Collapse in house prices will be good for economy

ionix5891

I was in quite a disagreement with David Mac the last time about ditching the euro

But hes latest rambling on the economy and house prices I think are spot on

... let's pick a typical ghost estate area such as Oranmore in Galway. If you go on Daft.ie you will find all the answers. If you want to buy a three-bed semi in Oranmore, it will set you back €335,000. However, you can rent the same place for €800 a month. What's more, there are 75 vacant three-bed semis in Oranmore advertised on Daft.ie alone.

Using the American valuation method, it implies that the house generates rent for the owner of €9,600. The house is worth 14 times that which gives us a value of €134,400. Yet the seller expects to get €335,000 for it!

jmayo

ionix5891 wrote: »

I was in quite a disagreement with David Mac the last time about ditching the euro

But hes latest rambling on the economy and house prices I think are spot on

House prices have to become realistic, reach the bottom, in order for people to start buying again.
Why would anyone buy now when they know in all likelyhood the property will have lost another 10%, at the very least, by this time next year.
And if anyone doubts that just look at unemployment figures, lending, salaries, consumer spending, immigration and housing supply fgiures.

Long term it is good for an economy that house prices are realistic and achiveable for normal workers without them having to sign up to crazy mortgages, dependent on cheap interest rates, for the rest of their working lives.

irish_bob

even after you factor in job losses , reduced wages and the inevtiability of interest rates going back up again , property prices will come back because the love affair with property is over for at least another twenty years , young kids growing up having to witness thier parents struggle with negative equity will run a mile from the notion of having to own your own home before your 30 , thier will be a seachange in mindset regarding property when this is all over or maybe im completley wrong and as david mc williams said when quoting dunne stores , WERE DIFFERENT CAUSE WERE IRISH

nesf

What he fails to mention or discuss in the article is the heterogeneity of the property market. A three bedroom semi in Oranmore is a very different beast compared to a city centre house/apartment in Dublin. The collapse in house prices will be good long term for the economy but saying prices will drop 10-20% next year isn't really useful. In some areas that number will be a lot bigger etc et al.

Belfast

ionix5891 wrote: »

I was in quite a disagreement with David Mac the last time about ditching the euro

But hes latest rambling on the economy and house prices I think are spot on

Good to see Mr MacWilliams talk sense again.

eamonnm79

Belfast wrote: »

Good to see Mr MacWilliams talk sense again.

I think what McWilliams is really good at is coming up with clever solutions to tricky Economic problems. However his big weakness is that he makes these solutions in a vacuum. He rarely takes other external consiquences into account.

However I agree with him 100% on the need to reduce property prices. Unfortunitely through our hugely increasing national debt and and losses to the taxpayer through nama we will all be paying for property losses indirectly for quite a long time regardless of wheather we own or rent.

Renting seems a good option for the next few years as I think prices will only come down kicking and screaming, Its a pity we have not got the good sence to reduce them more quickly. Greed, unlike what Gordon Gekko says is not always good.

djpbarry

eamonnm79 wrote: »

I think what McWilliams is really good at is coming up with clever solutions to tricky Economic problems.

Such as?

kmick

House price drops will be good for people - in that houses will become affordable. I am not an economist but when the dust settles the economists agreethere will be rampant inflation. This will be bad for the low paid and fixed income people. Large swings downwards are as bad a large swings upwards. Moderation is good in all things.

Dob74

Unemployment is heading for over 500k.
Some of those ghost estates are worth zero.(if not less the price of knocking them down and getting rid of the rubble)

I thought the rule of tumb was 7 years rent for the price of a house not 14?

harsea8

kmick wrote: »

House price drops will be good for people - in that houses will become affordable. I am not an economist but when the dust settles the economists agreethere will be rampant inflation. This will be bad for the low paid and fixed income people. Large swings downwards are as bad a large swings upwards. Moderation is good in all things.

