Housing Bubble Bursting

The_Conductor

Well, the expected .25% increase in ECB base rates to 4% has taken place. Thats another 30k knocked off people's borrowing capacity, and 10% off people's disposable income......

Duckjob

chump wrote:

There is no possible way anyone can call what we have yet - because we need to see what happens next. Maybe prices will take off again and history will regard this as a 'blip'.

Just out of curiosity, are there any bulls here who believe that property could 'take-off' again in the face of steady & ongoing interest rate rises ?

Personally, I think we've had the mother of all parties in the last ten years, and we're now just waking up to the mother of all hangovers.

whizzbang

smccarrick wrote:

Well, the expected .25% increase in ECB base rates to 4% has taken place. Thats another 30k knocked off people's borrowing capacity, and 10% off people's disposable income......

and another .25% on your savings if you're with the right institution!

conor_mc

Gurgle wrote:

System dynamics can only be called simple by someone who's never studied it
Wikipedia definition:
System dynamics is an approach to understanding the behaviour of complex systems over time. It deals with internal feedback loops and time delays that affect the behaviour of the entire system.

At least my theory is based on something scientific

I think you forgot to mention the ghost in your machine there - human nature.

It's like having a wonderful complex system of internal feedback loops, time delays, etc, but with a monkey jumping around on top of it.

In other words, system dynamics has nothing to do with housing markets. The closest hypothesis would be efficient market hypothesis - and that assumes that all available information is in the open, which we know it isn't since there are no published figures on inventory or volume of sales in this country. Those who read threads like this might be aware of trends of diminishing volume of sales and rising inventory, but the wider public are not therefore EMH doesn't apply.

whizzbang

conor_mc wrote:

I think you forgot to mention the ghost in your machine there - human nature.

It's like having a wonderful complex system of internal feedback loops, time delays, etc, but with a monkey jumping around on top of it.

In other words, system dynamics has nothing to do with housing markets. The closest hypothesis would be efficient market hypothesis - and that assumes that all available information is in the open, which we know it isn't since there are no published figures on inventory or volume of sales in this country. Those who read threads like this might be aware of trends of diminishing volume of sales and rising inventory, but the wider public are not therefore EMH doesn't apply.

I think Game theory would be more useful than mechanics.

JupiterKid

By that reasoning, we could be looking - potentially - at a 100% price drop or more lasting up to 10 to 15 years.

Sorry - what I meant of course was that the fall could involve a halving of house prices once the crash/deflation is over. (Since a doubling is +100% and misakenly took the halving to be 100% as well ) This would be a fall of 50% then - I believe that since the house prices started to go off kilter with other economic fundamentals around 2001, that prices could end up falling back to 2001 levels or earlier.

DonJose

smccarrick wrote:

Well, the expected .25% increase in ECB base rates to 4% has taken place. Thats another 30k knocked off people's borrowing capacity, and 10% off people's disposable income......

Not to mention there has been a 19% drop in Q1 mortgage numbers.

Its also interesting that re-mortgaging was up 5.8% year-on-year. Could this be property owners freeing up equity to offset short term debt.

http://rte.ie/business/2007/0606/mortgage.html

Akrasia

whizzbang wrote:

and another .25% on your savings if you're with the right institution!

Um, .25% on savings of 10k is a hell of a lot less than .25% on a loan of 300k

Gurgle

SimpleSam06 wrote:

No, you're blowing smoke in the hopes that no one else has studied it.

lol, I think you'll find that the internet in general and boards in particular is fairly full of people with qualifications in maths, science and engineering. If you never studied it, you'll probably find you're in the minority. And as I understood the course, it was system dynamics as applied to engineering.

SimpleSam06 wrote:

Even by your own definition given to us earlier, your "steady state" was ten years ago. Would you like to call a return to 1997 prices a soft landing? Why is anyone even feeding this troll?

Consider the economic boom as either a ramp input or a prolonged step input.

SkepticOne wrote:

The current 10% annualised falls we are seeing now?

From finfacts.ie:

measured over the past 12 months (up to and including April), the average price paid for a house in Ireland was still 5.1% higher in April 2007 than the price paid in April 2006.

