Housing Bubble Bursting

Cantab.

silverharp wrote:

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.

Hinting at raising CGT from 20% to 40% would cause investors to dump everything they owned and move to pastures greener.

There would be a flood of property being dumped on the market, and this would lead to the crash bottoming out a lot quicker. Is a quick bottom-out a good thing? Something preferrable to a long, drawn-out, depressing 'hard soft landing'?

Raising CGT from 20% to 40% would be a right cock-up for many investment portfolios that have been switched around like a rubric's cube to take advantage of this low rate. Only the well-off and powerful would have such complex portfolios - therefore, no government is going to upset their investments.

That said, advance warning may be leaked to those insiders.

For this 20% to 40% proposal to be sucessful, a raise from 20% to 40% would need to be short, sharp, clinical and without warning.

But remember, this is Ireland we live in, and there are insiders everywhere who will have bailed out long before any budget announcement on CGT changes.

SimpleSam06

Cantab. wrote:

For this 20% to 40% proposal to be sucessful, a raise from 20% to 40% would need to be short, sharp, clinical and without warning.

Also one might make a comment or two about a national economic policy which depends on the element of, eh, surprise.

Glenbhoy

Cantab. wrote:

Hinting at raising CGT from 20% to 40% would cause investors to dump everything they owned and move to pastures greener.

There would be a flood of property being dumped on the market, and this would lead to the crash bottoming out a lot quicker. Is a quick bottom-out a good thing? Something preferrable to a long, drawn-out, depressing 'hard soft landing'?

Raising CGT from 20% to 40% would be a right cock-up for many investment portfolios that have been switched around like a rubric's cube to take advantage of this low rate. Only the well-off and powerful would have such complex portfolios - therefore, no government is going to upset their investments.

That said, advance warning may be leaked to those insiders.

For this 20% to 40% proposal to be sucessful, a raise from 20% to 40% would need to be short, sharp, clinical and without warning.

But remember, this is Ireland we live in, and there are insiders everywhere who will have bailed out long before any budget announcement on CGT changes.

Such an announcement would have to be made overnight, there is no other way, so presumably that negate most of the negatives above.
Re people having to adjust their investment portfolios, two points, firstly, no investor should ever assume that the tax regime will remain constant, secondly, the CGT rate increase would only be on property and property related investments.
There are obviously many pros and cons and I've not really thought much about it, but on the whole it's an interesting idea, and if introduced properly it should help restrict supply and improve things for tenants.
Someone mentioned that this had been tried before in Bacon, it was supposed to have been, but was never actually implemented afaik.

On another note, according to today's IT Property supplement, developers all over are going to follow the trend set last weekend and reduce prices for the next phases. In Adamstown, Maplewood homes have reduced the prices of 4 bedroom semi's by 45K to 475K, although the same firm have increased prices of 2 bedroom townhouses by 11K.
The article continues to say that price cuts everywhere for new developments are inevitable.

Looking through the supplement (34 pages, the selling season is here at last), I didn't see much evidence of prices being more realistic, I think that perhaps vendors and estate agents have decided to run with the higher prices initially with reductions to follow if market conditions are as bad as many feel.

It also seems virtually certain that the ECB will leave the headline rate unchanged today.

D'Peoples Voice

SimpleSam06 wrote:

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.

Sam, I'm not saying its dersirable to leave prices where they are, but without changes to CGT, if there is a price collapse, the ones to benefit will be the investors who got out of the market a year ago - who have thousands of cash left aside for this scenario. Meanwhile FTBs will be finding even more difficult to get into the market as banks tighten their lending criteria. That is another reason why doubling of CGT is necessary - reducing the incentive for investors to enter the market or leave the market!

SimpleSam06 wrote:

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.

Reducing rents is not a bad thing - we must remember that the gov pays a rent supplement to many people on low incomes, so lower rent is a positive for the Gov. As regards driving investors to bankruptcy, investment properties are second houses, as long as they have their own house to liquidate to cover their losses - they get no sympathy from me! Clearly they didn't measure their market risk.

silverharp wrote:

one thing they could do is cut stamp duty with a hint that it might be reversed in the future. ...... This could generate more transactions if people were sitting on the fence.

No offence, but unless you're an estate agent trying to boost your income by increasing your volume of sales, this is of no benefit. In fact, it's almost the worst thing they could do! Perhaps you can explain what effect it will have on the various participants in the market including those on very low incomes.

SkepticOne

I think the idea of increasing CGT will be attractive to Government given that public finances are going to be squeezed in the years ahead.

Stamp duty taxed people getting in when the market was on the way up. Increased CGT will tax people on the way out when the market is on the way down.

