Negative Equity - can/will it happen?

gyppo

Just been reading another thread on here, and thought I'd see what the good people of AH thought of this.
Is the housing market going to crash? Think about it - we have a huge influx of migrant workers entering this country, a very large portion of which are employed in construction.
How sustainable is it for migrant construction workers to be coming to this country building houses which will ultimately be rented back out to them?

We have grossly overinflated house prices, with people mortgaged up to the eyeballs, and a number of interest hikes on the way. We also have a lot of wealthy people with their own property portfolios, who derive rental incomes from them.

So, whats going to happen if our migrant construction workforce decide there are more oppertunities elsewhere? London, for example is going to rocket constuction wise, due to the olympics coming up. Then, look at it another way - these migrant workers are here to earn money so they can buy their own properties in their native countries - or are they going to stay forever?

What do you think - am I being a pessimistic git, or is this a disaster waiting to happen?

brianthebard

London is has already experienced a similar construction explosion and is slowing down slightly now.

Steffano2002

You are not being pessimistic gyppo, you are being realistic and intelligent about this. Once there are enough houses built to meet the demand, house prices will drop. What will all the foreign builders do? Probably leave the country... Where will this leave Irish people? With massive mortgages to repay for houses worth barely half what they cost today... This will be followed by economic recession and rise in unemployment as more and more employers leave Ireland to settle in countries with better/cheaper tax laws.
It's a fact that all economic booms are followed by recession. For Ireland it's simply a question of time. Hopefully it will be another few years before it happens.

faceman

Im making general comments here but heres my tupence. Things have slowed down dramatically recently (after the first batch of SSIA's caused property demand to increase at an even more abnormal rate than we were used to for approx 6 months) but unfortunately micheal mcdowell and the irish independent and at one stage askaboutmoney.com are all having a negative impact on that market causing a series of unnatural peaks and troughs in the demand for housing.

As a long term investment, property is a good bet. However for the past 15 years, due to the boom property has also managed to make some big short term profits for people. (including me! ) This has given people a false expectation of how a property market operates.

Property will always be in high demand in ireland, dont mind what the doomsayers tell you. If someone thinks that the prices of a 3 bed semi in ranelagh is going to plummet to €100k, then they've their head in the clouds.

As for the notion of a property bubble - prices would want to plummet dramatically by at least 30% to prove there is a bubble.

Interest rates are on the way up which is crap for anyone with a loan, but they will come down again at some stage, its all swings and roundabouts.

People have always been "mortgaged up their eyeballs" when it comes to owning a home. Ask your parents, ask your grandparents. I disagree with this though. Despite what the media will tell you, not everyone is in this scenario. I had a very comfortable lifestyle when i bought my first property. Many of the people i know are the same.

THe one bit of advice i would say is be clever when you buy. Now is a good time for example as demand is unnaturally lower as some FTB's are waiting to see if the stamp duty mumbo jumbo will be reformed. And when its not reformed, FTB's will start to purchase again.

When FTB's stop buying, rental demand goes up. Investors buy property.

ok so my comments are very general but im not gettin dragged into another property debate as it goes nowhere.

I made a fortune from playing the property game in the last 5 years (and im was on a normal salary when i started) so i couldnt give a toss what the begrudgers say.

NutJob

Steffano2002 wrote:

You are not being pessimistic gyppo, you are being realistic and intelligent about this. Once there are enough houses built to meet the demand, house prices will drop. What will all the foreign builders do? Probably leave the country... Where will this leave Irish people? With massive mortgages to repay for houses worth barely half what they cost today... This will be followed by economic recession and rise in unemployment as more and more employers leave Ireland to settle in countries with better/cheaper tax laws.
It's a fact that all economic booms are followed by recession. For Ireland it's simply a question of time. Hopefully it will be another few years before it happens.

-Demand has met supply

-Interest rates will rise again (hurting already overstretched people)

-Im aware of many property's coming on the market valued over twice what they were two years ago

-I know tradesmen who have stated only this week to me that its slowed a hell of allot one considering a quick change of job or jumping the country(and he was doing well for himself).

-Theres the dreaded loss of confidence in th market



But if anyone wants to state its peachy best of luck.

faceman

Steffano2002 wrote:

You are not being pessimistic gyppo, you are being realistic and intelligent about this. Once there are enough houses built to meet the demand, house prices will drop. What will all the foreign builders do? Probably leave the country... Where will this leave Irish people? With massive mortgages to repay for houses worth barely half what they cost today... This will be followed by economic recession and rise in unemployment as more and more employers leave Ireland to settle in countries with better/cheaper tax laws.
It's a fact that all economic booms are followed by recession. For Ireland it's simply a question of time. Hopefully it will be another few years before it happens.

here we go.

so if house prices fall, does that mean homeowners have to sell? Nope. When people panic and try sell, who loses out if prices fall? the ones who sell. Its not shares in eircom we're talkin about!