Where are you getting your figures from?

SkepticOne wrote:

If the current rate of falling continues for the next few years then we are looing looking at drops of 40 to 50%. Would this be a crash?

Yes, a 40 to 50% drop over 5 years would be a crash in my book.

chump wrote:

from what I remember you believe what we have now represents a soft landing - but how can this be so? We may have only just begun

Its entirely possible that I'm wrong
But thats what predictions and guessing are all about.

And just for clarity what is your best guess (for the history books )

My guess from last july was:

me wrote:

I think in about 2 years prices will overshoot a littlle, by maybe 1%, then settle down and level off overall. There might be up to a 10%-15% drop in the 1-bed apartment type market, and maybe 3%-6% in the Yuppie south-side semis.

My timing was certainly off, remains to be seen whether the effects work out.

Zambia232 wrote:

Crash / Bubble Bursting - I think the words significantly and Dramatically leave to much wiggle room

Intentionally, as a bubble bursting is a hard and fast crash imo.

davej

With the interest rate rise yesterday and the election shenanigans a distant memory, it seems the property market has resumed its place as the primary topic for media attention.

http://www.independent.ie/opinion/letters/the-squeeze-on-home-buyers-692612.html

http://www.independent.ie/national-news/big-rise-in-first-buyers-after-stamp-duty-ends-692664.html

Is it not the case that any first time buyers who will supposedly "surge" towards the 2nd hand market will do so with ~30K less to offer (i.e the interest rate rise more than offsets the stamp duty changes) ?

davej

whizzbang

Akrasia wrote:

Um, .25% on savings of 10k is a hell of a lot less than .25% on a loan of 300k

Just as well I don't have a mortgage so

Gurgle wrote:

Where are you getting your figures from?

Year on year is the past year, annualised is the next year based on current trends.

gurramok

davej wrote:

With the interest rate rise yesterday and the election shenanigans a distant memory, it seems the property market has resumed its place as the primary topic for media attention.

http://www.independent.ie/opinion/letters/the-squeeze-on-home-buyers-692612.html

http://www.independent.ie/national-news/big-rise-in-first-buyers-after-stamp-duty-ends-692664.html

Is it not the case that any first time buyers who will supposedly "surge" towards the 2nd hand market will do so with ~30K less to offer (i.e the interest rate rise more than offsets the stamp duty changes) ?

davej

Amusing articles they are:)

Oh, it never occurs to those authors that FTB's affordibility has plummeted due to IR's climbing constantly.
And as one of the 'economists' said it started last August, it just so happens that the first IR rise happened 8 months previously as mortgage approvals last for 6 months on average
Unless the authors know that there is going to be a huge drop in house prices this month or FTB's have been saving extremely hard for a year to enable the those FTB's to 'surge' forward en masse..LOL

SimpleSam06

Gurgle wrote:

And as I understood the course, it was system dynamics as applied to engineering. Consider the economic boom as either a ramp input or a prolonged step input.

Now, just out of interest, what made you think you could apply your system dynamics experience in engineering to a consumer demand driven, semi random interest rate based financial phenomenon? Its worse than clutching at straws, it literally is blowing smoke to hide that you're sunk.

Bring on those yoy's, none of my predictions have been off by a week so far.

tHE vAGGABOND

FTB's have been saving extremely hard for a year to enable the those FTB's to 'surge' forward en masse..LOL

FF Stamp Duty changes are going to help a lot of FTB buying second hand places...

I would be shocked if there was not a bit of a surge..

[FTB - Like me ]

gurramok

tHE vAGGABOND wrote:

FF Stamp Duty changes are going to help a lot of FTB buying second hand places...

I would be shocked if there was not a bit of a surge..

[FTB - Like me ]

No offence, you must be in the tiny minority of FTB's who could well afford something over 317k especially if you are buying by yourself, maybe that was the surge they were talking about
FTB's like me and lots of others on boards for example cannot even get mortgage approval for that amount even if we tried

Akrasia

tHE vAGGABOND wrote:

FF Stamp Duty changes are going to help a lot of FTB buying second hand places...

