Housing Bubble Bursting

iguana

Gurgle wrote: »

IMO, real investors are thinking in terms of decades while bandwagon investors are thinking in terms of 6 months to a couple of years. In the long term property investment is as safe as houses.

Surely the key to proper investing is to buy low and sell high, then buy again low. If somebody bought a house 5 years ago for €200k then sold it early last year for €500k and plans to buy 2 houses for €200k each in 3 years, they will have double the profit in 20 years time of somebody who bought a house for €200k 5 years ago and just held onto it.

BendiBus

iguana wrote: »

Surely the key to proper investing is to buy low and sell high, then buy again low. If somebody bought a house 5 years ago for €200k then sold it early last year for €500k and plans to buy 2 houses for €200k each in 3 years, they will have double the profit in 20 years time of somebody who bought a house for €200k 5 years ago and just held onto it.

Which is one example of opportunity cost, something many Irish property buyers (speculators or investors, take your pick) don't seem to consider.

Do-more

Here's one for the VI's to latch on to! Seems there's no property bubble here after all!

SimpleSam06

Kipperhell wrote: »

A lot of forecasts see people in their tens and 20s will not be able to buy as the assets are held by the older generation.

Thats a bit of a simplification. The simple response is of course that the older generation die.

Kipperhell wrote: »

People are still working on the principle that everybody will have to own

Have you seen the state of tenant rights in this country? Its all very well pointing at places like Germany and saying "we will turn out like them", but the fact is we're nothing like them, legislation-wise. And if we were like them, many "landlords" would be getting out of the landlord business. If you plan on doing anything long term, you need to own.

Kipperhell wrote: »

The basics are if you think you can invest 200 a month in order for it amount to 400k in 20 years let me know.

The points you are making are good, but its making the assumption that things will stay more or less the same for the next 20 years, in terms of rents, tenant availability, house prices, interest rates and so on that I have a problem with.

Even if you can't find tenants for a total of 10 months over your 20 years (2 weeks a year), you just added 15,000 - 20,000 on to your 60,000.

Anyway, what I'm saying is that now is not a great time to be getting into the BTL business. Like everything else, I'd wait till things settle a bit to get a clearer picture of the future.

nesf

iguana wrote: »

Surely the key to proper investing is to buy low and sell high, then buy again low.

It gets slightly more complicated than that because you get a return on the asset through rent that (potentially) could be relatively large. There's also the problem of picking high and low prices usually being a fairly risky business which would lump it more into the speculation category than investment.

Investing would be more along the lines of buying property at a price where the return from rent would higher than other investments of a similar risk etc.


Or at least that's my understanding of the difference betwen the two terms.

iguana

nesf wrote: »

It gets slightly more complicated than that because you get a return on the asset through rent that (potentially) could be relatively large. There's also the problem of picking high and low prices usually being a fairly risky business which would lump it more into the speculation category than investment.

Investing would be more along the lines of buying property at a price where the return from rent would higher than other investments of a similar risk etc.


Or at least that's my understanding of the difference betwen the two terms.

But looking at it from my situation in the UK a house on my street just sold for £325k. The rental on the house would be between £1200-1500pm, however as it's possible to get 7% interest on savings here so that would get you £1895pm on interest. So right now just leaving your money in a savings account represents a better investment.

From a speculation point of view property is still selling fast but prices are currently static. So selling in May and buying gold would have been way more profitable.

faceman

iguana wrote: »

Surely the key to proper investing is to buy low and sell high, then buy again low. If somebody bought a house 5 years ago for €200k then sold it early last year for €500k and plans to buy 2 houses for €200k each in 3 years, they will have double the profit in 20 years time of somebody who bought a house for €200k 5 years ago and just held onto it.

the aul buy low, sell high thingie. The real question is what is high and what is low!

anyway, i have highlighted a very important part of your post. property investment is a long term investment, well its meant to be anyway. Just like pensions, precious metals etc, the return is great the longer the time. the problem ireland faced in recent years, was that as our economy grew, so did the demand for housing and prices rocketed. Investors were able to get a quick return on property purchasing and as a result, anyone and everyone could become a property investor by just purchasing a second property. (me included!)

as soon as trouble raises it head, amateur investors begin to panic. no long term strategy was initially investigated (or needed some would argue) so people are now faced with "arrgh sell sell sell, oh no there are no buyers!! Arrrgh i cant pay me bills syndrome".

getting back to your post, and im not picking on you at all my good man, your example cites a 4 year investment which is not long term when it comes to property. we need to get out of that mindset fairly rapidly if we are to stabilise the market and return to marginal annual increases in property prices.

