Housing Bubble Bursting

daveirl

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SimpleSam06

Apparently the EU has decided to step in and change the planning regulations in 22 counties around Ireland, as I read in the paper today. Once off houses were generally forbidden to anyone who didn't come from a particular locality, restricting development to large scale housing estates. The EU has just said this is discriminatory and illegal, apparently. I wonder what effect it will have on the ailing housing market, if any?

patrickolee

daveirl wrote:

This post has been deleted.

Well you're right on all of that I think. There might be one thing that I can think of which might cause babyface's landlord to pause. If the landlord bought say for 300,000 and it's now worth 1,000,000... 700,000 gain. If he were to sell now, he would lose 20%, or 140,000 straight away (less deductible expenditure). It would take a long time at 5% to make up that loss. Also, by having the asset of 1,000,000 he can use this to get access to more money, to buy other properties or stocks or whatever. Or indeed, he may already have done this, which might also prevent him from selling. Good old leverage.... I looked that up in a book here in the library Sam, thanks

miju

yes but in fairness the average property in Ireland costs 300-400k not 1 million

patrickolee

just using the figure babyface gave... but same applies for 300-400K props.

patrickolee

patrickolee wrote:

Well you're right on all of that I think. There might be one thing that I can think of which might cause babyface's landlord to pause. If the landlord bought say for 300,000 and it's now worth 1,000,000... 700,000 gain. If he were to sell now, he would lose 20%, or 140,000 straight away (less deductible expenditure). It would take a long time at 5% to make up that loss. Also, by having the asset of 1,000,000 he can use this to get access to more money, to buy other properties or stocks or whatever. Or indeed, he may already have done this, which might also prevent him from selling. Good old leverage.... I looked that up in a book here in the library Sam, thanks

Now you have just highlighted the entire problem with the property market and the nature of the bubble.

Approx 40% of purchasers (until the slowdown) were investors. They bought places that didnt give a yield would justify the property as an investment. They bought for it to go up in price. Capital appreciation. 250,000 - 300,000 houses are empty. If you dont rent it out you dont get hit with 20% capital gains tax on disposal of your asset. Alarm bells should be ringing now.

Prices stopped going up. So investors dont see it as a worthy investment anymore. 40% of the market disappeared. Hence the slowdown, hence the build up of unsold properties.

Prices will drop until property returns a decent yield again. You can estimate the investment value of a house by finding what it rents for and working out based on yield what its worth. An investor will not pay more than would affect his yield based on the calculation.

conor_mc

patrickolee wrote:

Well you're right on all of that I think. There might be one thing that I can think of which might cause babyface's landlord to pause. If the landlord bought say for 300,000 and it's now worth 1,000,000... 700,000 gain. If he were to sell now, he would lose 20%, or 140,000 straight away (less deductible expenditure). It would take a long time at 5% to make up that loss. Also, by having the asset of 1,000,000 he can use this to get access to more money, to buy other properties or stocks or whatever. Or indeed, he may already have done this, which might also prevent him from selling. Good old leverage.... I looked that up in a book here in the library Sam, thanks

So I guess you've got a perpetual motion machine in your back garden too?

You're forgetting that a million euro in cash is an asset too, and you know what, you can even use cash to buy stocks or whatever!!! Wow!!!!

You're forgetting that the bit of his €1m house that he uses to secure his leverage ceases to be his anymore, it becomes a liability and if he wanted to stick his €700k into stocks based on good old leverage, it'd cost him a helluva lot more in interest than his €140k in CGT.

patrickolee, I think you need to realise that house prices have stopped rising, and with that your theories on leveraging etc become very risky, as in bordering on the plain reckless.

patrickolee

conor_mc wrote:

You're forgetting that a million euro in cash is an asset too, and you know what, you can even use cash to buy stocks or whatever!!! Wow!!!!

Think you might have missed the point there conor. They have an asset worth 1 million, but if they try and convert it into cash it will only be 860,000, due to a tax liability resulting from capital appreciation.

