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Property Valuation
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07-06-2009 5:52pm#1Just wondering what peoples opinions of a method of valuing property I have seen bandied about quite a bit recently(by people like David McWilliams etc).
The method stipulates that the way to value a property is to multiply its annual earnings potential by 14.
eg: say a property rents a €800 pm => €9600 per annum (not taking into account expenses such as insurance etc)
This would give a property value of €9600 x 14 = €134,400
My thoughts on this:
I'm unsure how realistic a method of property valuation this is. Is this method primarily applicable to the US (where construction costs might be cheaper? people are not as attached to property perhaps?)
Would you have to add much more to the value of the property if it was in a noted good area, had an extra bedroom, bigger garden on top of the multiple of its earning power.
On the flipside I remeber a member of my family selling a 6 bedsit house in dublin in 95 for around 70k pounds at the time so maybe this method is not too far off the mark.
The reason Im asking is because I'm considering buying anytime in the next couple of years (I'm in no rush) but I would like to be able to calculate what a realistic price for a property is.
eg: at the moment Im looking at a 4 bedroom semi D in midlands town. Owners have an asking price of €280k, its in a nice area, If the house was be rented I reckon (after some research) it would make around €800 a month and therefore according to the method above its true value is around €135k which is just over a 50% discount on the owners asking price and just under a 65% discount on what the houses asking prices were about 2~3 years ago. (I believe some of them sold at the €370k-€380k mark back then at the height of the madness) It seems like a massive discount and Im sure some properties will be discounted by this amount but will decent houses in good areas go this low also.
Again, Im prepared to wait, Im not one of these a house is a home type people (in otherwords Im not willing to pay way over the odds for a house just because I like it and intend to live in it, renting is fine for me) but I also dont want to stick to an unrealistic method of valuation and I cant quite decide how realistic this method is.
I would appreciate informed and unbiased replies (if thats possible at all) and would like not to get a flood of "a house is worth what someone is willing to pay for it" or "you should just go ahead and buy it if you like it type" comments. Im interested in what people think of the method.0
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Join Date:Posts: 13683
It's called the 12/20 rule in the US. Basically a property which is priced at 12 times annual rent is a steal, while a property that is 20 times annual rent is overvalued. This more or less corresponds with the general guideline that a reasonably safe investment should have a gross yield of 5-8%.
If DMW wishes to use 14 times as a rule of thumb then that's fine, but I like to use the 12/20 rule.
So a city centre apartment that rents (actually rents, not wishful rents) for €1,000 is good value at €144,000 but is bad value at €240,000 and is worth a look in between.
Some people use net rents i.e. 10 months rent (1 month deducted for void periods, 1 month deducted for management fees, overheads, fees & sd etc), in which case it would be €120,000 to €200,000.
In any event, when you have homes that could just about rent for €2,000 but are on sale for close to a million, you know there's something very wrong (i.e. 41 times annual rent).0 -
Our estate sold 3-bed houses for 450K at the peak.
They'd rent for 1000 euro a month now.
That would mean they're worth 168K.
The lowest up for sale now is 390K.
Is 168K or close to it ever going to be seen?0 -
Extra bedroom, garden, good area should all be priced into the rent anyway.
The x14 rule has stood the test of time.
134K sounds right for many reasons other than the x14 rule.
(1) It is much closer to the prices in similar European areas.
(2) A further 50% drop is exactly what has been predicted by many economists (Morgan Kelly, McWilliams and so on)
The Irish property bubble increased prices from 1996 to 2007.
11 years :eek:
That is almost unprecedented in the OECD.
We are still in the bubble.
Unfortunately the bubble has ruined the lives of many people born in the 1970s (and late 60's) who were sucked in to it.
I'm guessing you are a child of the 80's and therefore thanking your lucky stars.
Stuck in apartments in NE and unable to move or have children I don't know many 30 somethings who voted FF...0 -
PullOutMethod wrote: »
Unfortunately the bubble has ruined the lives of many people born in the 1970s (and late 60's) who were sucked in to it.
I'm guessing you are a child of the 80's and therefore thanking your lucky stars.
Stuck in apartments in NE and unable to move or have children I don't know many 30 somethings who voted FF...
