Hitting rock bottom…

Hitting rock bottom…

When will the property market hit rock bottom?

There is an ongoing debate about the time that property prices are likely to bottom out, there are many different timeframes in circulation, but what do YOU think?

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The government is doing what it can to restart the property market. While I personally think this is mistaken policy, it is the course they have taken – and for good reason, a functioning property market can be a key economic driver, it is also one of the main routes of credit and wealth creation for regular people.

What has been done to make buying attractive?

  • Stamp duty is well below historic levels, 1% below €1,000,000 and 2% above that
  • Tax Relief at Source has been continued for first time buyers
  • Banks have been pressurised politically to drop rates – best example being AIB
  • There will be no capital gains for the next 7 years on investment property bought this year (although full details are not out until the Finance Act next week).

Other factors are…

  • ECB rates are at historic lows with a strong chance of going lower (granted this is not ‘Irish’ monetary policy but it feeds into the equation)
  • Yields in many arears are in the double digits, this makes the argument for investment a strong one.
  • NAMA is not offloading properties rapidly which can help create a misleading floor in prices
  • The stock of second hand houses in cities is dropping – this is the most sought after property stock at present.

So who would be crazy enough to buy a house in 2012? Actually, it may not be a bad decision. Next week we will have a ‘rent or buy’ calculator that lets you calculate the cost and capital balance after ten years (and you can factor in property and rental prices too!). Preliminary results indicate that when you take TRS into consideration that in many cases a buyer will not be disadvantaged financially.

You’ll need to wait and test your own scenario to see if it makes sense for you, but if other countries are anything to go by then we are merely in the ‘pre-boom’ period at present – we just have to hit rock bottom first.

A paper by the Central Bank on ‘Scenarios for Irish House Prices‘ clearly states that prices are likely to fall 56% and may go beyond that, but taking that guide it also means that most of the losses have already occurred.

The chart below takes a look at what happened in other countries.

The area is red is of particular interest, beceause that is the ‘below fundamental value’ section of the graph. In fact, it has tended to last longer than the boom, so when property prices take a beating they stay down – kind of the reverse of Sylvester Stallone in a Rocky movie. For Ireland that would mean that ‘property general’ may hit bottom c. 2015.

That is why reaching the bottom is a milestone – you can see from historical precedent that rock bottom is below what is calculated as ‘fundamental value’ and that you can expect to spend about 6 or 7 years below it. During that time there tends to be a reversion to the fundamental value – and that is why the new ‘no capital gains’ give away is of such interest.

If you can get 7-8% of a yield and appreciation during that period without tax the argument becomes compelling. Stocks have had a terrible decade – although great cycles within that – bonds have been a rollercoaster ride, again some great profits are being made but many have booked great losses as well. Property is no different, lots of people have lost their shirt, in fact, it is our property situation and associated debts are the driver behind the new Personal Insolvency Act which we covered last week.

Take a property like this one on Collins Avenue between the main thoroughfares of the Malahide Road and the Howth Road on Dublins Northside (Donnycarney). This property needs about €10,000 of work done to get it ship shape – cost c. €160,000, lots of room to extend if you wanted to.

As for the location, you have a school across the street, Parnell Park is there for the sports fans, Artane Castle for shopping is 3 minutes drive away, the Dart is a 5 minute walk – as are the bus corridors on two main roads, Killester shops are a 2 minute drive and there are churches, hospitals (Beaumont) and every other amenity close by.

That same property will get about €1,000 in rent (a big question is where rental prices will go- having stabilised in cities, reductions in rent subsidies may change that), giving a yield of 7.5%.

From a simple cost perspective you’d borrow €135,000 over 25 years and it would give a mortgage (not factoring in TRS if you are a first time buyer) of €790 a month. That’s cheaper than renting a similar property in the same location! (oddly, there are no properties to rent in Donnycarney at time of writing this even on the competitions site – I’m using a figure of €1,050 which a local agent told me was the regularly achieved price).

What does it mean? I don’t know, what I do know is that the market is being primed to get started, when financing returns (and it will eventually) it will be a key element of returning to health from the current state of pallative care. This week the SCSI released their annual survey, worth a read – and it also points towards credit being a missing vital ingredient.

Of late we can’t help but think we are in a bust heading towards another boom/bust having learned nothing from the past, time will tell!





Irish Mortgage Brokers

There are 16 comments for this article
  1. Pingback: Almost a quarter don’t expect property market to hit rock bottom until 2014 or 2015 – MyHome.ie Blog
  2. Pingback: Hitting rock bottom…(Houses in Ireland) « peter singhatey
  3. james wood at 1:36 pm

    Unemployment is also a key factor. If we look at the demographic make up of our unemployment figures and deduce out of the c.14% who would be eligible for home ownership if still in work we would have a clearer picture of what level of employment we need to stimulate the property market. However, consumer sentiment is also a key factor. Getting cash ready buyers to appreciate the value on the market and realise the market will recover is a necessity.

