Housing Bubble Bursting

Dalfiatach

As a bear in good standing (banned from AAM, regular on the propertypin for well over a year now, left politics.ie voluntarily recently because of the sheer sheeplike gombeen muppetry of the posters there) then I would say....

It'd be better for the country if we got a sharp correction over the next 3 years, but I fear we may be in for a long Japanese-style slump. There's just far too much inventory out there. We could stop building houses completely tomorrow and we'd have enough units to supply natural demand for about 4 years.

Prices will continue to fall, whether quickly or slowly, until fundamentals are restored. And that means net rental yields back up to 7-8% minimum, or alternatively the old price=120xmonthly rent rule. The banks will also hugely tighten credit criteria, and over the next couple of years we will be returning to the old standards of a minimum 10% deposit, mortgage terms will go back to 25 years maximum, and income limits will be restored probably something like 3.5xmain income + 1 or 2x second income, just as they always have been in nearly every country for the last 50 years (when not in bubble euphoria).

I still don't think 90% of the population have really twigged just how insane our property bubble really was, quite possibly the most ridiculously over-inflated property bubble in human history. And how much damage the unwinding will cause.

We can only hope that the carnage results in the people finally waking up and demanding real reform of our utterly corrupt planning system, ridiculous tenancy laws, and hugely inefficient public sector; purging our cultural admiration of cute-hoor stroke gombeenism and Famine-era obsession with The Land and property; and copping on at last that there is no such thing as a Get Rich Quick scheme. If we are to become a properly wealthy country, we will have to do it the old-fashioned way.

SimpleSam06

faceman wrote:

Pa my old compadre, you're still throwing text book stuff out! Somethings dont change!

Doesn't mean he's in any way wrong.

arctictree wrote:

So are we still to experience the 'bull trap'?

Without a doubt. The first rumblings of it have already begun in Galway, with large newspaper articles talking about "brisk sales of houses" in recent weeks.

SimpleSam06

whizzbang wrote:

That will probably come when the government intervenes to try an prop up the market. Maybe it was the Stamp duty reforms, maybe it will be extensive mortgage interest relief in the next budget, we will only know in hindsight.

They pretty much have to do something, though, or risk being lynched by the suddenly arthiritc Celtic tiger. Unfortunately that puts us in a feedback loop which draws out the pain considerably more; the worse it gets, the more people will be crying for fast fixes, the more the politicians will meddle, the longer it will take to fully deflate.

The best I can say is that the bubble is of such enormous size that no amount of political fiddling will mitigate its collapse. Maybe.

jimmycrackcorm

Some observations....

A friend who is a solicitor is absolutely flat out doing conveyancing; when questioned, simply says that people still need places to live and are buyng homes but are paying 5-10% less than the asking prices, and that while prices are dropping there still is strong and ongoing demand.

Some house prices are totally out of kilter than others and will suffer huge drops such as the recent 100k cut mentioned. There's an assumption that a developer putting houses for sale has correctly estimated the selling prices in the first place. They're not natural geniuses.

Not all empty houses are pure investment properties. Quite a substantial number were purchased as holiday homes.

A few of my well paid professional but home less friends are now excited about the possibility of finally being able to purchase a home. They're waiting for prices to drop more but not to buy as cheaply as possible but to a level where they will be able to get an affordable mortgage.

nesf

jimmycrackcorm wrote:

A friend who is a solicitor is absolutely flat out doing conveyancing; when questioned, simply says that people still need places to live and are buyng homes but are paying 5-10% less than the asking prices, and that while prices are dropping there still is strong and ongoing demand.

It's what differentiates a housing bubble from a standard bubble like the Dot Com one. Even in a collapsing market there will be some latent demand etc.

daveirl

This post has been deleted.

Pa ElGrande

jimmycrackcorm wrote:

Not all empty houses are pure investment properties. Quite a substantial number were purchased as holiday homes.