Born very late 70s so not far wrong there and I am thanking my lucky stars as I could very easily have bought at the peak and I have to admit I did get sucked into the whole mindset where a house became something more than a place to live etc. The only thing that stopped me was the sheer price of houses in my area and my dad telling me to look at the monthly payments Id be crippled with + how much you pay back on top of the principal after your 25+ years of indentured servitude. It made me sick to think how much Id be paying back to a bank even if interest rates didn't rise, it made me sick to think that Id be essentially working for them.0 -
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The multiple of rent rule is only applicable if it is intended to rent out the property as an investment. The Irish rental market is very small outside of social lettings run by the local authorities. The Irish rental market is dominated by young single people and students. These categories have very different accommodation requirements than families. Facilities such as gardens do not matter to single people and are not reflected in rents. I know a man ho inherited a three bedroom house with a large garden. He sold it and bought two three bedroom houses with small gardens from the proceeds. the remnt from each house was almost as much as he would have got in rent for the original house. The rent in good middle class areas is always pitiful in relation to the value of the property. If it is desired to live there is is because of the quality of life and the possibility of capital appreciation. Rents unlike prices vary relatively with location. The three most important factors in buying a house are location, location and location. Valuing an individual house is a matter of comparing the prices of similar house in the same location or else using an income multiplier. It is the higher of these figure which give the value of the house.0
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There are a bunch of different ways of valuing a property, or indeed anything.
The 12/20 or 14x methods are driven from valuing it on the basis of expected future cashflow based on its current configuration.
Valuing on the basis of expected future cashflow seems like a good idea.
You can also value it in other ways. You can take a view that rents will increase. (In some areas, there is certainly potential for increases if there is any sort of upturn.) You can take a view that the area will be redeveloped. All of these are reasons to pay more. (On the other hand, if the area looks like it will be in serious trouble and the house needs a lot of work done, these are obviously reasons to pay less).
The fact that interest rates are low should have a bearing.
There is no property tax in Ireland. In the US on the other hand, property taxes are an important issue.
I would say that 12/20 is conservative, but I wouldn't say that it's tremendously conservative.
Comparing an investment in property to an investment in a bond or a bank account is a little misleading. For one thing, a property investment is generally 'geared', or partially funded by borrowings.
There are also important tax benefits to owning property, especially if you own more than one investment property, though these have been reduced in the budget (which in turn is resulting in the value of property being driven down in this country).
High stamp duty also drives up property prices during a downturn, because it reduces liquidity.
So there is no simple model for valuing property.0 -
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Just on the point of rural property, the rent multiplier can be sightly off. At the moment a 3 bed semi rents for a the same amount as a 4 bed detach 10 minutes outside my town (actual rent, not dreamland). Proximity to the town is important for most people renting in a rural (non-city) area, but detached in a quite area would command a higher price.
However if we didn't have a glut of rented property i would say there would be a difference in the rental price and at the moment the rent multiplier of 12/20 is still a good base for any property.0 -
The three most important factors in buying a house are location, location and location. Valuing an individual house is a matter of comparing the prices of similar house in the same location or else using an income multiplier. It is the higher of these figure which give the value of the house.
Thank you for the reply, but its exactly this that is causing me to think long and hard about any offers I make and it is this that caused me to start this thread.
I agree that an average house in a good area is better than a fantastic house in a bad area but how do you convert this advantage into hard cash and not get too badly burned. At the moment very few houses are up for sale in this area, the last one that was had an asking price of €360k (unfinished - you put in the kitchen, flooring, bathroom etc). That price versus the 14x multiple is a huge discrepancy and I for one certainly wouldn't be offering the higher of the two prices.
This is what leads me to think there must be a "halfway house" type price (forgive the unintended pun) somewhere (not necessarily halfway) in between the 14 times annual earning price and the stratospheric asking price where the buyer is still getting reasonable value for money (a good house in a good area for a reasonable price that isn't likely to drop too much)
Apologies if I'm getting repetitive, thank you all for your replies. Just having a hard time wrapping my head around the 14x price and wondering how applicable it is to good properties in good areas.0 -
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This is what leads me to think there must be a "halfway house" type price (forgive the unintended pun) somewhere (not necessarily halfway) in between the 14 times annual earning price and the stratospheric asking price where the buyer is still getting reasonable value for money (a good house in a good area for a reasonable price that isn't likely to drop too much)
You can't impose a price on a house. Some houses are cash cows i.e. they return a high level of rent relative to the purchase price. prospects for capital appreciation or depreciation may not be good. Some houses are only good value if they can be sold easily for the same or more than was paid for them. This depends on your view of how the property market generally is going to perform and how that particular location is going to perform. Some locations improve over time relative to neighbouring locations. An example in is Ranelagh in Dublin which in the early 1980s was seen as a flatland with 4 bed houses for under 40K. By the early 1990s it was seen as an enclave of period housing close to the city centre and prices had tripled within 10 years.0 -
the value is as much as anyone is willing to pay on the day,these days no one is willing to pay anything!0
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You can't impose a price on a house. Some houses are cash cows i.e. they return a high level of rent relative to the purchase price. prospects for capital appreciation or depreciation may not be good. Some houses are only good value if they can be sold easily for the same or more than was paid for them. This depends on your view of how the property market generally is going to perform and how that particular location is going to perform. Some locations improve over time relative to neighbouring locations. An example in is Ranelagh in Dublin which in the early 1980s was seen as a flatland with 4 bed houses for under 40K. By the early 1990s it was seen as an enclave of period housing close to the city centre and prices had tripled within 10 years.