  4. john c at 12:00 am

    Interesting point @BarrierReef. Akin to a buywe of stocks ‘averaging down’ on their shareholding in a dip. Unfortunately as you allude, the banks dont want to play that game as they have been burnt and quite rightly have to deleverage.

    Its a chicken and egg game at the moment, stability returns when the banks start lending (and gambling to an extent) again. They wont even dip their toes in the water on risky lending until the market stabilises.

    I think we’ll hit a bottom in the next 2 – 3 years for residential property. Put a dent in the excess stock with some logical strategy from the government around distribution of same and joined up thinking with NAMA. If it comes a case of property getting to a point where construction costs are exceeding sale prices, then everything stops dead. Then there will begin some activity on a large scale

  5. Proinsias at 7:23 pm

    I cannot see any recovery in the price or value of home in the next 50 years or life time on the current generation of home owners.

    There is a simple reason for this, that the value of the house was only linked to the ability of the owner to secure a loan from the bank, and the bank making money from the CDO’s they sold on. So this housing bubble and house prices have absolutely no bearing on the value,price,quality or even location of the home that you are purchasing.

    It is like buying a car at a price determined by how many people own a VW. There is no correlation.
    So for the market to return to a situation were the actual value of the house is determined by the actual critria required like, building cost, man hours spent and actual location evaluation.

    This will not happen until you get rid of the home owners that feel bitter on the money they have spent for a house that is on truly worth 10% of what they paid.
    Also the mind set of making profit on owning a home, there should never be more then a 20% increase in home prices over the life time of the mortage. So you buy for 100 000 euro and in 25 years you sell it for 120 000 at max. this is the best saving scheme on the planet.
    But greed has killed us all and now we are all paying for it. So this mind set must be destroyed which will take aleast a generation to pass for things to improve.

    Long live the 99%

  6. Aidan at 7:20 pm

    I think its going to be impossible to call when property hits rock bottom, most likely rock bottom will be called a year or two after being reached.
    Now one thing that people may be forgetting about is property tax, and to take your example of a house costing 160k, site value 60k say 2% site value tax = €1,200 now this will have to be paid out off after tax income, if taxed at the high rate with all levies that will most likely increase this year I believe it would be prudent to allow for a 60% total top tax rate,
    This will require 3,ooo euro in rental income or wages to fund and I’m not even allowing for, or an increase in the second home tax for investors.
    Add in a decrease in rent allowances and its anyone guess where property values are going any time soon

  7. Peadar MacMillan at 6:13 pm

    In an open free economy it is always supply and demand.There is ample supply and latent demand is there but restricted. Demand is restricted by 1. Difficulty getting mortgages and 2. falling wages in the private sector coupled by insecurity of employment and 3. people will wait if they can to see how far they will fall and who would blame them. Prices will never return to the prevuious highs – which to me means my children when in the position, will be able to afford to buy property provided they can get a mortgage and a job.
    A possibilty is the re – emergence of groups co -operating as a building society non a small scale – returning to the original ideals of a building society, before they got the greed bug.
    Peadar MacMillan.

  8. BarrierReef at 5:43 pm

    Lack of credit is the big issue on two fronts. One the banks won’t take even modest risks now.

    Second most people who would be thinking of picking up the house on Collins Avenue in your example are not First time buyers, they probably already have a house or two and are in Negative Equity and the Banks won’t touch them, and while it might sound like a bust gambler having one last spin on a roulette wheels, I think Banks should be encouraging smalltime landlords in a controlled way to buy some cheaper stock now if they can come up with a certain deposit obviously as if the property will yield something that will contribute to paying down the rest of their debt, and when there is an uplift from here it will improve their overall LTV.

    The crazy thing in a lot of situations is that people want to sell, find a buyer willing to buy, The bank won’t lend to the buyer to buy a house which if they did would pay off the seller mortgage with the same institution.

  9. amiafool at 5:40 pm

    I think there has to be a number of factors achieved before we hit rock bottom.
    1. more assured situation viz Euro and Eurozone
    2. more liquidity in banks to facilitate lending
    3. introduction of a property register. It’s ludicrous that this has not occurred and would clarify real values. However, this is not what EAs and other property vested interests would like!

    4. When asking prices equal rental value multipliers ie monthly rent x 12 x 12 to 18 times, depending on which rental value multiplier you use.

    eg. 1200x 12 x 12 = 172,800 LOW
    1200 x 12 x 15 = 216,000 Medium
    1200 x 12 x 18 = 260,000 High

    House still asking 370,000 in this area!

    5. When buyers come back into the market, then prices may start to stabilise. the absence of buyers means that house prices are being reduced to attract purchasers.

    6. When is the best time to buy a house? Tomorrow.
    Compare this with 5 years ago – when is the best time to buy a house? – Yesterday.

  10. karl deeter at 5:27 pm

    @Owen – that is a massive price drop. If other properties go the same route then it will be beyond the general expectation (and they could!).

