House prices still too high!

Archie D Bunker

When house prices were rising, investors were counting on making a profit by selling these properties after a certain period of time, or they were counting on their investment to profit from the rises in prices.
If prices are falling, and the rental income is not tempting enough, investors stay out of the market or they invest someplace else where the conditions are better for them.
Property buyers who buy to live are only a part of the whole real estate market, and that is true for any country in the world.
A prosperous real estate market needs both components to thrive, and as long as investors stay out of the market, prices will continue to fall.

OMD

ei.sdraob wrote: »

wtf is this crap in last few posts

knock yourselves out

compare Ireland to other countries against various metrics

If you look at the graph you linked to and look at all the European countries. It only lets you look at Q1 2003 to Q1 2010. But in those 7 years every country except Germany had higher price growth than Ireland.

Also in the 12 years from 1998 to 2010 Switzerland, Netherlands, Canada and Denmark had lower growth than Ireland. South Africa, Australia, Spain, Britain, Sweeden and France all had higher growth. (Data was not available for other countries)

Pretty much the same can be said for prices in real terms from 1998 to 2010. Most countries according to the graph had higher price growth than Ireland.

I don't really think too much stock can be put into these types of graphs.

MRBEAVER

There are practically no investors in the market at the moment but it doesn't necessarily follow that they are required before prices begin to rise. And they will reenter when they think that there will be capital appreciation rather than whether prices fit some arcane formula that has worked nowhere in practice.

OMD

Archie D Bunker wrote: »

Even without proof, the theory is sound - basically becasue you have to take into account people who invest in real estate (as opposed to people who buy real estate to live in).
Such investors would not invest in real estate unless they get a certain minimal return on their investment when they rent it. The minimal return needs to be more than the return such an investor might get in other venues of investment, and from experience a savvy real estate investor would aim for at least 7% yearly return over his investment, and I have seen investors get 10% - 13% returns (albeit these were achieved in sort of high risk areas).

Just do the calculation yourself - if a property costs X and you want a 7% yearly rental return (even if we don't take into account other real estate associated costs and expenses which lower the overall rental income) - check and see how many properties you can find that will give you that.

If you can't find such properties, it means the real estate market is not tempting any investors, and without these investors the market will only continue to go down.

One problem here is you are talking about 7% after inflation. The property should go up with inflation and the rental income should go up with inflation. So what you are saying is that a property investor should expect a return of 10% a year. Now I am not saying that cannot happen but it is higher than you would expect from the stock market with a lot less risk. This formula says this is the minimum you should expect.

Also what distinguishes property from the stock market is most people who buy property are not investors they are looking for a place to live so will pay more if it suits their particular needs. Also rental property is not the same as owner occupied property. People will pay large sums for some houses that would never go on the rental market eg €10 million for a house in Dalkey or Ailesbury Road.

Also the rental market and the owner occupied market are not necessarily the same. Rental market will have a much larger number of apartments and multiple occupancy units.

However to say it again, unless this model can be replicated throughout the world (not just one or 2 countries) then I don't see why it should particularly apply to Ireland. What makes us different? Indeed as the rental market makes a much smaller proportion of the property market in this country than most other countries, it should be less relavent here than elsewhere

knuth

I personally believe that EA's are reluctant to inform the client of the realistic figures they should be selling at.

Majority of people are still living in cuckoo land and would probably take offence if the EA suggested the real value.

As times are tough, will an EA really put their neck on the board with the possibility of loosing their business out to other EA's?

johnnyskeleton

OMD wrote: »

However to say it again, unless this model can be replicated throughout the world (not just one or 2 countries) then I don't see why it should particularly apply to Ireland. What makes us different? Indeed as the rental market makes a much smaller proportion of the property market in this country than most other countries, it should be less relavent here than elsewhere

I don't think it can either. However, as general investment advice, if prices are 12x rent it is time to buy, if prices are 20x rent it is time to sell. This sets these as the two extremities of price:rent ratio. However, that is not to say that it is a universal rule.

As with all markets, supply and demand will set the price.

As a general trend for houses, they seem to average out around 3.5x gross earnings in the UK and I believe this is the general trend in house prices. They also tend to track inflation but none of these are hard and fast rules:

http://www.housepricecrash.co.uk/graphs-average-house-price-to-earnings-ratio.php

However, the crucial thing to note is that there is a large excess of supply over demand in this country at the moment. So, whatever metric is used to say what house prices ought to be, supply and demand should bring these prices lower.

