Housing Bubble Bursting

johnnyskeleton

Gegerty wrote: »

I don't know. But on the subject of average prices, which people in here love to mention (and average salaries too) If everyone could afford the "average" house what would happen? The "average" would go up. So "people" would still be unable to afford the "average" house price.

Do you know what average means? If everyone was prepared to pay the average price, and there were exactly enough houses for everybody, then houses would be sold for the average price, all other things being equal.

SimpleSam06

Blackjack wrote: »

Folks, I'm not convinced that the Formula here is entirely accurate, given the huge number of rental properties available on the market due to the large number of people who bought second properties for this purpose.

But up until at least last year rents were rocketing upwards, the effect of a large number of rental properties has yet to be felt. Rent in Ireland is not cheap.

The report shows that average rents across the country hit a new all-time-high in June 2007. The average rent nationwide now stands at €1,372, just over €100 or 9% more than this time last year. While a growth rate of 9% is still well above the average rate of inflation in the wider economy, the rate of growth in rents is slowing down. At the time of the last rental report 3 months ago, the rate of rental inflation was 11.9%

BigglesMcGee

johnnyskeleton wrote: »

Do you know what average means? If everyone was prepared to pay the average price, and there were exactly enough houses for everybody, then houses would be sold for the average price, all other things being equal.

Except that everyone doesnt pay the average price. They pay what the property is worth to them.

gurramok

So if avg rent is now 1372(which is gonna fall due to oversupply), thats 1372x12x12= 197k for an 'average' price.
Rents have not changed much since 2001(daft index) so that 197k seems steady for the last 7 yrs which proves a bubble existed and this price is not actually far off of what will happen for the average price of a gaff after the crash has ended and stabilised imho.

SimpleSam06

gurramok wrote: »

So if avg rent is now 1372 ... Rents have not changed much since 2001

Eh?

The report shows that average rents across the country hit a new all-time-high in June 2007. The average rent nationwide now stands at €1,372, just over €100 or 9% more than this time last year. While a growth rate of 9% is still well above the average rate of inflation in the wider economy, the rate of growth in rents is slowing down. At the time of the last rental report 3 months ago, the rate of rental inflation was 11.9%

gurramok

The daft index, rents haven't exactly jumped sky high since 2001(though i think they are still too high).
They did go down in between and rose again till this year and now falling again.

Example in Jan of each year:

2002 - 98.1
2003 - 85.5
2004 - 81.1
2005 - 82.8
2006 - 87
2007 - 96.6
2008 - 101.7

Latest - Apr '08 - 99.6 (recent fall which i forsee continuing).

Rents went up post 2004 when the floodgates from Eastern Europe were opened which propped up demand.

We dont have that this time around to rescue the rental market plus some are leaving amid a recession, its screwed.

SkepticOne

Attached is a graph from the daft figures. You can see the spike that occurred in mid-2007. This also coincided with extremely low inventory on Daft.

Since then asking prices have fallen back to just over 2002 levels, inventory has trebled and is currently rising at a rapid rate. As pointed out by gurramok, this suggest that landlords currently have unrealistic expectations of rent and therefore rents will fall. I believe that these unrealistic exceptions originate with media reports of "rising rents" which persisted long after rents had stopped rising (mid 2007) and actually started falling.

There is also the erroneous belief that if house prices fall rents must rise. The market will deal with this belief.

SimpleSam06

So what level would represent the baseline upon which to calculate the "rule of 12"? 2001 to 2002 levels of rent?

Afuera

SimpleSam06 wrote: »

So what level would represent the baseline upon which to calculate the "rule of 12"? 2001 to 2002 levels of rent?

Given the huge supply of property for rent it's possible that rents will settle back at those prices. One thing that should probably be considered though is the fact that tenants laws are very weak and the Irish are known to have a strong preference to buy. This may mean that rather than a "rule of 12" a "rule of 15" may be more applicable in the Irish context to account for that weighting. It would still mean that prices have a fair bit to fall before they reach a fair value. 43 times the annual rent is just ridiculous!

gurramok

SimpleSam06 wrote: »

So what level would represent the baseline upon which to calculate the "rule of 12"? 2001 to 2002 levels of rent?

Well, that was about the time when there was a partly justified bubble due to the economy playing catchup and being productive pre 2001/02.

Since then, its been a totally unjustifed bubble swamped with easy to get credit swelling house prices and rents have hardly budged at all.

