Housing Bubble Bursting

Gurgle

Afuera wrote:

it currently doesn't make any sense for someone to hold onto an investment property that is owned outright, unless it's for personal reasons. The same sum lodged in the bank will give a greater return with no risk or effort.

Luckily for them, most investors look past the end of their noses. In a weak market, any smart investor is settling back to weather the storm.

They might not make as much money this year as they would by selling up and stuffing the money into a savings account, but that situation is even less likely to last than recent years' rises in property value.

Do-more

miju wrote:

not that i doubt you do-more , but where did you hear this information. if its one thing i hate it's hearsay etc especially when im on your side of the fence

I appreciate it is just hearsay, but it comes from a normally reliable source. I have personally witnessed one of the site closures and know the names of all the developers involved but did not post them or specific locations. As for the banks moving to foreclose, again I have been given specific details but again wouldn't dream of posting them without it being publically substantiated.

The_Conductor

Do-more wrote:

I appreciate it is just hearsay, but it comes from a normally reliable source. I have personally witnessed one of the site closures and know the names of all the developers involved but did not post them or specific locations. As for the banks moving to foreclose, again I have been given specific details but again wouldn't dream of posting them without it being publically substantiated.

From talking to salaried electricians/carpenters/plumbers I have heard broadly similar stories- none of which have hit the media though. Apparently at present its the contractors who are being let go- which means that electricians who normally had a few people running around after them tidying up cabling etc, now are doing the whole lot themselves, taking around 4 or 5 times as long to complete single units. I have heard of one site in Lucan being closed altogether- and those employed there offered employment on other sites. I have also heard of 2 UK contracting firms being let go altogether, and offering their Irish staff work in the UK or redundancy (I am not aware of any accepting the UK offer).

It hasn't hit the media yet- RTE are running scared after the sustained lobbying from Industry after the Future Shock programme (I've been forwarded copies of some of the hysterical letters and e-mails), and the rest of the media are election mode.

What will be interesting is the upward creep in unemployment figures for May/June when they come out. April figures showed a very slight increase in unemployment claims from 4.4% in March to 4.5% in April (seasonally adjusted this is actually a .3% increase though).

S.

Afuera

Gurgle wrote:

They might not make as much money this year as they would by selling up and stuffing the money into a savings account, but that situation is even less likely to last than recent years' rises in property value.

They can reenter the property market whenever they like if they have the cash close to hand. They don't necessarily need to leave it in a bank deposit account. Could be diversified in many other things.

Why do you think that property is the only long term game in town? At the moment it's one of the riskiest, but then I guess real investors already realize that.

hi5

Afuera wrote:

They can reenter the property market whenever they like if they have the cash close to hand. They don't necessarily need to leave it in a bank deposit account. Could be diversified in many other things.

Why do you think that property is the only long term game in town? At the moment it's one of the riskiest, but then I guess real investors already realize that.

Property only rises with inflation over the long term,there is international historical data to prove this,so it can not be an investment in the long term.
You are confusing investing with speculating which is buying low selling high over the short term,the short term for property is historically usually anywhere between 5-15 years.

http://graphics8.nytimes.com/images/2006/08/26/weekinreview/27leon_graph2.large.gif

Afuera

hi5 wrote:

Property only rises with inflation over the long term,there is international historical data to prove this,so it can not be an investment in the long term.

Can you clarify what you mean when you say that property "can not be an investment in the long term"? You've lost me

hi5 wrote:

You are confusing investing with speculating which is buying low selling high over the short term,the short term for property is historically usually anywhere between 5-15 years.

I think you might be confused on this yourself.

Investing is when you have money or capital committed to the goal of gaining a financial return. In terms of property this could be either from rent or capital gains.

Speculating is any type of business (including investing) that promises high returns and by extension holds high risks. It doesn't just have to be buy low, sell high in a short space of time. An investor could be speculating that rents will skyrocket in the future and hold onto property based on this idea even though there is always the risk that it will not materialize. An investor could also be speculating that a property they have will be worth a lot more in the future when there is always the risk that it could be worth less.

hi5 wrote:

http://graphics8.nytimes.com/images/2006/08/26/weekinreview/27leon_graph2.large.gif

As interesting as the graph is, I think that it is flawed in the way it accounts for unsold property. Should an unsellable derelict property be valued at the last price it was sold for or should it be marked down as worthless? Leaving it at the last price it sold for is misleading but trying to identify properties that have become worthless would be very difficult. Reasons why a property could become worthless for example are if the area became contaminated, the property was badly built and fails to reach modern standards, there were geographical changes in the area such as the raising of the water table and so on.

babytooth

Afuera wrote:

Can you clarify what you mean when you say that property "can not be an investment in the long term"? You've lost me
.

property tracks inflation over time.
So as an investment, it only stands still..it doesn't make you any gains over time, in other words, it's nothing more than inflation preservation instruement.