All I'm trying to do, is offer you an explanation why a landlord who owns a property worth 1,000,000 might not sell that property and might be happy to get babyface's 2000 a month in rent. Jeeesh!

... and yes it is reckless/dangerous... I'm not a landlord!!!! Nor do I have a property worth 1 million!!!

babytooth

patrickolee wrote:

Think you might have missed the point there conor. They have an asset worth 1 million, but if they try and convert it into cash it will only be 860,000, due to a tax liability resulting from capital appreciation.

All I'm trying to do, is offer you an explanation why a landlord who owns a property worth 1,000,000 might not sell that property and might be happy to get babyface's 2000 a month in rent. Jeeesh!

... and yes it is reckless/dangerous... I'm not a landlord!!!! Nor do I have a property worth 1 million!!!

this cgt tax is payable on any asset, you only ever make 80% (yes some expceptions like ppr and art, wine etc...)

simple fact is that the 860k at 4% still gives him far better returns, and its also risk free, cash is king. It takes time to sell property.
Simlpe fact is that alot of ppl haven't the foggiest of what they are doing, alot of bank managers or the mortage brokers haven't a breeze either. The contango going on in this market is mind boggling. It has evolved into resembling a house of cards more and more over the last two years. Debt and the inability to exit because of the lack of buyers is the only thing holding the market together.

This is short term, As builders get laid off they wont be able to pay mortages (this will take up to a year to happen)..then more property will creep onto the market at a lower price, rinse and repeat where we are now but with smaller pool or buyers and a larger pool of sellers that are distressed and have banks calling in loans.

Remember, an investor doesn't mind payin his 140k as he still makes 560k,
But is prices drop to 800k, he only makes 400k (using the figures above) Whats better, 560 or 400, the rational thing is to exit and bank the money, more is always better than less...

Say bye bye to property increases, say hello to long, slow and steady decline as the market becomes unstuck

HashSlinging

Just as a matter of interest, can any of you wizz kids work out if my sister can claim back any stamp duty on her new house that she bought a month ago. She paid 382k for the house, im sure there is stamp duty worked into that price somewhere. shes a first time buyer.

SimpleSam06

Just a quick link to that story on planning permissions...

Planning guidelines in 22 counties which favour people connected to the locality are likely to be scrapped following a complaint to the European Commission.

The commission has completed an examination of the development plans of the counties following a complaint from an Irish citizen who was refused planning permission to build a house in Wicklow.

Planning guidelines in Wicklow restrict non-locals from being granted permission for one-off rural houses.

The commission is expected to announce within the coming month that many of the restrictions in the county development plans are illegal under European law.

It finds that many of the provisions concerned are discriminatory, disproportionate and constitute restrictions on the free movement of capital and the freedom of establishment guaranteed by the European treaties.

That will certainly take the shine off many rural or commuter "suburban estate" developments. Why buy in a cramped estate in some small village, when you can have your very own detached house, with large garden, for a similar price?

daveirl

This post has been deleted.

Glenbhoy

Hash, when did she close the contract? I would imagine she certainly has paid some stamp duty at this stage - if the property was second hand - if it was a new build, which seems to be implied by your post, then there is no stamp duty element and she has nothng to reclaim.

HashSlinging

Cheers Glenboy thats what i thought, wimminz!!

Calina

HashSlinging wrote:

Just as a matter of interest, can any of you wizz kids work out if my sister can claim back any stamp duty on her new house that she bought a month ago. She paid 382k for the house, im sure there is stamp duty worked into that price somewhere. shes a first time buyer.

presumably she should know if she paid stamp duty or not. If she did, then possibly depending on coming legislation, if she did not, then no.

Why are you sure there is stamp duty worked into the price? Normally they are separate considerations and most buyers know what is the house price and what is the stamp duty.

BendiBus

A Random Walk wrote:

Please explain to me the relationship between rent and general price inflation? I must have missed that bit in my economics lectures because they were so busy talking about supply and demand driving rents. I don't wander into the motors forum and start giving my theories on how an engine works (in my world it is due to the little people who live inside the white plugs), why do people who don't understand economics feel they can offer up their new and unusual theories?

