Housing Bubble Bursting

digitally-yours

SimpleSam06 I think we both are right in our own ways
as there are more than one ways for valuations

The appraiser will determine which one or more of these approaches may be applicable, based on the scope of work determination, and from that develop an appraisal analysis. Costs, income, and sales vary widely from one situation to the next, and particular importance is given to the specific characteristics of the subject.

Consideration is also given to the market for the property appraised. Appraisals of properties that are typically purchased by investors (e.g. - skyscrapers) may give greater weight to the income approach, while small retail or office properties, often purchased by owner-users, may give greater weighting to the sales comparison approach. While this may seem simple, it is not always obvious. For example, apartment complexes of a given quality tend to sell at a price per apartment, and as such the sales comparison approach may be more applicable. Single family residences are most commonly valued with greatest weighting to the sales comparison approach, but if a single family dwelling is in a neighborhood where all or most of the dwellings are rental units, then some variant of the income approach may be more useful.

Cost approach
Thats what i suggested

The Cost approach was formerly called the summation approach. The theory is that the value of a property can be estimated by summing the land value and the depreciated value of any improvements. The value of the improvements is often referred to by the abbreviation RCNLD (reproduction cost new less depreciation or replacement cost new less deprecation). Reproduction refers to reproducing an exact replica. Replacement cost refers to the cost of building a house or other improvement which has the same utility, but using modern design, workmanship and materials. In practice, appraisers use replacement cost and then deduct a factor for any functional disutility associated with the age of the subject property.

In most instances when the cost approach is involved, the overall methodology is a hybrid of the cost and sales comparison approaches. For example, while the replacement cost to construct a building can be determined by adding the labor, material, and other costs, land values and depreciation must be derived from an analysis of comparable data.

The cost approach is considered reliable when used on newer structures, but the method tends to become less reliable for older properties. The cost approach is often the only reliable approach when dealing with special use properties (e.g. -- public assembly, marinas).

Sales comparison approach

The sales comparison approach examines the price or price per unit area of similar properties being sold in the marketplace. Simply put, the sales of properties similar to the subject are analyzed and the sale prices adjusted to account for differences in the comparables to the subject to determine the value of the subject. This approach is generally considered the most reliable if adequate comparable sales exist. In any event, it is the only independent check on the reasonability of an appraisal opinion.

Note that this approach develops value from a purely pricing scheme, and as such is an example of a revealed preference model. An interesting perspective on the relationship between relatively subjective human estimation as compared with that obtained by purely mathematic modeling is contained in "Simple Heuristics That Make Us Smart" by Gerd Gigerenzer. Dr. Gigerenzer, a psychologist, asked people to estimate some real world facts based simply on their knowledge, experience and impressions. Common knowledge and some simple rules created models which were close to those produced by multiple regression analysis (MRA) and neural networks. The predictive value of the human models applied to a new sample was a bit better than the mathematical models, suggesting that the mathematical models may have described the data better but missed the predictive relationships. Similarly automated valuation models frequently find building size (square feet or meters) predictive of value, even when that information is not explicitly advertised. This is similar to the example in "The Wisdom of Crowds", Surowiecki, in which the scientist Francis Galton observed a crowd at a fair to, on average, accurately estimate the size of an ox.

Income approach or Income capitalization approach

This being suggested by you

The income capitalization approach is used to value commercial and investment properties.

In a commercial income producing property this approach capitalizes an income stream into a present value. This can be done using revenue multipliers or single-year capitalization rates of the net operating income. The Net operating income (NOI) is gross potential income (GPI), less vacancy (= Effective Gross Income) less operating expenses (but excluding debt service or depreciation charges applied by accountants).

Alternatively, multiple years of net operating income can be valued by a discounted cash flow analysis (DCF) model. The DCF model is widely used to value larger and more expensive income-producing properties, such as large office towers.

SimpleSam06

Excellent post Digitally, and well worthy of a sticky in its own right, even if it was copy-pasted directly from wikipedia . However, I will make a few points...

