Boycott Of The Housing Market

JimmySmith

Carb wrote:

I would seriously suggest you get financial advice before investing in property. Those are probably the most ridiculous calculations I've ever seen.

How so?

I havent included deposit or stamp duty, but they would have had to have that anyway before they get the mortgage. If they dont sell it they dont have selling costs, but they may indeed sell.

Dont get hung up on a rate of return either. Bottom line is the person owns the house after 30 years. A renter owns nothing.

Afuera

lomb wrote:

everyone needs a roof, and its a great way to save money, pay the capital and interest over 25-35 years and at the end own an asset that will probably have trebled in value. not bad in any ones book regardless of the short term carnage that may happen.

The carnage is hardly short term since it is forcing a whole generation into a lifetime of debt should they choose to buy their own place. The alternative is to rent long term, but that's not a very attractive option in Ireland as things stand.

I feel that some people will simply get fed up and move to other parts of the world where they can get a better quality of life. The EU makes this easier to do since you can collect the dole for three months abroad if you want to try life in another country and look to work there.

Those that stay will look for a government that can actually look after their needs properly.

lomb wrote:

true, but tenants can leave virtually at their own whim also. most residential leases are under 1 year, i dont think most tenants want onerous commerical style leases for 20 years where there is a 3 year rent review. maybe im wrong but i dont think so.

In Spain the landlord can't change the rent for the first 5 years of a lease. The tenant can leave after their first year if they want. It provides more security to the tenant than is available in Ireland.

Without long term renters the rental market is very susceptible to demographics. If things stay as they are there will be a lot of empty rentals when we are on the other side of the baby boom!

JimmySmith

Afuera wrote:

In Spain the landlord can't change the rent for the first 5 years of a lease. The tenant can leave after their first year if they want. It provides more security to the tenant than is available in Ireland.

Without long term renters the rental market is very susceptible to demographics. If things stay as they are there will be a lot of empty rentals when we are on the other side of the baby boom!

If someone left the country the landlord couldnt chase them for rent either. In practice i would think very few landlords chase lease breakers because its just not economical.

Cantab.

JimmySmith wrote:

How so?

I havent included deposit or stamp duty, but they would have had to have that anyway before they get the mortgage. If they dont sell it they dont have selling costs, but they may indeed sell.

Dont get hung up on a rate of return either. Bottom line is the person owns the house after 30 years. A renter owns nothing.

Let's go over your 'logic' again:

JimmySmith wrote:

Take that for an investor. Assuming they have taken out the 92% mortgage on a 2 bed house.

€322K

Monthly payments on mortgage.
€1500 per month = €18000 Made up of 12,600 in interest and 5,400 principal.

he gets €1100 * 10 a year in rent = €11,000. Possibly more but we'll take €1100 for an example

None of that 11,000 is taxed.

The investor is buying himself a 2 bed house for €7000 a year or €583 a month.

in 30 years thats his house whether it went up in value or not.

Now thats not expensive at all.

Now who is going to run from that.

Most investors pay at least 60% of the purchase price up front too.

First off, you can't just factor out the deposit, stamp duty, conveyency when looking at this from an investment point of view.

You've completely ingored inflation.

You've completely ignored the fact that the onus is on the investor to maintain the house, pay for insurance, provide furnishing and fix all wear-and-tear.

You've completely ignored the hourly rate the investor must expend in managing the property.

Once you've calculated all the determinable factors, you must then balance this with a thing called risk.

Risk includes:
interest rates
inflation rate/possible deflation/relative deflation
health of Irish economy
occupancy rate (function of economy)
being screwed by your tenants (missed payments, late payments etc.)
investor not being able to meet the balance of the mortgage repayments (job loss, no health insurance, etc.)

Various analyses show the yield is only 2% in current market conditions. Your money is better off in a RaboDirect bank account at a miserly 3% AFAIK.