Glenbhoy

iguana wrote: »

But looking at it from my situation in the UK a house on my street just sold for £325k. The rental on the house would be between £1200-1500pm, however as it's possible to get 7% interest on savings here so that would get you £1895pm on interest. So right now just leaving your money in a savings account represents a better investment.

From a speculation point of view property is still selling fast but prices are currently static. So selling in May and buying gold would have been way more profitable.

You can't ignore leverage which is how the majority of people invest in property, with that 325K they may buy 5 properties on 80% mortgages, that means they will get 6 - 7.5K per month less the mortgage repayments of course. One shouldn't forget tax implications too, normally a property investor has significant tax advantages over someone who invests in other ways.

arctictree

Glenbhoy wrote: »

You can't ignore leverage which is how the majority of people invest in property, with that 325K they may buy 5 properties on 80% mortgages, that means they will get 6 - 7.5K per month less the mortgage repayments of course. One shouldn't forget tax implications too, normally a property investor has significant tax advantages over someone who invests in other ways.

Leverage is a great way of making fast money when the market is going up.

When house prices are dropping its a sure way of losing your shirt....

SkepticOne

faceman wrote: »

the aul buy low, sell high thingie. The real question is what is high and what is low!

High=overvalued. Low=undervalued.

Currently house prices are overvalued but that is gradually changing. They will become fair valued and probably overshoot to become undervalued.

How do you determine their value from an investment point of view? Get rid of any assumptions of movement of prices or interest rates or rents. Is it a good investment now compared to other investment options. If not, it is overvalued at current conditions.

There are various ways of determining value but they all show gross overvaluation at the moment in the Irish market.

The current process we're seeing right now is investors learning the concept of value. It will take a few years.

iguana

faceman wrote: »

property investment is a long term investment, well its meant to be anyway. Just like pensions, precious metals etc, the return is great the longer the time.

Says who? I thought the point of investing was to get the best return possible. Just looking at the long-term return doesn't make any sense. Surely if you've bought an investment property (or any investment) at the begininning of a bubble it makes way more sense to watch the situation and sell close to the peak. Then hold your money or invest elsewhere as the bubble deflates then buy in when prices begin rising again.

Over the course of 30 years a bubble can happen twice, so long-term you have 4 times what you would have had if your strategy was to buy and hold. Of course you could time it all wrong and end up with less, but the thing with a property bubble is that it deflates slowly. Anyone who bought 5 years ago could still make a decent profit if they sell now. And they could probably buy a much better investment property in 5 years time which will most likely be worth more in 20 years than their current property will be.

nesf

iguana wrote: »

I thought the point of investing was to get the best return possible.

Generally speaking no. What you describe above is what investing is when you have a lump sum and can only ever make one investment with it. As soon as you can have multiple investments risk, maturity, portfolio diversification etc etc all come into it and finding the "best return possible" becomes quite a complicated question. What might be a ridiculous single investment might make a lot of sense as part of a broader portfolio or whatever.

Supercell

I think a huge amount of people in this country are counting on long term nominal values raising.

However when population growth turns negative here, as it surely will in the next 20 years + (if not long before), then less houses will be needed, meaning these wonderful "long-term" investments are anything but good value.
Honestly, now is the time to get out, well, maybe 1 year ago was the time to get out.

iguana

nesf wrote: »

Generally speaking no. What you describe above is what investing is when you have a lump sum and can only ever make one investment with it. As soon as you can have multiple investments risk, maturity, portfolio diversification etc etc all come into it and finding the "best return possible" becomes quite a complicated question. What might be a ridiculous single investment might make a lot of sense as part of a broader portfolio or whatever.