• The sales comparison of property value takes a snapshot of the approximate value of the property given a variety of factors. Market sentiment is not a snapshot but rather a vector value: what direction is it going. You are coming at this from the perspective of an income generating business (or you feel this is where I am coming from), which for the most part it is not. Or to put it another way, sales comparison will support market sentiment, if it's being done right, with ultimately the same effect.
• The cost approach again is subject to vector influences, since costs themselves are influenced by what the market is willing to pay. Construction workers can and have taken pay reductions, as have materials suppliers.
• Investors don't buy on the way down, and FTBs don't buy because they can't trade up, and so are stuck in an overpriced shoebox for at least 20 years, living a third world quality lifestyle. This is not a sane option. Take out those two and four parts in five of your market just dried up.
• Jimmy Murphy doesn't care what the appraiser thinks, if he feels its not worth the money he won't buy it. If the appraiser is doing his job properly, he'll take that into account, again basically supporting market sentiment.

iguana

SimpleSam06 wrote:

However, as was pointed out before, we are in the globally unprecedented situation of falling equity and rising interest rates - we are unique.QUOTE]

We are not unique. Spain is also experiencing property price drops and is probably a little further along than us. Spain is also in the Euro and has no control over it's interest rates.

SkepticOne

iguana wrote:

SimpleSam06 wrote:

However, as was pointed out before, we are in the globally unprecedented situation of falling equity and rising interest rates - we are unique.QUOTE]

We are not unique. Spain is also experiencing property price drops and is probably a little further along than us. Spain is also in the Euro and has no control over it's interest rates.

I think we could also compare ourselves to a local market in the US, e.g. Florida. Of course, there will never be exact counterparts.

Zambia

House prices plummet by up to €10,000 every month

Personnally will seeing everyone issue on the press pionts.

While not monitoring the market that closely down south, asking prices on myhome in Clonee where I sold are no different than this time last year.

So if the above quote is correct and we assume that this figure is derived from 2 months worth of data because if it isnt then its a bad indicator.

It would be nice of them to let everyone know where these areas where that prices are dropping at such an alarming rate. So we can all go wait for the bottom out there.

SimpleSam06

iguana wrote:

We are not unique. Spain is also experiencing property price drops and is probably a little further along than us. Spain is also in the Euro and has no control over it's interest rates.

Yes but Spain has a trillion dollar economy, set to overtake Germany by 2011. We seem to have all our eggs in one basket. As the bulls were once fond of saying, Ireland is indeed different.

Jesus Wept

Zambia232 wrote:

Personnally will seeing everyone issue on the press pionts.

While not monitoring the market that closely down south, asking prices on myhome in Clonee where I sold are no different than this time last year.

So if the above quote is correct and we assume that this figure is derived from 2 months worth of data because if it isnt then its a bad indicator.

It would be nice of them to let everyone know where these areas where that prices are dropping at such an alarming rate. So we can all go wait for the bottom out there.

Surely that's because people are unwilling to sell for less than what they bought.

Zambia

The-Rigger wrote:

Surely that's because people are unwilling to sell for less than what they bought.

This is true and backs what Miju said no-one wants to be seen as the sucker.

So asking prices stay high however deals are done for far less.

nesf

SimpleSam06 wrote:

How about a simple common sense one like "one average person can afford to buy their own home"?

That actually doesn't give you a value when you think about it. It's an ideal, not a rational thing you can use to reflect value.

SimpleSam06

nesf wrote:

That actually doesn't give you a value when you think about it. It's an ideal, not a rational thing you can use to reflect value.

Thats rational affordability based on the historical norm, and its as close to true value as you are likely to get. 150 to 175k for an average house, thats where I think equilibrium can be found. A person on 35k a year can afford that alright.

nesf

SimpleSam06 wrote:

Thats rational affordability based on the historical norm, and its as close to true value as you are likely to get. 150 to 175k for an average house, thats where I think equilibrium can be found. A person on 35k a year can afford that alright.

Houses aren't homogeneous products which complicates drawing inferences with any kind of accuracy. It also depends on a whole host of exogenous factors which makes it even more difficult to be "accurate" without abusing ceteris paribus wholesale tbh. We can, in retrospect, get a good spot price from what you are talking about but making predictions for the future isn't so easy.

