Housing Bubble Bursting

20goto10

It's still the same argument. To say the average buyer in merrion cannot afford the average house is a mathematical impossibility.

And there is quite clearly a socialist agenda going on in this country, as is always the case in a recession. These are the same people who will use the rating agencies analysis of the property market in theIr favour when we were in a bubble but dismiss their analysis when they start to report that Ireland is heading for an over correction. Nah, that doesn't suit their agenda so it's nothing more than claptrap coming from an organisation of crooked economists who don't know their arse from their elbow. (I'm referring to the s&p report).

Blackjack

20goto10 wrote: »

It's still the same argument. To say the average buyer in merrion cannot afford the average house is a mathematical impossibility.

And there is quite clearly a socialist agenda going on in this country, as is always the case in a recession. These are the same people who will use the rating agencies analysis of the property market in theIr favour when we were in a bubble but dismiss their analysis when they start to report that Ireland is heading for an over correction. Nah, that doesn't suit their agenda so it's nothing more than claptrap coming from an organisation of crooked economists who don't know their arse from their elbow. (I'm referring to the s&p report).

I'd have to question this.

If the average wage is 40K, then the average house should therefore be priced around 160K, if we're to take a 4xSalary valuation, which in my view is not unreasonable.

The issues stand where someone on 2.5 times that average (100K) can't afford a nicer house because at 400K, there isnt that much out there.

Still a bit to go in my opinion. There will be many that disagree, but it's still not reached a reasonable equilibrium IMO.

ozmen

Blackjack wrote: »

I'd have to question this.

If the average wage is 40K, then the average house should therefore be priced around 160K, if we're to take a 4xSalary valuation, which in my view is not unreasonable.

The issues stand where someone on 2.5 times that average (100K) can't afford a nicer house because at 400K, there isnt that much out there.

Still a bit to go in my opinion. There will be many that disagree, but it's still not reached a reasonable equilibrium IMO.

i think long term averages have run at closer to 5 times salary, so I would extend the budget for someone earning 100K to around 500K - I dont think its unreasonable that on that wage they wouldnt have saved 20% plus deposit. I'd disagree that there is nothing decent available at this price range today. I would agree that there aren't many - i.e. low supply, but 3 & 4 bed semi-d houses in nice areas of south side dublin can be had for under 500 now.

Jabber2

I've read thru a bit of this post and similar like it and am always amazed at the amount of people who seem to be sitting in the long grass with sizeable deposits and waiting for further drops..in the order of 20 or 30% from peak. All the debate is about the fundamentals (unemployment, taxes, taxes etc) and all very valid.
Personally I'm in the 10% bracket at most myself based on houses now having fallen close to 50% from peak and probably sitting at 2001 prices.
Why this % mainly because I just can't see people selling a house for the same price they may have paid for it back in 1997/8 and so effectively wiping every mortgage, maintenance and upgrade payment out in one foul swoop, they would have to admit they rented their house for 12/13 years with little or nothing to show for it, so for the same arguments that it doesn't make sense to buy yet it also dosen't make sense for these people to sell either. It's pretty evident from driving around town a lot of people are actually putting money into their (over-valued) house thru extensions and the like. I just can't see someone who bought a house in late nighties for @100k and seeing there house go to @400k selling now for @140k (60% drop) they probably still owe 40k in a mortgage so make 100K to what buy a nicer house for 200K + stamp and end up 13 years later trebling their mortage from the 40k remaining to now 120K.
There is oversupply and listed house prices are still too expensive but the stats show 60% of house owners have no mortgage and another 36% still making there payments so although 4% in difficulty this still puts 96% ok. Just as I think Ireland was over positive about the boom I think people are being similarly over positive about the bust.
A lot of people won't sell now for the above reasons others can't sell because they're negative equity so eventually having an effect on supply in areas people want to live in.

Blackjack

ozmen wrote: »

i think long term averages have run at closer to 5 times salary, so I would extend the budget for someone earning 100K to around 500K - I dont think its unreasonable that on that wage they wouldnt have saved 20% plus deposit. I'd disagree that there is nothing decent available at this price range today. I would agree that there aren't many - i.e. low supply, but 3 & 4 bed semi-d houses in nice areas of south side dublin can be had for under 500 now.

I think the quality of what you can get for 500K is poor, when you consider that you're parting with a Half a Million Euros for the privilege.

I still think there's a bit to go - remember that the average wage isn't the lowest wage possible, and there aren't a huge percentage of people earning over 100K either.

Treehouse72

20goto10 wrote: »

To say the average buyer in merrion cannot afford the average house is a mathematical impossibility.

Says the poster who earlier in the thread said they were outbid on two properties in Merrion!

Gurgle

Treehouse72 wrote: »

Like the old days, "average buyers" in Tallaght should be binmen, taxi drivers, retail workers, and, heck, even the unemployed (after all, even they used to buy houses once upon a time). This should be the case whether there is a second income or not.