I thought about getting locked in to a 2 bed flat in a poor location in Dublin that would end up costing me E1,400 a month. I put 60% of this figure monthly into an investment fund (FTSE linked) and is currently yielding 10-15% per annum (despite the recent jitters!).

lomb

Afuera wrote:

Without long term renters the rental market is very susceptible to demographics. If things stay as they are there will be a lot of empty rentals when we are on the other side of the baby boom!

very true, but landlords who get no or a falling return on capital will proably choose to sell to a willing market.
the problem is to how many units are needed. who knows, i dont think anyone really knows. ireland is a totally unstable country with regard to immigration, family marraige and divorce rates and the boom could turn to bust quite sharply with regard to supply/demand rates certainly on apartments where its not improbable that soon there will be too many.only a fool would disagree with that statement. the skys literally the limit on apaprtment construction and sites continue to sell for 6 or 7 million an acre in and around the city. the only thing that supports these prices is high density.
the one problem is that excess apartments falling in value will surely drag the whole market even in semis down.

Afuera

lomb wrote:

the one problem is that excess apartments falling in value will surely drag the whole market even in semis down.

Yes, once the tide turns that willing market could evaporate very quickly.

JimmySmith

Cantab. wrote:

Let's go over your 'logic' again:



First off, you can't just factor out the deposit, stamp duty, conveyency when looking at this from an investment point of view.

You've completely ingored inflation.

You've completely ignored the fact that the onus is on the investor to maintain the house, pay for insurance, provide furnishing and fix all wear-and-tear.

You've completely ignored the hourly rate the investor must expend in managing the property.

Once you've calculated all the determinable factors, you must then balance this with a thing called risk.

Risk includes:
interest rates
inflation rate/possible deflation/relative deflation
health of Irish economy
occupancy rate (function of economy)
being screwed by your tenants (missed payments, late payments etc.)
investor not being able to meet the balance of the mortgage repayments (job loss, no health insurance, etc.)

Various analyses show the yield is only 2% in current market conditions. Your money is better off in a RaboDirect bank account at a miserly 3% AFAIK.

I thought about getting locked in to a 2 bed flat in a poor location in Dublin that would end up costing me E1,400 a month. I put 60% of this figure monthly into an investment fund (FTSE linked) and is currently yielding 10-15% per annum (despite the recent jitters!).

I've given this to you from the point of view of owning the house after 30 years. Its an investment because you dont reap the rewards right away.

Insurance, maintenance etc isnt as expensive as some seem to think. Tax deductable too. So doesnt really figure.

The owner can manage it themselves. So it doesnt really figure either. A bit of maintenance every year or so and a quick check every now and then. Surely he wouldnt pay himslef for this

Yes I have taken occupancy rate and the possibility of being screwed by your tenant into account - 10 months per year rental.

Inflation works for the investor in this case. Over the 30 years the rent will increase and the extra payments by the owner will be less and inflation will reduce the real cost of this too.

Interest rates - Well we dont know do we. They may go up or down.

investor not being able to meet the balance of the mortgage repayments (job loss, no health insurance, etc.) - No different to you not being able to pay your rent if you lose your job.

What basis are you calculating yield on.

Buying costs are paid up front (already paid) as any buyer, investor or not would have to do, so will no longer factor in the fact that the owner now pays around €600 a year to own their house after 30 years. Granted they are still paying rent too or living in the garage.

Cantab. wrote:

I thought about getting locked in to a 2 bed flat in a poor location in Dublin that would end up costing me E1,400 a month. I put 60% of this figure monthly into an investment fund (FTSE linked) and is currently yielding 10-15% per annum (despite the recent jitters!).

Which investment fund would this be? Do tell, i want to invest Also you are still paying rent, or living with your parents. And you have to pay tax and a management fee on your 10%-15%

chump

Cantab. wrote:

Your money is better off in a RaboDirect bank account at a miserly 3% AFAIK.

I don't doubt that an investment in property can be very wise, over the long haul in particular when repayments are primarily capital ones (ie. after 10/15 years into the mortgage).

In the example above, JimmySmith used a monthly additional payment of ~ 600euro.
Now I don't doubt this is inaccurate, and factoring in all other costs and reasonable expected future costs, I'd imagine the true figure is quite a bit higher. ALthough you also have to factor in quite a few things which are in his favour.

Anyway.
If you were to instead pay 600euro p/m into a savings account compunded monthly at 3.5%, in 30 years you that money will be worth approximately 380,000.

Now if you were to buy this house, worth 350k, (for 600euro per month for 30 years (I'm ignoring initial payment of 8% etc etc.)) and assuming annual house price growth of, in 30 years...