Steffano2002 wrote:

It's a fact thot all economic booms are followed by recession. For Ireland it's simply a question of time. Hopefully it will be another few years before it happens.

Have you a source for that claim? If thats the case then 'its a fact' that all economic recessions are followed by a boom. Swings and roundabouts my friend.

People have been predicted property crashes in ireland since before i made my money

stepbar

Bully for you. I suppose you're not the worst of them. I know of one guy in South Dublin who owns 14 properties (Yes 14) in and around the Luas line. There is something sick about that. Thing is all of them are well paid for by now and should anything happen in the property market, he will be sorted. He couldnt give a damm if the value of his properties go up or down. FTB's are going to feel the pinch big time. I'm afraid its time the Government got the finger out. More affordable / Not for Profit housing is needed for those who want to buy a house but cant because of exorbitant prices.

Steffano2002

I stand by everything I said and we'll just have to wait 5 to 10 years to see if I was right.

Fair play to you for making money in the property market faceman. If I had been the age I am now when I moved to Ireland back in 1998 you bet your a$$ I would have too! Told my father (in France) he could make millions by investing in the property market over here but he told me to "shut my young trap cos I knew nothing"... Five years later he realised he could have been a multi-millionaire... Oh well, tough titties!

what_car

gyppo wrote:

Just been reading another thread on here, and thought I'd see what the good people of AH thought of this.
Is the housing market going to crash? Think about it - we have a huge influx of migrant workers entering this country, a very large portion of which are employed in construction.
How sustainable is it for migrant construction workers to be coming to this country building houses which will ultimately be rented back out to them?

We have grossly overinflated house prices, with people mortgaged up to the eyeballs, and a number of interest hikes on the way. We also have a lot of wealthy people with their own property portfolios, who derive rental incomes from them.

So, whats going to happen if our migrant construction workforce decide there are more oppertunities elsewhere? London, for example is going to rocket constuction wise, due to the olympics coming up. Then, look at it another way - these migrant workers are here to earn money so they can buy their own properties in their native countries - or are they going to stay forever?

What do you think - am I being a pessimistic git, or is this a disaster waiting to happen?

i have been keeping an eye on house prices lately......im in a commuter town.
5 weeks ago a house went on market at 440,000... still for sale.

last week price was reduced to 400,000............ still for sale..........
the housing market has slowed considerably......its all about affordability
and current interest rate hikes dont help... also read recently in the news that the number of mortgages being approved has also dropped ....

its becoming more increasingly expensive to live in Ireland, and also to do business here.......... as you can see with all the recent jobs being lost, and factories relocating abroad.......

just my observations!

johnnyskeleton

The way I see things house prices do not conform exactly to normal economic price theory (i.e. that the market price is the price where supply meets demand).

If it is accepted that
1) people need accomodation,
2) Irish people will only rent if they can't buy, and
3) There are no monetary factors other than what they can afford based on their monthly income.

The following figures are simplified figures for the purposes of illustration, I understand that they are not correct:

So if someone earns €3k net per month, and needs to spend €1k on non-accomodation expenses (food, holidays etc), they have €2k to spend per month on accomodation. To such a person, it is more or less the same thing to take out a 3% €300k mortgage with repayments of €2k per month as it is to take out a 7% €200k mortgage with the same repayment. At the end of the term they will have paid similar amounts and end up with a house. So in this example, the price to buy a house outright is largely irrelevant, what is important is the monthly repayment. So I think that if interest rates rose from 3-7%, then notwitstanding other factors, the price of the same house will drop.

Other facts obviously come into play, but I would suggest that this is the main one, and no matter how strong demand is for houses, people will calculate what they can afford on a monthly, rather than long term basis.

One further reason why prices might slow down is that in the example above, if there are no houses available at the prices they are willing to pay (e.g. I am prepared to get a mortgage of €300k at 3%, but the cheapest 1 bed flat is €350k) I might go over budget on the expectation that the capital appreciation on the house will cover my monthly losses. If there is uncertainty in the market, I will not want to risk going €50k overbudget, and this, in my humble opinion, will have a very substantial effect on house prices.

So my theory is that you should never enter into a mortgage unless you are happy that the monthly price you are paying is a reasonable price to pay for accomodation. If ordinary people go overbudget on the expectation of a guaranteed return, house prices will be artificially inflated.