House price drops certainly won't be good for all people, like those who have a mortgage that exceeds the value of the property (of which I'm certain there are quite a few). What people need to realise is that, what makes economic sense on a country-wide scale (ie, reduced house prices) may not make sense on a personal basis. If I had a €300,000 mortgage on a house that, realistically, was worth €250,000, and I had to sell (maybe cos I lost my job or a job came up elsewhere in the country) I'd probably chance my arm and put it on the market for €310,000. It's possible that this scenario is why we are not seeing the huge drops YET!!

Oasis44

Annual Rent x 14 + Cost of Build would make more sense to me

djpbarry

Oasis44 wrote: »

Annual Rent x 14 + Cost of Build would make more sense to me

Annual_Rent * 14 + Cost_of_Build + Sentiment.valueOf() + (Irish_Property_Psychosis).valueOf()

Dob74

Oasis44 wrote: »

Annual Rent x 14 + Cost of Build would make more sense to me

That would have been ok in the last 10 years.
But remember we have been in a time of historically low interest rates and massive economic expansion.
Once interest rates head into the 6 to 10% range it becomes less attractive.
Plus the cost of maintence for older buildings. Apartments are difficult and costly to maintain.

Triangle

ionix5891 wrote: »

Using the American valuation method, it implies that the house generates rent for the owner of €9,600. The house is worth 14 times that which gives us a value of €134,400. Yet the seller expects to get €335,000 for it!

But doesn't this give investors a higher return i.e.you buy for less and get your cash back faster? And if this is so wouldn't everyone try to get a property to rent (good returns) and then wouldn't this again push up prices as everyone trys to invest in property again?

Would we not be better off with high property prices - make the move from owning property to renting it like the rest of europe?

ixoy

Triangle wrote: »

Would we not be better off with high property prices - make the move from owning property to renting it like the rest of europe?

Not without major changes to rental legislation. We could hardly move to that model when the owner can still chuck you out because their kid needs a place for college or where you're not allowed renovate the appartment to the way you would like it to look.

House price drops might ultimately be good for me. I'd imagine the satellite towns will be hardest hit but I'd be interested in seeing what an area like Portmarnock (where I live) will be like. It's seen as a nice location but it's not that near town and yes, it's served by the DART but it's on a branched line (and doesn't get as many trains as Malahide). How will these factors play out - a desirable postcode versus facilities and infrastructure? Sure the two are sometimes linked but not always.

TaxiManMartin

Dob74 wrote: »

That would have been ok in the last 10 years.
But remember we have been in a time of historically low interest rates and massive economic expansion.
Once interest rates head into the 6 to 10% range it becomes less attractive.
Plus the cost of maintence for older buildings. Apartments are difficult and costly to maintain.

Whats the average interest rate been over say the last 10 or 15 years?

I know they were very high in the 80's but we know why that was.

grahamo

ionix5891 wrote: »

I was in quite a disagreement with David Mac the last time about ditching the euro

But hes latest rambling on the economy and house prices I think are spot on

I don't see how it is good for the economy
I would imagine the house owner in the example given paid more than the house was actually worth to the previous owner/builder/ developer. He would have had to take out a huge mortgage and will now have to spend the rest of his working life paying for it.:(
I think we can put negative equity aside as most people have 1 property, its their home and they have no intention of selling, so current value doesn't matter.
The result is all that money that could be going into the Irish economy creating employment and wealth is now going to the bank every month while the builder or developer has probably invested all his profit in another country:mad:
As usual it will be the working man who pays for this banana republic's mistakes.

jmayo

grahamo wrote: »

I don't see how it is good for the economy
I would imagine the house owner in the example given paid more than the house was actually worth to the previous owner/builder/ developer. He would have had to take out a huge mortgage and will now have to spend the rest of his working life paying for it.:(
I think we can put negative equity aside as most people have 1 property, its their home and they have no intention of selling, so current value doesn't matter.
The result is all that money that could be going into the Irish economy creating employment and wealth is now going to the bank every month while the builder or developer has probably invested all his profit in another country:mad:
As usual it will be the working man who pays for this banana republic's mistakes.