Blackjack

SimpleSam06 wrote: »

But up until at least last year rents were rocketing upwards, the effect of a large number of rental properties has yet to be felt. Rent in Ireland is not cheap.

Well, it's just I find that the rule is a bit odd, given that it values anywhere that commands a rent of 1000 (pretty much the minimum rent for 1 bedroom apartment anywhere) at 144,000.

Agreed Rent is not cheap, but I just don't think the rule is accurate.

johnnyskeleton

BigglesMcGee wrote: »

Except that everyone doesnt pay the average price. They pay what the property is worth to them.

Gererty said that if everyone could afford to pay for the average home, then the price of the average home would go up, which is not correct. It is only true if there are less houses than purchasors. If there is supply adequate to meet the demand, then the average price will be paid for the average house.

ambro25

Blackjack wrote: »

Well, it's just I find that the rule is a bit odd, given that it values anywhere that commands a rent of 1000 (pretty much the minimum rent for 1 bedroom apartment anywhere) at 144,000.

Agreed Rent is not cheap, but I just don't think the rule is accurate.

Look at it from an emotionally-detached and reasonably clued up investor's POV, as opposed to emotionally-driven speculator's POV (or 'must-get-on-the-ladder-at-any-price' FTBs), and you wil see that it makes perfect sense. It is a rule of thumb, however, it's not supposed to be 'accurate' (to within €1000, e.g.) :rolleyes:

It's a useful rule to assess how much market value diverges from "value for money" (in its purest sense), and set a 'watch point' or 'trigger point' by which a person, as a potential buyer (irrespective of motive: BTLet or BTLive), becomes readier to make the jump, e.g. 10% above 'rule of 12' value, 20%... 50%? But not 100% or more, which indicates a very serious market overheating issue and bigger problems down the line.

I should add, after my earlier post yesterday (under Ruggibear's post), that our rent at €1250 has not changed in 4 years, despite the property probably taking on (then probably losing by now) about €150-200k in value over the interval: the mark of a wise landlord, who knows value in reliable long-term tenants and privileges that over short-termism and year-on-year increases (with high tenant turnover and empty periods to go with it).

johnnyskeleton

gurramok wrote: »

So if avg rent is now 1372(which is gonna fall due to oversupply), thats 1372x12x12= 197k for an 'average' price.
Rents have not changed much since 2001(daft index) so that 197k seems steady for the last 7 yrs which proves a bubble existed and this price is not actually far off of what will happen for the average price of a gaff after the crash has ended and stabilised imho.

Forgive my ignorance, but isn't it the 12/20 rule i.e. if house prices are 12x annual rent then you should buy, if house prices are 20x annual rent then you should rent/sell? Anywhere in between represents normal value so a baseline for house prices should perhaps be somewhere between 12x and 20x rent.

SimpleSam06

Blackjack wrote: »

Well, it's just I find that the rule is a bit odd, given that it values anywhere that commands a rent of 1000 (pretty much the minimum rent for 1 bedroom apartment anywhere) at 144,000.

Eh the four bedroom house well within the city of Galway I am renting at the moment is going for a grand a month. A one bed apartment in a similar area couldn't be rented, or at best would fetch €300 to €400, for a value of €50-60,000. And I'd still say thats overpriced for a one bed around here.

Gurgle

johnnyskeleton wrote: »

Forgive my ignorance, but isn't it the 12/20 rule i.e. if house prices are 12x annual rent then you should buy, if house prices are 20x annual rent then you should rent/sell? Anywhere in between represents normal value so a baseline for house prices should perhaps be somewhere between 12x and 20x rent.

Now stop that - No thinking things through!

This thread is for doom-sayers and panic-mongers, not discussion.

BigglesMcGee

ambro25 wrote: »

Look at it from an emotionally-detached and reasonably clued up investor's POV, as opposed to emotionally-driven speculator's POV (or 'must-get-on-the-ladder-at-any-price' FTBs), and you wil see that it makes perfect sense. It is a rule of thumb, however, it's not supposed to be 'accurate' (to within €1000, e.g.) :rolleyes:

It's a useful rule to assess how much market value diverges from "value for money" (in its purest sense), and set a 'watch point' or 'trigger point' by which a person, as a potential buyer (irrespective of motive: BTLet or BTLive), becomes readier to make the jump, e.g. 10% above 'rule of 12' value, 20%... 50%? But not 100% or more, which indicates a very serious market overheating issue and bigger problems down the line.

