Housing Bubble Bursting

ixoy

patrickolee wrote:

But it was always hard for anyone on an average or below average wage to get a house. Apart from a brief period in the late 90s to early 00s, when wages shot up. Maybe we've returned to normality?

Yes but I'm talking about it being difficult for two people on average, or below average, salearies being able to get a house (in Dublin anyway). That's what makes it insane.

conor_mc

patrickolee wrote:

But it was always hard for anyone on an average or below average wage to get a house. Apart from a brief period in the late 90s to early 00s, when wages shot up. Maybe we've returned to normality?

Wishful thinking, I'm afraid.

You put that in a context that sounds reasonable, yet the reality is that from an historical ratio of 3:1 between average industrial wage and average house price, we're now at a ratio of 10:1.

A return to normality means a return to normal lending standards. Apply the same lending criteria as were prevalent up to the 90's and you'll see what I mean i.e. stump up 10% up front and pay the balance over 20 years.

Today you'll need to save pretty much a whole year's pre-tax salary for a deposit. Your 275k mortgage at 5% will cost you almost €1800 over 20 years as opposed to €1370 over 35, that's a 30% higher mortgage repayment on a net salary of what, €2000 or so a month?

Cheap, flexible credit has fuelled a boom. Those cheap lending standards have started to reverse, so house prices must fall as a result.

patrickolee

conor_mc wrote:

Wishful thinking, I'm afraid.

You put that in a context that sounds reasonable, yet the reality is that from an historical ratio of 3:1 between average industrial wage and average house price, we're now at a ratio of 10:1.

A return to normality means a return to normal lending standards. Apply the same lending criteria as were prevalent up to the 90's and you'll see what I mean i.e. stump up 10% up front and pay the balance over 20 years.

Today you'll need to save pretty much a whole year's pre-tax salary for a deposit. Your 275k mortgage at 5% will cost you almost €1800 over 20 years as opposed to €1370 over 35, that's a 30% higher mortgage repayment on a net salary of what, €2000 or so a month?

Cheap, flexible credit has fuelled a boom. Those cheap lending standards have started to reverse, so house prices must fall as a result.

The ratios are not comparable as in the past interest rates were huge, compared to what they are now and are likely to be for the foreseeable future. That is the reason the ratios had to be so low.

The term of the mortgage I agree with you on, it has grown. 20-25yrs was the norm, whereas 30-35yrs seem to be now. Will they grow further? Like Germany/Japan? Maybe interest only mortgages will be normal. Maybe in 30-40 years time people simply will not be able to afford to own their own home and renting will be the norm?

My point is, it was always a struggle to buy a house and always will be (except for a brief period in the late 90s early 00s, when things got out of sync). So we have returned to normality, not entered some special state. If there is a crash/crunch, people will still be whinging about how they can't afford a house as they will either lose their jobs/their household incomes will reduce.

SimpleSam06

patrickolee wrote:

The ratios are not comparable as in the past interest rates were huge, compared to what they are now and are likely to be for the foreseeable future. That is the reason the ratios had to be so low.

Wrong. Banks set the amounts they could lend based on the ability of the applicant to pay it back. High interest rates were a factor, but so was equity, the bank's profit margins, and that they would not risk lending based on two incomes, in case of personal difficulties, sicknesses, injuries, children being born, one job being lost, or a host of other high risk factors, which the banks have thrown to the wind in a fit of greed.

patrickolee wrote:

Maybe interest only mortgages will be normal. Maybe in 30-40 years time people simply will not be able to afford to own their own home and renting will be the norm?

In the event of the housing boom continuing ad infinitum, renting would be the only possibility in the mid term future. But in a country with only 4% land usage, and a low population, that would be insane, never mind the other elements in the equation.

Also if you do that you cut out the crucial FTB element of the market, you cripple the market, and prices drop, so your statement contradicts itself.

patrickolee wrote:

My point is, it was always a struggle to buy a house and always will be (except for a brief period in the late 90s early 00s, when things got out of sync). So we have returned to normality, not entered some special state.

This is like talking to the Iraqi information minister. The imperialist dogs of reality will be committing suicide outside the impenetrable gates of the Irish housing market, and all that. It was a struggle for one person to buy a house. Now its a struggle for two people to buy a house. Seeing whats wrong with the picture yet?

patrickolee wrote:

If there is a crash/crunch, people will still be whinging about how they can't afford a house as they will either lose their jobs/their household incomes will reduce.

Actually what will happen is a much needed reality check on Irish politics and the banking institutions in this country. I expect stronger controls on lending criteria, and a good winnowing out of the dead wood in government.

