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"Fair value" calculation for properties?

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  • 07-03-2009 11:31pm
    #1
    JackieT
    Closed Accounts Posts: 44 ✭


    Hi,

    I'm just asking about this for a good friend actually - personally I'm not that interested in property. Just wondering if there's some sort of universal formula to apply when it comes to calculating the fair value of property (I have no experience in the area).

    Basically she's looking to buy in Croatia/Zagreb, rents for a 2-bedroom flat there are around €400, sales prices have dropped from €160,000 to €120,000 during the last 6 months.

    She's an engineer, hence on a decent salary, around €14,000 pa - average salary is €10,000 pa in Zagreb, lower outside the capital. I'm not factoring in salaries in the equation below, just mentioning it as a reference point.

    I'm looking at this from an investor point of view, and I'd be looking to buy when the rental yield would be substantially above the return on putting your money into a savings account, so assuming €400m pcm, 10 months average occupancy/ year and a 6% rental yield, that would mean (400 * 10 * 16.5) = 66,000. So around €66,000 would be fair value in my opinion.

    Are there any better approximations for "fair value" in regards to property?


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    #2
    Senna
    Registered Users Posts: 8,800 ✭✭✭Senna


    Christ, a 2 bed flat is 12-16 times average wage and we thought we have over priced property (we do). Your friend is looking at a flat (not even a house) that 8.5 times his/her wage, complete madness.

    The rent is 400 per month and the average wage is 10k, that would mean the average person would be paying well over half their wages on rent. I'd say the rent prices your quoting are over inflated also, so you 66k figure could be still too high.
    Without knowing the area (at all) its hard to give any opinions, but i would look at wages related to property price. The old 3.5 x wages = average house prices might be of more help in your equitations.


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    #3
    JackieT
    Closed Accounts Posts: 44 ✭JackieT


    She keeps telling me that house prices never fall in value, and that Croatia is a special case as all croatians want to own their own house.

    Got a question about the 3.5x average wage formula, is that based on a historic average of house prices, or are we talking affordability here?


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    #4
    Ste.phen
    Registered Users Posts: 2,808 ✭✭✭Ste.phen


    JackieT wrote: »
    She keeps telling me that house prices never fall in value, and that Croatia is a special case as all croatians want to own their own house.

    Got a question about the 3.5x average wage formula, is that based on a historic average of house prices, or are we talking affordability here?
    It's a bit of both i think.

    Also, don't all irish people want to own their own house? Good thing we never had a property bubble here!


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    #5
    ParkRunner
    Registered Users Posts: 3,026 ✭✭✭ParkRunner


    Just wondering why mortgages are in fact calculated on gross rather than net pay seeing as you will never actually see the gross figure??


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    #6
    mikemac
    Closed Accounts Posts: 19,986 ✭✭✭✭mikemac


    JackieT wrote: »
    She keeps telling me that house prices never fall in value, and that Croatia is a special case as all croatians want to own their own house.

    Croatia must be unique, I'm certain I've never heard that in Ireland! ;)
    They truely are a special case

    Best of luck OP and if it all goes wrong then maybe Croatia will get the "soft landing" that we were promised


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    #7
    The_Conductor
    Moderators, Society & Culture Moderators Posts: 32,285 Mod ✭✭✭✭The_Conductor


    There isn't a definitive calculation- but from an investment point of view, you should get a return of 7-8% after expenses (which typically might be ~20% of the gross income, to allow for vacant periods etc).

    Assume €350 rpm, 12 months average occupancy/ year and a 8% rental yield and 20% costs, that would mean (280 * 12 * 12.5) Using this calculation- a maximum allowable price that an investor might countenance would be ~40k

    A 6% yield is insufficient, costs associated with the property have to be factored into the equation (including tax), and rental yields in Croatia are currently falling (albeit not as quickly as in some other EU countries). A big problem in Croatia is that people hopped on the 'property ladder' in the same manner lots of Irish did. The Croatian element is that many of the home loans are denominated in Euro, rather than Kuna- and consumer and personal debt levels in Croatia are at startling levels.

    Do a bit of research- BIRN's publication 'Balkan Insight' is a good start.

    Anyone who thinks Croatia is somehow isolated from the current mayhem is seriously deluded..........


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