I should add, after my earlier post yesterday (under Ruggibear's post), that our rent at €1250 has not changed in 4 years, despite the property probably taking on (then probably losing by now) about €150-200k in value over the interval: the mark of a wise landlord, who knows value in reliable long-term tenants and privileges that over short-termism and year-on-year increases (with high tenant turnover and empty periods to go with it).

From an emotionaly unattached point of view - Its a rule of thumb thats completely off the wall altogether and someone who believes this one has obviously got a wonky thumb.

gurramok

johnnyskeleton wrote: »

Forgive my ignorance, but isn't it the 12/20 rule i.e. if house prices are 12x annual rent then you should buy, if house prices are 20x annual rent then you should rent/sell? Anywhere in between represents normal value so a baseline for house prices should perhaps be somewhere between 12x and 20x rent.

I think 20 is stretching it a bit when we factor in the artificial supports for the rental market.

Problem is that rent for certain properties and in certain locations is far too high. For example, asking 1000-1200 for a 1bed is a ridiculous price when they are primarily aimed at singletons who are mostly forced to share.

Coupled with the fact that there are massive rental subsidies(was it half a billion euro p.a.?) from the govt in the form of rent allowance which is keeping rents high.
The govt get their figures for a rental sum of a property from the CSO who in turn get their rental figures NOT from tenants but by ringing up the estate agents who we know are dubious!!(House sale prices from this crowd recently were found to be all lies by the Irish Times, would you also trust them with the rental figures?)

This all gives an artificial ceiling to the rental market. When this discrepancy is removed along with the immigration factor, with talk of a massive social housing programme to rescue builders and then throw in oversupply, its a nightmare for landlords where only the experienced will survive.

Calina

Gurgle wrote: »

Now stop that - No thinking things through!

This thread is for doom-sayers and panic-mongers, not discussion.

I don't think that this is a constructive contribution to be honest with you. Anyway, you're not addressing the issue that in parts of Dublin, we're not talking 20 times rent, we're talking 30-45 times rent. We're nowhere near between 12 and 20.

ixoy

The price of a 2-bed apartment where I am is over 25x the annual rent (apartments are being advertised at a pretty ridiculous 400k). Now the apartments are old enough that, if bought earlier, the landlord could easily be on at 12x on the current rent, but it does give some idea the big gap between rent and asking prices as they still appear currently in some places

Afuera

BigglesMcGee wrote: »

From an emotionaly unattached point of view - Its a rule of thumb thats completely off the wall altogether and someone who believes this one has obviously got a wonky thumb.

What multiple do you think represents good value then?

You can state it as a multiple of rent or a multiple of a wage, but I won't accept the affordability measures that the banks devised in the last few years. They are just a scam.

To illustrate, someone may offer me a nice Rolex that only costs 50 EUR a month for the next 40 years. Is it affordable? Yes. Is it a fair value? Certainly not.

You have to admit though the banks really did a great job at convincing people to look at property in this skewed way. Is it affordable? Yes. Is it a fair value? Who cares.

ronbyrne2005

gurramok wrote: »

I think 20 is stretching it a bit when we factor in the artificial supports for the rental market.

Problem is that rent for certain properties and in certain locations is far too high. For example, asking 1000-1200 for a 1bed is a ridiculous price when they are primarily aimed at singletons who are mostly forced to share.

Coupled with the fact that there are massive rental subsidies(was it half a billion euro p.a.?) from the govt in the form of rent allowance which is keeping rents high.
The govt get their figures for a rental sum of a property from the CSO who in turn get their rental figures NOT from tenants but by ringing up the estate agents who we know are dubious!!(House sale prices from this crowd recently were found to be all lies by the Irish Times, would you also trust them with the rental figures?)

This all gives an artificial ceiling to the rental market. When this discrepancy is removed along with the immigration factor, with talk of a massive social housing programme to rescue builders and then throw in oversupply, its a nightmare for landlords where only the experienced will survive.

That is true about the government supporting rent prices, particularly in working class areas where higher % of people are getting the rent paid/heavily subsidised by HSE or other agency. The government would be better using 500million a year to finance an expansion of public housing stock on land they already own all over the state. The have tens thousands acres in cities and towns all over the place. Surely here in Ireland home of the phrase "rent is dead money" the government should'nt be paying 500 million a year in rent to landlords!

ionapaul

Afuera wrote: »

You can state it as a multiple of rent or a multiple of a wage, but I won't accept the affordability measures that the banks devised in the last few years. They are just a scam.