So, what I'm taking from this so far (and please correct me if I'm wrong) is that despite the fact you cant impose a price on a property you can use the 14x rule as a good guideline to what the price of an house should be and indeed probably will approach over the next couple of years (with rising unemployment, interest rates likely to rise, property tax etc coming in) but you will still have to decide for yourself how much you are willing to pay if anything over the odds for good area etc.
Out of curiosity are there any other potential house buyers out there and would they be willing to pay much of a premium for the right property in the right area given that there is so much uncertainty in the market at the moment and the likelihood (imo) that this premium will likely evaporate over the next 3-5 years.0 -
Out of curiosity are there any other potential house buyers out there and would they be willing to pay much of a premium for the right property in the right area given that there is so much uncertainty in the market at the moment and the likelihood (imo) that this premium will likely evaporate over the next 3-5 years.
I want a one bed apt in the city center. If I could get one in a decent enough area for say 150k Id buy it. But anything at my budget is in crap areas with herds of junkies roaming abouthe place. Id love somewhere near Camden Street going on up to Rathmines.0 -
Just on the point of rural property, the rent multiplier can be sightly off.
What I would say about property in the country is that it seems to be falling to the outer realms of realistic prices quite fast.
Locally there are some very nice 3bed semis, built to one of the best standards I've seen in a while...at the peak they were €280k, now there is one on at €179,500.
They are renting at about €700p/m * a multiplier if 14 is €117600 which leaves a €52k (after knocking €10k off the asking - minimum!). So the properties seem to about a third overvalued rather the the 50-60% and above in Dublin.
People may scoff at the 12/20 method but at least its something to base figures on, throughout the boom the prices were literally pulled out of a hat and then doubled and then inflated.0 -
Well, that makes it 55 percent overvalued, not one-third!
if you use 20 as a figure, then it's only a bit over.
It's certainly somewhere to start. If you actually want to buy property though, it's not much use in the Irish market.0 -
i think the best is to put in a low offer on anything your interested in,the worst they can do is say no,what they are asking for can be completely different from what they will get.i think anyone who has anything for sale at this moment in time is clearly looking for money,because i certainly wouldn.t be selling at this moment in time with the lack of money available,its a buyers market0
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SoupyNorman wrote: »throughout the boom the prices were literally pulled out of a hat and then doubled and then inflated.
Exactly. One builder in Waterford put houses on sale for €330k. He decided to put the price up to €410k in the next STREET (not phase) because he felt they represented 'too good a value').
Oh boy how times have changed. And rightly so. Young couples were nailed to a cross for 40 years by these people in the blink of an eye. And with no conscience.
I have no sympathy for those builders/developers/etc or the banks that capitulated in this whatsoever. And now a pathetic attempt (NAMA) to try to artificially keep prices high.
Amazing how the likes of the Competition Authority can go AWOL in this situation, isn't it?:rolleyes:0 -
SoupyNorman wrote: »What I would say about property in the country is that it seems to be falling to the outer realms of realistic prices quite fast.
But really rural property still has a long way to drop also, they may seem more realistic after looking at 1 bed apartments in dublin asking 300k, but just look at prices even 10 years ago in a rural area, by 1999 standards we're still in cloud cuckoo land. There's a glut of empties in nearly all areas and these will mean selling prices AND rental prices will continue to drop.
Possibly 4 bed detached on the edge of towns will far slightly better at the bottom as so many people will aspire to them, but it wont be much better.0 -
I haven't lived in Ireland in over 7 years, missed all the craziness and never really understood it either. But is there not a recommended price per square meter based on location for property in Ireland?0
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Out of curiosity are there any other potential house buyers out there and would they be willing to pay much of a premium for the right property in the right area
To take this part of your question in isolation amacca, I for one am a potential house buyer. While I would pay a premium for the right property in the right are I certainly wouldn't buy into the snob factor and pay over the odds. Thats just my perspective though. Having said that and in the extreme I wouldn't want to pay with my life or the life of a family member for living in a very rough area...a bit off the topic...sorry.
