Housing Bubble Bursting

niall2j

nesf wrote:

I was thinking along these lines: Presently we've an inflation rate of above 5% and mortgage interest rates of (on average) 4.8/4.9% depending on how you do it. So borrowing money for a mortgage is still cheap(ish). If we're in a situation where our interest rates are less than our inflation rates we are still in a good position. If there is an interest rate hike (and there almost definitely will be some) but the interest rate doesn't exceed the inflation rate by too much then borrowers aren't in a bad position from that perspective.

The most obvious comparison to me, as a layman, is between the interest I'd pay on a mortgage, and the equivalent rent I'd pay to a landlord. I take your point though.

eirmail

Raskolnikov wrote:

The rental market for 1-bedroomed apartments in Dublin is insane. Only a couple of weeks ago, there was almost nothing in Dublin under €1,000 a month. Now there's a rake of properties coming onto the market for far cheaper, eg Malahide for €750.

I really do hope that his continues, my lease is coming up soon and I'd love to be able to find a place for €700-€800

According to daftwatch http://daftwatch.atspace.com/daftcounty_1.html

The rental supply is up 20 percent since about 5-6 weeks ago in Dublin. It could be that investors pulled their property from the rental market to try and sell it , after a while when they struggled to sell it they decided to put it back on the market.

This happened in florida about 12 months ago and rents went down a lot.

seamus

Well one of the major deciding factors on whether to rent or mortgage should be the term of the mortgage.

With long term mortgages, your first few years are primarily spent paying off the interest on the mortgage - you might be contributing less than €50 a month to paying off the principal (i.e. the actual cost of the property).

In a high-inflation situation, this isn't so bad. You may spend three years in the property. You won't have paid off much of the principal, but this doesn't matter. Once you go to sell it, the property has had €Xk dumped on top of it and you run off happy.
In the current situation (or even in low inflation climates) it presents a dilemma - Do you spend three years paying off very little principal, and open yourself to the risk of having little equity (or negative equity) at that point, or do you pay the same in rent for those three years, come out with zero equity, but having exposed yourself to less risk?

The shorter the term of the mortgage, the more principal you are paying off from the start, so a shorter mortgage should be preferable over renting, whereas a longer mortgage can be as good as, or worse than renting.

miju

joejoem wrote:

However, nearly everything after that was just propeganda.

care to point what exactly was propaganda?

Tristrame wrote:

The makers must have a lot of appartments to let.

yeah because in a downturn the rental market isn't gonna get hammered out of it :rolleyes: :rolleyes: :rolleyes: :rolleyes:

miju

by the way heres a great little tool for quickly analysing if , when and how long it would be before buying is better than renting

anyone wanna do some sums

http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAPHIC.html

niall2j

seamus wrote:

With long term mortgages, your first few years are primarily spent paying off the interest on the mortgage - you might be contributing less than €50 a month to paying off the principal (i.e. the actual cost of the property).

Valid point, but €50 a month is waaay too low of an estimate. Even over 35 years, a €300k mortgage (let's say a tracker) has you paying €264.04 p/m off the principal from the off. This amount only increases, albeit slowly, over time.

http://www.jeacle.ie/mortgage/

daveirl

This post has been deleted.

nesf

daveirl wrote:

This post has been deleted.

Debatable. The assumption is that you can pay for the mortgage to start with (otherwise nothing else matters tbh and the bank will foreclose on the property). Then, the difference between renting and paying a mortgage on two similar properties is the money you have to make you mind up over. If inflation is running higher than the interest rate you are paying you "lose" more money by not having a mortgage and having it in your wallet. It gets more complicated when you start including different forms of investment where you get a certain interest rate on your investment but if they are less than the inflation rate (something you are practically guaranteed with deposit accounts which is where most people keep their cash) then you are still losing money in real terms (i.e. adjusting for inflation).

If there is wage inflation then it just makes the percentage of your wage that goes to pay your mortgage smaller as well as (most likely) feeding into the inflation loop and making it more attractive to be borrowing than saving etc.


