At what point will house prices turn and fall significantly? ie More than 20%

whizzbang

We keep seeing people saying they think prices will not fall unlexx this or that happens. I'm interested to see what will be the turning point that would freak most people out and have investors bailing from the market?

The_Conductor

According to the OECD- a 1% increase in ECB base rates is the figure you are looking for, not a 5% rise. They claim that this will make a property collapse 100% probable (insofar as 100% probable exists). Figures they are quoting for other countries show Denmark at current levels, i.e. before an increase next week, at 100% probable of a collapse. The Netherlands is currently at 75% probable of a collapse. I will try to find a link to the OECD report.

whizzbang

smccarrick wrote:

According to the OECD- a 1% increase in ECB base rates is the figure you are looking for, not a 5% rise. They claim that this will make a property collapse 100% probable (insofar as 100% probable exists). Figures they are quoting for other countries show Denmark at current levels, i.e. before an increase next week, at 100% probable of a collapse. The Netherlands is currently at 75% probable of a collapse. I will try to find a link to the OECD report.

yep, rate increase is one way of looking at it but I thought I would ask the question from the point of view of prices. I think most people don't really know about rates all they know is they see "15% rise in property this year!" in newspapers and feel they have to buy.

If these headlines start saying "house prices flat this year" or "Prices drop 5% year on year" then I think they will take notice. I am just wondering at what point will people's opinion change about the market? At what point will investors think "sod this" and sell out?

It is quite likely that rate increases could cause this decrease in growth but I think it is the base price changes that Joe Public will take notice of.

Lex Luthor

I would say house prices will always rise steadily, maybe not as much as previous 5-6yrs but until we get to interest rates hitting 8%'ish I can't see prices levelling off. Just MO

The_Conductor

Lex Luthor wrote:

I would say house prices will always rise steadily, maybe not as much as previous 5-6yrs but until we get to interest rates hitting 8%'ish I can't see prices levelling off. Just MO

At 8%, interest repayments on mortgages (assuming interest only mortgage), would be greater than 1.5times the average current after tax income on the average house price in todays terms......The current wage deal being negotiated is not expected to keep pace with inflation- so it will not be offset in that manner.

I.e. 35k per annum in *interest payments* alone.

We would have half the country torching their properties rather than get into situations like that.

8% is a totally unrealistic figure. I think that its not widely accepted how close to the tightrope we are threading at present. If AIB are giving 100% mortgages to first time buyers on a 450k property- that is almost 20k of interest payments (in todays terms, never mind after increases). That is a hell of a lot of money- particularly given that over 50% of these mortgages are going to single people not couples. (in a lot of cases, they are not willing to give a percentage, the parents of these people are either remortgaging at the same time to bring the loan to equity ratios below 85% or acting as guarantors on the mortgages)

We are in a very very dangerous situation at the moment. To expect house prices to continue increasing is an extremely risky punt. If I were buying a house at the moment (as I am- I am in the process of moving) I am not factoring in house price increases into the equation at all, I am however factoring in my ability to pay an additional 3% interest should I have to. I can pay that- but how many other people can? Remember, a 3% rise in rates on a 400k mortgage is equal to 12k in additional interest (note: interest, nothing else) per annum. An extra 800 a month (after mortgage interest relief)......

The country would be slaughtered long before a 3% rise to 6.5%, much less your 8%......

whizzbang

Lex Luthor wrote:

I would say house prices will always rise steadily, maybe not as much as previous 5-6yrs but until we get to interest rates hitting 8%'ish I can't see prices levelling off. Just MO

So you will be the one who voted "NEVER!" then

The results are looking interesting, to be honest it look like you are more on the bullish side than the majority of voters!

MrJones

can't see the prices dropping for at least 5-7 years. they may stabalise and show no increase, but it would take a substantial increase in interest rates for house prices to start decreasing.
best you can hope for is that they stop increasing by so much!

MrJones

man if interest rate hit 8%, they will be alotr alotr people with mortgages in trouble. it will be "reposession-central"

Lex Luthor wrote:

I would say house prices will always rise steadily, maybe not as much as previous 5-6yrs but until we get to interest rates hitting 8%'ish I can't see prices levelling off. Just MO

whizzbang

MrJones wrote:

can't see the prices dropping for at least 5-7 years. they may stabalise and show no increase, but it would take a substantial increase in interest rates for house prices to start decreasing.
best you can hope for is that they stop increasing by so much!