More detailed breakdown of census data:

You might buy a holiday home if say you have the disposible income to do it and no doubt some people do, what with 33,000 'millionaires' in the country.
However why in the world would you take out a long term loan to buy a holiday home? It makes very little sense, unless you are intending to sell your primary residence when you retire and move there permanently.

Having spoken to several people who own these houses their prime motivation is keeping up with the Smurfits and psychologically they are treating these holiday homes as 'investments', since very few have rental income they are speculating on capital gains. At most you are going to spend two weeks and maybe a few weekends in these places - I don't see how you gain much utility for the money spent/borrowed. Then again Irish people have done the same thing in Spain and Bulgaria. :rolleyes:

Chevy RV

Has the **** finally hit the fan ...........is the Irish love affair with buying property about to come to a dramatic end in a desperate fashion ??

Regards,

Chevy RV

Glenbhoy

jimmycrackcorm wrote:

Some observations....

A friend who is a solicitor is absolutely flat out doing conveyancing; when questioned, simply says that people still need places to live and are buyng homes but are paying 5-10% less than the asking prices, and that while prices are dropping there still is strong and ongoing demand.

I can only speak for myself, but I completed my own sale there 3 months ago, I was in close contact with my own estate agent and met a number of other agents when I was looking to rent. All were very concerned about the lack of movement in the market, one guy said to us "You managed to sell, there aren't many completions at the minute".
Added to this anecdotal evidence of a slowdown is the official data and projections from each and every mortgage provider, all reckon that mortgage lending for the year to date is down approx 20%, with data such as that, one would assume that your friend is a cut price solicitor, because I wouldn't imagine that many of the rest of them are flat out with residential conveyancing.

CelloPoint

Chevy RV wrote:

Has the **** finally hit the fan ...........is the Irish love affair with buying property about to come to a dramatic end in a desperate fashion ??

Regards,

Chevy RV

Ain't nothin' compared to the number of hits on these bad boys:

http://www.thepropertypin.com/forum/viewtopic.php?t=264&postdays=0&postorder=asc&start=0

Or this one (RIP - what a shame):

http://www.askaboutmoney.com/showthread.php?t=31710

Yes, the **** has hit the fan. The Irish love affair is over. The break-up will not be a pretty sight. Best hide somewhere warm and happy (preferably with a golf course and nice looking women) for at least five years.

SimpleSam06

faceman wrote:

back on topic, i dont believe the irish love affair with property is over at all. what on earth gives that impression???

I agree with you there, in fact I'd go so far as to say that property ownership is pretty much essential in this country for most people, since (as has been pointed out before in this thread) tenants rights are fairly medieval, so lifelong renting is not an option. Its not just a question of mentality.

I'd put it more like this; the era of grotesque amounts of money being lent out on very thin pretexts, inflating property values merely because the money was available, is over.

Or to put it another way, the day of bankers tearing the arse off it is done.

faceman

SimpleSam06 wrote:

I agree with you there, in fact I'd go so far as to say that property ownership is pretty much essential in this country for most people, since (as has been pointed out before in this thread) tenants rights are fairly medieval, so lifelong renting is not an option. Its not just a question of mentality.

I'd put it more like this; the era of grotesque amounts of money being lent out on very thin pretexts, inflating property values merely because the money was available, is over.

Or to put it another way, the day of bankers tearing the arse off it is done.

that sounds about right. however in saying that, BOI a few months go purchased mortgage funds at a discounted rated which they have been selling to buyers over the past few months. Im surprised it was allowed. despite my views on the property market, i think selling better than normal discounted mortgage rates in a market where rates have increased dramatically in 2 years is irresponsible.

A Random Walk

This "Irish love affair with property investment" has only happened in the last 10 years. Yes we've always had high rates of home ownership, but that's common to many countries. It's just another VI statement to justify prices.