SkepticOne

patrickolee wrote:

My point is, it was always a struggle to buy a house and always will be (except for a brief period in the late 90s early 00s, when things got out of sync). So we have returned to normality, not entered some special state. If there is a crash/crunch, people will still be whinging about how they can't afford a house as they will either lose their jobs/their household incomes will reduce.

Yes, what is disturbing is that as soon as interest rates went down, banks relaxed their lending criteria and prices rose accordingly to cancel out any benefit of the lower interest rates to new buyers.

Now that interest rates are rising, the amount that people can borrow is coming down and consequently prices will come down. This is correct. This is why you should not buy at historically low interest rates. It means that prices are at risk of falling. You will be left with the full debt but at the higher interest rate.

In addition to this, during the period of low interest rates, vast numbers of speculators entered the market attracted to capital appreciation despite lack of yield. No that prices are no longer rising those speculators will exit the market bringing prices down faster and to a lower level than interest rate movements alone would cause.

It looks like we are still in the denial stage of the bust with a vast build up of inventory occurring rather than rapid fall in prices (although there have been some falls). Obviously, this not a situation that can last and reality will impose itself.

robd

patrickolee wrote:

The term of the mortgage I agree with you on, it has grown. 20-25yrs was the norm, whereas 30-35yrs seem to be now. Will they grow further? Like Germany/Japan? Maybe interest only mortgages will be normal. Maybe in 30-40 years time people simply will not be able to afford to own their own home and renting will be the norm?

Renting may become more normal but not for the reasons you mention. Renting may become more normal for the young under 30's segment who like to be able to migrate/move around the EU to where the work is.

Renting can't just replace ownership if the cost of ownership is too high. After all, someone (eg an Investor) has to own the property. The income (rent) must cover the cost of finance (mortgage) to make this economically viable. Rent is much more related to the wages of the renters than the cost of finance. Looking at the market at a macro level over the long term, the income a property generates has to match the cost of finance and thus the price/value of the property in the first place. It will always return to this.

Interest only mortgages on residential property really only work in a low interest environment. When interest rates increase the capital repayment part of a mortgage becomes a much smaller % of the overall payment so they don't look that attractive. Also the yield (or discounted rental value) has to be in excess of the cost of interest, as per above paragraph.

You have to look at the rental market as a somewhat sub prime market. Ignoring the fact that some people (like myself) rent at the moment because in is financially more viable, in general people rent for some of the following reasons:

• They can't get a mortgage due to no credit history, bad credit history or they don't earn enough.
• They are transient, and only intend staying around for a short period of time and thus buying does not suit.

The argument basically, is that rent should be more than a mortgage. At the moment, this clearly isn't the case. Looking at rents around Dublin City (inside M50) of circa €1400 for a 2 bed apartment I don't think there is much scope for rental increases over the foreseeable future.

The only thing left is for prices to come down to resolve these imbalances.

Imposter

In the Irish market rent is similar to the mortgage but that is not the case elsewhere. Here in Austria renting costs about 50% of what a 20 year mortgage would. As a result a lot of people happily rent all their lives. Houses are generally owned but cost a lot more than apartments and are generally in the suburbs of towns and cities meaning not as well serviced in terms of public transport and the like compared to apartments.

Ireland's housing markets make zero sense. House prices are too high, rent is too high, credit is much too freely available, density is way too low, planning is non existent. Wages are too high and interest rates are now rising and Ireland has no control over them!

All of which come together to ruin the quality of life for people. People landing themsleves with 2 hour each way commutes to their jobs to fund a shoebox of a house with little or no garden and no public facilities.

Hopefully the market and the people driving it cop on to themselves at some stage soon!

patrickolee

robd wrote:

The argument basically, is that rent should be more than a mortgage. At the moment, this clearly isn't the case. Looking at rents around Dublin City (inside M50) of circa €1400 for a 2 bed apartment I don't think there is much scope for rental increases over the foreseeable future.

The only thing left is for prices to come down to resolve these imbalances.

Or for sale prices to increase and rent prices to stay as they are?

I agree there is an inbalance, which as imposter says, is very very unusual. In most countries renting is a lot cheaper than buying. It makes sense. It's almost as if there's an unseen power propping up the prices and keeping rental prices high relative to mortgage repayment amounts. What could that power be?

Could it be that the development of the country is controlled by a small number of people, who have realised that it is in their interest to maintain this imbalance? It would need to be someone who has control, or can influence, things like Mortgage interest relief, planning, infrastructure development (or lack of), re-zoning of land, tenants right (or lack of). Could they have been engineering this situation for the last 10 years? Could they continue for the next 5?