But there are a huge amount of people in Ireland and the UK who have 1 investment property. I know one who acknowledges that prices are dropping, has in IO mortgage that the rent doesn't cover and still thinks it's a great pension. And even though it might be, that doesn't mean that it wouldn't be better to sell now bank or re-invest the equity and buy again at a point when the rent at least covers the interest payments.

nesf

iguana wrote: »

But there are a huge amount of people in Ireland and the UK who have 1 investment property.

Definitely. I was speaking generally on the subject.

Kipperhell

SkepticOne wrote: »

I think people overcomplicate the issue when it comes to borrowing to invest. An investment in property is just like any other business. If you are going to invest in something - anything - then you will want the return from that investment to be greater than the cost of those funds over the period of the investment. That is the bottom line.

It does not take a genius to see that if you are getting a yield of 4% on a property but you are paying greater than 4% on interest alone, then you are making a loss. Just because we are also making capital repayments on top of interest payments doesn't change this basic equation.

WOW! That just proves you don't understand. You simply don't get that if you rent the property you are getting more revenue in and therefore do not payout the 4% on the loan from your current income. It doesn't matter what the rate comparatively is.

Mortgage 1200 rent 1000 (averaged out over the year to include vacancies) shortfall is 200. This means if the shortfall is the only money being paid on the property by the investor.
A story for you
You borrow €100 to buy a lawn mower costing you €14 to pay back the loan shark over ten months totalling €140 meaning you pay 40% interest. You hire out the lawnmower to somebody else for €12 a month paying the €2 yourself. in 10 months you have paid the loan shark his €140 yet you only paid €20 (10*2) the revenue you got was €120. Now the rate was 40% but you only paid €20 which is 20% off the overall value of €100. Mean while the bank is offering 20% interest on your €2. Being very simplistic about it I put the 20% on the full €20 over the 10 months making €24.

so here is the break down
Invest in the lawnmower €2 a month you have an asset €100
Invest in bank €2 a month you have €24
Note rental yield remained less than interest rate the whole time.
Now wait another 10 months. The investors is now got another €120(€12*10)
The person using the bank will have another €4.80 (20%*24).
Investors cash is €120 and asset €100 or €220 total after selling the mower
Bank guy has €28.80.

Now you can argue lawnmower prices will drop and loan shark rates will go up all you like there has to be some dramatic changes in lawnmower prices and and loan shark rates for the bank guy to have made more money than investor guy.

So in short you are right it doesn't take a genius to work out maths incorrectly it takes somebody who doesn't understand to do that!

eirmail

The yield on that lawnmower is 144 percent ? The yield on Irish property is about 3 percent.

The lawmower costs 100 quid and you can rent it out for 144 a year.

I would love to get myself a bunch of them.:)

Afuera

Kipperhell wrote: »

A story for you
You borrow €100 to buy a lawn mower costing you €14 to pay back the loan shark over ten months totalling €140 meaning you pay 40% interest. You hire out the lawnmower to somebody else for €12 a month paying the €2 yourself. in 10 months you have paid the loan shark his €140 yet you only paid €20 (10*2) the revenue you got was €120. Now the rate was 40% but you only paid €20 which is 20% off the overall value of €100. Mean while the bank is offering 20% interest on your €2. Being very simplistic about it I put the 20% on the full €20 over the 10 months making €24.

so here is the break down
Invest in the lawnmower €2 a month you have an asset €100
Invest in bank €2 a month you have €24
Note rental yield remained less than interest rate the whole time.
Now wait another 10 months. The investors is now got another €120(€12*10)
The person using the bank will have another €4.80 (20%*24).
Investors cash is €120 and asset €100 or €220 total after selling the mower
Bank guy has €28.80.