You'll notice from the most recent Daft figures that rents, after dropping for a while have reached their 2002 level. Has inflation been 0% for the past 5 years?

While you can always pick a term where you can show growth or contraction (5 years in this case), it's very hard to see rent inflation remaining static over the long term. Based simply on the value of money.

On the wider topic of rent vs buying over the long term, regardless of interest rates or rent inflation, my mortgage payments will be exactly zero in 20 years. I expect to live at least another 40. If I rent for life I pay rent for 40 years.

Finally, when comparing mortgage vs rent, shouldn't it be morgtage interest less TRS compares to rent less Rent relief. Didn't notice anyone mention rent relief yet.

miju

HashSlinging wrote:

Just as a matter of interest, can any of you wizz kids work out if my sister can claim back any stamp duty on her new house that she bought a month ago. She paid 382k for the house, im sure there is stamp duty worked into that price somewhere. shes a first time buyer.

actually on the subject of stamp duty reform i think most people here knew it was a red herring anyway as prices were falling before stamp duty became an "election issue". But it turns out that the published bill is going to be an even bigger red herring as any properties over 125sq metres must still have the normal stamp duty paid on it regardless if your a FTB or not

patrickolee

Rent relief is relatively small anyway. €1,800 at 20% = 360 Euro for the year. 30 quid a month. But fair point I suppose.

tHE vAGGABOND

as any properties over 125sq meters must still have the normal stamp duty paid on it

There are small Irish towns smaller than that, so its not an issue..

Anyway, your clearly a bit of an eejet as under the current rules FTB are exempt on stamp for new homes under this size [and therefore not over] - so they are just being consistent.

miju

miju wrote:

actually on the subject of stamp duty reform i think most people here knew it was a red herring anyway as prices were falling before stamp duty became an "election issue". But it turns out that the published bill is going to be an even bigger red herring as any properties over 125sq metres must still have the normal stamp duty paid on it regardless if your a FTB or not

I doubt now too many genuine first time buyers would be buying above 125sq metres and if they are,they probably have the means to do so.
You can get a 3 bedroom house to fit into 125sq metres For example.
Fair sized appartments would easily fit into that size.
Trading up at a later stage means they will be paying stamp duty anyhow but will have the huge tax break of paying no tax on the sale of the family home.

chump

125 (sq meters) = 1 345.4888 square feet

But the point is, if this is true, it hasn't been clarified!

Also this shouldn't affect second hand properties as they currently have no size restriction - so a size restriction would have to be implemented...

gurramok

Rte reported on the Six-One news today that the FTB stamp duty measure only affects 2-3000 of the 37,000 odd FTB's that buy, hence a tiny minority of wealthier FTB's will be overjoyed at the news

ie..a red herring measure to put life into a dead market

iguana

chump wrote:

Also this shouldn't affect second hand properties as they currently have no size restriction - so a size restriction would have to be implemented...

I think that's what it means though. Ftb's will no longer have to pay stamp duty on any second hand house as long as it is under 125m2. So you can buy this €950k house and pay no SD, but you will pay SD of €25k if you buy this this €430k house as it is a bigger house.

At least that's my understanding of it.

They have built mostly under 125SqM and thats what they want to shift.
They are effectively laying out the playing field to suit themselves.

The worst part of the bubble for me was the way we built tens of thousands of "starter" homes. The kind of property no one wants to stay in long term, hence the term.

The way some people talk you would swear that 1,400 sq ft or approx 125 sq m is massive living room. It really isnt. And it doesnt take alot to make houses bigger.

The government effectively WANT us to live in small properties. When the demographics show the population dwindle the culprit will be this bubble and the dual incomes that were needed and the people who were stuck in apartments.

It wont make sense for some people to work V claim the dole if they get stuck in a 1 bed apartment in commutersville if they want a family. Throwing away the keys, going bankrupt, claiming the dole (which the banks cant touch) and getting a council house will become tempting for some people.........