I think this is what has happened in Ireland, and I expect (or at least hope) that in 5 years time mortgage repayments will come back into line with what people are reasonably prepared to pay for accomodation.

So a single person just starting a job should be able to get a basic 1 bed flat in town for maybe €600-€900 p.m., a married couple will be able to get a normal 3 bed house in the commuter belt for €1500-2000 p.m. and so on...

I don't think young couples should be struggling to buy a run down 1 bed apartment in a rough area.

gyppo

faceman wrote:

so if house prices fall, does that mean homeowners have to sell? Nope. When people panic and try sell, who loses out if prices fall? the ones who sell. Its not shares in eircom we're talkin about!

Its those people that have multiple properties that they can no longer rent out that are going to sell - what else would they do with them - this is what will cause prices to fall.

seamus

faceman wrote:

so if house prices fall, does that mean homeowners have to sell? Nope. When people panic and try sell, who loses out if prices fall? the ones who sell. Its not shares in eircom we're talkin about!

The issue here is that we have a massive amount of people who were just in it for th few bucks. They're holding down four or five properties, with mortgages on at least half of their combined value, and when they bought they expected all of the properties to double in value within five years.

You can't beat human nature. You can't say "People won't sell". People will panic, and people will sell. The volatility of stock markets tells us that this is true.

By and large, the serious investors, people with portfolios of tens or even hundreds of properties, will hold out. As will the people who just bought their house for use as a home. It's the other guys, who have satisfied a massive amount of false demand over the last 5/6 years, and who were never in it for the long haul, that are dropping out now. While supply has largely accelerated towards demand in previous years, a number of economic factors has caused a sharp pause in demand. Supply of new homes and demand now match eachother, but as soon as the second-hand market started to see the above properties come back on, prices stalled, and began falling back.

All that said, demand is still strong. People still want property, and there are still plenty of buyers out there and pending for the homes that are available. We'll definitely have a return to normal growth, and overall prices will rise. But certain areas will see massive correction. Anywhere inside of the M50 will generally hold its value, as infrastructure is relatively good, and development continues in that area. Places outside of the M50, but with decent infrastructure, such as Tallaght or Sandyford will also hold stable, with perhaps a slight downward correction for smaller properties - two-beds and bungalows are massively overvalued in these areas.

Everywhere else, which is outside of the M50, and with poor infrastructure, will start to see large downward corrections - Newcastle, Tyrrelstown, Celbridge, etc.

daveirl

This post has been deleted.

cold_filter

just bought a house in tallaght there a week ago moving in in a couple of months, house is big nearly 1200 sq foot very big garden, for a decent price over 30 years as it stand at the moment myself and the gf will be paying 12 a month tbh thats very very cheap for us. We could have bought a house somewhere else for 450k witht the same dimensions, but when property devalues we wont be hit as hard i dont think as there are so many apartments around, people who have/want families will want a house.

Smoggy

If a crash happens, appartments will be hit the hardest, as its by no means ideal living.

Dublinletting

seamus wrote:

The issue here is that we have a massive amount of people who were just in it for th few bucks. They're holding down four or five properties, with mortgages on at least half of their combined value, and when they bought they expected all of the properties to double in value within five years.

You can't beat human nature. You can't say "People won't sell". People will panic, and people will sell. The volatility of stock markets tells us that this is true.

By and large, the serious investors, people with portfolios of tens or even hundreds of properties, will hold out. As will the people who just bought their house for use as a home. It's the other guys, who have satisfied a massive amount of false demand over the last 5/6 years, and who were never in it for the long haul, that are dropping out now. While supply has largely accelerated towards demand in previous years, a number of economic factors has caused a sharp pause in demand. Supply of new homes and demand now match eachother, but as soon as the second-hand market started to see the above properties come back on, prices stalled, and began falling back.

All that said, demand is still strong. People still want property, and there are still plenty of buyers out there and pending for the homes that are available. We'll definitely have a return to normal growth, and overall prices will rise. But certain areas will see massive correction. Anywhere inside of the M50 will generally hold its value, as infrastructure is relatively good, and development continues in that area. Places outside of the M50, but with decent infrastructure, such as Tallaght or Sandyford will also hold stable, with perhaps a slight downward correction for smaller properties - two-beds and bungalows are massively overvalued in these areas.

Everywhere else, which is outside of the M50, and with poor infrastructure, will start to see large downward corrections - Newcastle, Tyrrelstown, Celbridge, etc.