I would be shocked if there was not a bit of a surge..

[FTB - Like me ]

Um, These announcements on stamp duty are going to be accompanied with dire warnings about a possible further 1% increase in interest rates. Each quarter % increase reduces mortgage affordability by 30k. How many FTBs are going to be able to borrow enough money to get on the housing market at current prices if they only qualify for a mortgage for 100k less than than they could have this time last year? (not to mention the huge increase in monthly repayments if approval is given)

The housing market is absolutely 100% screwed. There is no way on earth that we can avoid a catastrophic collapse. The Damage has been done by the FF/PD gross mismanagement of the Irish Economy

ixoy

Any figures released recently on the average price of a house for a first-time buyer in Dublin? I'm finding it difficult to believe that most FTBs are in a position to spend 317K+ and itching for that stamp duty drop to spend more, especially in the light of all these mortgage interest rate rises.

A Random Walk

ixoy wrote:

Any figures released recently on the average price of a house for a first-time buyer in Dublin? I'm finding it difficult to believe that most FTBs are in a position to spend 317K+ and itching for that stamp duty drop to spend more, especially in the light of all these mortgage interest rate rises.

The figures released this week show that the average FTB mortgage is 222,023, which might give some idea.

This stamp duty will save the market idea will be shown to be more VI spin, it probably gives them time to offload their own properties.

Akrasia

davej wrote:

http://www.independent.ie/national-news/big-rise-in-first-buyers-after-stamp-duty-ends-692664.html

davej

It's very interesting to note that this editorial that predicts nothing more than an expected surge in FTBs following and announcement (contents yet unknown) about stamp duty reforms by the incoming government at some ill defined point in the future, is a front page story in big black writing BIG RISE IN FIRST TIME BUYERS AFTER STAMP DUTY ENDS

Another disgracefully misleading piece of journalism from the Irish Independent. Especially in light of the ECB interest rate hike and indications of further increases to come.

The article sites two 'Leading property economists' who are of course, employees of Sherry Fitzgerald and Douglas Newman Good who make silly unsubstantiated statements about how stamp duty uncertainty is the cause of the slow down in demand
Even though they admit that the 'nervousness' started last August, but McDowell didn't start off the Stamp duty debate until the end of September. So unless FTBs had a time machine, uncertainty over stamp duty could not have been the cause of 'nervousness' in August.

VoidStarNull

Stamp duty represents funds extracted from the property market by the
government, so any reduction in duty should provide a market boost, either
in the number of transactions or in the value of transactions. I would expect the
former, since given the level of over-supply it is unlikely that sellers can ask
for higher prices.

If stamp duty is a critical factor holding back the market, then cutting it could
produce a large boost, otherwise there will just be a small boost proportional to
the amount of duty which the government chooses to forego. In this context,
FF is aiming to cut only for FTBs precisely in order to limit the fall in revenues.

Regardless of whether or not stamp duty is holding the market back,
market participants will argue for cuts. Any cuts translate into
more funds flowing to market participants, whether prices rise or fall,
simply because less money is being extracted from the market.

So claims by VIs that stamp duty cuts will solve world hunger should be taken
with a grain of salt.

Afuera

Akrasia wrote:

The article sites two 'Leading property economists' who are of course, employees of Sherry Fitzgerald and Douglas Newman Good who make silly unsubstantiated statements about how stamp duty uncertainty is the cause of the slow down in demand

This explanation always sounded like a total red herring and thanks to recently released figures, showing the reductions in mortgage lending, it has been well and truly blown out of the water. Most tellingly there are currently 20% less investors applying for mortgages than this time last year. Stamp duty makes no difference to these guys. If the fundamentals were rosy these guys should be piling in to clean up while there is uncertainty. Since they're not, what does that say about our fundamentals? Was sentiment the only thing pulling the market along for so many years?

gurramok

Yep, one BIG LIE.