    @Paddy Smells a Rat – as always you are in debunking the spin!

    However, this calculation was done on a 25 year mortgage not a 35 year one as you suggest. Furthermore, 35 years is still the leading term for first time buyers so we took a far more conservative view and went with the more historical norm of 25 years (before you say ‘what about 20 years!’ that was the leader in the 70’s).

    Gross yield calculations don’t factor in additional costs as you have indicated – net yields would be better for that purpose, you mention shares when the S&P had a flat decade? Do you have a specific play that you think is good? Share it!

    Fancy sharing the time you voted for? I’m guessing it was the 2020-2025 period?

    @Jim that may all prove true, the historical example from other countries is the foundation I am working on for a return.

    @P Degan – we see that problem – but we work in that area so it may be larger in our opinion than it is in reality. But agree, the right price gets a sale, it is really that simple.

  11. Dan at 5:14 pm

    Good article.

    I believe prices will stabilise in 2013, if they have reached a cost between 3 and 5 times the average industrial wage. Falls have not been uniform.
    Stabilisation would have come in 2012.
    But Minister Noonan insisted on screwing with Mortgage Interest Relief, preventing stabilisation for yet another year.

    My only caveat is that the yields you are taking for Irish property are highly unreliable.
    Rents in Cork, not to mind Dublin, are exorbitant compared to Berlin for example. It’s expected due to the sheer demand for rentals.

    As soon as this scenario reverses, and people beign to buy – expect to see rental yields drop by 25% to 50%, back to 1999 levels.

  12. P Degan at 4:54 pm

    You have to segment by the location and property type to really answer this.

    More popular areas ARE selling again albeit at reduced rates from peak but the drops have certainly slowed.

    Especially 3/4 bed house in areas that we’re accessible to the masses in the boom.

    There is value now and people with money are buying. Bigger issue, I think, is that people actually can’t get a mortgage now.

  13. Jeran-Pierre Paats-Williams at 2:47 pm

    the real price in my opinion:
    free plot to all Irish people (they own the land)
    interest free, inflation indexed one off loan for Irish people to buid their home; swaps allowed;
    homes are a basic human right; cannot be pledged;
    unused land/ buildings to be leased to short, long term visitors; prices to meet international average;
    then you might have market and social stability and host visitors (business and others) in a respectful and considerate manner;

  14. Jim at 2:25 pm

    Karl, with lack of acces to bank funds, banks looking for higher deposit to loan ratios and deposits, the few cash buyers out there will be the real winners. If we were the only country in this position there would be some chance of a quicker recovery, but austerity, increased taxes, emigration and uncertainty seem to be the national and European policy.

  15. Paddy smells a rat (again!) at 1:44 pm

    Some committee at the economy destroying property pimps club must have decided at their most recent get-together that with a bit of spring in the air now is a good time to once again try to talk us into buying overpriced Irish property by calling a “bottom of the market”. And just as on all previous occasions this has been tried the answer is; if you want to sell a house, flat or whatever put it on auction with no reserve and it will sell at the true market price which as always, in good time and bad is the price the buyer is prepared to pay.

    To say that monthly repayments on a 35-year variable mortgage are lower than monthly rent is a misleading argument for buying a property because:

    1. 35-years is far too long a period over which to pay off a property. If it is a family home the owner is putting themselves in debt up to their retirement date with less chance to have extra cash for children’s 3rd level education or pension provision not to mention those well earned holidays, sports cars, motor bikes, holiday homes, etc. that many or us look forward to buying in our 50s and 60s. 20-years fixed interest financing with a 20% deposit will control house prices and prevent long-term financial handcuffs.

    2. Likewise, what investor would go for such a proposition; one or two months letting void and you are loosing money. And what about the old rule of 1% of the property value for maintenance and renovations? That will blow a hole in that rental proposition. In this overpriced market much better to buy shares or other investments that can be sold at any time with a couple of days notice. And if you are a PAYE taxpayer, maximise your 41% tax deductable pension contributions and if available, you’re ESOP at work before you make any other investments.

    3. When you rent you can move when your family size changes, when you get offered a better job, when the neighbourhood becomes anti-social, and at very little cost or trouble. Try doing that when you are a home owner.

    You may well think I am writing this because I cant afford to buy a house, that is not the case as I sold me last house in 2006 to a poor sod who is now struggling to make the payments while we have very happily rented a much nicer place at 1/3 his monthly mortgage payment for the past six years. Don’t be taken-in, there is a time to buy, it just has not arrived yet.

  16. owen at 12:49 pm

    @Karl, for an accurate answer perhaps one needs a real crystal ball? I would have been more optimistic about the recovery in property prices, until, I recently learned about a house which recently sold for € 70k. Admittedly complete modernisation was required but the price contrasts starkly with the sales prices achieved for similar houses in same development which reached € 400k during the peak. That represents a price drop of over 80% and much greater than the average 50% one reads about. Seems the bottom for some may yet be some time away?