I like your analogy but I think you need to flesh it out further. What about depreciation, un-rented periods, maintanence etc.? Those risks and costs need to be factored in somehow. Also, if everyone (or lets say about 80% of the population) already has a lawnmower (or a collection of lawnmowers) than the resale value of your second-hand heavily-used lawnmower is really not going to be that much, is it?

I think that the biggest difference between your analogy and the Irish property market though is the length of time involved in paying for the asset. The risks are more managable and predictable over a short period of time. Over a long period though you'll need to pull a lot of aces from the pack before it all comes good. If the market gets saturated, you could be left with an asset that nobody wants to rent from you and nobody is willing to buy.

Kipperhell

SimpleSam06 wrote: »

Thats a bit of a simplification. The simple response is of course that the older generation die.

The older generation are living longer and younger people are settling down later in life. The younger generation are now going to be dying early too. In time the older generation will die out but they are going to be holding the assets for a longer time.

SimpleSam06 wrote: »

The points you are making are good, but its making the assumption that things will stay more or less the same for the next 20 years, in terms of rents, tenant availability, house prices, interest rates and so on that I have a problem with.

Actually I am stating they will change. I am saying people will be renting for longer. More people are landlords and I don't think they are all going to vacate the market. I don't assume things will remain as they are in the real world It was an example to simplify things being said. I was pointing out rental yield and interest rates are not directly comparable as you suggested.

SimpleSam06 wrote: »

Even if you can't find tenants for a total of 10 months over your 20 years (2 weeks a year), you just added 15,000 - 20,000 on to your 60,000.

Anyway, what I'm saying is that now is not a great time to be getting into the BTL business. Like everything else, I'd wait till things settle a bit to get a clearer picture of the future.

So it is 80,000 instead of 60,000 so that means you pay 20% of the value of the 400,000 property as opposed 15% it is still better returns than most investments.
You weren't saying it is a bad time to buy now. You were saying it is a bad time to buy when interest rates were higher than rental yields. That was the false logic I was pointing out. I don't think generally it would be a good time to buy to invest due to other factors such as decreasing prices (wait a year or two and you might get a better deal), possible further rate rises and lack of good value properties with potential (used to be able to buy houses with large corner garden for less than regular ones).
Subsidising rent in buying a house was how many investors bought in the 80s and it is not a fundamentally incorrect method of investing. You can speculate all you like about why now is not a good time but a proven method of investing in property is not wrong. All investment has risk but working on a 80% return over 20 years property is a relatively small risk.

DonJose

Kipperhell wrote: »

Mortgage 1200 rent 1000

I'd like to know where I could buy a house with a mortgage of €1200 and rent it for €1000.

I'm renting at the moment, I pay €850 a month, I found the exact same house on Daft, 35 year mortgage costs €1608.07 a month, a traditional mortgage of 25 years costs €1889.40 a month.

Kipperhell

Afuera wrote: »

I like your analogy but I think you need to flesh it out further. What about depreciation, un-rented periods, maintanence etc.? Those risks and costs need to be factored in somehow. Also, if everyone (or lets say about 80% of the population) already has a lawnmower (or a collection of lawnmowers) than the resale value of your second-hand heavily-used lawnmower is really not going to be much though is it?

I think that the biggest difference between your analogy and the Irish property market though is the length of time involved in paying for the asset. The risks are more managable and predictable over a short period of time. Over a long period of time you'll need to pull a lot of aces from the pack before it all comes good.

Let me point this out again very clearly. This is in response to claims that rental yield must be higher than interest rates for it to be a good investment. This is simply not the case as I am pointing out.

Yes lots of other factors but I am not saying there aren't other factors. I put it simply but if you wanted to really work it out it would still favour property over most other investments IMHO. Risk is in property is definitely more manageable over long periods of time. I would say if you can find 5 investments from 20 or 30 years ago where putting in 10% of the then markets rent in for the entire time period I doubt it will have increase in value to the extent of property. I am guessing the point where property naturally superseded other investment is 10 years and on top of that prices rose so people did well. If somebody want to work it all out and prove that in the real world the mathematical principle I outlined does not work go ahead. I have said it is not detailed but I would love somebody to point out how when all things are factored in it is fundamentally not viable.