But they have never been an average buyer in any area, they've been the average renter. The average buyer in Tallaght (in the old days) is a professional landlord. Where does the notion come from that affordable means for everybody?

ozmen

Gurgle wrote: »

But they have never been an average buyer in any area, they've been the average renter. The average buyer in Tallaght (in the old days) is a professional landlord. Where does the notion come from that affordable means for everybody?

But shouldnt anyone in full time employment be able to afford a house? In a healthy market rent should be more expensive than a mortgage payment, otherwise property yields wont be attractive to investors / landlords. So if your wage is sufficient to rent a property long term it makes sense to think that you should be able to afford to buy that same house, no?

Blackjack wrote: »

I think the quality of what you can get for 500K is poor, when you consider that you're parting with a Half a Million Euros for the privilege.

I still think there's a bit to go - remember that the average wage isn't the lowest wage possible, and there aren't a huge percentage of people earning over 100K either.

500K isnt worth what it used to be, and if you are earking 100K then its only five times your income.

I agree though that house still have a way to fall. I would not advise anyone to buy a step on the ladder at today's prices, chances are they will fall further and you'll be stuck for a few years, but if you have found a house for life then I think that it might be worth it.

I think that it will take a while for house prices to reach bottom so it depends on which is more important to you, owning a house now, or getting it at the lowest possible price - and trying to call bottom of a market will be just as hit and miss as calling the top.

Gurgle

ozmen wrote: »

But shouldnt anyone in full time employment be able to afford a house?

Every 18yo who gets out of school and starts work as a labourer should be able to buy a house? In a utopian paradise maybe, but I don't think theres anywhere on earth where this is true.

ozmen wrote:

In a healthy market rent should be more expensive than a mortgage payment, otherwise property yields wont be attractive to investors / landlords.

Thats not a healthy market, thats a crazy market. Its what got us into this situation, and turned tens of thousands of ordinary Joes into wannabe landlords.

In a healthy market, rent (after tax) should cover the interest on the loan and the maintenance costs and maybe make some contribution towards the capital repayments. Then property is a sound long-term investment but not a speculation game.

Calina

ozmen wrote: »

500K isnt worth what it used to be, and if you are earking 100K then its only five times your income.

The overwhelming majority of people are not earning 100KE and as a result, 500KE is an overwhelming lot of money to get together for many many people, including people in the higher tax brackets.

Calina

Gurgle wrote: »

Thats not a healthy market, thats a crazy market. Its what got us into this situation, and turned tens of thousands of ordinary Joes into wannabe landlords.

Actually given that rents were below interest paid on mortgages for most of the period between 2001 and 2006 when the property bubble burst, I'm not sure this is correct. It was the 20% year on year capital appreciation made property investment easy and free money. Many of those investment properties never even made it onto the rental supply market because courtesy of the bubble they were earning free money month by month in capital appreciation.

ozmen

Gurgle wrote: »

Every 18yo who gets out of school and starts work as a labourer should be able to buy a house? In a utopian paradise maybe, but I don't think theres anywhere on earth where this is true.

No, not the day they get out of school, but after a few years, yes. If that 18yo saves for a few years and builds up savings equal to a years income they should be able to borrow 4 times their wage to buy a home for 5 times their wage. At minimum wage that would mean €8 per hour, ~16K per annum, so a house for €80K. That's not looking too good - but there are currently houses for sale in tallaght around the 100K mark so they're not far off.

Gurgle wrote: »

In a healthy market, rent (after tax) should cover the interest on the loan and the maintenance costs and maybe make some contribution towards the capital repayments. Then property is a sound long-term investment but not a speculation game.

This makes sense if we assume most landlords are people who own at most one extra house for rental purposes. If the rental only just barely covers the interest they cant afford to buy many properties as they are paying the capital from their income. If they are high net worth individuals then they would be better off putting their cash in the bank than a rental property at this level of yield.

Also rereading the text in bold above, this sounds awfully like paying a mortgage, certainly in the early years when the interest makes up the majority of the replayments, so if I can afford to do this for a few years surely I can afford to buy the property I'm renting.

OMD

ozmen wrote: »

No, not the day thye get out of school, but after a few years, yes. If that 18yo saves for a few years and builds up savings equal to a years income they should be able to borrow 4 times their wage to buy a home for 5 times their wage. At minimum wage that would mean €8 per hour, ~16K per annum, so a house for €80K. That's not looking too good - but there are currently houses for sale in tallaght around the 100K mark so they're not far off.

Why should someone on minimum wage expect to own their own house? Does this happen elsewhere in the world?

ozmen

Calina wrote: »

The overwhelming majority of people are not earning 100KE and as a result, 500KE is an overwhelming lot of money to get together for many many people, including people in the higher tax brackets.