I just don't understand why an investor would hold onto a property if it's price was not increasing? especially if his rent does not cover the mortgage?

The_Conductor

whizzbang wrote:

I just don't understand why an investor would hold onto a property if it's price was not increasing? especially if his rent does not cover the mortgage?

I'm with you 100% on this one.
There may be special cases where they are hanging onto properties for their children or something- but all other things being equal no rational investor would hang onto property like that.

I can easily see a load of buy-to-let property hitting the market in the coming months. It will be interesting to see how things pan out.

FillSpectre

THe whole thread makes massive assumptions.
1)Investors will bale
2)Investors are the cause
3)That house price will turn

I have said it before but people seem to miss the point. Newer investors tend to be people who bought their houes a while ago. THey effectively have small mortgages on expensive property. When they invest even with a short fall from rent their combined mortgage on two properties can easily be less than their neigbours who bought a little later (3 years say).

On RTE a couple sold their Dublin house and bought one house to live and another investment property. If the market droped it wouldn't really effect them. Why would they bail?

If the market crashes the people in trouble will be those fresh into the market.

I think the market will slow down as FTB can not afford it.

Loads of experts calimed house prices wouldn't be effect by SSIAs I think the current market is showing things differenetly

whizzbang

FillSpectre wrote:

THe whole thread makes massive assumptions.
1)Investors will bale
2)Investors are the cause
3)That house price will turn

I have said it before but people seem to miss the point. Newer investors tend to be people who bought their houes a while ago. THey effectively have small mortgages on expensive property. When they invest even with a short fall from rent their combined mortgage on two properties can easily be less than their neigbours who bought a little later (3 years say).

On RTE a couple sold their Dublin house and bought one house to live and another investment property. If the market droped it wouldn't really effect them. Why would they bail?
.

I think the question is why would they stay? Even if they could cover the costs why would the hold onto a depreciating asset? Unless they want to hold on to investment property until the prices recover which would be 10 to 15 years.

FillSpectre wrote:

Loads of experts calimed house prices wouldn't be effect by SSIAs I think the current market is showing things differenetly

It is hard to say if the current surge is from SSIAs, I think the only way to prive it is if the prices keep going up at this rate for the next year until SSIAs are done.

The_Conductor

FillSpectre wrote:

THe whole thread makes massive assumptions.
1)Investors will bale
2)Investors are the cause
3)That house price will turn

Not necessarily.
In my opinion I think it is every bit as likely that the buyers of property over the last 3 years or so, are every bit as likely to bail as interest rates start to bite.

Vis- investors bailing- for the most part investors are rational creatures. I know of one investor who has offloaded 14 properties in the Crumlin/Kimmage and Clondalkin/Lucan areas since January. His point is that he wants to lock in his asset gains, and he does not see the returns at present as justifying the risk to his gains. This individual is sitting on gains of millions. Lucky bugger.

People who have bought in the last 2 or 3 years and are suddenly paying 60-70% more (with a defacto 100% increase in mortgage interest repayments) are probably every bit as likely as investors to bail.

I don't think its implied that investors are the cause of the house price bubble. They certainly are a sympthom of it though. They are only following the money- and there is money to be made, so rationally they are doing so. Government policy is far more culpable than investors in this regard.

3) House prices turning- well, FTBs are more or less priced out of the market, and investors are gathering momentum in selling to lock in gains (particularly in the case of apartments and other units with less inherent value than freehold 2 and 3 bed properties). At the end of the day economics are at work. Once supply exceeds demand, bang, bubble burst. Supply of certain types of property is already exceeding demand (particularly apartment style properties). The only thing holding them where they are at present is the "I must get my foot on the property ladder at all costs" brigade.

Time will tell of course.

aniascor

They were discussing this on The Last Word yesterday evening, and one of the experts (sorry can't remember if he was the banker or the property guy) made an interesting point. If interests rates keep going up, say by the 1% everyone is predicting in the next year, then making payments is still not going to be a problem for most people. (Granted there are some who are already feeling the pinch - but most people seem to think their mortgage repayments are very affordable right now.)