To answer this part of your question amacca I'll certainly be keeping my money on deposit for the time being.given that there is so much uncertainty in the market at the moment and the likelihood (imo) that this premium will likely evaporate over the next 3-5 years.0 -
SoupyNorman wrote: »What I would say about property in the country is that it seems to be falling to the outer realms of realistic prices quite fast.
Locally there are some very nice 3bed semis, built to one of the best standards I've seen in a while...at the peak they were €280k, now there is one on at €179,500.
They are renting at about €700p/m * a multiplier if 14 is €117600 which leaves a €52k (after knocking €10k off the asking - minimum!). So the properties seem to about a third overvalued rather the the 50-60% and above in Dublin.
People may scoff at the 12/20 method but at least its something to base figures on, throughout the boom the prices were literally pulled out of a hat and then doubled and then inflated.
I can't say I particularly agree with you Soupynorman. If in the example you are using and if one was going to use the 14* rule and based on a selling price of €169,500 (even taking of the €10k as you suggest) this leads me to believe that the property is slightly over 44% over valued as oppossed to a third overvalued (remember €117,600 is your starting point, not €169,500)...as this represents what it should be valued at (applying the rule) or 100%. 44% is still nearer to the 50% mark than the 33.3% all the same. Don't really want to be splitting hairs about the mathematics though:)
While the 14* rule or the 12/20 rule may be useful it is probably a bit limited too I'm sure. I think probably most of us will agree thats valueing houses and property is neally an exact science. Just as when such rules went totally out the window in the boom years it may well work in the opposite direction in the next few years and we may be looking at a 10* rule. Now I'm not saying this will happen but I'm not saying it won't either. Remember after a boom period property prices tend to overshoot in the opposite direction, with Japan and Finland being good examples.
Think along with multiplier rules you have to factor in expectations and employment and a bit surprised nobody really mentioned them already (at least I don't think anyone did). Think there is no doubt a lot of people thought they were totally invincible during the boom years, their salaries were on an steep upward curve until retirement and there was no chance of loosing their job...a higher chance of getting a better job elsewhere. This no doubt fuelled the madness of it all. As for now, well maybe things aren't as rosey looking.
Supply and demand is another important factor. Just in my small local country town there is an absolute glut of empty properties. Fantastic buildings too they are. Many sitting idle for a time any many of them never have being inhabited. With mass emigration a very real threat the balance may end up tipping further
Im sure low interest rates are a total blessing for many property owners at present but if we enter a period of high inflation that sees interest rates shoot up as many commentators are suggesting it may be a telling time.
Even though I am a potential house buyer I really don't think my views are that biased and I think I am looking at the situation pretty objectively. I can't see any reasons why house prices wont fall further.
On a side note one expression bantered by estate agents in particular which I have grown to detest of late is "there is very good value out there at the moment". I went into an estate agent in Limerick city a few weeks as I was passing and wanted to query the price of a 3 bed semi-d I'd seen on daft with POA. Asked the EA. Reply was along the lines of...that one is has an asking price of €259,000. It represents really good value for money as present owner paid €339,000 18 months ago but he will accept €240,000 for a quick sale. Really I said to myself well it wont be my €240,000.0 -
So, what I'm taking from this so far (and please correct me if I'm wrong) is that despite the fact you cant impose a price on a property you can use the 14x rule as a good guideline to what the price of an house should be and indeed probably will approach over the next couple of years (with rising unemployment, interest rates likely to rise, property tax etc coming in) but you will still have to decide for yourself how much you are willing to pay if anything over the odds for good area etc.
Out of curiosity are there any other potential house buyers out there and would they be willing to pay much of a premium for the right property in the right area given that there is so much uncertainty in the market at the moment and the likelihood (imo) that this premium will likely evaporate over the next 3-5 years.
If you think the property market generally is going to fall there is no sense in buying by any method other than the multiplier. Multipliers rise as well as fall. At one time property could be bought for multipliers of between 4 and 5. Invariably you can rent in a desirable area for less than the cost of buying. Rent will be less than repayments on a 100% mortgage and there will be no maintenance costs. If the mortgage is less than 100% there will be a loss of income on the deposit. The money saved can be put into some other investment medium.