The money that was used to buy these properties wasn't ours in the first place, it was borrowed and it ended upwith developers who have already gone off to build in Bulgaris, Sofia, London etc.

High house prices = high salary demands = high business costs = uncompettive business = lower exports = business relocating or closing = job losses = lower tax returns = higher public spending on welfare = poor economy

Ok.

Dob74

TaxiManMartin wrote: »

Whats the average interest rate been over say the last 10 or 15 years?

I know they were very high in the 80's but we know why that was.

I only have the american figures.
1990 9.74%
1991 9.07%
1992 7.83%
1993 6.93%
1994 7.31%
Annual national average terms on single-family mortgages

1982 14.73%

If it reaches the 82 figure where all screwed:eek:

grahamo

jmayo wrote: »

The money that was used to buy these properties wasn't ours in the first place, it was borrowed and it ended upwith developers who have already gone off to build in Bulgaris, Sofia, London etc.

High house prices = high salary demands = high business costs = uncompettive business = lower exports = business relocating or closing = job losses = lower tax returns = higher public spending on welfare = poor economy

Ok.

Yes I agree but the point I'm trying to make is that the fact that people will be spending the next 20 odd years paying out the best part of their income on a mortgage, that will mean that they will have less spending power which will mean it will be that much harder for the economy to recover.

gurramok

grahamo wrote: »

Yes I agree but the point I'm trying to make is that the fact that people will be spending the next 20 odd years paying out the best part of their income on a mortgage, that will mean that they will have less spending power which will mean it will be that much harder for the economy to recover.

Only a small minority are affected by that scenario, the vast vast majority of the population did not buy in 2006 .

Its their responsibility to get themselves out of that hole created by a reckless decision to buy at a high price.

jmayo

grahamo wrote: »

Yes I agree but the point I'm trying to make is that the fact that people will be spending the next 20 odd years paying out the best part of their income on a mortgage, that will mean that they will have less spending power which will mean it will be that much harder for the economy to recover.

As gurramok points out not everyone is in that situation.
Sadly some people were forced to buy or upgrade because of family reasons and they will be paying back way more than the value of the property.
It also will mean they are stuck where they are and they can't borrow for other purposes.
Note I have no sympathy for those that just wanted to get on the ladder or were into make quick buck on investment.

You can not keep property prices at an unsustainable level to either help those you mention above or to help developers & builders stay afloat and pay back the banks (as wanted by mrgaa1 poster over on Accomdation & Property forum).

It just cripples the economy as we have found out to our cost.

TaxiManMartin

Dob74 wrote: »

I only have the american figures.
1990 9.74%
1991 9.07%
1992 7.83%
1993 6.93%
1994 7.31%
Annual national average terms on single-family mortgages

1982 14.73%

If it reaches the 82 figure where all screwed:eek:

Now THAT is a selective post if ever i saw one

Im sure you know what they've been since then alright.

MG

Oasis44 wrote: »

Annual Rent x 14 + Cost of Build would make more sense to me

What is the rationale for this? I can see the logic of the 14x formula (being a 7% return - maybe less if you include costs) which has an intuitive feel of reasonableness, but I'm not sure why you would add the build cost to this.

MG

Fundamentally, I think McWilliams is right that it would be good for the economy. It's a bit like Oil prices - when it is high we all pay a little extra because everyone has extra costs to cover. Similarly, high property prices forced up rents and wages to cover this, so a softening of prices will return property costs to a more reasonable level and reduce rental costs and wage demands.

This should make up more competitive and have a cost structure based on a sounder basis.

Of course, there will be losers but there was a popular concept about two years ago - personal responsibility - which should not be forgotten.