I never said the majority of people earned 100K - I certainly don't. The majority of houses don't cost 500K, out of ~5700 houses for sale in Dublin only ~1000 cost 500 or more

The point of a mortgage is that you don't need to get 500K together, you borrow 80% of it, or up to 92%.

ozmen

OMD wrote: »

Why should someone on minimum wage expect to own their own house? Does this happen elsewhere in the world?

I'm just pointing out that today it is possible, although not necessarily a nice house in a nice area.

Treehouse72

Ozmen, your posts are mostly spot-on and I look forward to posting later in support of what you are saying when I have more time.

In the meantime, I'll just say I find find it astonishing that people appear not to realise that pre-bubble working class people bought houses in working class areas. It is a measure of how screwed-up our collective psychologies are by the property bubble that it appears there is a generation of people who think the only way low earners can put a roof over their head is by renting. They can't seem to connect the dots and see that this has only been necessary in recent years because of bubble sales prices. It's as though they think that high property prices are a given, static, immutable...and thus of course people on modest incomes can't afford them. Newsflash: those high prices were bubble prices. No bubble, no high prices, no problem for modest incomes to buy modest homes.

Gurgle

ozmen wrote: »

No, not the day they get out of school, but after a few years, yes. If that 18yo saves for a few years and builds up savings equal to a years income they should be able to borrow 4 times their wage to buy a home for 5 times their wage. At minimum wage that would mean €8 per hour, ~16K per annum, so a house for €80K.

This is a circular arguement - people on minimum wage earn around 16k which would qualify them to buy an €80k house so there should be €80k houses for people on minimum wage to buy.

ozmen wrote: »

If the rental only just barely covers the interest they cant afford to buy many properties as they are paying the capital from their income.

Exactly. The rental is profitable in the long term but costly in the short term. Otherwise everybody with access to credit would be buying 'investment' property.... sound familiar?

ozmen wrote: »

if I can afford to do this for a few years surely I can afford to buy the property I'm renting.

And this is more of what caused the bubble. You have to be able to pay it all the way through the life of the mortgage through recessions as well as booms.

ozmen

Gurgle wrote: »

This is a circular arguement - people on minimum wage earn around 16k which would qualify them to buy an €80k house so there should be €80k houses for people on minimum wage to buy.

This is supply and demand surely? You are arguing that these people should rent for their lifetime? and that people with money should invest it in property to rent to them? If I was one of these very rich people who could afford to own swathes of houses in Tallaght, I'd have my money in the bank - I dont want to deal with the hassle/maintenance of these properties.

Gurgle wrote: »

Exactly. The rental is profitable in the long term but costly in the short term. Otherwise everybody with access to credit would be buying 'investment' property.... sound familiar?

And this is more of what caused the bubble. You have to be able to pay it all the way through the life of the mortgage through recessions as well as booms.

Again why would a wealthy individual want to take on the headache of many properties for a low and unreliable return? During a recession you're going to find that if people cant afford mortgages, they will also have trouble covering the interest on your investments for you. Rents increase with inflation - apart from fluctuations in interest rates a mortgage payment is fixed over the long term. Think - if you had taken a mortgage on a house in 1990, versus having rented it the last 20 years?

It's only really profitable in the long term if property price growth outstrips inflation. Otherwise you were better off investing your savings elsewhere.

K-9

Gurgle wrote: »

This is a circular arguement - people on minimum wage earn around 16k which would qualify them to buy an €80k house so there should be €80k houses for people on minimum wage to buy.

I'd wonder how affordable that would be for somebody on minimum wage given other costs they may have, car, food, heating etc.

I suppose that applies to rent as well, but you aren't signing a 30 year contract.

ozmen

K-9 wrote: »

I'd wonder how affordable that would be for somebody on minimum wage given other costs they may have, car, food, heating etc.

I suppose that applies to rent as well, but you aren't signing a 30 year contract.

Rents rise a lot more than mortgage payments. I have colleagues who are lucky enough to be 10 years older than me and bought their houses in the 90s. They have paltry mortgages of a 200-300pm. To rent the house they're living in would cost 1000pm today.

Admittedly the boom had a lot to do with that divergence, but there will always be inflation, even if the ECB manages to keep it at 2%, and so to rent the same house in ten years will cost you a lot more than it costs today, whereas if you buy that house today your mortgage payments will be relatively steady over the same period (there is the risk of periods of high interest rates but its a risk, not a guarantee)

Gurgle

ozmen wrote: »

You are arguing that these people should rent for their lifetime?

It's not a 'should'. Very few people are on minimum wage for their whole working life. Anyone who is will be renting for their lifetime. Do you know anyone who bought a house (ever) while earning half the average industrial wage?

ozmen wrote:

And that people with money should invest it in property to rent to them?