The whole thing is based around judging mortgage payments and rent rates in real rather than nominal terms.

uberwolf

seamus wrote:

Not in Dublin though. The cost of renting a 2 bed apartment is quickly approaching the cost of the mortgage on same.

2 Bed Apartment to rent on Adelaide Road: http://www.daft.ie/24517
€2,175/month

Just around the corner, 2 bed apartment to Buy on Harcourt Green: http://www.daft.ie/119594
~€2,200/month mortgage.

not withstanding the deposit a purchaser would require you're right. But in a reasonable market a yield would be expected to beat interest rates. What you're pointing out is a positive for the market in well located properties.

conor_mc

nesf wrote:

Then, the difference between renting and paying a mortgage on two similar properties is the money you have to make you mind up over. If inflation is running higher than the interest rate you are paying you "lose" more money by not having a mortgage and having it in your wallet. It gets more complicated when you start including different forms of investment where you get a certain interest rate on your investment but if they are less than the inflation rate (something you are practically guaranteed with deposit accounts which is where most people keep their cash) then you are still losing money in real terms (i.e. adjusting for inflation).

What if house price growth is less than inflation too? Taking niall2j's example above, the €264 worth of house that you're actually acquiring each month is also losing in real terms.

nesf

conor_mc wrote:

What if house price growth is less than inflation too? Taking niall2j's example above, the €264 worth of house that you're actually acquiring each month is also losing in real terms.

I was only looking at it from a making mortgage payments perspective. The thing is that the actual value of the house only matters if you are an investor or someone who's planning on selling in the short to medium term. If it's a family home that you are unlikely to leave outside of eviction then it actually makes sense to only worry about your repayments and ignore the value of the house.

You are quite correct though that if house price growth is less than inflation that there would a reduction in the real value of the house. This very much is an issue for people who are either investors or planning on trading up in the near future.


The media tends to forget this but there are two distinct types of property crash. One is where there is a reduction in real terms but not in nominal terms (i.e. as above house price growth is less than inflation) and the second is where both nominal and real house prices decrease. From what I've read of these things the former not the latter tends to be the more common scenario though both are possible and both are problematic for the market, just because nominal prices increase doesn't mean that the market is still healthy.

Victor

seamus wrote:

Not in Dublin though. The cost of renting a 2 bed apartment is quickly approaching the cost of the mortgage on same.

2 Bed Apartment to rent on Adelaide Road: http://www.daft.ie/24517
€2,175/month

Just around the corner, 2 bed apartment to Buy on Harcourt Green: http://www.daft.ie/119594
~€2,200/month mortgage.

You need to compare like with like. Symphony House is a lot nicer than Harcourt Green.

jdivision

Victor wrote:

You need to compare like with like. Symphony House is a lot nicer than Harcourt Green.

While you are right Victor, the apt in Symphony House looks tiny compared to the one on Harcourt Green

Victor

Victor wrote:

You need to compare like with like. Symphony House is a lot nicer than Harcourt Green.

like with like? http://www.youtube.com/watch?v=cHfq40rhgBY
36 thorndale avenue to buy - 600,000 euros mortgage 2646euros per month over 35 years
to rent the same house its 1600euros per month

davej

Matt Cooper discusses futureshock

(skip first 31 minutes)

http://www.radioireland.ie/lastword/1742007-18.wmv

davej

whizzbang

davej wrote:

Matt Cooper discusses futureshock

(skip first 31 minutes)

http://www.radioireland.ie/lastword/1742007-18.wmv

davej

That was quite interesting, especially that he cancelled the next topic for it! I think Matt has had enough of the VIs shpeel and is taking them on whenever they state our "Special Circumstances", fair play to ye Matt!

It will be interesting listening to these interviews in a years time to see who´s right.

Also it is amazing they are still quoting 4% growth for this year even though we have only had 0.3% so far!

babytooth

nesf wrote:

I was only looking at it from a making mortgage payments perspective. The thing is that the actual value of the house only matters if you are an investor or someone who's planning on selling in the short to medium term. If it's a family home that you are unlikely to leave outside of eviction then it actually makes sense to only worry about your repayments and ignore the value of the house.