You are better off buying government inflation bonds, at least these pay you over and above inflation...

babytooth

smccarrick wrote:

From talking to salaried electricians/carpenters/plumbers I have heard broadly similar stories- none of which have hit the media though. Apparently at present its the contractors who are being let go- which means that electricians who normally had a few people running around after them tidying up cabling etc, now are doing the whole lot themselves, taking around 4 or 5 times as long to complete single units. I have heard of one site in Lucan being closed altogether- and those employed there offered employment on other sites. I have also heard of 2 UK contracting firms being let go altogether, and offering their Irish staff work in the UK or redundancy (I am not aware of any accepting the UK offer).

It hasn't hit the media yet- RTE are running scared after the sustained lobbying from Industry after the Future Shock programme (I've been forwarded copies of some of the hysterical letters and e-mails), and the rest of the media are election mode.

What will be interesting is the upward creep in unemployment figures for May/June when they come out. April figures showed a very slight increase in unemployment claims from 4.4% in March to 4.5% in April (seasonally adjusted this is actually a .3% increase though).

S.

i have heard the same from talking to contractors, owrk is getting scarce, they cant pick and choose jobs as they used to be able to, and the finishing spec is higher...they are having to do more for the same price...

anychance forwarding some of the emails you refer to, nice to guage the sentiment. or if you prefer perhaps past them up here after removing personal details..

ta.

Afuera

babytooth wrote:

property tracks inflation over time.
So as an investment, it only stands still..it doesn't make you any gains over time, in other words, it's nothing more than inflation preservation instruement.

You are better off buying government inflation bonds, at least these pay you over and above inflation...

But if you're earning rent off the property then it's doing more than just being an inflation preservation instrument.

babytooth

Afuera wrote:

But if you're earning rent off the property then it's doing more than just being an inflation preservation instrument.

let me repharse it then,

i have a 100 euro, earning 1.5%, which we can use as a proxy for the average yeilds in irish property.

I have inflation at 5.3%, the last central bank published figure, and this doesn't include housing costs in its price.

You make 1.5 per year, your asset has decreased in value by 5.3% to 94.7%

So total net return is 100(income yield-inflation costs) = 100(1.5-5.3) = 96.2

Now extend that example and look at yield (the rent you earn) and the inflation element eating into your asset value.

On average, interest rates are above inflation in the long run, (in Ireland this hasn't been the case for the last 10 years, but there will be a similar period where we are above in the near future.)...ok, so with yield, usually above inflation, (ie.before factoring in the deprecaiting nature of property, and whihc require upkeep and repairs and holding costs) is only slightly above inflation due to the low risk of a commodity such as housing.

Ok, bundle the whole thing together, include the rent as a manner of yield. Bundle in the cost and what you end up is is something along the lines

of 100(yield - cost of carry - inflation) and discount this at todays interest rates at a simialr risk return rate (something like AIB or BoI offer about 10-12%)...

eqtn becomes, aprox 100( aprox 1)/(1+12)^t

it doesn't add up to invest in property at this moment in time, you need either
1. cheap property
2. high rent
3. low inflation.
4. low carry costs
5. most importantly..the lack of higher yielding, lower risk, more liquid asset class...and this is not the case.

Afuera

babytooth wrote:

let me repharse it then,
.
.
.
it doesn't add up to invest in property at this moment in time, you need either
1. cheap property
2. high rent
3. low inflation.
4. low carry costs
5. most importantly..the lack of higher yielding, lower risk, more liquid asset class...and this is not the case.

Thanks for taking the time out to explain that Babytooth. I can see how that would work for cash and other assets but I'm still wondering why inflation is a negative factor on property. I would have thought it was the complete opposite. Because inflation increases the cost of building a new home, second hand homes should rise in line with them. Is it not true that house prices more or less match inflation over the long term?

I agree with you fully that it doesn't make sense to invest in property at the moment though. The lack of a decent yield really seems to be the key and they appear very overvalued whichever way you look at it.

babytooth

Afuera wrote:

Thanks for taking the time out to explain that Babytooth. I can see how that would work for cash and other assets but I'm still wondering why inflation is a negative factor on property. I would have thought it was the complete opposite. Because inflation increases the cost of building a new home, second hand homes should rise in line with them. Is it not true that house prices more or less match inflation over the long term?