SkepticOne

Kipperhell wrote: »

WOW! That just proves you don't understand. You simply don't get that if you rent the property you are getting more revenue in and therefore do not payout the 4% on the loan from your current income. It doesn't matter what the rate comparatively is.

Mortgage 1200 rent 1000 (averaged out over the year to include vacancies) shortfall is 200. This means if the shortfall is the only money being paid on the property by the investor.
A story for you

But what sort of property is 1200 a month over 20 years (see your earlier post) going to get you? Looks to me like you are talking about a property worth 180,000. If you are then getting 1000 a month for it your your yield is 6.5% not 4%.

Afuera

Kipperhell wrote: »

Let me point this out again very clearly. This is in response to claims that rental yield must be higher than interest rates for it to be a good investment. This is simply not the case as I am pointing out.

Interest plays a much bigger part in the cost of an asset if it's paid for over a long period of time (such as that of a property). Your example was disingenous if that was what you were trying to prove.

Kipperhell wrote: »

Risk is in property is definitely more manageable over long periods of time.

That's crazy talk, I don't think you understand the nature of risk. Primarily, there must be a healthy rental market (otherwise you will have to pay the loan back out of your own pocket) and there must be a healthy resale market (otherwise your asset will depreciate greatly) to be successful in the plan you suggested. If you slip up on one or both of these things then because of leverage, you can find yourself paying a lot more than you originally expected for a minimal return or even a loss. It's a lot easier to guess what's going to happen in the short term than the long term, but even short term plans can carry a lot of risk when leverage is involved.

To take your lawnmower example: if the engine needs to be replaced after 10 months at a cost of 20 EUR, you find that the resale value is 20% less than buying a new one (i.e. second hand lawnmowers are only worth 80 EUR), and you have 2 quiet months during winter where you can't rent it out, then you will end up having to invest over 3 times the amount that you originally planned and would only end up making a 25% return on that. The joy of leverage is that if you don't have the capacity to triple the amount you're investing, then you stand to lose the lot!

SimpleSam06

Kipperhell wrote: »

The older generation are living longer and younger people are settling down later in life. The younger generation are now going to be dying early too. In time the older generation will die out but they are going to be holding the assets for a longer time.

Hahah, what? Hold on there a minute, are you trying to make out that the older generation will outlive the younger generation? You're away with the fairies there I'm afraid.

Kipperhell wrote: »

I am saying people will be renting for longer.

You seem to have missed my earlier point about renting - its just not a viable option with the state of tenant rights in this country.

Let me put it to you like this. You have a family with two children. The landlord fancies a bit of rackrenting this season, so he jacks up the price 15%. You don't like it, hit the road. Thats exactly it. And don't come back telling me he can only increase rent in line with rent in the area, whats to stop a half dozen of them getting together and pushing up rents themselves? Or just doing it and damn the lot of em? The PRTB is a toothless joke, thats why there is a charity needed to look after tenants rights in this country.

Thats really not good enough for anyone.

Kipperhell wrote: »

More people are landlords and I don't think they are all going to vacate the market.

Unfortunately for you and for them, the market doesn't care what you want. Unlike the property market the rental market is very vulnerable to rapid demographic and economic changes, so let me paint a scenario for you:

• Economic downturn in Ireland
• Large amounts of economic migrants seek greener pastures
• Overpriced houses aren't moving, so many people put them up for rent to try to cover the mortgage

Now what you have is a much increased supply of houses, and a much reduced supply of tenants. Hows that €200 a month coming along?

Kipperhell wrote: »

I was pointing out rental yield and interest rates are not directly comparable as you suggested.

Saying they are completely divorced from one another is completely wrong, however.

Kipperhell wrote: »

So it is 80,000 instead of 60,000 so that means you pay 20% of the value of the 400,000 property as opposed 15% it is still better returns than most investments.

Considering we are speaking in purely hypothetical terms here, throwing out 20% of value as a point in your favour is facetious.