You are quite correct though that if house price growth is less than inflation that there would a reduction in the real value of the house. This very much is an issue for people who are either investors or planning on trading up in the near future.


The media tends to forget this but there are two distinct types of property crash. One is where there is a reduction in real terms but not in nominal terms (i.e. as above house price growth is less than inflation) and the second is where both nominal and real house prices decrease. From what I've read of these things the former not the latter tends to be the more common scenario though both are possible and both are problematic for the market, just because nominal prices increase doesn't mean that the market is still healthy.

think your getting a bit mixed up.

Seems like your talking about the nominal and real cost of money:

1 + nominal / 1 + inflation = 1 + real.

While i see what you are getting at, that borrowed money cost you nothing in real terms, as in the fact that inflation erodes your savings if the the real rate is <= 0. But, what really is the case is that, inflation adds to your costs as well on the flip side, so while your loan costs less in real terms, your wages also are worht less on real terms, as are your savings. inflation erodes your asset worth be it in cash or house asset.

Inflation works on both sides of the fence, pushes down the cost but also the worth....

But to be honest, all this is in the area of theoritical finance. All in all, things stay the same, unless you increase your wages inline with inflation (which the unions may look for but prob won't get as the money isn't there for it and it only turns the cirlce even more to worsen inflation and fiat value decreases). If wages don't increase, but costs do, then you are less off, if your house or your bank account aren't appreciating by an amount at least equal to inflation, then you are losing money.

any clearer..?...my typing can be a bit sloppy

nesf

babytooth wrote:

think your getting a bit mixed up.

Seems like your talking about the nominal and real cost of money:

1 + nominal / 1 + inflation = 1 + real.

While i see what you are getting at, that borrowed money cost you nothing in real terms, as in the fact that inflation erodes your savings if the the real rate is <= 0. But, what really is the case is that, inflation adds to your costs as well on the flip side, so while your loan costs less in real terms, your wages also are worht less on real terms, as are your savings. inflation erodes your asset worth be it in cash or house asset.

Inflation works on both sides of the fence, pushes down the cost but also the worth....

But to be honest, all this is in the area of theoritical finance. All in all, things stay the same, unless you increase your wages inline with inflation (which the unions may look for but prob won't get as the money isn't there for it and it only turns the cirlce even more to worsen inflation and fiat value decreases). If wages don't increase, but costs do, then you are less off, if your house or your bank account aren't appreciating by an amount at least equal to inflation, then you are losing money.

any clearer..?...my typing can be a bit sloppy

What you say is true but um, I don't think I'm mixed up. All I was talking about was the real cost of borrowing not saying that inflation in and of itself is a good thing.

Pa ElGrande

I just watched the program, RTE have posted it online.
Based on the reviews here they were aiming to grab peoples attention, and guaging the EA's comments, I would not be surprised if there was a contract taken out on Mr. Curran (I'm joking). All these arguments about lack of balance and yet, none of the property ramping programs on TV ever attempts to warn users of the risks involved with their investments or puchases. When was the last time anyone heard Dan McLaughlin (BOI) or Austin Hughes (IIB) give a balanced view in public when advising people to buy property?
Do the journalists in the Sunday Independent give a balanced view when calling for the removal of stamp duty?
There have been umpteen warnings from David McWilliams, George Lee, The Central Bank, Businessmen like Dermot Desmond, Michael Smurfit & Ben Dunne and many participants on boards that have not achieved the same effect. I say well done to Richard Curran for jolting the population out of its sleepwalk and upsetting the property vested interests.

In my opinion the program makers pulled their punches by presenting the most optimistic scenario as to the anticipated scale of the declines, but, they did make it clear beforehand that this was only a scenario. I guess people choose to see what they wanted.

What is abundantly clear from the program is that neither the banks nor government can prevent this downturn happening and they will keep talking up the market as long as possible. The current government as well as the opposition parties are also fully aware of the potential scale of the decline, hence the focus on the national development plan as a public works project to try and maintain employment levels.