Edit: And that still doesn't imply that there's a "true value" for property.

SimpleSam06

nesf wrote:

Edit: And that still doesn't imply that there's a "true value" for property.

My point in essence was that I feel the crash will bottom out somewhere around the 50% of current prices mark or somewhere just below, and this is a sustainable value, or as close to a "true value" as you are likely to get. How fast we get there is a different story.

Rational or "real" value = Equilibrium = Sustainable price = 50% of current, given about a 5 year window.

Do-more

smccarrick wrote:

Personally I do think that we are in for a similar ride though- not the short sharp shock that a lot of people are gambling on.

Traditionally the "sharp shock" has come in the form of large percentage jumps in interest rates overnight and I do not think that this is likely in the Eurozone, although anything is possible. The other possibility would be in the form of war or major terrorist attacks, such as taking out a large number of oil refineries, which would have a huge effect on the World economy.

Certainly we seemed doomed to the drip, drip of slowly increasing interest rates, although at some point we may reach a "tipping point" where so many people are struggling to make payments that the next rise will push tens of thousands of people into defaulting on their mortgage payments. The question really is if rates will rise to that tipping point?

I've heard a number of anecdotes from people connected with the lenders, that it is already becoming alarming in terms of the amount of people looking for repayment breaks, going on interest only etc.

Even if this were to primarily effect the lower end of the market, the effect is to pull the rug out from under the entire market.

This IMO is what is going to determine the speed and size of any further falls in the market.

D'Peoples Voice

Do-more wrote:

I've heard a number of anecdotes from people connected with the lenders, that it is already becoming alarming in terms of the amount of people looking for repayment breaks, going on interest only etc.

Will the PAYE tax cuts ( 20% -> 18%, 41% -> 40%), as promised by the Government in the election, help these people?

Will the increase in the mortgage interest relief, as promised by the Government in the election, help?

Will the SEM (Single Electricity Market) being introduced this November to stimulate competition in the electricity market thus lowering prices help people?

A weakening dollar keeping petrol prices low if not sending them lower help people?

The reform of the PRSI levies,as promised by the Government in the election, skewed in favour of those in the lower income brackets, will this not help people?

Falling insurance premiums caused by fewer deaths on the roads - will this not help people? - although VHI premiums are on the way up:o

Not saying I wouldn't see my investment property immediately and invest it into the ISEQ that is very cheap at present, I just wanted to add some points that should be taken into account for these people!

The_Conductor

D'Peoples Voice wrote:

Will the PAYE tax cuts ( 20% -> 18%, 41% -> 40%), as promised by the Government in the election, help these people?

More lately Cowen has advised that tax cuts are low on his agenda, given the massive falls in tax revenue predicted.

D'Peoples Voice wrote:

Will the increase in the mortgage interest relief, as promised by the Government in the election, help?

It will- but only to a certain extent- its at marginal rates, and with the massively increased repayments people are making, while its helpful, its not enough.

D'Peoples Voice wrote:

Will the SEM (Single Electricity Market) being introduced this November to stimulate competition in the electricity market thus lowering prices help people?

Eh, no. The regulator turned down an ESB request for permission to reduce prices by 10% with immediate effect last week (as it was deemed incompatible with a competitive market, and would mean the margins would not be sufficient to entice more providors to enter the Irish market).

D'Peoples Voice wrote:

A weakening dollar keeping petrol prices low if not sending them lower help people?

A weakening dollar helps, because oil is priced in dollars. However, as of 20 minutes ago, the price of brent oil was 1 cent away from its historic high (which was reached in August of last year). If the dollar falls 10% and oil goes up 20%- you're still worse off, thats whats happened......

D'Peoples Voice wrote:

The reform of the PRSI levies,as promised by the Government in the election, skewed in favour of those in the lower income brackets, will this not help people?

Once again- its on the back burner- getting the HSE to row back on its 830million deficit may free up some cash, but its not a priority- they don't have to worry about the electorate for another few years of course, and people have short memories.