I would agree with here Seamus I’m a letting agent and property manager for property all over Dublin. And investors who own just one or two properties are starting to panic sell as they think the market is reaching its peak with all the negative media reports adding fuel to the fire. In quite a few cases landlords are breaking their lease with tenants and selling before a 12 month lease is up.
Saying that there is still a huge demand within the city center area for any property to rent so I can’t see prices falling at all within this area. With the lack of availability in this area a poor 1 bed that would only have achieved 950 per month last year is now fetching 1100 per month within a couple of days of showings. So rental income is going up along with interest rates and landlords are not suffering as a result of the increased rates.
So investors who were out there to make a quick buck over the last few years are getting out now with cash in the bank while longer term investors are covering there mortgage and will have a large nest egg 30 years down the line.
That’s my opinion anyhow.

hmmm

Dublinletting wrote:

So investors who were out there to make a quick buck over the last few years are getting out now with cash in the bank while longer term investors are covering there mortgage and will have a large nest egg 30 years down the line.
That’s my opinion anyhow.

You've just said it yourself that there is a temporary rental squeeze as people try and sell houses. If we look at someplace like daftwatch we can see that the for sale inventory is going through the roof. These panicking investors will not be able to carry their houses empty and for sale indefinately, they will either have to drop the price to sell or they will put them back out for rent. To extrapolate and say that temporary high rents will continue to pay an investor back over 30 years is a bit of a stretch - we've been here in 2001, and rents have fallen every year since.

jobless

johnnyskeleton wrote:

So if someone earns €3k net per month,

A fair example you picked here....seeing as the average wage is between 30 - 35k a year......

johnnyskeleton wrote:

So a single person just starting a job should be able to get a basic 1 bed flat in town for maybe €600-€900 p.m., a married couple will be able to get a normal 3 bed house in the commuter belt for €1500-2000 p.m. and so on...

I don't think young couples should be struggling to buy a run down 1 bed apartment in a rough area.

I dont know what world you live in if you think paying 1500-2000 a month is a reasonable price per month for a commuter house..... you must be seriously well off if you think this reasonable......but sure according to you most of us are earning 3k net!

Dublinletting

hmmm wrote:

You've just said it yourself that there is a temporary rental squeeze as people try and sell houses. If we look at someplace like daftwatch we can see that the for sale inventory is going through the roof. These panicking investors will not be able to carry their houses empty and for sale indefinately, they will either have to drop the price to sell or they will put them back out for rent. To extrapolate and say that temporary high rents will continue to pay an investor back over 30 years is a bit of a stretch - we've been here in 2001, and rents have fallen every year since.

Hmmmm................ rents have increased over the last 3 years alone a couple of example's ill give;

2004 NOW
North city centre 1 bed 850 1100
South city centre 1 bed 900 1200
Swords 2 bed 825 1200
Clondalkin 850 1175

now they are all going up and I think It will stay this way in the city centre and keep steady outside of.

jobless

gyppo wrote:

Just been reading another thread on here, and thought I'd see what the good people of AH thought of this.
Is the housing market going to crash? Think about it - we have a huge influx of migrant workers entering this country, a very large portion of which are employed in construction.
How sustainable is it for migrant construction workers to be coming to this country building houses which will ultimately be rented back out to them?

We have grossly overinflated house prices, with people mortgaged up to the eyeballs, and a number of interest hikes on the way. We also have a lot of wealthy people with their own property portfolios, who derive rental incomes from them.

So, whats going to happen if our migrant construction workforce decide there are more oppertunities elsewhere? London, for example is going to rocket constuction wise, due to the olympics coming up. Then, look at it another way - these migrant workers are here to earn money so they can buy their own properties in their native countries - or are they going to stay forever?

What do you think - am I being a pessimistic git, or is this a disaster waiting to happen?

According to the latest daft report prices fell in Santry and maynooth between 7-9 % from June til Jan.....so anyone who bought there last summer or a few months before you could say is in negative equity

squire1

gyppo wrote:

Think about it - we have a huge influx of migrant workers entering this country, a very large portion of which are employed in construction.

Construction is not just about building houses. I work for a major construction firm (infrastructure projects mainly) and we have so much work on the books over the next few years that there is a worry that we will not be able to get enough labour!

The thing is that most of the infrastructue projects being carried out at the moment should have been done 15 or 20 years ago. With the new emphasis on Public Private Partnerships, project like tolled roads or port tunnells, there is a new lease of life in this sector of construction.

So if house prices are going to fall because of construction workers leaving the country then it is not going to happen in the forseeable future, in my humble opinion.