Benedict

David McWilliams is a highly respected economist who also happens to write books and articles. He claims that the rental x 13 to 15 method is valid and I put my faith in him. He has said that the USA - among others - uses this method. Irish investors also use this method and that is what should really concern us.

But let's forget the rental method for a moment. Another method is the income multiple. Your house should cost you 3 to 4 times your gross annual income. 5 times at a push. Yet the average house in Dublin is now costing 10 times the average income.

This is lunacy!

House prices have to fall by 40% of current price at least.

OMD

Benedict wrote: »

David McWilliams is a highly respected economist who also happens to write books and articles. He claims that the rental x 13 to 15 method is valid and I put my faith in him. He has said that the USA - among others - uses this method. Irish investors also use this method and that is what should really concern us.

The last I heard USA prices were about 25 times rental income but they may have dropped recently.

Benedict wrote: »

But let's forget the rental method for a moment. Another method is the income multiple. Your house should cost you 3 to 4 times your gross annual income. 5 times at a push. Yet the average house in Dublin is now costing 10 times the average income.

This is lunacy!

House prices have to fall by 40% of current price at least.

It is hard to say how unafordable house prices are at present. Finfacts had this from January of this year where they looked at prices as a multiple of income
http://www.finfacts.ie/irishfinancenews/article_1018886.shtml

"There were 62 severely unaffordable markets this year, down from 64 in 2008. The least affordable markets were concentrated in Australia (22) the UK (19) and the US (11). Nine of the 11 US severely unaffordable markets were in California. There were 5 severely unaffordable markets in New Zealand and 5 in Canada.

Housing in Ireland has become moderately unaffordable with a Median Multiple of 3.7, showing a trend toward historic norm of 3.0.
Irish housing had been affordable as late as the middle 1990s, with a Median Multiple below 3.0."


Obviously house prices have fallen since this survey was done

Jabber2

The old adage still applies as it did during the boom and as it does presently during the downturn and as it will into the future, "a house is worth exactly what someone is willing to pay for it", rightly or wrongly, foolishly or wisely.
Irish people buy houses its what we do......
I'm sure Mr Mcwilliams and Professor's Lucey and Kelly own houses did they purchase their "home" on the 14 times annual rent multiplier?
Personally I think the idea that houses will fall another 40-50% is as pessimistic as EA's were optimistic. This would push prices back to the early 90's most people who bought houses then would be mortgage free (60% of home owners) why would they sell now, too upgrade?
Who knows when they'll bottom out but if they fall back that far most of the country just wasted the guts of 20 years paying a mortgage..

accensi0n

Jabber2 wrote: »

Personally I think the idea that houses will fall another 40-50% is as pessimistic as EA's were optimistic.

Aren't people who think this, optimistic?

Benedict

When (not if) the house prices fall further, some will be hurt, and this is sad. But it will be good for the country overall. I mean, Daft has now produced a statistic that the average house has fallen to 342K. EBS now refuses to grant a loan where the LTV is less than 20% (and other lenders are set to follow this) - so the buyer of an "average" house will have to find 68,400K in cash before he/she can even think about getting a mortgage? Throw in the associated costs - like a solicitor and a few chairs to sit on! You're talking about needing cash of well over 70K! This will drive more and more people away from even thinking of purchasing which will, in turn, drive down demand and price.

If anyone thinks the property market has already collapsed, just wait until 2011!

OMD

Benedict wrote: »

I mean, Daft has now produced a statistic that the average house has fallen to 342K. EBS now refuses to grant a loan where the LTV is less than 20% (and other lenders are set to follow this) - so the buyer of an "average" house will have to find 68,400K in cash before he/she can even think about getting a mortgage? Throw in the associated costs - like a solicitor and a few chairs to sit on! You're talking about needing cash of well over 70K! This will drive more and more people away from even thinking of purchasing which will, in turn, drive down demand and price.

If anyone thinks the property market has already collapsed, just wait until 2011!

Where did you get the statistic that the average house price "has fallen to 342K"? I don't think house prices were ever at that level even at the peak of the market. According to the ESRI quarterly report (which probably overestimates house prices) the average price is €204,830.