D'Peoples Voice wrote:

Falling insurance premiums caused by fewer deaths on the roads - will this not help people? - although VHI premiums are on the way up:o

Premiums have fallen for cars. They have increased for health, as you have pointed out, but also for buildings and contents insurance (particularly given the crabby weather in the East and in the UK). One pretty much offsets the other.

D'Peoples Voice wrote:

Not saying I wouldn't see my investment property immediately and invest it into the ISEQ that is very cheap at present, I just wanted to add some points that should be taken into account for these people!

Good thing you didn't invest in the ISEQ last week- isn't it!

BendiBus

Just a little anecdote, suggesting estate agents are not too busy at the moment, and trying to hold on to customers:

A relative has a property for sale. Her EA said he had a viewer lined up and could she be out when they arrived. She waited for the EA to arrive then left and parked around the corner from where she could watch discreetly. After 10 minutes the EA left without anyone having come to view. Despite this the EA said later that the viewers definitely seemed interested My relative said nothing.

nesf

BendiBus wrote:

Just a little anecdote, suggesting estate agents are not too busy at the moment, and trying to hold on to customers:

A relative has a property for sale. Her EA said he had a viewer lined up and could she be out when they arrived. She waited for the EA to arrive then left and parked around the corner from where she could watch discreetly. After 10 minutes the EA left without anyone having come to view. Despite this the EA said later that the viewers definitely seemed interested My relative said nothing.

It mightn't be anything sinister and might be a no-show and the EA trying to put a positive slant on things. Or they could be trying to make it look like there's interest in order to keep their business.

SimpleSam06

nesf wrote:

It mightn't be anything sinister and might be a no-show and the EA trying to put a positive slant on things. Or they could be trying to make it look like there's interest in order to keep their business.

Lying to the customers is automatic grounds for firing, I'd say...

Glenbhoy

http://www.independent.ie/opinion/analysis/the-smart-ballsy-guys-are-buying-up-property-right-now-1047118.html

By Brendan O'Connor
Sunday July 29 2007


SO THE sky is falling in again. The Irish stock market is apparently in meltdown, because of the housing market, which is also apparently in meltdown. The level of property horror stories is at an all-time high and everyone is tripping over each other to predict even greater gloom than the next guy.


Tell you what, I think I know what I'd be doing if I had money, and if I wasn't already massively over-exposed to the property market by virtue of owning a reasonable home. I'd be buying property. In fact, I might do it anyway. You don't even need money to buy property these days. Imagine if you walked into the bank and said, "Listen, guys. I want to gamble a million on the stock market. I have 100 grand myself, will you guys lend me 900 grand at really low rates and I'll pay you back over 40 years? In fact I won't even pay off the principal, I'll just pay off the interest." They'd laugh you out of it. But substitute gambling on the property market for gambling on the stock market and they'll fall over themselves to give it to you.

So why would I be buying property right now if I could? Well, for starters, property is good value these days. It's certainly cheaper than it was six months ago. While the official figures on aggregate surveys are talking about drops of two to three per cent in property prices, anyone who is out there in the jungle will tell you that it is a buyer's market bigtime.

If you're smart and you have balls and you're dealing with the right buyer you can knock 10 per cent or more off the price of a house these days. And that could well be a house that has already been reduced in price by 10 per cent or more in the last six months. Because while the big picture suggests a 3 per cent drop, the big picture is made up of lots of little pictures and you don't knock 3 per cent off the price of your house if you can't sell it. Individual house prices fall in substantial chunks.

John D Rockefeller famously said that the way to make money is to buy when blood is running in the streets. Buying into a boom is kind of a mug's game, and, as we know, anyone can do it. The really smart and ballsy guys are the guys who are buying when no one else is. The guys who made real money on property in Ireland were the ones who bought property before everyone else, when it was unfashionable. They were in a minority. Most people who bought property bought it recently, in a seller's market, for top dollar. Which makes no sense when you think about it. When you think about it, it makes sense to buy property now. Though of course some people say it always makes sense to buy property. There is no such thing as a good or a bad time to buy. It's always a good time to buy.