Maybe I'm talking through my preverbial.

D'Peoples Voice

D'Peoples Voice wrote:

Will the PAYE tax cuts ( 20% -> 18%, 41% -> 40%), as promised by the Government in the election, help these people?

Will the increase in the mortgage interest relief, as promised by the Government in the election, help?

The reform of the PRSI levies,as promised by the Government in the election, skewed in favour of those in the lower income brackets, will this not help people?

I think the Government is sending signals to us that they have no money or are in serious deficit. After the slowdown in 2001/02, NO new Road project started in 2003 (maybe it was 2002). Anyway I think we will see a repeat of this in 2008, (thankfully all the PPPs will go ahead as they cost the Government only a fraction of their true cost)

http://www.businessworld.ie/rankednews2.htm?s=index.html;s2=rankednews2.htm;r=4;a=1805202

Transport 21 projects hit major delays
Monday, August 13 08:51:38

Delays of up to two years are predicted for some of the major infrastructure projects under the Government's Transport 21 initiative, according to reports.

Reports this morning say the completion dates for 11 major projects have been revised without any explanation on various websites funded by the Department of Transport .
The completion date for upgrade of the M50 motorway has been delayed from 2007 to 2008, while the date for the Metro North scheme in Dublin has been put back from 2012 to 2013.

A string of other projects around the country have also been delayed by a year, while the planned LUAS extension from Tallaght to Citywest has been delayed by two years.

So if Government spending on road construction slows down ..........

SkepticOne

patrickolee wrote:

Or for sale prices to increase and rent prices to stay as they are?

I agree there is an inbalance, which as imposter says, is very very unusual. In most countries renting is a lot cheaper than buying. It makes sense. It's almost as if there's an unseen power propping up the prices and keeping rental prices high relative to mortgage repayment amounts. What could that power be?

I think you might like to reread robd's post. You seem to have misconstrued that he is arguing that rent is high compared to buying.

BobbyD10

Imposter wrote:

In the Irish market rent is similar to the mortgage but that is not the case elsewhere. Here in Austria renting costs about 50% of what a 20 year mortgage would. As a result a lot of people happily rent all their lives. Houses are generally owned but cost a lot more than apartments and are generally in the suburbs of towns and cities meaning not as well serviced in terms of public transport and the like compared to apartments.

Ireland's housing markets make zero sense. House prices are too high, rent is too high, credit is much too freely available, density is way too low, planning is non existent. Wages are too high and interest rates are now rising and Ireland has no control over them!

All of which come together to ruin the quality of life for people. People landing themsleves with 2 hour each way commutes to their jobs to fund a shoebox of a house with little or no garden and no public facilities.

Hopefully the market and the people driving it cop on to themselves at some stage soon!

Agree.

chump

BobbyD10 wrote:

Agree.

Agree too.

SimpleSam06

More worries about property on the international front.

Shares in Asia have fallen again as concerns about global credit conditions - driven by problems in the US mortgage sector - continue to worry investors...As US interest rates have risen and the housing bubble has burst, a growing number of sub-prime borrowers have defaulted on their loans prompting extensive financial difficulties for a number of investment funds with heavy exposure to the sector - and triggering fears of a wider financial crisis.

While some estimates say $300bn in loans could be at risk, one of the biggest worries for investors is not knowing the eventual scale of the problem.

Can we lay the blame for the whole thing on securitisation?

We're also starting to see the knock on effects of our local bust already here in Galway, with several high end home supply and furniture shops closing down in the last few weeks.

digitally-yours

50,000 houses for sale now

who thought 5 years ago that there will be 50k houses on the market for sale
i am sure there are loads and loads of others who want to sell but are not comming to market because of the current downturn

http://daftwatch.atspace.com/

SkepticOne

digitally-yours wrote:

50,000 houses for sale now

who thought 5 years ago that there will be 50k houses on the market for sale
i am sure there are loads and loads of others who want to sell but are not comming to market because of the current downturn

http://daftwatch.atspace.com/

It supports the idea that we are in the denial stage of the bubble and that there is a lot of it. It will be interesting to see what happens in the next few months as reality sets in.

delboy159

digitally-yours wrote:

50,000 houses for sale now

who thought 5 years ago that there will be 50k houses on the market for sale
i am sure there are loads and loads of others who want to sell but are not comming to market because of the current downturn

http://daftwatch.atspace.com/

I think it's widely accepted that there are far more than 50k for sale at the moment.