Gurgle

MG wrote: »

Fundamentally, I think McWilliams is right that it would be good for the economy.

tbh, I can't see how it will make any difference to the economy. There's as many houses built as we need (and some to spare).

Are the builders going to start building again because prices go down?

Are the various unions going to go to their employers and offer to accept a pay cut for all their members because they're buying houses for less?

The problems with the economy are:
a) Global recession - due to bankers working off ultra-boom estimates as though the boom would go on forever.

b) There are way more people employed in the building industry than this country can support. Until a large proportion of these people accept this and retrain, they're going to be unemployed and unemployable. This is the fundamental problem with the apprentice system (without even considering labourers) - you end up as a one-trick pony. The best of unemployed plasterers and plumbers will struggle to find new employment above minimum wage.

For now they're in a holding pattern - draw the dole, do a few nixers and hope for the best for a few months, see how the industry is going.

Sorry lads, the industry is gone.

Firetrap

While I feel sorry for people who bought the last couple of years and are possibly struggling to pay their mortgages, what was going on couldn't last. We went so mad building things that now there's little left to build. We've got all the shopping centres we need, a lot of new roads, a glut of empty houses.

It was shocking the way house prices shot up and was allowed to happen. Remember all those shiny new estates where you'd have to get in on phase 1 or 2 because if you didn't, you'd be paying €30k extra for the next phase? All the gazumping that went on? The only people who gained from this were the banks at the time and the builders. For the poor souls who had to get the higher mortgages, it meant even more being taken out of their disposable income. Less disposable income = less money being spent elsewhere.

ionix5891

Gurgle wrote: »

tbh, I can't see how it will make any difference to the economy. There's as many houses built as we need (and some to spare).

Are the builders going to start building again because prices go down?

Are the various unions going to go to their employers and offer to accept a pay cut for all their members because they're buying houses for less?

The problems with the economy are:
a) Global recession - due to bankers working off ultra-boom estimates as though the boom would go on forever.

b) There are way more people employed in the building industry than this country can support. Until a large proportion of these people accept this and retrain, they're going to be unemployed and unemployable. This is the fundamental problem with the apprentice system (without even considering labourers) - you end up as a one-trick pony. The best of unemployed plasterers and plumbers will struggle to find new employment above minimum wage.

For now they're in a holding pattern - draw the dole, do a few nixers and hope for the best for a few months, see how the industry is going.

Sorry lads, the industry is gone.

firstly house prices are going down, just due to all the market manipulation is happening in slow motion

* if prices go down, builders would not ram up production, quite the opposite, why make a product (house) with low profit margin

* unions have nothing to do with house prices, but yes it will be hard to justify pay increases when one has more disposable income due to lower mortgages


housing as an asset is hugely overvalued, i dont see how anyone renting can make any return on it nowadays with prices for rent going thru floor and so much accommodation on market

prices will fall one way or another they still hugely overvalued...

Daithinski

MG wrote: »

What is the rationale for this? I can see the logic of the 14x formula (being a 7% return - maybe less if you include costs) which has an intuitive feel of reasonableness, but I'm not sure why you would add the build cost to this.

Because the annual rent times 14 would be approx 170k.

The materials and land/labour cost would be more than this.

Generally builders like to sell for a profit, for arguments sake say 20% (I know in Ireland it was traditionally more like 100%+)

Price is now 204.

Now add on government taxes vat etc you are looking at another 30% maybe?

You are now up around the 265k mark. This would be comparable to house prices from around 2002/2003.

Anything less than this would be below cost selling.

House prices could very well dip below their "real" value before coming back up when the economy starts to recover.


Any drop below this would be selling for less than what the house is actually worth.

But I think €265k would be a realistic price for the 3 bed semis that were selling in the 375-400k bracket.

The annual rent times 14 might work in the US but i don't think the figures add up here.

For example, in the US and other countries the labour costs are a lot less. 10 dollars an hour (in the US).