In Ireland there are many people who insist on buying themselves a house even though it may be irrational from an economic viewpoint.0 -
When could you buy for a multiplier of 4 or 5? It must be quite a while ago. Sixties or seventies?0
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antoinolachtnai wrote: »When could you buy for a multiplier of 4 or 5? It must be quite a while ago. Sixties or seventies?
I think he must be talking about multiples of income- not gross rental multiples (though I am open to correction on this). If property taxes were introduced into the equation- and owning a property became rather expensive- then a lot more people would probably rent- driving up rents, and down house values?0 -
In the late 80s into the early 90s the multiple was as low as four times annual rent on certain properties. These were generally pre 63s in bad areas. Pre 63 properties in Ranelagh were about 7 times annual rental income. Some people bought such properties and converted them into family homes and and made them worth far more than they paid. The estate agents pretty quickly got in on the act and started marketing the houses as potential family homes, with increased prices, which in no way reflected the rental income.0
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in the early 90's? A house in 15 bedsits, at 30 pounds/bedsit/week = 23400/year, so you could buy that for 94,000 euros? I really don't think this was true. Maybe earlier 80's, possibly later 80's but I don't think early 90's.
7 times, yes, that's what they used to talk about. Now, remember kids, interest rates were a lot higher back then. Also, the maintenance involved in a 12-bedsit house is a lot more hands-on and frequent than a house let as a single unit.
Antoin.0 -
antoinolachtnai wrote: »in the early 90's? A house in 15 bedsits, at 30 pounds/bedsit/week = 23400/year, so you could buy that for 94,000 euros? I really don't think this was true. Maybe earlier 80's, possibly later 80's but I don't think early 90's.
7 times, yes, that's what they used to talk about. Now, remember kids, interest rates were a lot higher back then. Also, the maintenance involved in a 12-bedsit house is a lot more hands-on and frequent than a house let as a single unit.
Antoin.
Just from personal experience, I know of a house in bedsits that could potentially earn about 6-7k (pounds) a year selling for about 70k in Dublin in the mid 90s.
I say potentially because of course the bedsits wouldn't be set all year round, maintenance costs, electricity bills not paid were probably all problems etc.
This is around the 10-14x mark for the mid 90s before things started to go mental. The house wasn't in the most fantastic or the worst of areas so that would support (at least anecdotally)the idea that they weren't selling at 5-7 times earnings in the 90s anyway. Agree though, it might have been commonplace in the 80s when I was just a young wan etc.0 -
antoinolachtnai wrote: »in the early 90's? A house in 15 bedsits, at 30 pounds/bedsit/week = 23400/year, so you could buy that for 94,000 euros? I really don't think this was true. Maybe earlier 80's, possibly later 80's but I don't think early 90's.
7 times, yes, that's what they used to talk about. Now, remember kids, interest rates were a lot higher back then. Also, the maintenance involved in a 12-bedsit house is a lot more hands-on and frequent than a house let as a single unit.
Antoin.
It depended on location. At either end of the North Circular Road multiples were down in the 4-5 times annual income into the 90's. Eg. Seville Place Dublin 1. £16K p.a. for £65K It was 7-8 in the Rathmines, Ranelagh and City End SCR areas. These were multiples of the gross rent. Interest rates were higher at the time. Larger units were often empty for the summer but bedsits were generally let constantly.
The point of all of this is that multipliers change and therefore when buying properties based on a multiplier it is important to realise that there are two variables -: rent and multiplier. If these change the value of the property changes. Given that interest rates are at historic lows and rents are falling the odds are for falling values.0 -
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It depended on location. At either end of the North Circular Road multiples were down in the 4-5 times annual income into the 90's. Eg. Seville Place Dublin 1. £16K p.a. for £65K It was 7-8 in the Rathmines, Ranelagh and City End SCR areas. These were multiples of the gross rent. Interest rates were higher at the time. Larger units were often empty for the summer but bedsits were generally let constantly.
The point of all of this is that multipliers change and therefore when buying properties based on a multiplier it is important to realise that there are two variables -: rent and multiplier. If these change the value of the property changes. Given that interest rates are at historic lows and rents are falling the odds are for falling values.
A guy i know got a 25k punt compensation claim in early 1990s and used it to buy a large property on North circular road that would probably have sold for over a million in 2006. People dont realise how high rental yields were in Dublin in 1990s. Loads of people in secure employment like Gardai, prison officers, civil servants got multiple mortgages to buy houses to rent out as the rent more than covered the mortgage and house prices were low relative to income making capital appreciation likely.0
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