1, 2, 3, 4, 5 %
1% -> 472,391.56
2% -> 637,423.14
3% -> 859,894.77
4% -> 1,159,724.31
5% -> 1,563,710.51

The upside is huge.
Sorry, the potential upside is huge

A few points though.
How many 30/40/50/60 year old speculators do you honestly believe are in it for the long haul?
You're forgetting that many of these people are using IO mortgages.
Inflation figures are likely to be higher.
There is a very real chance IMO that house price growth in Ireland in the close future will be stagnant (real terms negative) or negative.
Unless a wise choice of property is made, that is rentable and will remain so, trouble.
etc.etc.etc.

daveirl

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CiaranC

chump wrote:

I don't doubt that an investment in property can be very wise, over the long haul in particular when repayments are primarily capital ones (ie. after 10/15 years into the mortgage)....

Wow! A post which actually acknowledges the other sides argument! Is the sky falling?

daveirl wrote:

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Id like to see one for a renting scenario over the same period too. Anyone?

ronbyrne2005

daveirl wrote:

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Basically at average interest rates of 5% and inflation at average of 2.5% a house has to rise 40% AFTER inflation over 30 years to even break even

ronbyrne2005

My house is a 3 bed in Dublin and a neighbouring identical house sold for 750k recently which with a 100% repayment mortgage costs nearly 5k a month at 5% interest, another identical house is renting for 1400 a month and rents are static since 2000 in real terms. If someone rented and invested the amount they saved by renting every month into a tax effiecient revenue approved pension fund or a non pension mutual fund you will make at least as much as if owning a house but you will be well diversified. Do people not realise that investing 500 a month in an approved pension fund you almost double your money immediately before it is invested over 30/40 years.
Anyone buying now is a fool. Once it is much cheaper to rent than to repay a 100% interest only mortgage you shouldnt buy unless house prices are not highly priced in fundamental terms (relative to incomes etc).

House price growth can never outperform equities/companies in the long term.

daveirl

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daveirl

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ronbyrne2005

daveirl wrote:

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No ,Karls calculator only takes inflation into account on the interest side not on principal repayments. you need to find the present value of the annual/monthly principal repayments. PV= (1-(1+r)^n))/r multiplied by capital repayment.

daveirl

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JimmySmith

daveirl wrote:

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Looks interesting.
Does this investor get any rental income from the house? And what about the tax paid on it minus the interest which is deductable? And also the €5K maintainance which is also deductable for tax.
And the landlord may have to live somewhere himself for 30 years.
You could even extend that table out to 45 or 50 years or more (depending how old these guys are when they start (and die) i suppose) where the house owner puts the 24000 into the same investment A/C at 7% after the 30 years and see how it all works out. I think 5K a year for maintenance is very steep too. And the 6% interest rate over 30 years may be a bit high, but who knows.

JimmySmith

By the way. Anyone watching tenants from hell on TV3 now?
Could change an investors mind

daveirl

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ronbyrne2005

daveirl wrote:

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maintenence is usually predicted to be 1% of houses value (as a rule of thumb)
People forget that the interest on a mortgage is in effect rent for the money you borrow from the bank.

JimmySmith

daveirl wrote:

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I can see where you are coming from alright. There are many variables but i guess the assumptions you made are as close as possible alright. Do you have a spreadsheet for the claculations. If so extend it out to 45 years for the crack.

I think your surplus column may be a bit off. Should it be 24000 - rent ?

JimmySmith

ronbyrne2005 wrote:

maintenence is usually predicted to be 1% of houses value (as a rule of thumb).

Right then, bring on the crash, and let it be big. I want my maintenance costs to go down

Cantab.

JimmySmith wrote:

I've given this to you from the point of view of owning the house after 30 years. Its an investment because you dont reap the rewards right away.

Another disadvantage. At least on the equity markets, profits are instant.

JimmySmith wrote:

Insurance, maintenance etc isnt as expensive as some seem to think. Tax deductable too. So doesnt really figure.

You'd be surprised. My aunt is paying 3k a year maintainence on her 2-bed rathmines flat. I know of another friend who is paying over 2k on his 2-bed Dublin 3 flat. What do you think €2,000 a year +5% inflation over 35 years comes to? Granted, a lot of landlords get their tenants to pay maintainence fees.