I agree with you fully that it doesn't make sense to invest in property at the moment though. The lack of a decent yield really seems to be the key and they appear very overvalued whichever way you look at it.

inflation increases the nominal cost of everything (lets assume that inflation affectes everything equally).

But, for your statement to stay valid, everything must remain constant.
We can build houses cheaper and quicker today than in previous years. Technology has vastly improved so a house 20 years ago isn't the same quality as today, and if a house today was produced at the standard of 20 years ago, it could be done alot quicker and cheaper.

Land prices have increase, so this would work in the opossite way to the technological advances above, making houses dearer...

If we are to compare anything, then all else must be equal except that which we are comparing. Of course this isn't feasible, so one must attempt to correct in some manner or another.

And inflation, if it is universal, changes everything, but only in a nominal way, so in relatiy everything moves up at the same pace...of course this doesn't happen either...


But, yup, your right, investing in property is nota money making proposition in the long term, although ppl have been lucky, in ireland in the short term. But, things being average, there will be ppl who lose the simialr amounts of money in property going forward,

It's a zero sum game, one wins means another loses..thing is when are these gains/losses realsied.

as simple way of viewing inflations negative effect

If i have 100 euros, (its 2002) and I held onto it in my pocket - didnt invest it at all. Today I decide to take it out of my pocket to spend.

I have lost.

Why? because its still 100 euros!
Because of inflation - in 2002 I could get more for a hundred than I would today!!!!

So if houses go up in value at a rate LESS THAN INFLATION people are losing.
This is happening now.

chump

I don't think it is as simple as that babytooth.
What about region specific factors that will impact on demand. What about restrictions on supply. What about quality and availability of cheap labour. What about government incentives and tax deductibles. What about the difference between OWNING a home and owning a mortgage. What about the term of a mortgage.

There is no doubt that cash can yield higher returns elsewhere. Is there a doubt that acquiring a mortgage to attain a property in a stable market will be a tax effective vehicle for accumulating equity while providing a fundamental service?

sorry for the query but could you explain the items bolded below - probably my own ignorance but I cant figure them out... rgds

let me repharse it then,

i have a 100 euro, earning 1.5%, which we can use as a proxy for the average yeilds in irish property.

I have inflation at 5.3%, the last central bank published figure, and this doesn't include housing costs in its price. I dispute this figures of 1.5% and 5.3%, and is wage inflation not the key inflationary figure that drives house price growth and where is house price growth figured into your theory - if house prices grow on par with inflation would growth not be capital + yield

You make 1.5 per year, your asset has decreased in value by 5.3% to 94.7%
Has it not decreased to 100/105.03?

So total net return is 100(income yield-inflation costs) = 100(1.5-5.3)= 96.2

Now extend that example and look at yield (the rent you earn) and the inflation element eating into your asset value.

On average, interest rates are above inflation in the long run, (in Ireland this hasn't been the case for the last 10 years, but there will be a similar period where we are above in the near future.)...ok, so with yield, usually above inflation, (ie.before factoring in the deprecaiting nature of property, and whihc require upkeep and repairs and holding costs) is only slightly above inflation due to the low risk of a commodity such as housing.

Ok, bundle the whole thing together, include the rent as a manner of yield. Bundle in the cost and what you end up is is something along the lines

of 100(yield - cost of carry - inflation) and discount this at todays interest rates at a simialr risk return rate (something like AIB or BoI offer about 10-12%)...

eqtn becomes, aprox 100( aprox 1)/(1+12)^t

it doesn't add up to invest in property at this moment in time, you need either
1. cheap property
2. high rent
3. low inflation.
4. low carry costs
5. most importantly..the lack of higher yielding, lower risk, more liquid asset class...and this is not the case.

babytooth

chump wrote:

I don't think it is as simple as that babytooth.
What about region specific factors that will impact on demand. What about restrictions on supply. What about quality and availability of cheap labour. What about government incentives and tax deductibles. What about the difference between OWNING a home and owning a mortgage. What about the term of a mortgage.