I'm not saying it is a good thing for the economy as a whole to have so high a percentage of labour in the Construction Industry but the signs are that it is going to continue, at least in the short to medium term.

conor_mc

squire1 wrote:

Construction is not just about building houses. I work for a major construction firm (infrastructure projects mainly) and we have so much work on the books over the next few years that there is a worry that we will not be able to get enough labour!

Will you be looking for tilers, roofers, plumbers and electricians though? How many brickies do you need to build a road?

I can't see how infrastructure construction will take up all the slack that a significant drop in residential construction would entail. Don't forget that alot of the planned infrastructure will be funded by stamp duty - a significant drop in this will see some of these projects prioritised over others.

Zambia

jobless wrote:

According to the latest daft report prices fell in Santry and maynooth between 7-9 % from June til Jan.....so anyone who bought there last summer or a few months before you could say is in negative equity

Negative Equity = Where the outstanding loan is higher than the market value of the mortgaged property.

So negative equity is a possiblity if and only if you have borrowed for the complete price of the house and it drops.

If you borrowed the full price + Stamp and the house price does not rise then

actually then your F***ed

faceman

Smoggy wrote:

If a crash happens, appartments will be hit the hardest, as its by no means ideal living.

thats just not true. Location, access to public transport, local amenities, an individuals housing need will determine what will be hit hardest.

squire1

conor_mc wrote:

Will you be looking for tilers, roofers, plumbers and electricians though? How many brickies do you need to build a road?

Yep, and plasterers, steel fixers, carpenters, pipelayers, machine operators general operatives, foremen, safety officers, engineers, quantity surveyors, contracts managers and project managers. How many houses have been built without having proper infrastructure in place, which now needs to be done.

Infrastructure includes schools, swimming pools, prisons, government buildings, water/sewage treatment plants, OPW works, etc. It is not restricted to civil engineering.

jobless

Zambia232 wrote:

Negative Equity = Where the outstanding loan is higher than the market value of the mortgaged property.

So negative equity is a possiblity if and only if you have borrowed for the complete price of the house and it drops.

If you borrowed the full price + Stamp and the house price does not rise then

actually then your F***ed

fair enough.... but a huge amount of loans given out last year were 100 percent mortgages....

even if you'd put up the deposit yourself....you'd still be pissed off that you paid x amount and now its worth less than that

b3t4

I really don't think demand is as high as it used to be. I'm no expert in this area but I can only go on what I see from my bus and in my area every day. From what I can see a lot of people are panicing.

A duplex, 2 bed appartment and a house by me in Terenure are up for sale for weeks now. I haven't even seen people around to view them.

Then there is a place down the round which has 9units up for sale for the last two months now, possibly even more.

Another 1 bed down the road from that is up for sale for weeks.

Every week a new property seems to go up for sale on South Circular road.

The house market in Dublin is just too expensive. How any can afford or is willing to pay out the mortgage repayments every month is beyond me.

I see grey clouds ahead for this property market malarky.
A.

parliament

gyppo wrote:

We have grossly overinflated house prices.

Not necessarily, just because a house worth 80k 5 years ago is now worth 300k does not mean it over inflated have you ever thought that maybe prices were the opposite. Look at other major European cites, would you expect to pick up a house for much cheaper? Also thay have the same inflation rates as us so its not a unique situation here

conor_mc

parliament wrote:

Not necessarily, just because a house worth 80k 5 years ago is now worth 300k does not mean it over inflated

I doubt anybody who has managed to formulate the opinion (against the backdrop of pro-property media etc) that house prices are overinflated has done so based on such a simplistic measure.

- Average house price to average industrial wage is 10:1, as opposed to 3:1 or 4:1 historically.

- Rental yields of 1-3% max, when historical average is 6-7% minimum.

- Rents not rising during several years of massive house price growth indicates no shortage of housing in the country, therefore no fundamental justification for recent price rises.

EDIT: one last thing - we are not a major European city.

parliament

parliament wrote:

Look at other major European cites, would you expect to pick up a house for much cheaper?

Oh my God - look at other European Cities before you make statements like that!!

http://www.daft.ie/7203081

http://www.daft.ie/7286897

http://www.daft.ie/7270514

We have absolutely NOTHING to justify our prices! How on earth did we get to a situation where some of our property costs more per square foot than somewhere like Manhattan.
Places like that they have MILLIONS of people living in the one area.
This is Ireland lets not forget that! Wonderful country and all but its a false economy we need to realise that

Western_sean

Location, access to public transport, local amenities, an individuals housing need will determine what will be hit hardest

Are these criteria are completely appropriate in a country with such a low population density?