There is only one scenario where the mythical 'soft landing' can come about and that can only happen if strong employment and low interest rates are maintained. If either of these break then the house of cards comes falling down rapidly and the decline in residential construction output is definately going to happen, the fall in planning permissions signals that.

Call me a doomster if you want, whether the multinationals leave or not, this crash is happening. Knowledge is power and I disagree with the vested interest's attempts to dismiss this program as unbalanced and sensationalist, when their real aim is to trap people in knowing denial.

nesf

Pa ElGrande wrote:

Call me a doomster if you want, whether the multinationals leave or not, this crash is happening. Knowledge is power and I disagree with the vested interest's attempts to dismiss this program as unbalanced and sensationalist, when their real aim is to trap people in knowing denial.

But the program was unbalanced and sensationalist, half of it was human interest garbage worth nothing substantial in a debate on this. Yes there are vested interests, yes there are definitely people on both sides of this debate who are strongly biased but to call this program unbiased, balanced and sober really stretches the imagination. Whether your a bull or bear or simply neutral in this that much should be obvious.

babytooth

nesf wrote:

What you say is true but um, I don't think I'm mixed up. All I was talking about was the real cost of borrowing not saying that inflation in and of itself is a good thing.

inflation isn't good, but its a result as a time mismatch between money supply and demand and the inevitable lag in computing the correct coeffiecent relating the two.

it is better than deflation, but nothing is ideal...except maybe prefect tracking, which doesn't happen.

is_that_so

Pa ElGrande wrote:

I just watched the program, RTE have posted it online.
Based on the reviews here they were aiming to grab peoples attention, and guaging the EA's comments, I would not be surprised if there was a contract taken out on Mr. Curran (I'm joking). All these arguments about lack of balance and yet, none of the property ramping programs on TV ever attempts to warn users of the risks involved with their investments or puchases. When was the last time anyone heard Dan McLaughlin (BOI) or Austin Hughes (IIB) give a balanced view in public when advising people to buy property?
Do the journalists in the Sunday Independent give a balanced view when calling for the removal of stamp duty?
There have been umpteen warnings from David McWilliams, George Lee, The Central Bank, Businessmen like Dermot Desmond, Michael Smurfit & Ben Dunne and many participants on boards that have not achieved the same effect. I say well done to Richard Curran for jolting the population out of its sleepwalk and upsetting the property vested interests.

In my opinion the program makers pulled their punches by presenting the most optimistic scenario as to the anticipated scale of the declines, but, they did make it clear beforehand that this was only a scenario. I guess people choose to see what they wanted.

What is abundantly clear from the program is that neither the banks nor government can prevent this downturn happening and they will keep talking up the market as long as possible. The current government as well as the opposition parties are also fully aware of the potential scale of the decline, hence the focus on the national development plan as a public works project to try and maintain employment levels.

There is only one scenario where the mythical 'soft landing' can come about and that can only happen if strong employment and low interest rates are maintained. If either of these break then the house of cards comes falling down rapidly and the decline in residential construction output is definately going to happen, the fall in planning permissions signals that.

Call me a doomster if you want, whether the multinationals leave or not, this crash is happening. Knowledge is power and I disagree with the vested interest's attempts to dismiss this program as unbalanced and sensationalist, when their real aim is to trap people in knowing denial.

"Vested interests" aside it was pretty poor television and very poor assembled. If it were on a topic that is not so close to your heart I have no doubt that you would not have had any problems acknowledging that.

pjbrady1

Purely Tongue in cheek formula
Paddy Powers have odds of 5/2 on Permo index showing a price fall (must go into a bookies cant find it on website).
A common betting tactic is that when the odds are too long bet big.

If we take 1 as being the probability of house prices rising when it is reported across the board that prices are rising (as in years like 1997,1998,1999)
Then what is probability of house prices rising this year?
So Probability of house prices will rise is (1 - P(Negative factors cause fall)).
So for example interest rates going up by 6% this year = 100% price fall, however chance of this rise of 6% is at a guess 1000/1.
Note it is Probability an event can happen and would have a downward effect.