It slows down the rate at which investors are getting out thereby slowing down the rate of house price declines at the same time generates revenue for the Government. A win-win situation.

I think it is quite likely that they will go ahead with something like this.

iguana

The ecb decided to hold interest rates at 4% this month.

http://www.bloomberg.com/apps/news?pid=20601068&sid=aylzYZbI.Euc&refer=economy

arctictree

Bull Trap ?!

miju

quite possibly artictree, i heard Austin Hughes on newstalk saying that the rate rising cycle is now finished. dream on baby theres still another 1 before year end and possibly early next year.

the stock market debacle of the last couple of weeks has bought Ireland inc a small stay of execution IMHO

silverharp

D'Peoples Voice wrote:

No offence, but unless you're an estate agent trying to boost your income by increasing your volume of sales, this is of no benefit. In fact, it's almost the worst thing they could do! Perhaps you can explain what effect it will have on the various participants in the market including those on very low incomes.

The gov. in theory would keep it's revenue up if transactions increased same logic as reducing CGT.

Stamp duty has distorted the market, I live in a mature area with a mix of 3 and 4 bedroom houses. Nobody can afford to trade up due to the stamp duty hit, so everyone is extending their house. in ten more years there will be no 3 bedroom houses left on the road. I would always be against a tax that changes peoples decision making process for no good reason

BTW I am looking at this from what the gov. might do without making a value judgement. It is in the gov. interest to keep the gravy train going, look at bush's proposals in the US to bail out the lenders.

iguana

miju wrote:

quite possibly artictree, i heard Austin Hughes on newstalk saying that the rate rising cycle is now finished. dream on baby theres still another 1 before year end and possibly early next year.

the stock market debacle of the last couple of weeks has bought Ireland inc a small stay of execution IMHO

I think that if we are to see a dead cat bounce this is where we will see it. On an anecdotal level I know of a couple people who want to sell and have been waiting to see if the ECB would raise it's rates in September to sell. I'm not entirely sure of the logic but it seems there is a consensus amoung many of the general public that if the ECB held the rate today the wouldn't go up again.

D'Peoples Voice

silverharp wrote:

Stamp duty has distorted the market, I live in a mature area with a mix of 3 and 4 bedroom houses. Nobody can afford to trade up due to the stamp duty hit, so everyone is extending their house.

To explain why it won't help - John is buying a house in Ballinteer off Paul, the house costs EUR 750,000, so John is willing to pay EUR 750,000 + EUR 67,500(9% SD). If stamp duty is abolished, Paul will know that if John could afford EUR 750,000 + EUR 67,500 before, he can still afford it now, result, Paul ups the price of his house to EUR 817,500. This happens across the board, so who benefits - only people selling houses but not buying themselves - trader uppers and FTBs certainly don't benefit. Oh and Estate agents commissions soar! Even the VI admit that once SD is abolished, prices will jump, but they try to defend it by saying it will be only be a once off massive jump - ok that's ok then, house prices are already overvalued - what's an extra jump?
The government aren't worried too much about their falling stamp duty revenues - after all house prices increases have found their way into the CPI through housing costs, and this means the Gov must pay out more in benefits for those on Welfare and in the public sector. A lower CPI will feed through to a more competitive economy and this in turn will fund higher income and corporation taxes. Ironically reducing stamp duty, causing house price jumps, makes the gov more dependent on property related taxes, as the rest of the economy looses it's competitiveness as wages are bid and overall taxes fall.

Colonel Sanders

iguana wrote:

I think that if we are to see a dead cat bounce this is where we will see it. On an anecdotal level I know of a couple people who want to sell and have been waiting to see if the ECB would raise it's rates in September to sell. I'm not entirely sure of the logic but it seems there is a consensus amoung many of the general public that if the ECB held the rate today the wouldn't go up again.

yeah, I have heard this kind of crap from peoplr too. They think they're out of the woods because one forecast rate rise didn't materialise (the same people have zero idea on the reasons why) so they think its up up and away again.

silverharp

D'Peoples Voice wrote:

The government aren't worried too much about their falling stamp duty revenues - after all house prices increases have found their way into the CPI through housing costs, and this means the Gov must pay out more in benefits for those on Welfare and in the public sector. A lower CPI will feed through to a more competitive economy and this in turn will fund higher income and corporation taxes. Ironically reducing stamp duty, causing house price jumps, makes the gov more dependent on property related taxes, as the rest of the economy looses it's competitiveness as wages are bid and overall taxes fall.