As been stated, average FTB mortgage is 222k, if affordibility is dropped by 30k or even the sceptic 10k, its just impossible for a FTB(1 or 2) to save that 10k each time a IR rise occurs to break even to that 222k!

gurramok

AIB now say 'house prices will fall by 2% this year'
http://www.ireland.com/newspaper/frontpage/2007/0607/1180721210324.html

Affordability is the central issue, even AIB admit this.

Also, stock market takes tumble on this weeks property related news.

AIB wrote:

AIB has predicted that house prices will fall by 2 per cent this year. The warning came on the day the European Central Bank (ECB) raised interest rates for the eighth time since December 2005 and indicated further rises may be on the way.

The increase in European interest rates combined with fears that US rates will remain high hit share prices globally. European markets were down 1.5 per cent and on Wall Street the Dow Jones fell almost 1 per cent.

As much as €3 billion was wiped off the value of the Irish market yesterday. The fall, which came on the back of a €2.6 billion loss on Tuesday, was attributed to the ECB rate rise and also news that Irish mortgage lending fell in the first quarter. The financial institutions most closely tied to the property market were the worst hit.

The data on mortgage lending came from the Irish Bankers' Federation, whose survey of the mortgage market suggests that lending fell by 7.5 per cent in the first quarter, the first annual fall recorded in the history of the survey. The quarter-point rise, announced yesterday by Mr Trichet, brings the bank's main refinancing rate to 4 per cent, and raises the cost of a typical €300,000 mortgage by €40 a month.

Eight such increases have occurred since December 2005, implying a rise of about €320 for a €300,000 mortgage.

Mr Trichet said the ECB remained concerned about the threat of inflation in the euro zone.

AIB chief economist John Beggs predicted yesterday that interest rates would rise further, a development which he said would have a "crucial impact" on house price trends.

"We see rates being increased to 4.25 per cent in September and by a further 0.25 per cent to 4.5 per cent in early 2008," he said.

"This would still be below the peak for interest rates in the last cycle of 4.75 per cent."

AIB also warned that the Irish housing market was entering a crucial period and that deteriorating affordability conditions were taking their toll on activity levels.

It said prices will fall by 2 per cent this year, but that this still constituted a soft landing for the market. "The annual rate of house price inflation could well turn negative over the summer months and, even with some modest increases in prices in the latter part of the year, the inflation rate could still be in negative territory in December," the bank said.

VoidStarNull

Looks like the decision of EBS from last January to only stress-test
mortgage applications at current rates plus 1% could come back to
haunt them. Rates then were 3.5%, unless memory fails me.

Now they are expected to hit 4.5 - 4.75 % next year.

Lots of commentators have recently changed their view on interest rates.
Recall at the end of last year most people were expecting that US rates
would decline this year. Just recently the markets have finally given up
betting on this.

Given that expectations were wrong, you'd have to guess there's
a risk that current estimates of the peak are also too low. Personally
I reckon we'll see 5% and higher next year. And ECB rates won't fall until
the German economy is in trouble, which could be 2-3 years away.

chump

Akrasia wrote:

It's very interesting to note that this editorial that predicts nothing more than an expected surge in FTBs following and announcement (contents yet unknown) about stamp duty reforms by the incoming government at some ill defined point in the future, is a front page story in big black writing BIG RISE IN FIRST TIME BUYERS AFTER STAMP DUTY ENDS

Another disgracefully misleading piece of journalism from the Irish Independent. Especially in light of the ECB interest rate hike and indications of further increases to come.

The article sites two 'Leading property economists' who are of course, employees of Sherry Fitzgerald and Douglas Newman Good who make silly unsubstantiated statements about how stamp duty uncertainty is the cause of the slow down in demand
Even though they admit that the 'nervousness' started last August, but McDowell didn't start off the Stamp duty debate until the end of September. So unless FTBs had a time machine, uncertainty over stamp duty could not have been the cause of 'nervousness' in August.

It's a disgusting piece of journalism - I actually can't believe they published it.

Talk about unbalanced reporting - and front page!

Com'onnnnn

whizzbang

chump wrote:

It's a disgusting piece of journalism - I actually can't believe they published it.

Talk about unbalanced reporting - and front page!