SimpleSam06

Deleted User wrote:

The government effectively WANT us to live in small properties.

I think you mean the builders who paid for the government WANT us to live in small properties. More profit per square foot, yanno...

indiewindy

Some fairly conclusive evidence that the market is going to keep sinking this year


http://www.rte.ie/business/2007/0621/ilp.html
Irish banks slid sharply on the ISEQ today after Irish Life & Permanent said it expects €800m less in new mortgage lending this year, compared to 2006.

On the Dublin market this afternoon AIB is down nearly 2.5%, Anglo Irish Bank is 2.2% lower, and Bank of Ireland and Irish Life & Permanent are both down nearly 2%.

In a trading statement Irish Life & Permanent said it expected its Irish residential mortgage book to see growth of about 20% this year, with new lending of around €3.4 billion.

AdvertisementHowever, this is 19% less than last year's total of €4.2 billion in new mortgage lending.

It said the slowdown in Irish mortgage lending growth will be offset by stronger consumer finance and commercial lending.

Irish Life & Permanent has raised its profit targets for this year, helped by particularly strong growth in its life and pensions business.

In the trading statement covering the first six months of the year, the company said total loans in its banking business were expected to grow by 20% in the first half compared with the same period last year.

IL&P said it now expected pre-tax profits from its core life and banking divisions to grow by a high teen percentage, up from the previous low to mid-teens outlook.

It said life sales were expected to grow by more than 35% in the first half, helped by the maturing of SSIA savings. IL&P said there was 'tremendous' growth in pension sales. Pre-tax profits in the life business were expected to show 35% growth in the first half alone, moderating in the second half.

Permanent TSB expects to have opened 34,000 new current accounts in the first six months, with more than 60,000 in the full year.

Shares in the company were down 33 cent at €18.95 in Dublin late this afternoon.

iguana

Ok, it now seems that ftb's are exempt from SD on all sizes of property and that Ireland.com made a mistake in reporting it.

dochasach

It looks like the Florida property market is still spiraling downwards. What's more, construction only comprises about 7% of the economy there. What is it here now, 40%? The good news is, Floridians have a solution:

The Daily News “More than 300 people with a keen interest in the Emerald Coast’s real estate market gathered Wednesday at Destiny Worship Center to ask for God’s blessing. The Real Estate Prayer Luncheon was organized in hopes of breathing life and positive thinking into the area’s slumping housing market.”

“It was the first of what the organizers, co-owner of Crye Leike Coastal Realty Wanda Duke, former Destin City Councilman Mel Ponder and Destiny Worship Center Pastor Steve Vaggalis, hope will become a regular, uplifting event.”

“‘The heartbeat of today’s economic community is on the backs of the real estate community,’ Ponder told the crowd.” “Those gathered had one goal, ‘changing the climate in the area.’”

“‘We need to think positively and get everyone on the same page,’ Duke said. ‘Positive things that come out of your mouth will end with positive results. If we lose hope, we lose everything.’”

That's right brothas and sistahs, we need a Real Estate Prayer Luncheon! So put yer hands on the screen and say it with me now:

"I BELIEVE that fundamentals don't matter! I BELIEVE in 15 million an acre. I BELIEVE that the 250,000 empty houses will appreciate in value even when empty. It won't matter when construction workers go home, emigration returns because we've priced tech companies out of this country. When there are 500,000 empty houses and no one to live in them, each of these houses will become even more valuable. I BELIEVE an economy is sustainable when based primarily on the construction of empty homes and that houses are not for living in, they are for selling at a profit. I BELIEVE that any slump is temporary and that Satan works his ways though FTB stamp duty and the law of supply and demand, both of which have been slain by our godly government ministers in selfless sole behalf of FTBs who have the God given right to own debt on a house at 8X their annual income. I BELIEVE my banker, the seller's estate agent and the newspaper he buys expensive ads in are always looking after my best interest. I BELIEVE that selling up Ireland at todays values should justifiably produce enough cash buy Poland and East Germany or half the U.S., this is sound economics and sinners should question not the mysterious ways of the Lord's messengers in his government. I BELIEVE that an apartment in Ballymun or Limerick should cost more than a house in Geneva, Barcelona or Orlando. And that prices of property both within and beyond the pale will rise to heaven for all eternity. So help me {insert your local EA's name}
-- Amen