In Ireland the minimum wage for a labourer with 1-2 years experience is €15.:eek: Compared to our standard minimum wage of about €8.65

I know ultimately house prices will be determined by demand, and availability of credit so who knows how low they could go. I think is that that formula is a load of nonsense and entirely useless for calculating the value of anything.


(Maybe because the government was getting a percentage of the new house prices they purposefully jacked up the labour costs in the construction industry to increase their own tax take.)

TaxiManMartin

Firetrap wrote: »

While I feel sorry for people who bought the last couple of years and are possibly struggling to pay their mortgages, what was going on couldn't last. We went so mad building things that now there's little left to build. We've got all the shopping centres we need, a lot of new roads, a glut of empty houses.

It was shocking the way house prices shot up and was allowed to happen. Remember all those shiny new estates where you'd have to get in on phase 1 or 2 because if you didn't, you'd be paying €30k extra for the next phase? All the gazumping that went on? The only people who gained from this were the banks at the time and the builders. For the poor souls who had to get the higher mortgages, it meant even more being taken out of their disposable income. Less disposable income = less money being spent elsewhere.

All valid points. Banks and builders were not the only ones to gain though.
Business owners who banked wads of money. People who bought and paid down their houses, or sold near the peak.
I would say most people gained from the boom.

Similar happens after every downturn in an economy though.
We look back at the mistakes
we always take a note to learn from the mistakes of the past and make sure it never happens again.

And yet people have short memories.
And it starts all over again in a few short years.
And when there is another upturn and money to be made we're all looking for our share of it again, until the next downturn.

MG

Daithinski wrote: »

Because the annual rent times 14 would be approx 170k.

The materials and land/labour cost would be more than this.

Generally builders like to sell for a profit, for arguments sake say 20% (I know in Ireland it was traditionally more like 100%+)

Price is now 204.

Now add on government taxes vat etc you are looking at another 30% maybe?

You are now up around the 265k mark. This would be comparable to house prices from around 2002/2003.

Anything less than this would be below cost selling.

House prices could very well dip below their "real" value before coming back up when the economy starts to recover.


Any drop below this would be selling for less than what the house is actually worth.

But I think €265k would be a realistic price for the 3 bed semis that were selling in the 375-400k bracket.

The annual rent times 14 might work in the US but i don't think the figures add up here.

For example, in the US and other countries the labour costs are a lot less. 10 dollars an hour (in the US).

In Ireland the minimum wage for a labourer with 1-2 years experience is €15.:eek: Compared to our standard minimum wage of about €8.65

I know ultimately house prices will be determined by demand, and availability of credit so who knows how low they could go. I think is that that formula is a load of nonsense and entirely useless for calculating the value of anything.


(Maybe because the government was getting a percentage of the new house prices they purposefully jacked up the labour costs in the construction industry to increase their own tax take.)

Firstly, the 14times + build cost does not come into your above calc. The above formula you propose would be build cost + tranactional costs + profit.

There are two problems with build cost plus formula that the likes of the CIF espouse is (1) oversupply and (2) assumptions on build cost.

Oversupply means that you don't need to build a house - there is already one there. This takes build cost out of the equation and replaces it more or less with cash flow issues rather than profit. Below cost selling is therefore possible if it provides a cash flow lifeline (or can be forced by lenders /creditors liquidating)

The second issue is the assumptions on build cost - land value have collapsed, wages are under pressure due to oversupply of labour and materials costs are generally falling on economic activity.

The reason the 14x model is so appealing is that it focuses on return on investment, which is the main driver of every purchase. Rents are far more flexible than sales asking prices so show the return very well and imply the true value very well. Rents also take into account such variables as the minimum wages etc. The implied 7% is an excellent return - anything higher would seem extrordinarily high, especially in a low capital growth environment.

Throw the cost plus model in the bin, it's useless. The Price earnings ratio is far more valuable.