A lot of single DAFT adverts are for developments with 20/30/100+ properties.
Also, there are many props for sale throughout the country not on DAFT. Not to mention the sellers "holding off"....

The true figure out there could be 75k, or even higher.... No one knows

Colonel Sanders

add in another six figures of empty properties around the country not occupied but not officailly on the market and what does that to the market?

Must say I'm not a total doomsday merchant re. the property market but on the face of it, its hard to be anything except very pessimistic.

chump

Colonel Sanders wrote:

add in another six figures of empty properties around the country not occupied but not officailly on the market and what does that to the market?

Must say I'm not a total doomsday merchant re. the property market but on the face of it, its hard to be anything except very pessimistic.

Very few people on this thread would I regard as doomsday merchants. Is someone who interprets that there is a significant downside risk associated with irish property at the minute a doomsday merchant?

Only in the eyes of the ignorant bullish imo.

goldenbrown

paddy power bookies shortest odds on a fall this year
a m8 who does evaluations for mortgage applications for banks is doing very few
if u r aiming to buy..best move is to wait:)

LegacyUser

If the property market is going to burst .. then why have there been more "sold" signs and "sale agreed" signs in the last couple of months?

Maybe there is a need to drop price in order to sell! But prices were on the ridiculous side anyway!! 3 houses have sold in our estate this month. So it isn't all negative.

digitally-yours

Interesting read

How things stand internationally

Definately not the right time to buy house

"Sales of existing homes fell in 41 states during the April-June quarter while home prices were down in one-third of the metropolitan areas surveyed, a real estate trade group reported Wednesday.

The new figures from the National Association of Realtors underscored the severity of the current housing slump, the worst downturn in 16 years."

more here
http://abcnews.go.com/Business/WireStory?id=3482224&page=1

ionapaul

There definitely isn't a feeling of panic or strong pessimism in the country at large, just yet. From converations with friends, I think most people recognise that the market is shaky (from the stream of 'slightly negative but not overly so' stories in the media - people believe what they are told!) but will right itself soon without tipping into 'crash' territory. As a long time bear myself, I genuinely feel there will be no huge declines in home values unless this sentiment is changed - we have almost full employment and will not see a rush of foreclosures like they are having in the US unless the employment picture changes. Am I crazy or does the possibility of what they called 'a soft landing' - not much change in nominal home values for 5 or more years (obviously real values will be decreasing in line with inflation) - seem higher now than a few months ago?
I really feel Ireland could avoid a crash if sentiment and employment remain positive. Thoughts?

SimpleSam06

ionapaul wrote:

Am I crazy or does the possibility of what they called 'a soft landing' - not much change in nominal home values for 5 or more years (obviously real values will be decreasing in line with inflation) - seem higher now than a few months ago?

You are crazy I'm afraid! The key issue in Ireland is affordability. Most FTBs can't afford even a ratty little shoebox, and if they can, sentiment bedamned, thats where they will spend the rest of their lives. So they aren't buying.

Investors aren't touching it because there is no appreciation to be had, and trade-uppers aren't going near it because they can't find anyone to buy their overpriced houses. BTLers can't begin to cover mortgages with rent. So who is going to buy to keep the market going? Exactly nobody. Nobody buys, and that excludes the massive economic effects of a slowdown in the building industry in Ireland, with the knock on effects in employment. The tipping point has been reached, although panic has not yet set in. That will happen in Q4 2007 or Q1 2008, IMHO.

Do-more wrote:

As a matter of interest can you tell me which furniture shops have closed? Got a mate in the Biz!

That place in the Eyre Square centre, for one. Can't for the life of me recall the name though - they do all sorts of fancy furnishings and statuettes and whatnot. "Options", maybe? There was at least one other, but I can't think where it is at this stage.

mathie

delboy159 wrote:

I think it's widely accepted that there are far more than 50k for sale at the moment.

A lot of single DAFT adverts are for developments with 20/30/100+ properties.
Also, there are many props for sale throughout the country not on DAFT. Not to mention the sellers "holding off"....

The true figure out there could be 75k, or even higher.... No one knows

Conversely there are numerous properties listed twice on daft.

Snaga

Interesting report based on MyHome figures for the last 2 weeks here - http://irishpropertywatch.5gbfree.com/ipw_myhome_report12_130807.html

I'd hate to have bought one of them K Club houses for 7.5mill when they can be snapped up 2 weeks later for a measly 5.25mill

Glenbhoy

Interesting that affordability is going to be pushed even further as the leading financial institutions are now stress testing at ECB +3%, they appear to be doing this in order to allay outside fears that we may have been a bit lax with our lending policies (see US sub-prime crisis), but of course no Irish bank would ever have lent money on the strength of spurious income evidence, would they??
This is a highly significant move and dwarfs any ECB increases to an extent.