Anyway, there is blood on the streets, or at least an impression of blood on the streets, and it's time to buy. You can be guaranteed that's what the smart guys are doing. Every smart, rich bloke (the two can, in fact, occur in the same guy) I've spoken to for the last few years has been, to some extent, hoarding cash, waiting for this. And now they're around picking up bargains. Some of them might be waiting a little while more, in the hope that we haven't reached the bottom yet. But lots of them know that the trick is to buy and sell stuff a little bit too soon. Lots of guys have gone broke waiting for the actual top or bottom of the market.

Not only is property better value now than when everyone was barrelling into it a year ago, it also provides better returns. Rents are booming right now. It doesn't take a genius to figure it: right now you can buy property for less and it will yield you more. That's a better deal than six months ago.

Money is also still cheap. OK, interest rates aren't 2 per cent any more, but 5 per cent is still cheap money in anyone's books and everyone seems to agree it's not going to get much dearer.

This is not to say everything is rosy in the garden, but then you know that. The vultures of doom who have been circling for years waiting to be right eventually are having a field day.

It was another week of gloom and doom in the headlines.

After years of willing it, journalists who didn't buy property when they should have think they've finally got what they wanted. And they are wallowing in the mire. They also know that bad news is good news and a headline that's going to scare the crap out of people is more fun than one that just says things are still OK.

But reading between the headlines, a more balanced picture emerges.

For example, Jim Power of Friends First was credited with giving a gloomy outlook for the economy and housing last week. In fact, Power was relatively upbeat about property. Is a 2 per cent drop in the market overall really going to kill us? Is that not a soft landing? And did Power not predict that prices would start to rise again next year due to less supply, more mortgage-interest relief and stabilising interest rates? If that's what we regard as gloom these days, then clearly we're spoilt.

The Central Bank's version of gloom last week was to say that growth will fall this year - to 5 per cent. As falling growth goes, 5 per cent ain't bad.

Unemployment is going to grow too - from 4.5 per cent to 4.75 per cent. It's hardly the bad old days, is it? Four or 5 per cent unemployment constitutes practically full employment when you take into account frictional, structural and voluntary unemployment - the unemployment that always exists even if there are jobs for everyone.

And, yes, the Iseq is down 6 per cent this year, but balance that off against the 30 per cent it gained last year. The 6 per cent fall doesn't even fully cancel out its gains of last December.

So, you know, maybe the sky is falling in, but maybe you should think twice before you follow the Chicken Lickens of the media into Foxy Loxy's dark cave.

Well, there you go people - top econcomic and financial whizz journalist reckons it's time to get back into the market!!

miju

funny how he didnt name any names

Do-more

That's the greatest load of horse manure I've ever read.

In one sentance he's saying there's blood in the streets and then a few later he's saying it's a softlanding!

Then:

Every smart, rich bloke (the two can, in fact, occur in the same guy) I've spoken to for the last few years has been, to some extent, hoarding cash, waiting for this. And now they're around picking up bargains. Some of them might be waiting a little while more, in the hope that we haven't reached the bottom yet. But lots of them know that the trick is to buy and sell stuff a little bit too soon. Lots of guys have gone broke waiting for the actual top or bottom of the market.

More horse manure, the safe way to do it is to buy after the bottom has been reached and prices have begun to rise again, as the poster from Japan pointed out a day or two ago, there can be many "false bottoms" to catch out the unwary.

SimpleSam06

Glenbhoy wrote:

Well, there you go people - top econcomic and financial whizz journalist reckons it's time to get back into the market!!

Looks like someone is trying to flog off their investment property before it gets too hot! The article is riddled with mistakes, but I'll just pick out the low hanging fruit...

Well, for starters, property is good value these days. It's certainly cheaper than it was six months ago.

And what makes him think it won't be cheaper in six months again? And hold on, I thought it was engraved across the heavens by christ almighty with a splinter of the one true cross that property could never go down?

If you're smart and you have balls and you're dealing with the right buyer you can knock 10 per cent or more off the price of a house these days.

And if you buy this, he'll sell you some nice beachfront property in Roscommon too.