JimmySmith wrote:

The owner can manage it themselves. So it doesnt really figure either. A bit of maintenance every year or so and a quick check every now and then. Surely he wouldnt pay himslef for this

Yes, but how much does it cost the owner to manage it when they could be playing golf? If you're on a 60k a year salary, what's your hourly rate?

JimmySmith wrote:

Yes I have taken occupancy rate and the possibility of being screwed by your tenant into account - 10 months per year rental.

Ok.

JimmySmith wrote:

Inflation works for the investor in this case. Over the 30 years the rent will increase and the extra payments by the owner will be less and inflation will reduce the real cost of this too.

Inflation may work in the investor's favour, but you are tied to Irish economic performance for the next 30 years. At least with equities you can adapt to changing markets rapidly and you have far more flexibility.

JimmySmith wrote:

Interest rates - Well we dont know do we. They may go up or down.

Of course. It's the risk that must be assessed. The tipping point between being able to make reasonable predictions about the future of Irish property vs. high risk has, in my opinion, been reached.

JimmySmith wrote:

investor not being able to meet the balance of the mortgage repayments (job loss, no health insurance, etc.) - No different to you not being able to pay your rent if you lose your job.

I thought we had seperated the two issues here. We're not talking about buying somewhere to live - we're talking about property as an investment.

JimmySmith wrote:

Buying costs are paid up front (already paid) as any buyer, investor or not would have to do, so will no longer factor in the fact that the owner now pays around €600 a year to own their house after 30 years. Granted they are still paying rent too or living in the garage.

And think of the risk they must take on to realise this dream? Think of the years of hassle dealing with tenants. Think of the maintainence costs and think of the money that could have been made in sounder investments.

JimmySmith wrote:

Which investment fund would this be? Do tell, i want to invest Also you are still paying rent, or living with your parents. And you have to pay tax and a management fee on your 10%-15%

I use Fexco online share dealing. Anyone can do it, it's not rocket science. And no, I live in rented accomodation - 400E per month, 3-bed house, own double room, Dartry, Dublin 6. House is worth 800k. I'd sooner live here than fork out for a 250k mortgage for 35 years living somewhere like Blanchardstown, Rathoath or Darndale.

DublinWriter

lomb wrote:

true, but tenants can leave virtually at their own whim also. most residential leases are under 1 year, i dont think most tenants want onerous commerical style leases for 20 years where there is a 3 year rent review. maybe im wrong but i dont think so.

True Lomb, but considering a deposit would be held, and the absconding tenant would have only gotten away with 1 or 2 months areers in rent max, it's not a biggie.

SkepticOne

I wonder how many people are like JimmySmith and don't really look into alternative investment opportunities. There must be thousands of people who could be making more money on relatively low interest bearing accounts with significantly less risk. Probably there are a lot of people who are losing money overall as an investment and are totally dependent on capital appreciation.

However it is good that such people as JimmySmith exist. They are the people that buy as other people are getting out. They are the people that you can rent from as you invest elsewhere.

FillSpectre

Afuera wrote:

It's a flawed business plan, which ultimately amounts to speculation, if you can't verify the basic underlying facts to insure it's economic viability.

Then everything is speculation in your eyes. No matter what type of business it can be said to be speculation. It is the opinion of many other people to be a standard model for property investement

Afuera wrote:

Tenants only have security of tenure for four years in Ireland. Rents can be raised at the whim of the landlord.

Rents cannot be raised on a whim. I know people who are renting the same place over 10 years.

Afuera wrote:

I haven't heard anyone saying that they are going to crash just because prices have been rising.

I haven't heard anybody say why it will crash other than prices going up mentioned here.

Afuera wrote:

It's the rate of the rise compared to incomes and the fact that economically we seem to be entering a different era, with increasing rate rises, that has most people worried.

So it isn't rising prices it is rising prices compared to income? That is rising prices which people are claiming will cause some change.People in here are not worried they are hoping it will happen.

Afuera wrote:

Demographics, immigration, emigration etc. are all very hard to foresee is this increasingly global environment. I'm not too sure how safe it is to assume that we need more property either.

