the game, at last.
    6. We are going to have to start building again in the cities and materials like copper etc are in demand across the globe. 2b new middle class consumers across the globe are going to want stuff.
    7. You can trace the affordability index back for 200 years. The cycles are clear. We are close but no there yet on this one in the urban environment.
    8 prices will fall further perhaps for another three years, however if I said would you take three years rent free! Well thats the benefit of buying now v three years time as you will be mortgage and rent free three years earlier. You are guaranteed to get older or not to care.
    9. Would it be better for a higher rate of interest and more lending. Yes but we are likely to get higher rates and little lending for a while yet.
    10. The magical number depends on time you are going to hold on to the property. Cash buyers take 10% off min. Buying a home … If you can get a mortgage go for it. Select carefully. Rumour that stamp duty will go up in two years time.
    11. There are limited sites close to excellent public transport, close to nice work rest and play spaces

  4. Pauline at 9:51 pm

    The banks are the SOLE cause of the property market failing, my daughter was approved for 150,000 but when went for “proper assessment” was told 90,000 and not needing repair, they both work, what are they supposed to buy with that – a cow barn – either the houses prices drop further to facilitate this pittance or the banks need to lend more to serious buyers. BAH!

  5. Karl Deeter Author at 9:43 pm

    @Jane: Banks are lending, it is just in a hyper-conservative manner. They don’t always give full disclosure on the exact reason for rejecting a loan, sometimes it can be very ‘soft’ underwriting: they don’t like the long term outlook for the industry you are in, the company you work for reported a loss etc. as for the exact banks, BOI/ICS, AIB, KBC are lending very conservatively, then ‘open for business but closed for enquiries’ is PTsb, EBS/Haven, Ulsterbank, and NIB.

    @Peter I think even if I could afford a 20 year mortgage I would take a longer term and accept the higher overall interest paid and either save the money or invest it in something else. Just a personal thing, I like cashflow and the speed of amortization is an investment in itself but it just concentrates everything into the property when you can diversify elsewhere with the extra cash.

    @PeterPaul good analysis! I think your comment is the ‘comment of the post’ so far

  6. Peter Paul at 6:57 pm

    It depends on your local market – the cost of renting vs. mortgage payments. I’m looking at buying in the Washington DC area, but the concept would hold anywhere [the numbers are fairly generic]:
    Monthly rent is 1500. Buying a comparable property would cost 400,000; monthly mortgage + bank fees payment on that would be 2500 (10% downpayment, 30-yr mortgage on 360K @ 4.5% APR).
    In other words, I pay a 1000 premium per month so I’ll be an owner 30 years from now, and should live ‘free’ in retirement. Assuming a 2% appreciation in value annually, that property would then be worth 740,000. Sounds nice.
    Alternatively, I keep renting, and save the 1000 that I pay less per month for my accommodation. Do that for 30 years, assume a 2% rent increase and a 2% income increase annually, plus a 2% yield on savings, and after 30 years your savings add up to 730,000. You can buy that property outright, and you didn’t have maintenance expenses for the 30 years you rented.
    Conclusion: if you can rent cheaper than the monthly mortgage payments on an equivalent property, keep renting and saving; buy if your mortgage payments (now AND later) are below rental rates. Run the numbers for your particular area’s real estate market and financing options.

  7. EveLyn at 6:45 pm

    WHEN THE BANKS LEND MORTGAGES THE PROPERTY MARKET WILL STABILISE AND BEGIN GRADUALLY TO RECOVER!! As long as the banks refuse to lend property will continue to fall! We need the government to stand up to the banks.

  8. Peter at 3:50 pm

    I have to agree with Dee’s comment above.
    Unfortunately there’s no such thing as a “job for life” nowadays.

    During the boom times many of us lost our common sense.
    House prices were so high, the only way many of us could pay the monthly DD was to take a mortgage out over 30+ years.

    Before signing the bank forms and getting as much money as the banks would allow us,
    many of us only briefly pondered : “will I actually be able to pay the mortgage every month for the next 25/30+ years ?”
    Some people reading this will have mortgage payments even in their retirement years.
    Honestly, if those people had the chance to go back in time, would they do this again ? I think not.
    But hey.. we’re only human. Everyone of us would change some things if we had a second chance.

    House prices still have a long way to go, to come down to a realistic level again.
    NOBODY should have to pay a mortgage greater than 20yrs, just to buy a home to live in.
    COME ON !! It’s common sense people !!!

    In relation to the original question Renting Vs Buying.
    Both have their advantages and disadvantages.
    Whichever route a person chooses, they need to make a “educated decision” for themselves and their family.
    Write down the pro’s and con’s of both – for both short term and long term.
    Cut out the “One-upmanship” rubbish and stick to “practicality”.
    A lot can happen over the span of 20years, however we also need to enjoy life a bit too eh ?