Who said they should? Wasn't me.
I said that its a good long term investment, so long as you can afford to commit to the payments.

ozmen wrote:

why would a wealthy individual want to take on the headache of many properties for a low and unreliable return?... Rents increase with inflation - apart from fluctuations in interest rates a mortgage payment is fixed over the long term.

You've asked and answered the question.

ozmen wrote:

It's only really profitable in the long term if property price growth outstrips inflation. Otherwise you were better off investing your savings elsewhere.

Assume property price and rental yield both exactly match inflation. Do the year-by-year income & outgoings calculation for 25 years and you'll understand what I'm saying.

'Elsewhere' also carries a risk vs reward assesment. Property is very low-risk long term, so should be compared to similar investment.

ozmen

Gurgle wrote: »

You've asked and answered the question.

I think that we are both arguing the same point but making different conclusions - i.e. we both contend that long term its cheaper to buy and maintain than to rent the same house - I conclude therefore that someone who can afford the rent price throughout the mortgage period could have more than afforded the mortgage. You contend that it makes sense that this person not be able to draw down a mortgage as although they can afford the rent there is doubt as to whether they could maintain the mortgage payments.

You may well be right that the banks will be reluctant to lend to someone on minimum wage, but if they can show a good savings track record, i.e. if they can get a decent deposit together then they should be able to buy the house they are renting, the mortgage repayments would be affordable to them.

Treehouse72

Gurgle wrote: »

Do you know anyone who bought a house (ever) while earning half the average industrial wage?

Yes. Working class people living in working class areas from the foundation of the state up till about 2000. I am honestly mystified as to how you don't know that this was the case.

Blackjack

Gurgle wrote: »

Do you know anyone who bought a house (ever) while earning half the average industrial wage?

Treehouse72 wrote: »

Yes. Working class people living in working class areas from the foundation of the state up till about 2000. I am honestly mystified as to how you don't know that this was the case.

Half the average wage?

norrie rugger

Blackjack wrote: »

Half the average wage?

Plenty of barmen bought houses in councill estates yes

K-9

Treehouse72 wrote: »

Yes. Working class people living in working class areas from the foundation of the state up till about 2000. I am honestly mystified as to how you don't know that this was the case.

With state help. Banks would not have entertained anybody on the minimum wage equivalent in the 80's, or before that.

Blackjack wrote: »

Half the average wage?

Average industrial wage was 35k around 04/05. Minimum full time wage is/was about 17/18k.

Blackjack

norrie rugger wrote: »

Plenty of barmen bought houses in councill estates yes

Barmen earn more than Minimum wage. Certainly those who've been at it for a few years.

TJJP

OMD wrote: »

Why should someone on minimum wage expect to own their own house? Does this happen elsewhere in the world?

In the developed world, mostly the state intervenes to provide affordable or subsidised housing. In Ireland, people on minimum or lower income didn’t necessarily expect to own property in the past.

Treehouse72 wrote: »

Yes. Working class people living in working class areas from the foundation of the state up till about 2000. I am honestly mystified as to how you don't know that this was the case.

But did they own? Up to the early 1990’s for example?

K-9 wrote: »

With state help. Banks would not have entertained anybody on the minimum wage equivalent in the 80's, or before that.

And that is the nub of it, I think. In Dublin the city council off loaded property in rent to buy schemes in many of the 'working class' areas creating new landlords/owners post 1980’s. This was replicated in many countries as the state sought to off load public debt to private debt.

Many of the rent-to-buy buyers bought houses they had previously rented for 40 – 60k in a rising market. Once the market really took off some sold up (for 140 – 160k) and upgraded hoping to do the same over and over. It’s the same 90’s bubble and negative equity issue the UK experienced.

ZYX

Treehouse72 wrote: »

Yes. Working class people living in working class areas from the foundation of the state up till about 2000. I am honestly mystified as to how you don't know that this was the case.

Some interesting reading here.

http://dublinopinion.com/2007/06/25/irish-home-ownership-myths-and-reality/




"In other words, the culture of home ownership in urban working class areas is not only a recent phenomenon, it simply wouldn’t exist in its present ratio were it not for substantial government grants and incentives. The culture of home ownership is one directly influenced by central government money.
Now, it has to be asked: are the people buying homes today, buying a home for 40 to 60 per cent of its market value? Is the rest of the purchase price supplied by the government? It was state-sponsored incentives such as these that allowed people in the 1970s and 1980s to buy their homes, and yet people today expect to own a home, but in a market that has been completely privatised in the past twenty five years.
In the 1980s, the largest supplier of mortgages in the country was local authorities: now it is private money-lenders. The economic dynamics have completely changed, but the culture of home ownership above everything else remains. "

steveoracle

Good old government have really sorted us out again.... house prices crash from an imaginery bubble... wonderful!