JupiterKid

Nice one dochasalch!:D

I met a EA this afternoon to discuss an academic matter. We ended up talking about the property market and he got very nervous and despondent - he said that conditions are the worst in his 15 years as an EA - nothing is selling. He runs two offices and things are so bad in the market that he said he was glad of his law degree in case he needed a new career next year.

He was also worried about "all the negativity talk" destabilising the property market further. I replied by pointing out that if the property market was propped up by sound fundamentals (which of course it isn't) then negative sentiment wouldn't make much difference. The EA was especially worried about websites like the Property Pin changing the public's sentiment about property for the worse.

gurramok

LOL about what he said about the Property Pin.
We have nearly 600 registered users and yet we influence public opinion to that degree?
Coupled with info on boards and the banning of anything negative about house price discussion on AAM, the internet is a brilliant resource for buyers and sellers alike to see through the crap spouted by IRISH vested interests.

There was talk on radio the other week that developers have 2,000 new completed builds that they cannot sell in the Dublin area alone, nothing to do with fundamentals of course

Its gas how all the bulls who spouted the VI line this time last year have disappeared and even some have come around to saying for example from daft discussion 'oh prices will fall a little this year and then rise 10% next year' without any basis, figures out of top of their head!!

Amen Dochasach, it would be cheaper to live in a nice large gaff in a nice area of Orlando than live in the undesirable area where i am from and thats saying something about the state of the market in this country.

See the following article from examiner, where will all those laid off in the construction sector get jobs? (something one in five men work in construction now. Ya can't transfer brickies/plasterers/electricians/plumbers to roadbuilding)
Something like 80% of jobs created last year were in construction/public sector/retail.

(finfacts summary of below article http://www.finfacts.com/irelandbusinessnews/publish/article_10007568.shtml)

examiner wrote:

Drop in housing construction to cost State €500m

By Brian O’Mahony, Chief Business Correspondent
THE Government is set to lose €500 million in tax revenues because of a sharp drop in the number of houses built in the second half of 2007.

A report by one of the country’s leading stockbrokers also warns the number of houses built could decline by up to 30% year on year in the last quarter of this year.

That will lead to job losses in the construction sector for the first time in many years while the VAT take would be further impacted, warned Rossa White, senior economist with Davy Stockbrokers.

Despite the deterioration in the housing market and the loss of revenue implied, a government surplus is still likely this year, said the report.

However, it points out that house completions, not housing starts, are the barometer of the health of the sector, which has had an enormous influence on economic growth, employment and tax revenue for more than a decade.

The brokers expect 65,000 completions in 2008, down 10,000 on an earlier forecast and a 20% decline on the 80,000 house completions that will be delivered this year.

While the economy will grow by about 6% in the first half of the year, that pace will slow to 3% or less in the second half as the impact of the housing slowdown comes home to roost.

It means an average annual growth rate of 4.5% this year against 6% last year.

As the slowdown deepens, that figure will fall sharply to 3% in 2008 as the housing market slowdown bites even harder.

Bloxham Stockbrokers recently forecast the economy would still deliver a hearty growth rate of 6%.

Chief economist Alan McQuaid argued the pessimism has been overdone and he cited Central Statistics Office figures showing the economy was still performing on most fronts.

The Davy review says the housing market, which accounts for nearly a third of the economy, is in a period of transition.

As a result of that slippage the report is forecasting that the growth in employment could slow from between 3% to 3.5% this year and fall to as low as 1% in 2008 if the housing market continues to decline.

However, the building sector’s non-residential sector may deliver jobs growth of up to 7%, compensating for much of the jobs fallout from the housing market, said the report.