    Every €1k the house price comes down, is saving potential buyers money.
    OK.. rents are a bit high nowadays, because landlords know that people are holding off buying houses at the moment.
    We may have to take the pain for another year.. but in that time, house prices will come down more ( i.e. if nobody’s buying )
    and when they do bottom out and people leave their rentals to buy their own home.
    This will in term create a glut on the rental market again, which will force landlords to bring down their rents again.
    Long term.. everybody wins. ( except those people who have bought a house in the past 4yrs ..sorry )
    “The needs of the many outweigh the needs of the few”

  9. Jane at 3:29 pm

    Hi Karl, I just want to know what lenders are actually giving out loans. I hear they are all saying they are but when you apply they look for a reason to say no and generally tend to find one. I have also heard they are not obliged to tell you why they turn your application down?

    Jane – Irishtown

  10. Karl Deeter Author at 2:58 pm

    @Damien What’s the take on landlords/renters?

    @Gareth O’Toole why should prices go to a certain pre-set amount? Why not below that or wherever the market brings them?

    @Kenneth we see that story played out every day!

    @Paul Intereseting, if the actual cost is cheaper than renting where you are now then there is no ‘owners premium’ on the property – although you often see that in residential as it is dominated by owner occupiers; at the same time the ‘price drop’ which may not be reflected in cost is bothersome?
    An interesting conundrum, what price do you think it will have in 20 years?

    @Kim What if you want to move house and the price has fallen in the mean time? Your equity is wiped out and you are stuck?

    @Dee Jobs for life are over – indeed I was making that very point yesterday on Newstalk when speaking about pensions (http://www.mortgagebrokers.ie/blog/ down on the right, the Audio from the 10th – 2nd interview is about pensions)

    But to say ‘mortgages are over’? I agree when you say ‘it may be too extreme’, they have existed throughout depressions and economic calamity far worse than anything we have experienced this time around.

    On the idea of the ‘value’, you are describing a ‘market’, and what if other people want to live in that same area? Then there can situations (taking out NAMA and apartments) where prices go up, what alternative are you suggesting?

    @Caroline – did you factor in the value of Tax Relief at Source that you’ll lose as a first time buyer who doesn’t buy in 2011?

    @James how does allowing people to move freely in a market society create failure?

    @bazza I have heard that comment a few times, in fact, a few estate agents have told me that they can’t find any rental property for families of late. This is in part due to relocation because properties are being repaired from flood damage and families have to live elsewhere, but in general the ‘rental stock’ is not there for long term family letting.

    @Abdel a lot of people are doing option 2 as you describe

    @mark Snell actually we have a decent list of people who want to buy – obviously this is anecdotal as our clients are only part of the market, but credit scarcity is a big factor now. As for going back to 1994. I had a coffee with Morgan Kelly a few weeks back and you make him look like an optimist! If your argument holds true do you also think that rents will have to go off a cliff edge as well?

    @Deirdre Inman a problem we see regularly here, although we do have a guy in our office named Stephen Hughes who is expert at offshore applications, you can call him if you want. I’m sure other companies have people like him but I don’t have contact names in other firms with that specialty (do know a lot of brokers if you want a list though)

    @David – interesting analysis, at 73% drops you may be waiting a while!

    @Paddy Renter – default risk exists anyway, it then comes down to expected vs actual default, but that doesn’t mean that banks shouldn’t increase the rate they charge new borrowers? Credit is scarce and when things are scarce the price of the item tends to rise, is it any different with financing?

    Well done on having time the market right! post some pics of that dream home!

    @Stephen – oddly I’m thinking that unless massive inflation comes along that low base rates are perhaps likely. The rate at which economies reverse is getting lower and lower over time. This may be greenspan economics brought to far but do you envisage 10% rates any time soon?

  11. Stephen at 2:17 pm

    In a purely financial sense comparing a monthly mortgage payment amount to a monthly rental amount is misleading. What you really need to compare is the cost of buying a mortgage, i.e. the amount of interest paid.

    At a time when interest rates are very low the cost of the mortgage compared to the cost of renting seem low. However, over the lifetime of a mortgage interest rates will not remain at the current low levels.