Com'onnnnn

hmm, did those Indo journalists ever sell those houses they were trying to shift? Maybe they are looking for a few good weeks to sell of their own places?

aphex™

Irish Bank Federation released data today on the mortgage market....

1st quarter mortgages down 7.5% in value and 19% in volume on the first quarter of 2006.

IBF wrote:

*
In value terms, the slowdown in new mortgage lending is evident across most market segments – the one notable exception is re-mortgaging (switching) which shows year-on-year growth of 5.8%.
*
In volume terms, the slowdown is evident across all market segments - with the least decline among first-time buyers (down 9.9%) and the largest decline among mover purchasers (down 25%).
*
First-time buyers now account for 20.7% of the total market by volume – their highest share yet since commencement of this series. Notwithstanding the anticipated slowdown in new mortgage lending, Central Bank data confirms that, at €129 billion, the overall size of the mortgage market continues to increase.

Press release here
Full report here

the1andonly1

Just a quick (i hope) post on how I think things might turn out

The economics of house prices, are based on supply and demand, so for house prices to change, one of those 2 variables will have to shift. Last year there were 93,000 homes built in Ireland, and the method of measuring this is by taking the number of new ESB connections. The ESB are now predicting a slowdown in this growth, with 350,000 new connections expected over the next 7 years (50,000 per annum). So we have a decrease in the rate of new homes being built, which would, if all other variables remain the same, result in a price increase. There are though, other changes, especially with regards to the demand side of this supply/demand equation.

With the amount of new homes being built falling, there will be an excess supply of labour in the construction industry (unless this is offset by growth in commercial property building – which I have no knowledge off, correct me if I’m wrong!). According to the central statistics office, the construction industry employees about 14% of the total Irish workforce at the moment http://www.cso.ie/statistics/empandunempilo.htm, which is considerable. If there are going to be less homes being built, then surely that will mean there will have to be job cuts in this industry. These job cuts will not just effect those people directly involved but will ripple through the economy, and may have a much greater effect. (i.e. someone who has lost their job is not going to have any discretionary income to spend – thereby impacting other sectors of the economy etc…). The real effect of this is hard to gauge now, and I’m not going to try to put a figure on it, but it could be substantial.

If this scenario holds, and unless other sectors of the economy improve (unlikely in my opinion, as many of these industries are dependant on the construction industry), there will be a reduction in the rate of our economic growth, which will have the effect of lessening the demand for houses considerably. The increase in the interest rate will add to this. Simply put, people will not have enough money to spend on houses at the current prices. So prices will have to fall.

Another thing to look at is the current rents for property. Rents are currently running below mortgage repayments, which may tempt people to rent rather than buy. And if this happens (it probably already is happening) it will lessen the demand for purchases in the housing market, especially with further interest rate rises on the horizon.

Altogether, I see the drop in demand outstripping the drop in supply, which will have the effect of lowering house prices. By how much, and in what time – frame, is hard to tell, but it will happen nonetheless. Although, this is just a general statement; some places will be hit harder than others (good locations are less likely to see a price drop – people living in commuter towns 2 hours from Dublin on the other hand…)

Anyway, that was longer than I thought, and I still didn’t get to outline everything! Any ideas on how valid my 1st year economics analysis is?!

miju

if housing output drops to 50,000 houses per year which is what is predicted then that translates to a loss of some 60,000 jobs DIRECTLY EMPLOYED in construction and thats not including sectors that rely on construction activity for their profits either NOR the amount of migrant workers who are renting who will go to shores anew for better work

i posted the figures before but this figure is easily arrived at by comparing historical data of housing output versus directly employed. in short this country genuinely is ****ed.

SimpleSam06

the1andonly1 wrote:

The economics of house prices, are based on supply and demand, so for house prices to change, one of those 2 variables will have to shift.

...

Any ideas on how valid my 1st year economics analysis is?!

You forgot interest rates and public sentiment. These are the other two things house prices are based on. Higher interest rates = less money being loaned, therefore the cash for higher house prices simply is not there. Talk of decreasing supply always seems to leave out the 110 - 150,000 empty houses in Ireland at the moment as well, not to mention overbuilding from this year, finished in a hurry.