It is important that the masses come to understand this - maybe basic financial literacy should be taught in secondary school? A pint of milk would be affordable to me (and lots of people) at €50; if it were scarse enough I suppose paying this would be feasible. Likewise if petrol went to €20 per litre, it would still be very affordable for many people.

One of the many great scams pulled during the property boom years was to convince naive people that if a property was affordable, it was good value. I'd like to think that people are seeing through this now, but that is not why people aren't buying, it is only that the current property prices are now unaffordable! Not because people (apart from a small minority of financially literate folk) recognise there is no value to be had yet. Sad situation.

BigglesMcGee

Afuera wrote: »

What multiple do you think represents good value then?

You can state it as a multiple of rent or a multiple of a wage, but I won't accept the affordability measures that the banks devised in the last few years. They are just a scam.

To illustrate, someone may offer me a nice Rolex that only costs 50 EUR a month for the next 40 years. Is it affordable? Yes. Is it a fair value? Certainly not.

You have to admit though the banks really did a great job at convincing people to look at property in this skewed way. Is it affordable? Yes. Is it a fair value? Who cares.

Supply and demand is what will cause the rent / cost of a house to settle wherever its going to settle. Not a stupid rule of thumb about multiples applied to an infinite number of situations.

Its the value to the people that want an item, and the value to the people they are in competition for it as well as the supply of the item that will effect a price.

Afuera

ionapaul wrote: »

One of the many great scams pulled during the property boom years was to convince naive people that if a property was affordable, it was good value. I'd like to think that people are seeing through this now, but that is not why people aren't buying, it is only that the current property prices are now unaffordable! Not because people (apart from a small minority of financially literate folk) recognise there is no value to be had yet. Sad situation.

I think you're right on the money with this one. If there was no affordability problems we would probably be still steaming ahead with massive price increases and have people queueing up overnight to snap up property as it came to market. I suppose this is human nature though, we are not as rational as we like to think. This type of behaviour also partially explains why markets often over correct on the way down. There's a big danger that "property" will become like a bad word in Ireland these next few years and people will continue to keep out of the market regardless of whether value has been reached or not.
We really have to ask though what our financial regulator's role in all this was? Were they looking after the interests of the public, the interests of the banking system or the interests of the banks?

Afuera

BigglesMcGee wrote: »

Its the value to the people that want an item, and the value to the people they are in competition for it as well as the supply of the item that will effect a price.

And you refuse to contemplate that renting can act as a substitute to buying? The price of rents has to be correlated somehow with the cost of buying.

beeno67

ionapaul wrote: »

I'd like to think that people are seeing through this now, but that is not why people aren't buying, it is only that the current property prices are now unaffordable! Not because people (apart from a small minority of financially literate folk) recognise there is no value to be had yet. Sad situation.

People are buying. Just not as many as before. In the first 3 months of this year 25 houses per hour were been sold (based on 40 hour week).

A multiple of 12 times rent makes little sense as it implies a return to investor of 8% a year plus capital appreciation less expenses. Investors in any business would be delighted with this kind of return

ronbyrne2005

beeno67 wrote: »

People are buying. Just not as many as before. In the first 3 months of this year 25 houses per hour were been sold (based on 40 hour week).

A multiple of 12 times rent makes little sense as it implies a return to investor of 8% a year plus capital appreciation less expenses. Investors in any business would be delighted with this kind of return

Eh Dublin property was yielding around 10% up untill year 2000. In many markets a 10% rental yield is not considered excessive. Capital appreciation is'nt guaruanteed and if it is'nt greater than inflation rate then it's capital depreciation. Also costs of ownership are not to be underestimated - insurance, maintenance, income tax if any profit, interest, management fees etc. I think you are a bit delluded in what you think acceptable risk:return levels are for professional investors.

beeno67

ronbyrne2005 wrote: »

Eh Dublin property was yielding around 10% up untill year 2000.quote]
Really? I find that surprising. Do you have any figures or links?
The cost for expenses in renting out houses in UK is 3%. (Probably much the same here. Insurance slightly higher but newer housing stock means less repairs)

martian1980

Beeno67, aren't you banned for a week?