    The VIs use the cost argument to convince us to buy now. They say this on the basis that the cost of a mortgage is much less than it has ever been and try to convince us that even if house prices fall further it is likely that mortgage costs (i.e. interest rates) will go up. It’s hard to work out if they think the general public are stupid or they are just plain stupid themselves. Buying a mortgage now doesn’t mean it won’t cost more when the rates go up in the future (apart, obviously, from fixed rate mortgages which charge a premium and have been mostly withdrawn from the market). So you don’t avoid higher costs in the future by buying the mortgage sooner. Starting a mortgage on low interest rates helps a little as by the time the rates go up you may have reduced the capital (on which the rate is charged) sufficiently to see a benefit. But when you offset that against the rate at which house prices are falling in Ireland at the moment it is insignificant.

    In other words, this is only a justifiable argument when house prices are largely remaining static or increasing.

    So, right now, with house prices continuing to fall buying is not a good financial decision.

  12. Paddy, the happy renter at 12:34 pm

    1. Would it be better if banks had higher rates and were more willing to lend?
    No, the banks are not lending because the risks are too high. They know prices will fall for the foreseeable future until sensible house prices are achieved in Ireland, which is a house at around three times the buyer’s annual salary. The other risk is the risk of default by buyers who loose their jobs.
    2. Are you waiting until prices hit a certain point? If so what price in what area is your magic number?
    Home buyers should not pay more than 3 times the principal salary and 1 times the second, that is the magic number.
    3. Are you going to rent long term, if so then what kind of lease do you have?
    I am renting a 200m2 penthouse apartment for 1600 per month, my neighbor paid 1.7 million plus 9% stamp duty plus legal fees for a similar unit, he must be sick as a parrot. I will keep on renting thank-you. The cash I got from selling my mortgage free house to someone conned by the housing bubble is well invested and paying my rent several times over.
    4. Have you considered Tax Relief at Source or potential Site Value Tax in your estimates of costs?
    Yes, tax relief is a relatively unimportant issue compared to the cost difference between renting and buying, and the risk associated with owning a fixed asset of declining value and salability which also has to be maintained at owner’s cost.

  13. David at 12:12 pm

    Interesting questions some of which I have thought about a lot so some simple answers for you.

    1) No, it wouldn’t change what we would borrow as borrowing more is what puts you in the hole in the first place. The house prices have to lower to affordable levels before any mortgage is worth considering.

    2) 27% of peak 2007 house price value is our magic number (where it should be if inflation only were used to calculate the house price rise instead of hype)

    3)No

    4)No we haven’t considered any tax relief or site tax on the basis that government whims can change very quickly and leave us with a bad investment.

    We stopped trusting government policy years ago as a reason to make a buy. Tax breaks are usually just a short term con to get you to invest.

  14. Deirdre Inman at 12:02 pm

    I am an Irish American with Irish citizenship who’s been trying to buy a property in Ireland for almost two years. We are returning again next week to continue the process, which has been difficult at best. I am a repatriating citizen who lived in Meath and is looking for a holiday/retirement home. My husband and I earn about $150K per year, yet the bank would not finance us 10K euro!!!!! We have perfect credit and own a 5BR house outside Wash DC, but they won’t consider any monies earned outside Eire as income. So now we’re buying for cash, but that process has been in limbo since last Feb. Money is in the bank in Ireland. Bottom line is that now the prices have dropped again, and we plan to back out of that deal and buy something better for less. He who hesitates is lost…

  15. Mark Snell at 11:57 am

    This is going in only 1 direction-> down. There are very few buyers in the market and very little mortgage capital available in the market at present -> no meeting of expectations and low sales. If anyone really wants to sell then they are going have to drop the prices back to 1994 levels, the days of making capital gains have gone. Am I am painting the world a little black?…….not really it is a simple question of supply and demand. Back in the days of Jack and his green army flying off for a 2 day lads trip for a match in the USA, interest rates were a lot higher, housing supply was not plentiful and banks were as tight fisted as they are now. However it made sense to invest as the cost of purchasing a house was realistic and rent covered the mortgage. Therefore cost of the investment is king and only if there is a return on that investment will anyone take the plunge. The days of relying on capital gains for a return as I already mentioned are long gone.

    Furthermore on the owner occupier market there is so much uncertainty in the employment market, again the lack of available finance and a general feeling that the market has still some way to go means that there is very little movement in this sector.

    Regardless of what the auctioneers are saying it all boils down to a supply and demand. In order to restore the market the correction will have to be drastic and having lost the run of ourselves the bottom will come at in and around the prices before the boom circa 1994. Once there the market will then start to move again but we are a long way from there…………..advice continue to rent rather than buy even if you can get your hands on the mystical mortgages that AIB and BOI are supposed to be saying yes to.

    Finally selling when you’re in negative equity does not always lead to ruin. Firstly the loss will be crystallised and secondly if you sell and trade up then you will also be purchasing property which you probably could not have afforded 2-3 years ago. When the market finally starts to rise then the loss will be wiped out in a number of years. Stay with what you have got and it will probably take 20 years for prices to recover to the levels they were at the height of the boom…..don’t forget there are a lot less buyers a lot more houses and the blight of emigration has again taken hold.