No it's not hard that is what a census is for. It just needs to be close. If Ireland is made up of mostly 3 bed semis as there were mostly families and now there are less families and more single people we end up with a housing problem. This is why we suddenly need more property as the housing stock doesn't match our current needs. Dublin is certainly rstricted when it comes to housing

Afuera wrote:

The main thing I was trying to show with those figures is that:
1) It's not that difficult for supply to match demand at the current output levels (that is if they haven't already being reached but is currently being distorted by speculators in the market)
2) The demand of rental properties has an upper limit. Once that is reached some investors will have unlet properties and have to pay the entire mortgage of their investment on their own.

1) It doesn't show that as it ignores many key elements as I pointed out and I think you are using some flawed assumptions from the start but you don't agree which is fair enough. Do 80% of the adults you know own their home?
2) What upper limit? The limit seems to be those who can afford and those who can't. If you can't buy you are going to have to rent. You are working on the assumption investors will always have to rental yoeld based on current house prices when it is based on what they buy for.

Afuera wrote:

IMHO it's not that likely that investors will keep piling in unless they are able to get a quantifiable return.

I kind of agree that investors won't keep coming in but by that I would mean individual investors. Comercial property is more owned by big investors and companies generally I think that could happen to residential property. Very few buildings, if any, on Grafton street are owned by investors but are owned by insurance companies,banks etc... In other EU countries it is this that provides rental property. They can take the slow burning investment. It is already happening in fact

FillSpectre

ronbyrne2005 wrote:

My house is a 3 bed in Dublin and a neighbouring identical house sold for 750k recently which with a 100% repayment mortgage costs nearly 5k a month at 5% interest, another identical house is renting for 1400 a month and rents are static since 2000 in real terms. If someone rented and invested the amount they saved by renting every month into a tax effiecient revenue approved pension fund or a non pension mutual fund you will make at least as much as if owning a house but you will be well diversified. Do people not realise that investing 500 a month in an approved pension fund you almost double your money immediately before it is invested over 30/40 years.
Anyone buying now is a fool. Once it is much cheaper to rent than to repay a 100% interest only mortgage you shouldnt buy unless house prices are not highly priced in fundamental terms (relative to incomes etc).

House price growth can never outperform equities/companies in the long term.

As pointed out investment isn't always about pure capital returns and appreciation worked out as you said a rental income once the house is paid for can easily out perform a pension. Investors are not fools they can see what you seem to not see. It depends on why you are investing and what your expectations are. You are asuming the expectation and dismissing the other reasons for investment. Has property out performed pensions in Ireland? I know it can't keep going as is but stock crashes were also damaging to pensions. Pensions can't be passed on to children our a spouse. Fine to say houses are over priced and not a great investment but don't ignore the massive benifits of owning something physical with a purpose. My pension is not worth much more than what I put in but if I put it into property I would have had a better return and over 30 years maybe they would even out but nobody really knows.

Gurgle

daveirl wrote:

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15 Year mortgage - Earlier you were talking about 30 years.
6% Fixed rate - Thats terrible, variable rates are unlikely to ever reach 6% again, never mind average at 6%. Why would anyone take this option?

€5k a year maintenance for an appartment?
Management companies' directors must all be driving brand new Mercs at that price.
My 3-bed semi doesn't cost €1k per year in maintenance, and that includes everything from paint to rubbish collection.

As I said earlier, if you don't want to be a debted home owner, don't buy a house.

Cantab wrote:

400E per month, 3-bed house, own double room, Dartry, Dublin 6

You're obviously not the only tenant.
Whats the monthly rent for the whole house then?

Lemo

SkepticOne wrote:

I wonder how many people are like JimmySmith and don't really look into alternative investment opportunities. There must be thousands of people who could be making more money on relatively low interest bearing accounts with significantly less risk.

I'm not a financial guru but I think the reason why property investment seems to work better for most people is that it's the only investment where a bank will lend you massive amount of money to get involved in (once you have your own house to borrow against)?

So while I would struggle to find €10K to invest in "alternative opportunities", I would have no problem getting a bank to lend me €400K to buy a second house...

Am I missing something here?

chump

Lemo wrote:

I'm not a financial guru but I think the reason why property investment seems to work better for most people is that it's the only investment where a bank will lend you massive amount of money to get involved in (once you have your own house to borrow against)?

So while I would struggle to find €10K to invest in "alternative opportunities", I would have no problem getting a bank to lend me €400K to buy a second house...

Am I missing something here?

No, you're on the ball. By gearing up you also increase risk though.
There will always be wise property investments, I'm just not confident they exist in Ireland any more.