Kipperhell wrote: »

You weren't saying it is a bad time to buy now. You were saying it is a bad time to buy when interest rates were higher than rental yields.

Which would describe the situation now, no?

Kipperhell wrote: »

That was the false logic I was pointing out.

Eh you've lost me here. False logic?

Kipperhell wrote: »

Subsidising rent in buying a house was how many investors bought in the 80s and it is not a fundamentally incorrect method of investing.

Any method of investing should take into account the current and likely future market conditions. What was true then is not true now.

Kipperhell wrote: »

You can speculate all you like about why now is not a good time but a proven method of investing in property is not wrong.

I wonder were they saying that about the proven methods of investment in Wall Street right before the crash?

Kipperhell wrote: »

All investment has risk but working on a 80% return over 20 years property is a relatively small risk.

Well, I'll leave you to it so. Best of luck.

SkepticOne

To be fair to Kipperhell, if you completely exclude risk, gearing makes total sense, you get all the upside without having to worry about the potentially catastrophic downside.

If this is what is being argued by Kipperhell then I agree with him although the numbers used to support this seem to have been produced from thin air. The advantage of gearing in this instance is nowhere near as great as it would seem.

I stand by my view that if it does not make sense to invest, say, 400,000 of one's own saved cash in property then it does not make sense to borrow to invest 400,000 in property.

Even though it may only be 80,000 of your own money, it only takes a drop of 20% and this is wiped out. There are many who believe this has already happened in the Irish market.

4x gearing = 4 x gains but also 4 x risk - back to where you started.

But also let's use realistic numbers in the examples. If you are paying 1,200 a month in mortgage payments over 20 years and getting 1000 in rent this is 6.6% yield, a much better proposition than typical at present.

nesf

SkepticOne wrote: »

To be fair to Kipperhell, if you completely exclude risk, gearing makes total sense, you get all the upside without having to worry about the potentially catastrophic downside.

Very true. Gearing is a really good idea in certain conditions assuming you're not strongly risk adverse.

SkepticOne wrote: »

If this is what is being argued by Kipperhell then I agree with him although the numbers used to support this seem to have been produced from thin air.

This isn't actually a problem so long as you're only just trying to illustrate a general point.

SkepticOne wrote: »

I stand by my view that if it does not make sense to invest, say, 400,000 of one's own saved cash in property then it does not make sense to borrow to invest 400,000 in property.

If you're an owner-occupier it's more complicated though because it's only "partially an investment".

SkepticOne

nesf wrote: »

If you're an owner-occupier it's more complicated though because it's only "partially an investment".

Yes we're only looking at this from the point of view of the investor but they are an important group and have driven prices in the last few years.

Kipperhell

nesf wrote: »

Very true. Gearing is a really good idea in certain conditions assuming you're not strongly risk adverse.

This isn't actually a problem so long as you're only just trying to illustrate a general point.

If you're an owner-occupier it's more complicated though because it's only "partially an investment".

Pretty much what I was saying. If you want to argue the figures that is a totally different issue.
It is is very easy to poke hole in an illustration of how it is done. I would like to point out nobody has even managed to come up with a counter simply example to prove how wrong it is. You can be renting for less than your mortgage with your eye ion the future and this is not stupid.

I completely reject the notion that borrowing money must make as much sense as if you have the money. The banking system is reliant on the principle
you borrow at one rate and charge more to your customers.

Do-more

Only 40% of households would now qualify for a mortgage on an average new home, according to the Central Bank.

Its financial stability report also shows Ireland is the most heavily indebted country in the OECD.

In comparison, the Central Bank last year found that 50% of all households would be eligible for a mortgage on an average new home.

Residential properties are also becoming less attractive for investors with house prices levelling off.

Rental income now covers just 66% of mortgage repayments on new houses.

This is significantly down from two years ago, when there was just a 16% shortfall.


RTE News story.

nesf

The average new house price doesn't really mean much as a figure tbh when you're talking about affordablity for people. The median price would be a lot more interesting.