You previously said prices have to fall 40%. €204,830 is 40% less than 342k. Have we reached the bottom;)

By the way EBS are offering 80% loans on apartments outside the cities. In cities they offer 85% LTV on apartments. For houses they are offering 92% mortgages.

Benedict

Benedict wrote: »

Daft has now produced a statistic that the average house has fallen to 342K.

This and your tendancy to place 100% faith in whatever DmW comes out with doesn't give you much credibility. Despite the recession there are loads of single folk on lots more than the "average" income you quote. There are also loads and loads of couples both on this average income, also there are loads of folk out there who have no probs getting substantial wads of cash off mummy and daddy.

Anyone out there who reckons they will buy a 3 bed semi in a good area in Dublin, Cork or Galway in 2011 for the figures thrown around in this thread are quite simply off their head. Time will prove me correct

Also if no one is buying rents will only go one way

McTigs

Nobody has been buying for the past three years and rents have been falling everywhere.

McTigs

RoverJames wrote: »

Despite the recession there are loads of single folk on lots more than the "average" income you quote. There are also loads and loads of couples both on this average income, also there are loads of folk out there who have no probs getting substantial wads of cash off mummy and daddy.

I earn more than the "average income" and also have access to "substantial wads of cash" and i still wouldn't buy at todays prices.

Just cos you have the wherewithall to make a crap money decision does mean you will or you should.

Truth is nobody can say for certain what way it's going to go but for me all relevant criterea point to further drops. There is nothing to be gained from buying now and everything to be gained by waiting to see how it turns out.

McTigs

McTigs wrote: »

I earn more than the "average income" and also have access to "substantial wads of cash" and i still wouldn't buy at todays prices.

Just cos you have the wherewithall to make a crap money decision does mean you will or you should.

Truth is nobody can say for certain what way it's going to go but for me all relevant criterea point to further drops. There is nothing to be gained from buying now and everything to be gained by waiting to see how it turns out.

Quite a few folk are buying though, rightly or wrongly.
Those that haven't property all still want to own some, that will in time drive the market again.

OMD

McTigs wrote: »

I earn more than the "average income" and also have access to "substantial wads of cash" and i still wouldn't buy at todays prices.

Just cos you have the wherewithall to make a crap money decision does mean you will or you should.

Truth is nobody can say for certain what way it's going to go but for me all relevant criterea point to further drops. There is nothing to be gained from buying now and everything to be gained by waiting to see how it turns out.

I think the market will definitly fall further. The question really is how much? The average home is now affordable to the average earner which it wasn't before. That at least is progress.

average_runner

You wouldnt buy now for an investment, but if your looking for a family home it could be worth buying now.


Main reaosn for sure is interest rates will continue to rise, if you buy now you could and I said could get a better fix term deal now than in a years time. So you will save money there.

Also prices in the shops will now start to rise because of currency etc.

Personally i got in three years ago with a .5 tracker, even though the house has lost 40 - 50 grand, we will make that back on the money we are saving on interest now, as if we bought now we be paying over 4% interest almost, instead its 1.5 %

But i do think the time to buy was when prices started to fall initailly and trackers were at their lowest, but people said dont buy as trackers be around forever:eek: and prices get lower.

People forgot interest rates will go up and now banks got rid of tracker they can hike their rates as much as they want

Its our family home so doesnt matter.

Mr. Presentable

OMD wrote: »

I think the market will definitly fall further. The question really is how much? The average home is now affordable to the average earner which it wasn't before. That at least is progress.

This is true.

NB:There have been signs of recovery at the top end in Co Dublin, with million Euro plus prices paid exceeding asking in April. Historically, recovery starts at the top and filters down, so it could be two more years before houses in Leitrim etc start to recover.

am i bovvered

=average_runner;66286007]

Personally i got in three years ago with a .5 tracker, even though the house has lost 40 - 50 grand, we will make that back on the money we are saving on interest now, as if we bought now we be paying over 4% interest almost, instead its 1.5 %

But i do think the time to buy was when prices started to fall initailly and trackers were at their lowest, but people said dont buy as trackers be around forever:eek: and prices get lower.

I have often thought about this, someone who bought in 2007 on a tracker could work out better off in the long run as opposed to a purchaser in 2010 or later because the long term cost of borrowing has increased.

CamperMan

the vast majority of these properties will have mortgages on them, how can someone sell a house for €100,000 when they bought it for €250,000 in the boom and probably have a €200,000 mortgage outstanding, they have to try and sell the property to cover the outstanding debt.

