What SHOULD the average house cost?

2nz

Here's a question for ye: what should the average house cost?
I.e. based on the old banking rule (now defunct) that a bank would only give an individual a mortgage which is 2.5 times their salary (+1.5 times the spouse's salary).

By that calculation the average industrial wage of €30,576 only allows an average working couple to borrow €122k. In a market free of investors would this mean that the average house price should not be much more than this?
Yes, the maths is a little basic, but what do you think a FAIR average price would be?

http://irishhousepricesfalling.blogspot.com/

Sponge Bob

a fair price given that taxes are low and disposable income higher (unlike back in the 2.5x days) and taking regional disparities into account would mean that the 1 bed shoebox starter home on the fringe of the M50 should be available for around €150k max and less than that elsewhere , maybe €90k in Donegal for example .

Idleater

In theory, the actual cost of a house is its rebuild cost.

This, naturally enough, is the cost that an insurance company would have to pay to rebuild that particular house again if it were to be destroyed.

If you have a mortgage taken out on a house, you are more than likely required to have a house insurance policy that covers this.

Maybe you should post a different thread asking people to divulge the difference between the rebuild cost on their House Insurance Policy compared to the price they paid for the house.

L.

Sponge Bob

A 500 sq ft tiger cub shoebox at a generous €120 per square foot rebuild cost would be €60k by that logic , thats too low and does not take parking / land costs / existing utilities etc into account

conor_mc

You could measure it a couple of ways....

1) Avg house price as a multiple of avg industrial wage - historically 5-6, currently 10+ (300k/30k ....ish).

2) net rental yield. The value of a house should be fundamentally proportional to either the income it can generate (by being rented out) or the costs it can save you (by not having to pay rent). Typically this would have to be higher than interest rates, and compare favourably to deposit rates (for example) due to the risk involved. Take a house which costs €450k, rents out for €1500 a month (less expenses, usually calculated as 10 months occupancy per annum). Net yield is ((1500 * 10) / 4500 ) * 100 = 3.33%. Rental yields would usually range from 7-10%..... except in Ireland, that is.

Reversing the calculations, a house which rents out for €1500 a month at 6% yield would be priced at ((1500*10) / 6) * 100 = €250k.

DublinWriter

A couple of points re this:

1. Firstly, isn't the 2.5 + 1.5 rule gone now? Don't most Financial Institutions work on a 6 times salary rule now when deciding how much to loan you?

2. Should your question be "What is the fair price of a house be when you totally disguard Capitalism and it's intrinsic law of supply and demand?"

A couple of observations re this:

1. In the early 1970's, average house prices were 4 to 5 times the average industrial wage. These days they are closer to 15 to 20 times the average industrial wage.

2. There is no official arbitration process for agreeing acceptable maintenance costs on apartments in a collective bargaining context (i.e. with other tenants/owners) with management companies. They can charge what they like and you'll have no choice but to pay it.

A couple of questions re this:

1. What ever happened to state-provided/assisted accomodation? In the early 1970's, my folks could only afford a house through the Dublin Corporation sponsored mortgage programme. They now own their own house through this, but have successive governments turned their backs on the people since the 70's? This was at a time when Ireland was at it's poorest and we had a pretty decent health care system. It would be generous to say that governments had a Laisse-faire policy towards developers, but the brown-baggism going on since the 1970's proves otherwise.

2. Why is their no-joined up urban planning strategy? A stranger flying into Dublin airport would be forgiven for thinking he was flying into a rural-idyl from the amount of green-fields visable just seconds before touch-down. Fly into any other major European city and you're almost landing on top of housing estates. Why has land to the extreme North and South poles of county Dublin just been allowed to 'drip-feed' into the hands of developers without adequate provision for facilities, schools and shops. Lucan is the classic case of this to the South, and 'The Coast' will be the classic case of this to the North - basically a middle-class ghetto.

Gurgle

2nz wrote:

By that calculation the average industrial wage of €30,576 only allows an average working couple to borrow €122k. In a market free of investors would this mean that the average house price should not be much more than this?

Not to go into mad maths, wouldn't it be safe to assume that a couple on average industrial wage would be at the bottom end of the housing market rather than at the average?

DublinWriter wrote:

1. In the early 1970's, average house prices were 4 to 5 times the average industrial wage. These days they are closer to 15 to 20 times the average industrial wage.

Nope, they're currently at 10x

Average house price €304k as of August.

conor_mc

Gurgle wrote:

Not to go into mad maths, wouldn't it be safe to assume that a couple on average industrial wage would be at the bottom end of the housing market rather than at the average?

It's the average wage, not the minimum wage. It'd be safe to make your assumption in todays market perhaps, but my parents bought an average house on a single average wage once upon a time!

Sponge Bob

The long term average is 4x (going way back) but that was when each family only had one income earner.