When you think about it, it makes sense to buy property now. Though of course some people say it always makes sense to buy property. There is no such thing as a good or a bad time to buy. It's always a good time to buy.

Great, so invest all your money in a post-boom dot com. I mean, its always a good time to buy, right? :rolleyes:

Every smart, rich bloke (the two can, in fact, occur in the same guy) I've spoken to for the last few years has been, to some extent, hoarding cash, waiting for this. And now they're around picking up bargains.

I hate it when reporters refer to themselves in the third person. As a matter of fact, the smart money bailed about a year and a half ago, and we won't be seeing that for another decade.

I draw cold comfort from the fact that his errors and bald lies are glaringly obvious enough that just about anyone could spot them.

Glenbhoy

SimpleSam06 wrote:

I draw cold comfort from the fact that his errors and bald lies are glaringly obvious enough that just about anyone could spot them.

I wouldn't be so sure - the rest of the paper is so riddled with mistakes and nonsense that the readers probably can't tell the wood from the trees anymore.
One query - what does O'Connor actually do - journo?? If so, what sort, and why does he commentate on the economy and politics, and why does the Sindo editor think that anyone cares what O'Connor thinks? (He'll be talking up Bulgaria next;) )

SkepticOne

I think O'Connor is just looking to fill column inches. He must know that suggesting that the only people buying property right now are 'ballsy' will put people off buying further. Like in the old comedy series Yes Minister, Sir Humphry was able to put off the minister from doing something by suggesting the action was brave. People don't .want to feel brave when buying property. They want a one-way bet.

Some people here will remember that about six months ago, O'Connor was urging people with property to hold tight and not sell in the hope that this would maintain property prices. Obviously people can see that no good investment requires people to engage in this type of behavior.

The message O'Connor has been putting out all along is that property is a bad investment and people have acted accordingly.

bugler

For a long time now I have been unable to read the Sindo on moral grounds. BOC's over-contribution to the paper was also a huge factor.

How did a failed comedian come to write half of a Sunday 'broadsheet' (I use the word loosely)?

He is the epitome of the obnoxious university loudmouth, the sort of person that kept people away with embarassment from the Law or Literary Societies when I was at college.

chump

bugler wrote:

For a long time now I have been unable to read the Sindo on moral grounds. BOC's over-contribution to the paper was also a huge factor.

How did a failed comedian come to write half of a Sunday 'broadsheet' (I use the word loosely)?

He is the epitome of the obnoxious university loudmouth, the sort of person that kept people away with embarassment from the Law or Literary Societies when I was at college.

He's awful. I also have been avoiding the paper for the last 6 odd months, it's truly shambolic - as that article demonstrates.

Duckjob

Jaysus, thats piss-poor. Even if you ignore the glaring inaccuracies, inconsistencies and obvious VI spin, it still reads like something written by a six year old.

Does he really get paid for writing this shíte?

Victor

Do-more wrote:

More horse manure, the safe way to do it is to buy after the bottom has been reached and prices have begun to rise again, as the poster from Japan pointed out a day or two ago, there can be many "false bottoms" to catch out the unwary.

Yes, one has to be aware of false bottoms, but there is some sense in that particular point. Waiting beyond the final bottom means waiting until prices are rising. You are then in a bidding war.

Victor

Do-more wrote:

More horse manure, the safe way to do it is to buy after the bottom has been reached and prices have begun to rise again, as the poster from Japan pointed out a day or two ago, there can be many "false bottoms" to catch out the unwary.

While one has to be aware of false bottoms, there is some sense in that point. Waiting until after the final bottom means buyinh into a bidding war.

The_Conductor

Perhaps BOC was intending to be humorous in his article?
Then again, sarcasm is the lowest form of wit......
Re: his nice house that he mentions- he whipped up a lot of fervour in Rathgar about a year ago- as it was his conjecture that the provision of a recycling bring centre would negatively impact on local house values...... Seems a little odd- I'd love to have access to a bring centre. His complaint was not upheld. Bord Pleanala details: http://www.pleanala.ie/REP/RL2/RRL2320.DOC and http://www.pleanala.ie/REP/212/R212843.DOC

Ye archetypal NIMBY........