  16. Abdel Elsayed at 11:40 am

    I live in Co Meath Close to Drogheda
    I want to move to Dublin by either ways
    1. swap houses & pay differnce in price
    or 2. swap houses as rent & pay the difference in rent

    I have a very good house 5 bed rooms with large gardens front & back, but all my childern study in Dublin

    Can you help…!
    Are there any one wants to discuss this ideas…?

  17. bazza at 11:34 am

    I have rented in continental Europe and I can categorically say that the quality of rental accomodation is far far superior to that in Ireland.

    People are never going to be happy renting in Ireland until there is a majority of decent family houses or apartments that come with unlimited leases and regulated rent.

    I do not think there are any apartments in Ireland that are suitable for families – small shoeboxes with poor quality build and fittings and no storage in the basement.

    There also needs to be more unfurnished rental property available to give tenants the incentive to look after their home and furnish it nicely. In tandem, Landlords should be compelled to update properties periodically, such as painting them every 5 years.

    All these things are standard on the Continent, but not here.

  18. james at 11:32 am

    GREED HAS AT LAST MADE ITS MARK ON THE FUTURE.

    the UK has led the way for normal people to make large profits from an unstable housing market. Brits were also the main culprits causing massive spikes in Spanish house prices. Through the out of control press people were led to believe it was all normal! Housing should always be affordable for a new family.. end of story.. unless we come up with a solution the future is bleak.

    And Theresa May should be prosecuted for allowing another 450000 illegal immigrants/terrorist/criminals into the country.
    But will she?? no way like the Bankers that should be in prison she will get away with it .

    OPEN BORDERS WAS A MASSIVE FAILURE

  19. caroline at 11:31 am

    just waiting for the right house and to see what happens with international markets also. still think house prices could go lower

  20. Dee at 11:29 am

    You have to stop asking the same questions, as if life hasn’t changed dramatically for everyone living in the western world.
    Jobs for life are over. Mortgages are over. And if that is too extreme then at least, mortgages based on two incomes have to become a thing of the past.
    The housing “market” is false. In Ireland how many thousand houses built previously are now in NAMA. If they were on the market, thus making it a real market, what price woud houses be now?
    The elemet of the cost that is devoted to profit for some company or bank is something that we need to move away from and I am entirely unwilling to spend. I personally am willing to pay a price for a property that reflects its real value, ie the materials used in its construction, the value of the land it is on (real value)and amenities that are close by.
    With regard to long term renting it is not an ideal situation as one may be alive for a lot longer than one has a job. If you compare the cost of renting versus the combined cost of bank interest plus inflated price of house in the first place you are looking at 30 years worth of rent maybe? Not material.

  21. Kim at 11:28 am

    Buying a house is worth it if the price of the mortgage per month is less than what you’d be paying in rent, especially in the bigger cities.

  22. Paul at 11:28 am

    All good questions!

    We are currently sale agreed on a property but are hesitating. The cost of the mortgage will be less than the amount we are currently paying in rent in the same area. Also, we would both be happy with the house we are due to buy, although there is always somewhere bigger and nicer.

    However, we suspect that we are slightly overpaying for the house, given the recent price falls, but there isn’t anything else available in the area in the same bracket. We also fear that prices are going to fall further.

    So either we look at the purchase as an investment or not – if we view it as an investment, we should wait for another 6-12 months. Alternatively we just tell ourselves that we are buying a nice home that is affordable and will suit our family for the at least the next 20 years. Probably the latter makes most sense, but still unsure.

  23. kenneth at 11:26 am

    if i cant even get a small loan for a car and i earn 60,000 how will i get a mortgage ?
    it wont change till the banks start loaning out again….

  24. Gareth O’Toole at 11:24 am

    All I can say is property was NEVER worth the stupid levels they reached and they should return to being €100,000 plus a bit more per home

  25. Damien at 11:20 am

    Irrespective of what is happening to house prices, and really who cares apart from cash investors anyway… Genuine people who are looking to buy are not willing to tie themselves to a debt when there is so much uncertainty and more austerity… If you want to talk about prices, well if the capital budget for Ireland for next year is dropping to 1990s percentages (read Dan O’Brien in Irish Times), then sustainable living and sustainable mortgages will also have to drop back that far… still to many over priced properties and still to many charlatans trying to cash in on the buyer… and as for it being a buyers market.. yep for the cash buyer no for the people of the country who just want to live here… As for landlords and renters well that is a completely different kettle…