I see no reason why that should NOT be 6x nowadays (as distinct from 10x) with 2 earners in a family unit much of the time but we also have the oversupply problem we never had before on anything like this scale.



The oversupply (from long term 10% to 16%) was built in during 2002 - 2006 so that at the time of the greatest ever population growth in Ireland ( 2004 -2006) we overbuilt completely even taking this massive one off population increase into account.

These units, currently parked off the market, will come on the market. 100,000 will have to be brought into use to bring us to our long term vacant average which is c.10% of the housing stock as you can see.

Even that long term average is over twice that of Wales or Scotland who tend to be around the 5% mark.

Zynks

Comparing multiples of average salary to average house prices is like pricing cars by the size of their wheels. On a national level, to establish if property is over valued, I think these are the relevant figures to consider:

• Current average equity - the house price average minus average outstanding mortgage
• Ability to pay - average salary compared to average outstanding mortgage repayment
• Current levels of supply and demand
• Location, location, location
• Average mortgage legth - Scope to reduce repayments by extending the lifetime of the loan
• The possibility that stamp duty is removed or reduced, at least for home owners trading up or down.

From these, I conclude the following:

• House prices should not raise significantly as interest rates go up, except in sectors where there is a high level of trade ups - equity goes up accordingly
• Salaries are not going up... at least not mine!
• Irish passion for property is not likely to change much, but how can anyone be passionate for property out in the sticks when the transport infrastructure is not there? And it is mostly in the outskirts that new property is being developed. To improve quality of life overall, there should be a massive investment in transport (not this 100 bus BS) and/or city development should head towards apartment buildings designed for families, with plenty of space, utility are, communal gardens, etc. - but realistically, developers don't give a f**k, the government doesn't appear to give a f**k, and buyers will buy any c**p thrown at them...but they may start becoming more demanding as excess levels of property start to become apparent.
• I have no idea what are the average national figures for equity and outstanding mortgage, but I suspect those figures will not make the market look as bad as average income vs. house prices.

My guesses:

• Property in suburban ghettos (large number of houses with next to no facilities and inhabited by people commuting into town to work and study) will devalue as supply exceeds demand. Oh, that is already happening, isn't it???
• Apartments built with low standards (small, low quality materials, no facilities) will drop badly, independent of location simply because c**p is c**p, no matter where it is!
• People will always want to trade-up, especially when living in sub-standard property and/or located in remote areas with poor public transport services available. Good quality built property in well urbanised areas inside or outside town will survive a crash.

faceman

2nz wrote:

By that calculation the average industrial wage of €30,576 only allows an average working couple to borrow €122k.

er, where did you get this massive inaccuracy from re amount you can borrow?

2nz

faceman wrote:

er, where did you get this massive inaccuracy from re amount you can borrow?

Eh, read the sentence before that one.
Those are old banking rules

faceman

2nz wrote:

Eh, read the sentence before that one.
Those are old banking rules

LOL there you go - old being the appropriate word - ancient being another.

the amount the bank will loan is based upon your ability to repay and your circumstances.

Gurgle

Zynks wrote:

People will always want to trade-up, especially when living in sub-standard property and/or located in remote areas with poor public transport services available. Good quality built property in well urbanised areas inside or outside town will survive a crash.

On this point
- It is often possible and more cost effective to extend/improve your property.
- I dont think it matters where you are, theres no public transport; buy a car
- Not everyone wants to live in well urbanised areas

Zynks

- It is often possible and more cost effective to extend/improve your property.

No doubt it is more cost effective. But may not always the the most desirable or practical.

- I dont think it matters where you are, theres no public transport; buy a car

Maybe I am only one of the few that really considered commuting time as a real key issue (quality of life). I would live in a house half the size in order to secure reduced commute and have access to public transport. It is an illusion to go for lower cost per square foot far out and spend the balance in petrol costs and hours of commute a day.

- Not everyone wants to live in well urbanised areas

Shops, sewage system, piped water, access to broadband, restaurants, cinemas, parks, mobile phone coverage, piped gas... sure some people are not that interested, but are they that many?

Gurgle

Zynks wrote:

Maybe I am only one of the few that really considered commuting time as a real key issue (quality of life). I would live in a house half the size in order to secure reduced commute and have access to public transport.

I would choose a job (even lower paying) located where I can easily commute from where I want to live
Theres also flexitime & shift work.

Zynks wrote:

It is an illusion to go for lower cost per square foot far out and spend the balance in petrol costs and hours of commute a day.

True, to a point.
If you're looking at a mortgage of 2400pm compared to 1200, thats a lot of bus tickets/petrol.

Zynks wrote:

Shops, sewage system, piped water, access to broadband, restaurants, cinemas, parks, mobile phone coverage, piped gas

We have all those things outside the pale these days.