Once property prices start falling and mortgages get more expensive, we'll lose that love pretty quickly.

faceman

its the irish love affair with property as opposed to property investment. I believe the love affair of property investment is the drunken love child of the property affair in the first place.

iguana

Greece, Belgium, Norway, Luxembourg and Spain for example all have historically high rates of home ownership. The fact that Ireland has unusually high rates is a myth. Part of the whole "Ireland is different" myth. We certainly do have a preference for owning rather than renting, partially due to crappy tenant rights and partially due to a love of owning the land we live on but we aren't alone in that.

D'Peoples Voice

Pa ElGrande wrote:

From now the angle of decline will depend on how the Government reacts, if they withdraw market support and do not intervene then this will be over in two to three years, it would be sharp and very painful, but we would be able to dust ourselves off and start on the road to recovery.

My prediction before the last budget was that the gov would only change mortgage interest relief and not stamp duty as changes to stamp duty are inflationary and favour only the vendor.
For this budget I predict the government will see themselves in a fantastic position with respect to the property market. Ten years ago, at the time of the Bacon reports, we were talking about simulating supply to ease house price growth. The answer then as it is now is supply not demand. All we hear from VIs is for the Gov to do something from the demand side.
But an easier solution can be achieved if the Government do something about the supply side and DO NOTHING ABOUT THE DEMAND SIDE.

Double the rate of CGT OVERNIGHT on budget day.

It will reduce the risk of a sudden rush to sell by investors in January caused by the autumn season being a washout

It coerces investors to stay on as landlords, rents are stabilised benefitting those on low incomes who can never expect to buy

Gives more confidence to prospective FTB to buy, as prices will stabilise as a result of investors not willing to sell and pay CGT of 40%

It has no negative effect on existing homeowners - in fact reassures them their house price will not collapse.

for those investors that do sell, government tax take is increased

Glenbhoy

iguana wrote:

Greece, Belgium, Norway, Luxembourg and Spain for example all have historically high rates of home ownership. The fact that Ireland has unusually high rates is a myth. Part of the whole "Ireland is different" myth. We certainly do have a preference for owning rather than renting, partially due to crappy tenant rights and partially due to a love of owning the land we live on but we aren't alone in that.

Housing is one of the key dimensions of an individual’s material position and quality of life. Adequate accommodation not only affects well-being, it can also be a matter of survival.

Most people in the new Member States are homeowners; more than half of the population own their own home, and in some cases – Estonia, Hungary, Lithuania, Slovakia, Slovenia, Bulgaria and Romania – the figure is over 80%. There are two exceptions to this rule: the Czech Republic and Latvia. In the former EU15, the rate of home ownership is only above 70% in Ireland, Italy, Luxembourg and Spain, and none of the other EU15 countries exceed the 80% line.

http://www.eurofound.europa.eu/press/communique/2004/november/newsletter7.htm

I hope those people investing in former Eastern bloc countries aren't expecting the locals newfound interest in property ownership to bail them out!

SimpleSam06

D'Peoples Voice wrote:

It has no negative effect on existing homeowners - in fact reassures them their house price will not collapse.

Seeing as their current house prices are already seriously overinflated, how on earth can you put that as a good thing? A lot of people seem to be twisting and turning in an effort to avoid a crash, as though it was the end of the world. It will be rough, yes, but overall it will do the country and future generations good. And in any case, that misses out the key problem which the housing bubble has caused - affordability. Things won't be in equilbrium until houses are affordable again.

Pandering to those who got fat suckling at the teat of the Celtic tiger is a hiding to nothing.

Edit: Also it stands no chance of working in the face of tightened lending criteria from the banks. Your house price can't stabilise if no one can lay their hands on the price. Forcing the majority of investors to become landlords will also crash the price of rent, with many ripple effects. Also, that excludes the fact that you'll flat out drive many investors to bankruptcy.

Economically, it makes no sense. Tis a square wheel.

Glenbhoy

D'Peoples Voice wrote:

Double the rate of CGT OVERNIGHT on budget day.