There is no doubt that cash can yield higher returns elsewhere. Is there a doubt that acquiring a mortgage to attain a property in a stable market will be a tax effective vehicle for accumulating equity while providing a fundamental service?

sorry for the query but could you explain the items bolded below - probably my own ignorance but I cant figure them out... rgds

ok,
wage inflation increase the nominal value of your wage packet. If wage inflation is greater than general inflation, you end up having move disposable income. If not, you have less disposable income.
Both matter, as the price of building a house would come under general inflation, whereas the wage infaltion would be mainly on the purchasing side of the eqtn (of course a small sector dependent part is involved in the building of the house)

Yes, your etn is valid if the price of your asset increase with general inflation,
after the first year it would be worth 1+5.3% and would have generated a yield of 1.5%, giving you an overal earning of (5.5+1.5)% nominal return, or a real return of (1.5%/5.3%) real return....they thing is that house prices historically, worldwide track inflation. This is before any ancillary costs are taken into accounts. With yields so low, you are losing money to inflation every day...i left it at 100 as house prices are not currently increasing, and if anything would appear to be entering a period of decreasing worth, or a t best static...

The second etn, should be 1(1/12%)^t

ie: the future price of the house is for money in the future. This needs to be discounted back to todays price...

It makes no sense to use the risk free rate of 4.0% as property is an invetment for alot of ppl, so they should use something more comparable, such as as property dependent stock like BoI or AIB...and add a premium for the lack of liqudity.,,


And yes, you would need to factor in the servicing of the loan/mortage and the tax incentives and repairs etc...

But why pay out interest at 4.5% aprox to borrow to buy an asset that is paying 1.5% and needs to appreciate in value by 5.3% to retain its orignal purchase value....

its a no brainer not to invest..

Afuera

Deleted User wrote:

So if houses go up in value at a rate LESS THAN INFLATION people are losing.

I think that you need to take rental yield into consideration here also though.
If there's inflation of 5.3%, and a property rises by less than inflation at 3.3% but it generates a rental yield of 3% then there is still an overall gain of 1% by the investor. They start to lose when the combined gain and rental yield are negative to inflation. I imagine at current levels that the point where that happens is not far off, if it has not already been reached.

Afuera

Afuera wrote:

I think that you need to take rental yield into consideration here also though.

Of course! But to me the big issue is the more than 250,000 empty properties in the country. Unrented - what a disaster once they fail to at least match inflation.

Afuera wrote:

If there's inflation of 5.3%, and a property rises by less than inflation at 3.3% but it generates a rental yield of 3% then there is still an overall gain of 1% by the investor. They start to lose when the combined gain and rental yield are negative to inflation.

With regards the above - property is only a good investment if the combined "gain" and yield are positive to inflation by so many percent as to make it more attractive than leaving the money in an account or other investment.
Being a landlord has responsibility and costs while some other investments would be "easier"

Afuera

Deleted User wrote:

Of course! But to me the big issue is the more than 250,000 empty properties in the country. Unrented - what a disaster once they fail to at least match inflation.

Good point. I can't see those being released into the market (either rental or sales) without making a big splash.

Deleted User wrote:

With regards the above - property is only a good investment if the combined "gain" and yield are positive to inflation by so many percent as to make it more attractive than leaving the money in an account or other investment.
Being a landlord has responsibility and costs while some other investments would be "easier"

Yes, I agree. Investment in property at the moment carries far too much risk for it to make sense.

babytooth

Afuera wrote:

I think that you need to take rental yield into consideration here also though.
If there's inflation of 5.3%, and a property rises by less than inflation at 3.3% but it generates a rental yield of 3% then there is still an overall gain of 1% by the investor. They start to lose when the combined gain and rental yield are negative to inflation. I imagine at current levels that the point where that happens is not far off, if it has not already been reached.

i would dispute this and state that they are losing at levels higher than this. With inflation = capital gain + rent yeild, then they are standing still from the 1st purschase date.

They need to add in the earnings they are losing by not investing in say aib or boi and the premium they should be getting for accepting less liquidity and more risk...

they are losing, in my opinion, if they are not getting 5.3% inflation + average irish bank stock returns of 10% plus a premium of, say 2-4% for lack of liquidity..

i'd expect, at least 13-14% to consider property even viable as an investment,
In this marke, i would demand nothing less than 30-35 % year on year return to take the higer risk of price drops....

but, as there is muppets out there how are buying, i'm quite happy to make profit on the back of their losses...a nice tidy sum...