Benedict wrote: »

Hi Everyone,

It absolutely intrigues me why on earth estate agents insist on asking prices for houses which are still so high that it is unlikely that any buyer will even go to view them! The true value of a residential property can be estimated in a number of ways and each method should produce roughly the same figure. You can go by rental potential (a property should be 13 to 15 times the potential annual rental). This is the case whether you rent it or live in it. The value is the same either way. Yet daft and myhome are laden with properties that have an asking price of double (or more) what they are worth according to this method.
You can go by income. The average house should be about 3 times the average income. Yet they tend to be more than 6 or 7 times. Again, gross overpricing.
You can estimate by percentage yield. Going by this method, the seller should be paying the buyer to take the property - not the other way around!

So when will reality dawn?

Anyone know? Are the estate agents still praying that some buyers will emerge from an underground cave and not have heard that the boom is over?

Do they not realise that it is better to sell now for 50% of the current asking price than to wait another year and sell it for even less?

It beggars belief!

Regards,

Benedict. (29 May 10)

gurramok

OMD wrote: »

The average home is now affordable to the average earner which it wasn't before.

How?

Benedict

The average worker earns about 35K per annum. He she should be able to purchase an average house for between 3 and four times that amount. In Dublin, the average house is 10 times the average wage.

End of story.

OMD

gurramok wrote: »

How?

I suppose it depends how you define affordable. I was looking at either spending no more than 35% of your takehome pay on your mortgage or either the new criteria some banks have, that you should have €1500 a month left over after your mortgage is taken out. We are just about at that level now.

A married person 1 income earning €38,000 a year takes home €2700 a month. A 25 year mortgage with EBS for €185,000 (90% mortgage) will cost €886 a month which is 33% of take home pay and leaves them with €1814 a month. To be safer they should fix. If they fixed for 10 years it would push the % up to 40% but still leave them with €1,600 a month. They could get it back to 35% by lengthening the term.

Average income for home buyers tends to be higher than others also. One of the main reasons for this is they are older. Most 1st time buyers are over 30 years old so would have higher incomes than average.

OMD

Benedict wrote: »

The average worker earns about 35K per annum. He she should be able to purchase an average house for between 3 and four times that amount. In Dublin, the average house is 10 times the average wage.

End of story.

Benedict, the average home is not €350,000 (in Dublin or not) as has been pointed out to you twice already.

gurramok

OMD wrote: »

I suppose it depends how you define affordable. I was looking at either spending no more than 35% of your takehome pay on your mortgage or either the new criteria some banks have, that you should have €1500 a month left over after your mortgage is taken out. We are just about at that level now.

A married person 1 income earning €38,000 a year takes home €2700 a month. A 25 year mortgage with EBS for €185,000 (90% mortgage) will cost €886 a month which is 33% of take home pay and leaves them with €1814 a month. To be safer they should fix. If they fixed for 10 years it would push the % up to 40% but still leave them with €1,600 a month. They could get it back to 35% by lengthening the term.

Average income for home buyers tends to be higher than others also. One of the main reasons for this is they are older. Most 1st time buyers are over 30 years old so would have higher incomes than average.

What interest rates and have you taken into account of singletons in urban areas?
And above all, what gaff can you get for 205k in a safe urban area?

Benedict

See the quote below from Myhat's Paul O'Connor -

"So far, prices are down an average of 6%, while we are heading for a total drop this year of over 14% (compared to about 18% in 2009). The average asking price for a three-bed semi in Dublin is now close to €342,000, says O'Connor."

Okay, maybe not 350K - but 342K is near enough!

Don't take my word for it. Surf Daft or Myhome and see what you can get for an asking price of much under 342K.

turbobaby

johndaman66 wrote: »

I very much agree with your logic in assuming that even still current asking prices are ridiculous from an investor point of view or indeed otherwise Benedict. I reckon you might at best match the rate of return for putting your money on deposit at a rate of 3.3% which you mention if you buy to let. Especially when one considers if you are letting a house long term there will no doubt be vacancy periods between tenants during which the house will still need to be heated and esb and the like paid also. One also needs to factor in the opportunity cost of maintaining the house or cost of employing somebody to do so...cutting lawns, weeds, painting, servicing boilers etc. There is also the risk of your house being trashed by tenants (which I have seen happen on more than one occasion from a casual observer point of view).