It was his opinion that what would affect house prices would be the actual amounts that people can borrow. When you go to the bank to get a mortgage, they stress-test your ability to repay your mortgage taking into account an interest rate increase. When the interest rates rise, the stress-test amount gets higher. So for example, if they are currently stress-testing people's repayment capabilities up to 6%, if rates rise by 1%, they will have to stress-test them up to 7% - which means that people won't be able to borrow as much. He gave the example of a couple currently earning €70,000 between them. He said that an increase of 1% would mean that the amount they could borrow would be reduced by 40,000. Which means that they would have 40,000 less to spend on a house. This reduction in spending power is what he predicted would ultimately impact the house prices.

I thought what he was saying made a lot of sense.

Personally, I think that a lot of the increases in price are due to investors - or speculators to be more precise - and that they will definitely cut and run as soon as the huge returns start to dry up. Think about the people we hear of who buy 6-10 houses in new developments, and sell them in the next phase at 10-15% profits. If that profit margin falls to 5% or less, then they will have trouble covering their costs (stamp duty, solicitor's fees, etc.).

The best thing that could happen for home owners is that house prices level off (and I say this as a person in the process of becoming a home owner). If you think about it - if you buy a 2-bed house for 350,000 at a time when 3-beds are 380,000 and house prices levelled off, it would cost you 30,000 to upgrade your house in the future. Money which you have probably paid off your mortgage over a couple of years.

But if house prices increase by 20% during the time between when you buy the first place and when you want to upgrade, it will cost you 36,000 to upgrade. (Taking a 20% increase into account: 420,000 - sale price of your 2-bed, 456,000 - purchase price of the 3-bed)

I know this is a very simplistic view of how things work - but I do think that escalating house prices hurt most people in the long run (the exceptions being those who have cleared all or most of their mortgages, and investors and speculators).

FillSpectre

whizzbang wrote:

I think the question is why would they stay? Even if they could cover the costs why would the hold onto a depreciating asset? Unless they want to hold on to investment property until the prices recover which would be 10 to 15 years.

Because they can get a return of rent from the asset they own which tends to be higher than the divedent returns from shares. The investment property may be smaller and ideal for their retirement. THe property may be close to a college for their children when they are older. THere are lots of reasons and unlike shares and other investments you can use a house.

whizzbang wrote:

It is hard to say if the current surge is from SSIAs, I think the only way to prive it is if the prices keep going up at this rate for the next year until SSIAs are done.

Well I have friends who work in banks and they told me that most 100%+ mortgages were given out to people based on SSIAs. I think it makes sense this is the case.

aniascor

I think you are missing the fact that a 3 bed house tend to increse more than a 2 bed house. WHen the market goes up an average of 20% it might be 15% for the 2 bed and 25% for the 3 bed.

I don't get the 60% increse in repayments form a 1% rise. I gues it could be the case with the right figure but what are those figurs and how many people are actually close to that. I think on a rough gauge they would need to go up 5% for me to get a 40% increase in my mortgage bu t that is rough.

whizzbang

FillSpectre wrote:

Well I have friends who work in banks and they told me that most 100%+ mortgages were given out to people based on SSIAs. I think it makes sense this is the case.

First off they were not meant to do that as SSIAs were not allowed to be collateral for a loan from what I remember. Secondly I think SSIAs are going to be spent on reducing credit card debts and the like, I think SSIA money has been spent long ago.

The_Conductor

whizzbang wrote:

First off they were not meant to do that as SSIAs were not allowed to be collateral for a loan from what I remember. Secondly I think SSIAs are going to be spent on reducing credit card debts and the like, I think SSIA money has been spent long ago.

True- the banks have never been known for following official rules and guidelines though- look at all the mis-sold schemes and the bogus non-resident accounts. The banks are covering themselves by getting individual SSIA account holders to sign a declaration about 3 months prior to accounts maturing stating that the proceeds meet all the qualifying rules for the scheme.

Re: interest rates- a 1% increase on a 2.5% rate is a 40% increase

whizzbang

smccarrick wrote:

True- the banks have never been known for following official rules and guidelines though- look at all the mis-sold schemes and the bogus non-resident accounts. The banks are covering themselves by getting individual SSIA account holders to sign a declaration about 3 months prior to accounts maturing stating that the proceeds meet all the qualifying rules for the scheme.