Interesting point about CPI v Stamp duty it would mitigate the tax slump however I have no idea if it is fiscal neutral or not. When housing prices were going up I would completely agree that any tax saving would have just led to an auctioning up of prices however in a falling price environment and if you’re the gov. you have no incentive to see falling prices as from their perspective they get it in the neck. Remember Bertie coming out against the doom sayers last year. If houses prices say fall 10% on average for the next 3 years and if stamp duty was cut, it may or may not effect prices but in certain parts of the market it would increase activity. I don’t think it would make a big difference either way as the market is driven by liquidity and bubbles never end neatly.

I still think though that the stamp duty is a deeply unfair tax due to the market distortions it creates and in a falling price market there is an opportunity for reform.

CelloPoint

So was "done and dusted" Dan right after all? Credit where credit's due and all...

whizzbang

CelloPoint wrote:

So was "done and dusted" Dan right after all? Credit where credit's due and all...

I thought we were done and dusted at 3.5%

A Random Walk

What the VI economists aren't telling you is that interest rates don't matter to house prices any more. Because of the credit crunch mortgages are going to become harder to get and banks will start charging a higher margin irrespective of interest rates.

It might be good news for current mortgage holders who won't get hit with an interest rate hike, but the price of their property is still going to keep falling.

nesf

miju wrote:

quite possibly artictree, i heard Austin Hughes on newstalk saying that the rate rising cycle is now finished. dream on baby theres still another 1 before year end and possibly early next year.

There's actually good reasons to debate that. In a few months once we've seen which way the dust settles with regard to the markets etc will tell us whether the rates will continue to rise in the medium term.

Personally I agree with you assuming the fallout from the sub-prime issues aren't so bad but I wouldn't bet the house on it if you pardon the pun.

nesf

A Random Walk wrote:

What the VI economists aren't telling you is that interest rates don't matter to house prices any more. Because of the credit crunch mortgages are going to become harder to get and banks will start charging a higher margin irrespective of interest rates.

It might be good news for current mortgage holders who won't get hit with an interest rate hike, but the price of their property is still going to keep falling.

Agreed pretty much.

miju

dont get me wrong i do think we're near enough to the top of the cycle in that between now and next March they'll be somewhere between 4.25% - 4.50% and they'll probably stay at the level for most of 2008 and drop back then by a half percent or so (but nowhere near the 2% that fed this bubble in the first place)

nesf

miju wrote:

dont get me wrong i do think we're near enough to the top of the cycle in that between now and next March they'll be somewhere between 4.25% - 4.50% and they'll probably stay at the level for most of 2008 and drop back then by a half percent or so (but nowhere near the 2% that fed this bubble in the first place)

*shrugs*

Until the global economy settles down all bets are off tbh. The next Fed meeting will be important imho.

PIMPHO

So would one advise to opt for a tracker mortgage over a fixed term mortgage?

Tom123

PIMPHO wrote:

So would one advise to opt for a tracker mortgage over a fixed term mortgage?

It's hard to know but I still expect the ECB to raise rates twice in he next 6 months

nesf

Tom123 wrote:

It's hard to know but I still expect the ECB to raise rates twice in he next 6 months

Why?

expediateclimb

I think this slow drop in house prices at the moment is gonna turn into quite a large one in the near future. Once prices start to fall its pretty hard to stop.

Tom123

nesf wrote:

Why?

I think the current pause was just that a pause. Once the markets calm down again I think the ECB will return to its tightening bias.

Inflation is still rising, particularly food, and I think the ECB will have no option but to stick to its remit.

I think the markets are also stilling pricing in 1 more raise this year.

nesf

Tom123 wrote:

I think the current pause was just that a pause. Once the markets calm down again I think the ECB will return to its tightening bias.

Inflation is still rising, particularly food, and I think the ECB will have no option but to stick to its remit.

I think the markets are also stilling pricing in 1 more raise this year.

I agree, I'm just not sure that the markets will calm down quick enough for 2 raises in 6 months. The market is still pricing in one more raise but when it's coming is becoming quite uncertain.

Tom123

nesf wrote:

I agree, I'm just not sure that the markets will calm down quick enough for 2 raises in 6 months. The market is still pricing in one more raise but when it's coming is becoming quite uncertain.

Very true but I think the ECB still feels that one or two more raises are required

nesf

Tom123 wrote:

Very true but I think the ECB still feels that one or two more raises are required

I think it was summed up very well by George Lee. The ECB are patiently waiting for all the furore to die down so they can get back to their plan and start moving up the cycle again.

gurramok

nesf wrote:

Why?

ECB probably think that 'normal' rates are at around 4.25-4.75%.(ignoring other fatcors for the mo)

Thats what they were before 9/11 hit. http://www.ecb.int/stats/monetary/rates/html/index.en.html

silverharp

Remember though, the central banks follow the market not the other way around. If the ECB or the FED decide to drop rates, it is because they are following short term T-bill rates in the US for instance. If they drop rates it just confirms that a recession has started