Think such has being the case with a right long time really...even during the "boom years" but unsustainable property appreciation was part of the equation then.

I think myself there is a generational factor at play to a certain extent. To me it seems that much of the older generation seem to have this mindset that you cannot loose in property or land and there is never a bad time to buy. My parents who are very conservative and in no way extravigant to the extent of being tight with money follow this logic. I have tried to explain the rent multiplier rule to them on a number of occasions and although they understand the methodology behind it they appear to dismiss it all the same as not being relevant or at least thats the impression I seem to get. I do see this divide in my workplace also to a certain extent... Its hard to believe that managers and people with many years experience working in the financial services industry would still proclaim that "rent is dead money". I think having seen the mistakes made by their counterparts and siblings and the mess some of them are in more and more of the younger generation are very weary of taking the plunge and even see owning a property as a noose around their neck and realise the advantages and the added mobility of renting.

Think also there will be some activity in the market regardless of market conditions. Some people regardless of age will attach too much emotional involvement to buying a house and buy regardless as opposed to renting if they get mortgage approval. For example the young married couple type with a kid or two who will buy as oppossed to renting because they will have the freedom to paint the kiddies room what colour the kiddies wish, which they perhaps believe they couldn't or wouldn't be bothered doing if they were to rent because its not a place of their own. Then there may be those who buy now because it seems to them as if there is marvellous value out there compared to a few years ago and they think they are picking themselves up a bargain. This may be through a lack of research or failure to acknowledge further anticipated price drops or indeed couldn't care less if prices are going to drop further.

Sorry for all the waffle and am probably going of a tangent even but just to express my thoughts on the subject. By the way Benedict would you have any further information or perhaps a link to that 3.3% gross NationWide deposit account. Also do you know if it falls under the state guarntee scheme?

Very well said Sir!

Treehouse72

OMD wrote: »

The average home is now affordable to the average earner which it wasn't before. That at least is progress.

Even if we assume an average Dublin salary is €40,000 (and I doubt it is that high), then 5x that is the absolute maximum somebody could borrow. Sensibly, it should be as low as 3x. But whatever, I looked in South Dublin for a €200,000 "average house".

This 2-bed is €175,000 and is in Kimmage:


www.daft.ie/1531667

Is that an "average" house?

Another 2-bed in Drimnagh, €200,000:
http://www.daft.ie/searchsale.daft?id=525597

The first 3-bed I could find at €200,000 is in Ballyfermott:
http://www.daft.ie/searchsale.daft?id=521965

Now, you'll excuse me OMD, but those are not "average" homes. They are tradtional working class homes. They are below average. And yet 5x an above average salary can't buy them? How on earth do we square that circle?

OMD wrote: »

A married person 1 income earning €38,000 a year takes home €2700 a month. A 25 year mortgage with EBS for €185,000 (90% mortgage) will cost €886 a month which is 33% of take home pay and leaves them with €1814 a month. To be safer they should fix. If they fixed for 10 years it would push the % up to 40% but still leave them with €1,600 a month. They could get it back to 35% by lengthening the term.

Deloitte's Tax Calculator says that €38,000 is €2,300 pm:

http://www.deloitte.ie/tc/Results.aspx

33% of that is €759. That is a 40 year mortgage at 3.8%. To put that another way, the longest possible mortgage term at a below-trend long term rate in order to buy a dereclict 2-bed in Crumlin, or 3-bed in Ballyfermott.

The very best of luck to anyone who thinks that's "average" or normal or sustainable or the future. It's none of those things.

bryaner

Benedict wrote: »

Personally, I'm not interested in wasting time trawling through every first world country has paid for houses of the past 40 years - I'm talking about here and now. David McWilliams has stated that the annual rental formula is valid that that it is the one normally used in the USA. Prof Brian Lucey agrees with him. So does Prof Morgan Kelly! All three of these great men (and most intelligent thinking people of Ireland too), believe that houses are still a complete rip off. All 3 cite the rental potential method as back up evidence for this. If you think these men are incorrect - then I (and all readers of this blog) would love to hear your evidence. Do you have evidence that this formula is invalid. If you do, then let's hear it!

We're waiting!

Mc Williams also stated that the Dollar would slip to $1.50 against the Euro..