It will reduce the risk of a sudden rush to sell by investors in January caused by the autumn season being a washout

It coerces investors to stay on as landlords, rents are stabilised benefitting those on low incomes who can never expect to buy

Gives more confidence to prospective FTB to buy, as prices will stabilise as a result of investors not willing to sell and pay CGT of 40%

It has no negative effect on existing homeowners - in fact reassures them their house price will not collapse.

for those investors that do sell, government tax take is increased

I like it, but there is zero chance they will do this. They will extend mortgage interest relief massively, they may tinker with stamp duty for non-ftb's too, but to increase CGT would bite off too many of the feeding hands.

patrickolee

Glenbhoy wrote:

I like it, but there is zero chance they will do this. They will extend mortgage interest relief massively, they may tinker with stamp duty for non-ftb's too, but to increase CGT would bite off too many of the feeding hands.

D'People Voice, that's a great idea and I agree with you on the impacts. Unfortunately though, I also agree with Glenbhoy, they probably won't have the balls to do it. Might not suit their fund raisers! Pity though, it would make a lot of sense.

Colonel Sanders

unfortunately the major weakness in democracy is that Governments will do what is best for remaining in power rather than what is actually the right thing to do. Hence I agree with Glenbhoy, zero chance of the suggestions abve happening.

Afuera

D'Peoples Voice wrote:

Double the rate of CGT OVERNIGHT on budget day.

In hindsight allowing favorable CGT rates for property investors was not a good idea (and I think it was already flagged in Bacon's report in 2000), but I don't think the next budget would be the right time to revert back to the way it was before. Doing it at this point could create a largely stagnant property market that would make it difficult for everyone and possible prolong this difficulty. Sellers would still have problems selling (oversupply), buyers would still have problems buying (lack of affordability), the economy and the government would still suffer due to reduced employment and stamp duty.

At this stage of the game, I think the market forces should be left to do their work and take the market back to fundamental levels. The sooner this is done the better and then the government can introduce measures like that mentioned by D'Peoples Voice to prevent us arriving at the rediculous situation we now find ourselves in.

D'Peoples Voice

D'Peoples Voice wrote:

Double the rate of CGT OVERNIGHT on budget day.

It will reduce the risk of a sudden rush to sell by investors in January caused by the autumn season being a washout

It coerces investors to stay on as landlords, rents are stabilised benefitting those on low incomes who can never expect to buy

Gives more confidence to prospective FTB to buy, as prices will stabilise as a result of investors not willing to sell and pay CGT of 40%

It has no negative effect on existing homeowners - in fact reassures them their house price will not collapse.

for those investors that do sell, government tax take is increased

Interesting but do we know how many of the vacant properties were bought on interest only loans, say we double CGT, it could turn out that we could be forcing bankruptcy? Yes I know it would mean that people borrowed extremely irresponsibly but is it a situation we want? Yes or no? Is the hypothetical scenario feasible? Its certainly possible!

In recent years, more than 75 per cent of Bank of Ireland investment customers have availed of the bank's ten-year interest-only mortgage, according to Bank of Ireland Mortgages Manager Olive Moran.

http://www.finfacts.com/irelandbusinessnew..._10005328.shtml

Interest-Only Mortgages
As the name suggests, you pay only the interest of the loan, thereby lowering your monthly payment by quite a lot at least initially. The problem is, once you do begin paying principal, you have to play catch-up to pay off the debt before your term is up. These loans can be of value for people who want to save or invest the money they would have paid in principal. Interest-only loans are for people who have a better use for their cash, such as investments like stocks or shares, or renovations to add value to the property. One must be financially astute or this method can be extremely dangerous.
. Interest-only loans make sense for people whose income is sporadic, either because they are paid on commission or because they receive annual bonuses. In this case, they have the option of only paying interest some months but can pay above and beyond the amount due when they get their bonus checks.
. Interest-only loans may be suitable for people who want to buy a house and carry out renovations to add value to the property and sell it on.
. Interest-only loans may be suitable for a solicitor-in-training who wants to buy a house now but isn't earning a lot yet but is confident that he/she will in the future.