Re: interest rates- a 1% increase on a 2.5% rate is a 40% increase

yep,

as a matter of interest (bad pun) would this 40% increase be reflected in a direct 40% increase in mortgage repayments for people with interest only mortgages?

J

The_Conductor

whizzbang wrote:

yep,

as a matter of interest (bad pun) would this 40% increase be reflected in a direct 40% increase in mortgage repayments for people with interest only mortgages?

J

Normally they would be locked into a particular mortgage rate for e.g. a 2 year period (NIB do a good rate on this). After the expiration of the 2 year period, yep, their interest payments would go up 40%. This would be tempered by limited Mortgage Interest Tax relief (I believe it goes up to about 9k) but this would only supply very limited shelter to the increase.

There are a shipload of people out there going to get the shock of their lives in 18 months to 2 years time.......

whizzbang

smccarrick wrote:

Normally they would be locked into a particular mortgage rate for e.g. a 2 year period (NIB do a good rate on this). After the expiration of the 2 year period, yep, their interest payments would go up 40%. This would be tempered by limited Mortgage Interest Tax relief (I believe it goes up to about 9k) but this would only supply very limited shelter to the increase.

There are a shipload of people out there going to get the shock of their lives in 18 months to 2 years time.......

ahh thanks for clearing that up. So those AIB Ads telling people "you can have a mortgage AND a life" is lureing people in for a nasty surprise! Unscruplous banks? who would have thought?

FillSpectre

whizzbang wrote:

First off they were not meant to do that as SSIAs were not allowed to be collateral for a loan from what I remember. Secondly I think SSIAs are going to be spent on reducing credit card debts and the like, I think SSIA money has been spent long ago.

It wasn't used as collateral it was seen as a future change in cicumstances. As of today many people have a spare €255 a month along with a lump sum of €20k. A bank could easily see that as a good reason to give a 100% loan.

I can only tell you what I was told and as house prices seem to have started rising prior to matured based on 100% mortgages I think speaks for itself. You could be right about debt but anybody I know hasn''t pre spent it.

whizzbang

FillSpectre wrote:

It wasn't used as collateral it was seen as a future change in cicumstances. As of today many people have a spare €255 a month along with a lump sum of €20k. A bank could easily see that as a good reason to give a 100% loan.

I can only tell you what I was told and as house prices seem to have started rising prior to matured based on 100% mortgages I think speaks for itself. You could be right about debt but anybody I know hasn''t pre spent it.

fair enough, but I saw an awful lot of 42 inch plazma TVs going out of Powercity in Salleynoggin in January and I reckon they had SSIA written all over them!

aniascor

FillSpectre wrote:

aniascor

I think you are missing the fact that a 3 bed house tend to increse more than a 2 bed house. WHen the market goes up an average of 20% it might be 15% for the 2 bed and 25% for the 3 bed.

Yes - I have seen this happen over the course of the 18 months that I spent looking for a house. I knew that saying both the 2 bed and the 3 bed would increase by 20% was a simplistic view - but I just wanted to show that with those kinds of increases, upgrading your house would cost more.

And if the figures are 15% on the 2 bed (bringing it from 350,000 to 402,500) and 25% on the 3-bed (bringing it from 380,000 to 475,000), it is clear that now it is costing you almost 75,000 to upgrade your house - whereas if prices remained steady, it would just cost you 30,000.

I guess the point I am trying to make is that the average HOME owner would be better off if prices stayed steady, or increased at the rate of inflation. Only the investors really gain from big house price increases.

FillSpectre

aniascor wrote:

I guess the point I am trying to make is that the average HOME owner would be better off if prices stayed steady, or increased at the rate of inflation. Only the investors really gain from big house price increases.

Not really you are saying that if prices keep going up you won't be able to upgrade! You missed the stamp duty issue connected to that too. Your average home owner isn't upgrading to a bigger house.

It is a valid point about market movement and how this will sieze up the market eventually. If you can't move up the ladder and nobody can get on there would be a problem.

aniascor

Isn't the whole point of a ladder that you start at the bottom and then move upwards (upgrade)?

I think a lot of people do intend upgrading from their first house - I know I do, and any of my friends who have bought do.