Idbatterim

My mum got her 2 houses valued today, both in Dublin 14, the price she would get for selling them now is 100k less each than this time last year according to the estate agent, and i am not surprised by his valuation as it was expected, he said they cant shift at the moment. So this puts in perspective where the market is really at, not what the builders, banks or other vested interests have to say!

chump

Well I'm for sure on the bear side of the fence at the minute but this is short-termism on my part. I do not doubt at the minute buying a property is a dangerous game, investing in property is an even crazier game w.r.t. Ireland.

indiewindy

Here is another example of estate agent and developer desperation, in earlier phases of this devepopment people queued overnight to get a house, now you get your mortgage paid for the first year and a car raffle. This place is only 2 minutes walk from a college as well. http://www.michaellavelle.info/Home/tabid/309/ctl/Detail/mid/834/xmid/387/xmfid/10/Default.aspx

Do-more

indiewindy wrote:

Here is another example of estate agent and developer desperation, in earlier phases of this devepopment people queued overnight to get a house, now you get your mortgage paid for the first year and a car raffle. This place is only 2 minutes walk from a college as well. http://www.michaellavelle.info/Home/tabid/309/ctl/Detail/mid/834/xmid/387/xmfid/10/Default.aspx

As it's so close to the college, I'm sure there was a lot of interest from investors in earlier phases. Not too many of them buying at present!;)

VoidStarNull

Now that the boom is over, we are going to have to figure out what to do
with:

* all the newly-built empty houses,
* all the unemployed construction workers, estate agents, and mortgage brokers.

I suggest the "logical" solution is for the government to pay the unemployed
former denizens of the property sector to demolish the empty houses.

After all, most of them are pretty ugly and they could damage our tourist
industry. To maximize the employment potential of this project, the estate
agents and mortgage brokers should be instructed to demolish the houses
using their bare hands. (We'll have to allow the construction workers to use
tools, to avoid offending their professional dignity).

Of course first the government will have to buy the empty houses from the
investors who own them. But that shouldn't be a problem in the near future

VoidStarNull

For those interested, I found a readable (but short) popular introduction
to housing market economics in "Free Lunch", by David Smith (available
in most large bookshops, I think).

He bases his analysis on the British market, and makes the following observations (which echo observations made in this thread recently):

* House prices in the long term can be expected to rise in line with household
incomes (because households compete to buy/rent houses)

* Household incomes increase a couple of percentage points faster per
year than inflation (that's why we can buy more stuff now than our
parents could in the past)

* During the British boom of the late 80's, developers built lots of cheap
"starter-homes" to satisfy investor demand. After the investors left the
market, these homes traded at a discount (because owner-occupiers pay
more attention to quality). Shoe-box owners, beware!

iguana

VoidStarNull wrote:

* all the unemployed construction workers,

In fairness, they will largely have the opportunity to make a good living in London. For the next 4 years anyway.

Do-more

I got a practical demonstration of the madness of the Irish property market today. I was in a small terraced house off the South Circular Road, close to Griffith College. Tastefully modernised and extended out the back. This evening I was curious to know what sort of price the property was valued at, so I had a look on myhome.ie. There's a few houses for sale on the same street, one example is a two bed terrace with a grand total of 88 sq.m. for which they are currently asking €875,000!!! That's almost €10,000 per sq.m.!
How anyone could justify that sort of valuation beats me. God help any poor devils who have bought at those sort of valuations (+ the stamp duty of course) I'd guess in 5 years time the price will be more like €400,000 and it will probably be 20 years from now before prices regain their current levels.

You can talk all you want about commuter towns taking a heavy drop, but that really took the biscuit for me.

iguana

Do-more wrote:

You can talk all you want about commuter towns taking a heavy drop, but that really took the biscuit for me.

There are lots of parts of Dublin where the prices are bloody insane. This house for example. Sure it's lovely looking inside and has a nice garden overlooking a park, but it's a 3-bed semi with 1 bathroom for nearly €1.7m.:eek:

I really don't get the big deal about Mount Merrion. Sure it's a perfectly pleasant suburb and it has a fairly good bus service. (One of the best in Dublin, but pretty crap compared to my local buses in London - in an area not renowned for it's bus service because it has tube and train.) But what exactly is attracting the millionaires?


This house while not as well done up on the inside is a similar size, 4 bedroom, far more attractively built, €195k cheaper (which would more than get the house re-decorated) and in Ranelagh. An area that is also over-priced but at least has obvious attractions.

Maybe it's just me, but I don't understand how perfectly ordinary suburbs became worth millions.

VoidStarNull

In defence of Mount Merrion: it's on top of a hill, beautiful views over
Dublin bay, it's entirely suburban (no horrible shopping centres and pub-life),
and the houses look of good quality build. Excellent schools in the area.

You know what? I should have been an estate agent. 1.7 million? It's a snip!

Gurgle

Do-more wrote:

they are currently asking €875,000!!!...
I'd guess in 5 years time the price will be more like €400,000

lol
that is all