Quote from David Kiernan, Managing Director of independent mortgage brokers One Life Home Loans

patrickolee

Deleted User wrote:

Interesting but do we know how many of the vacant properties were bought on interest only loans, say we double CGT, it could turn out that we could be forcing bankruptcy? Yes I know it would mean that people borrowed extremely irresponsibly but is it a situation we want? Yes or no? Is the hypothetical scenario feasible? Its certainly possible!

How would it induce bankruptcy? Is CGT not only payable on sale of the property and applied to the _gains_ that were made?

Zambia

patrickolee wrote:

How would it induce bankruptcy? Is CGT not only payable on sale of the property and applied to the _gains_ that were made?

If i buy a gaff at 300,000

I borrow 280,000 to do so

I have repayments of 1000 at 4% I have rent at 1000

due to interest hike I have mortgage repayments of 1300%

I cant afford the extra 300 I decide to sell

Value of the property is now 310,000 I am charged cgt of 3,000

I recover my original investment no bankruptcy and 7,000 to boot

If anything was to get me stamp would

SimpleSam06

Zambia232 wrote:

I recover my original investment no bankruptcy and 7,000 to boot

Carraige costs, advertising, inflation, and more? On the plus side, you have made the banks richer, I guess...

gurramok

Housing starts down 58% in August!...annualized 44,500.

So when these starts feed into completions sometime late next year/into 2009, housing construction which the economy depends a fair bit on will be down by half.
And this 44,500 is near to 'normal' demand in a normal economy, where it should of been for last couple of years at least.

That is going to hit govt revenues, those 280,000 jobs in construction and related finance/retail industry extremely hard.
http://www.ireland.com/newspaper/breaking/2007/0905/breaking60.htm

ireland.com wrote:

A leading stockbroking firm has cut its GNP growth on the back of lower than expected house completion data.

Rossa White of Davy Research said housing starts were now running at an annualised rate of 44,500 compared with 94,500 12 months ago and had fallen 58 per cent in August.

As a result, Davys are cutting their housing forecasts to 75,000 completions this year and 55,000 completions in 2008. The figure for next year is 10,000 houses, or almost 20 per cent lower than earlier predictions.

Davys said investment in renovations and extensions to houses remained strong, accounting for about one-sixth of residential investment and that this was off-setting some of the decline in activity.

Mr White said the revised provisional estimate was now for GNP growth of 4.25 to 4.5 per cent in 2007 and 2.5 to 2.75 per cent in 2008.

Zambia

SimpleSam06 wrote:

Carraige costs, advertising, inflation, and more? On the plus side, you have made the banks richer, I guess...

I concur however example merely to demo CGT cost.

indiewindy

Afuera wrote:

In hindsight allowing favorable CGT rates for property investors was not a good idea (and I think it was already flagged in Bacon's report in 2000), but I don't think the next budget would be the right time to revert back to the way it was before. Doing it at this point could create a largely stagnant property market that would make it difficult for everyone and possible prolong this difficulty. Sellers would still have problems selling (oversupply), buyers would still have problems buying (lack of affordability), the economy and the government would still suffer due to reduced employment and stamp duty.

At this stage of the game, I think the market forces should be left to do their work and take the market back to fundamental levels. The sooner this is done the better and then the government can introduce measures like that mentioned by D'Peoples Voice to prevent us arriving at the rediculous situation we now find ourselves in.

When CGT rates were cut to 20%, the actual amount of CGT paid to the Government actually doubled eventhough the rate itself halved. If you doubled rates people will just sit on their hands. When selling you can write off your expenses incurred (repairs, ads, upkeep etc) in holding the property against your CGT liability.

silverharp

I wouldn't advise it as ultimately it wouldn't work but one thing they could do is cut stamp duty with a hint that it might be reversed in the future. Remember the valid argument that more revenue was generated when CGT was cut from 40% to 20%. This could generate more transactions if people were sitting on the fence.