Lex Luthor

whizzbang wrote:

So you will be the one who voted "NEVER!" then

Well, there were 2 probable answers....

I voted Never becuae I can't see them turn and falling significantly, but I would have voted for the first one also but I can't be sure at what rate they will increase every year and you can only vote once

Did anyone watch that program the other night with that girl & her brother trying to buy a 3 bed property in Dublin and they had a budget of €420k?

Every time they went to put an offer in they were nearly almost all the time outbid by investors.

There is still a huge demand for housing especially in Dublin and until this stops, the prices will continue to rise to a point. I think they looked at one house with an asking of €350k and they were basically told it would at least be sold for €381k. They bowed out when it went to €385k.

PS. I just got a call from my bank to tell me that the mortgage offer I received yesterday in the post of the 1yr fixed rate, had to be back & signed in 45 days as I was very lucky I got the quote yesterday cos the 1yr fixed rates are going up today.

ambro25

FillSpectre wrote:

You missed the stamp duty issue connected to that too. Your average home owner isn't upgrading to a bigger house.

Very valid points.

The average home owner isn't upgrading indeed, they're spending the equity released (if any) on home improvements.

Note that in a booming market, this situation can become similar to -say- second hand cars, wherein extras bought at great expense at the time (of buying a new car) become worthless at resale time because, a few years down the line, they become expected/the norm (i.e. alloys, aircon...). That's been seen in the UK property market for aeons now (e.g. "so it's got a conservatory? so what?").

[cop out]I'll not vote, I'm fed up of arguing before even starting [/cop out]

FillSpectre

Lex Luthor wrote:

Well, there were 2 probable answers....

I voted Never becuae I can't see them turn and falling significantly, but I would have voted for the first one also but I can't be sure at what rate they will increase every year and you can only vote once

Did anyone watch that program the other night with that girl & her brother trying to buy a 3 bed property in Dublin and they had a budget of €420k?

Every time they went to put an offer in they were nearly almost all the time outbid by investors.

I saw the show. They were outbid but it never stated by whom so it wasn't investors as fact. If you take the fact that house guide prices in Dublin are 10-20% below expected price they weren't out bid but bidding on houses they couldn't afford.

They let your one have a little rant about investors and her hate of stamp duty a bit too much. She was a bit of bitch if you ask me becasue she was earning more than her brother and wasn't paying any rent while he paid €200 a month and has the nerve to say the goverenment should be fairer.

FillSpectre

ambro25 wrote:

Very valid points.

The average home owner isn't upgrading indeed, they're spending the equity released (if any) on home improvements.

Note that in a booming market, this situation can become similar to -say- second hand cars, wherein extras bought at great expense at the time (of buying a new car) become worthless at resale time because, a few years down the line, they become expected/the norm (i.e. alloys, aircon...). That's been seen in the UK property market for aeons now (e.g. "so it's got a conservatory? so what?").

[cop out]I'll not vote, I'm fed up of arguing before even starting [/cop out]

I agree certain imporvements do not increase value but done correctly it will increase the value of your house. It isn't really like the car market except for the fact a car with loads of mod kits is probably worth less than the original car to some people.
On the TV property shows they say concervatories add value but less than building costs. If you add crazy paving to the front of your house with diamond leading I am sure you devalue your house.

aniascor

ambro25 wrote:

The average home owner isn't upgrading indeed, they're spending the equity released (if any) on home improvements.

You're right - but in terms of the housing market, surely the people who are effecting (and most affected by) house prices are those who are buying and selling - not those who are releasing equity. And I would be interested to find out what the figures are on people who are selling one house and buying another - what percentage of them are upgrading?

I'm guessing most - but that's all I'm doing, guessing based on my own experiences and observations.

delboy159

How mad would house prices be if there wasn't stamp duty?

The reason I ask is (I wasn't actually bringing things off topic) -
The government has a subtle tool to insulate the economy from a property down turn - decrease/remove stamp duty. Has anyone thought of this in their forward thinking? We all saw how property valued at 260k ish shot up to 317k in the blink of an eye after the last FTB stamp duty change....

Their motive won't be for the good of buyers - it will be to help get votes by
a) removing a tax
b) trying to inject some life into the market and thus boast about how they are keeping the economy going despite tough times......