By Brendan Keenan
Wednesday August 15 2007


AIB economists have cut sharply their estimates for the number of houses to be built next year and now expect a 22pc fall on this year's level.


And the trouble in global credit markets could put more pressure on the Irish housing market, according to the subscription-only magazine Finance.

It says several leading Irish lenders told a conference in Barcelona that they were now assessing borrowers' ability to repay mortgages on a basis of ECB rates plus 3pc, compared with the previous 'stress-test' of plus 2pc.

This was designed to assure investors that Irish banks are sound, and do not have over-exposure to risky property lending, the magazine says.

But it is equivalent to a further 1pc interest rate increase and indicates that the market is currently seeing a reduction in credit supply.

The resulting fall in affordability could mean a further reduction in demand and more pressure on property prices.

Analysts at AIB Global Treasury think the number of houses completed next year could be as low as 62,500, compared with the record 88,200 last year and an estimated 80,000 completions this year, based on the current trend in house guarantee registrations and commencement notices,

A growing number of Irish economists now think house completions will be less than 65,000 next year.

This could reduce economic growth to around 3pc and knock €1bn off government revenues, according to some estimates.

AIB chief economist John Beggs said the risk was that building could slow even faster, if the housing market does not pick up in the autumn selling season.

"The danger is that sentiment towards the housing market remains depressed, and that developers slow the rate of house completions even further," he said.

"The building industry has proved extremely responsive to demand levels, both on the way up and the on the way down, so we expect a further contraction in the level of house-building activity in the coming months," Mr Beggs said.

"At this stage, our best estimate is that completions will fall to 80,000 in 2007 - down from our previous estimate of 82,500, a decline of 9.3pc on last year," he said.

The report says the main response to reduced demand for housing so far has been in reduced building rather than lower prices.

But by next month prices could be lower than in September last year, stay lower until the end of 2007, and remain flat or slightly higher in 2008, it says.

http://www.independent.ie/business/aib-estimate-for-2008-housing-completions-is-slashed-by-22pc-1058993.html

Supercell

Ryaller wrote:

Christ almighty...

Well put, I second you!

Dragging this back on topic....Credit crunch derails ECB as it firefights liquidity crisis

I'm a little surprised by how little the current meltdown on the global markets is being reported here. Liquidity is fast trying up, so much so that while the interest rates may slow or stop their increases, this should absolutely be no cause of joy to the various Irish VI's.

Put it simply, whilst rates may no longer be going up, the banks here will have to seriously tighten their belts and only loan to those who are rock solid in terms of ability to payback, as its fast getting very very hard to securitise housing loans.

In short - smaller mortgages to fewer people will be the result, its not looking good at all despite how some in the press may be trying to spin a pause in the interest rate raises.

ronbyrne2005

Longfield wrote:

Well put, I second you!

Dragging this back on topic....Credit crunch derails ECB as it firefights liquidity crisis

I'm a little surprised by how little the current meltdown on the global markets is being reported here. Liquidity is fast trying up, so much so that while the interest rates may slow or stop their increases, this should absolutely be no cause of joy to the various Irish VI's.

Put it simply, whilst rates may no longer be going up, the banks here will have to seriously tighten their belts and only loan to those who are rock solid in terms of ability to payback, as its fast getting very very hard to securitise housing loans.

In short - smaller mortgages to fewer people will be the result, its not looking good at all despite how some in the press may be trying to spin a pause in the interest rate raises.

Brendan KEenan was on radio tonight and said even if rates are not raised house prices are likely to continue to fall.

SimpleSam06

Longfield wrote:

I'm a little surprised by how little the current meltdown on the global markets is being reported here.

Yes, I posted a link to a BBC news article on the same lines a while back before I got shanghied into asking people were they going bankrupt.

Longfield wrote:

Put it simply, whilst rates may no longer be going up, the banks here will have to seriously tighten their belts and only loan to those who are rock solid in terms of ability to payback, as its fast getting very very hard to securitise housing loans.

I would view that as an extremely good thing, since it will force the banks to reassert responsible lending practices and stop handing out massive mortgages to anyone with a payslip.

The_Conductor

Guys- please get back on topic, and quit trying to draw each other out. If there is any more offtopic posting, taunting, snide or irrelevant comments- the perpetrator(s) will be banned (for a length of time which the moderators will decide is appropriate). Consider this post a warning- seperate warnings will not be given.

S.