P(House prices rising)=
= (1-P(Rates Rise)-(P(Unemployment rise)-(P(scarcity buyers)-P(Investors panic sell)-p(bank savings rate war)-p(oversupply)-p(halt to immigration)-p(too low rental yields)-p(317,500 price target)-p(wages plateauing/falling).

Any others to add to equation?
Rate rise by .25% in June is supposed to happen, with a further .25% looking like a dambuster,
Bank savings rate war has happened and has swallowed SSIA money and is a safe alternative for investors,
Oversupply has happened especially in Mayo/Roscommon/Kerry
Rental yields are already too low in some areas (strongish in good dublin areas though)
317,500 stamp duty price target is happening with nice three beds in cities

In the current economic/media/market climate it looks like chance of a price rise are virtually Zero.

ps. can anyone find that bet on Paddypower.com? don't see it in novelty or current affairs tab.

Raskolnikov

They pulled the bet on paddypower, apparently people were filling their boots at 5/2 on a decrease.

Pa ElGrande

is_that_so wrote:

"Vested interests" aside it was pretty poor television and very poor assembled. If it were on a topic that is not so close to your heart I have no doubt that you would not have had any problems acknowledging that.

I agree, this is tabloid TV and given my involvment in the debate, most of the arguments could have been better presented, however, for most people in this country property is an emotional investment, this is the first program on the property bubble to appeal to people at that level and it has succeeded in getting the attention of its target audience.

aphex™

I wouldn't worry about it being poorly informed. It is aimed at the disastrously naive after all.

You've to dumb things down for the people who haven't bothered to look at rent yields verses repayments before buying. Actually scratch that, the ones who have kept apartments empty for months on end deserve a dose of it for pushing up prices.

I've spent hours explaining it to people, and had them tell me they'd have 5 investment properties within 2-3 years. Now their parents are out working in retirement to cover the mortgage. If this programme explained it in 1 hour but with a bit of embellishment then I find that acceptable .

gurramok

Have a look also at the followup debate on Prime Time just gone http://www.rte.ie/news/primetime/

Debate between Jim Power(from the banks) and Professor Morgan Kelly(UCD)

It seems its a war or words in the media between the banking/EA interests and the professors who know their stuff

Would you trust the professors or the bank officials?

Jim pointed out there are 1million people between 25 and 35 yrs old, pity he didn't mention that the vast majority cannot afford to buy considering at least 66% of the workforce earn below 34k p.a.

One thing Morgan has pointed out that was not mentioned in Future Shock, over 200,000 non-holiday home properties lying idle including 60,000 newly built since '02 and nearly 40,000 vacant in Dublin area alone, most of them probably held by speculators.

aphex™

gurramok wrote:

One thing Morgan has pointed out that was not mentioned in Future Shock, over 200,000 non-holiday home properties lying idle including 60,000 newly built since '02 and nearly 40,000 vacant in Dublin area alone, most of them probably held by speculators.

They said something like "40% of the homes built since 200(?) are empty". I forget which year. I mentioned it to somebody and they just said "so?" .

conor_mc

gurramok wrote:

Have a look also at the followup debate on Prime Time just gone http://www.rte.ie/news/primetime/

Debate between Jim Power(from the banks) and Professor Morgan Kelly(UCD)

It seems its a war or words in the media between the banking/EA interests and the professors who know their stuff

Funnily enough, I don't see Jim Power as a vested interest - Friends First aren't involved in property.

I don't agree with his opinion, but at least he has tried to quantify his argument (re age demographic, inward immigration etc) with figures.

Unlike others who talk about "strong fundamentals" without telling us exactly what those fundamentals are supposed to be.

Still, it was funny watching Morgan Kelly get so frustrated with the absolute denial on the other side - I've felt like this so many times in pub conversations that I've just had to pin me trap shut before I say something I shouldn't!!!

SkepticOne

MyHome.ie have a report trends in asking prices. The only sector where asking prices are still rising is new 3 bed semis.

http://www.myhome.ie/advice_news/pdf/barometer_q1_2007.pdf

Looks like the peak in asking prices was about mid 2006. We are beginning to see some of this coming through in the ESRI reports.