Negative Equity and Increasing House Prices - The Great Myth!

techdiver

In many discussions about the re-inflating bubble happening in Dublin the argument is put forward that people in negative equity will gain with the increase in house prices. I would like to investigate this further and dispel this myth once and for all.

There are 3 types of people in negative equity:

1. People who are still living in their current house and only moan about the fact that it's worth less than what they paid for it. The can still service their mortgage and have no intention of selling or moving. In my opinion, they just need to suck it up and get on with it.
2. People who can no longer service their mortgage and are in serious financial trouble (although with recent moves by AIB it seems they are still better off than renters.).
3. People who want to trade up.

Rapidly increasing house prices don't do anything for group 1.

For people in group 2 it may prove somewhat of a relief as they can sell at less of a loss and carry less debt with them.

But the most misrepresented position is for those in group 3. Rising house prices are NOT GOOD for this group. I will outline an example below.

They took out a mortgage of €300,000 for a 2 bed apartment in Dublin city centre of which there is €250,000 outstanding. Their apartment is now worth €150,000. They wish to trade up to a new house which is priced at €400,000. As things stand if they negotiate a new mortgage and dispose of the existing property they will be left with a new mortgage of €500,000 ((€400,000 + €250,000) - €150,000).

Apartment worth|€150,000
New House worth|€400,000
New Debt|€500,000


So lets take a 10% rise in property prices.

Apartment worth|€165,000
New House worth|€440,000
New Debt|€525,000


So as you can clearly see, despite the fact that their current apartment increases by €15,000 there is a net loss of €25,000 in a market rising 10% for those "trader uppers" in negative equity. Rising house prices will help very few "ordinary people" and will only stand to further enrich the already rich. The message to the people of Ireland is not to fall for the bluff of the "property pornographers", as David McWilliams puts it.

stepster

What do you have to say about to people who are in negative equity, desperately want to sell, in order to rent a property? That is my situation, so I'm delighted if house prices are rising as I know I cannot afford a house in the area I want to live and renting suits me fine.

techdiver

stepster wrote: »

What do you have to say about to people who are in negative equity, desperately want to sell, in order to rent a property? That is my situation, so I'm delighted if house prices are rising as I know I cannot afford a house in the area I want to live and renting suits me fine.

Ok, I did not assume for that scenario in my post. It is valid, but I wonder what portion of the entire market that would represent?

I was trying to make a point that it is often assumed that increasing house prices are good for those in negative equity across the board.

stepster

And you make a good point! It would be very interesting to know how many others are in my boat, I suspect a few more than you think..

Sand Wedge

techdiver wrote: »

Ok, I did not assume for that scenario in my post. It is valid, but I wonder what portion of the entire market that would represent?

I was trying to make a point that it is often assumed that increasing house prices are good for those in negative equity across the board.

You also did not take into account the psychological benefit of group one of increasing house prices. People may not intend to move, but they also do not want to feel the pressure that there house is worth less than the mortgage they are paying for the house.

The Spider

Well a couple of things, I would assume (I said assume) it's hard to sell a property, and carry outstanding debt onto a new loan. If prices rise above what you paid you can go debt free to rent, as has been mentioned to move to another part of the country, retirees may want to do that. Most importantly there's the psychological fact of having extensive debt.

An example, when we were looking for a house in 2012, we looked in Glenageary, there was a three bed for sale at 380,000 (good luck with that price now). We obviously were trying to get a reduction because we thought that was too expensive, if only we'd known but in hindsight moving out has been the way better option.

The estate agent told us she wouldn't budge that was her lower limit, he explained that at the height of the boom those houses were going for 1.2 million (nuts!) and if she had sold then she could have bought an apartment close by for 500,000, which would leave her with 700,000 for retirement excluding fees and all that.

When she sold now for 380'000, although apartment prices had dropped with house prices in Glenageary they had dropped to 200,000, this would have left her with 180,000 as opposed to 700,000 for her retirement, which she found hard to swallow.

There's more than likely a lot more people out there like that in the areas that people want to buy in, and that's why supply is restricted as prices rise, they see their retirement pot rising with it.

Now you mention trading up, but I think a lot of people who would be looking to sell in the mature areas of Dublin will more than likely be looking to either trade down in the area, move to another part of the country or move abroad, and they want to maximise the amount of capital they bring with them to their new life, as they're highly unlikely to find another job, and they more than likely don't want to find a job. They want to enjoy their retirement.

GUIGuy

Nor did you mention those who either want to:

Trade down: Middle-aged/elderly whose pensions were wiped out. They might be able to sell and move to something smaller and pocket the cash.

Move for work: Living and possibly working in Dublin but struggling. Sees a job in somewhere else that pays enough but doesn't want to waste money on rent (or family can't move).

Cut losses on investment: Many of the amateur landlords got into it as their pension. If the rents aren't covering payments then they want to sell up and rely on state pension rather than have property repossessed and be saddled with the difference between what's outstanding and what the liquidator sells it for.

So these are another 3 cases where it could benefit some people.

I agree in most cases it won't help 'up traders', but I can't remember anybody ever saying it would.

techdiver

It might be interesting to add a poll that people could choose which category, if any they fall into?

Edit: Poll Added. Assume trade down is any re-location that means a purchase less than sale of current property.

ted1

techdiver wrote: »

In many discussions about the re-inflating bubble happening in Dublin the argument is put forward that people in negative equity will gain with the increase in house prices. I would like to investigate this further and dispel this myth once and for all.

There are 3 types of people in negative equity:

1. People who are still living in their current house and only moan about the fact that it's worth less than what they paid for it. The can still service their mortgage and have no intention of selling or moving. In my opinion, they just need to suck it up and get on with it.
2. People who can no longer service their mortgage and are in serious financial trouble (although with recent moves by AIB it seems they are still better off than renters.).
3. People who want to trade up.

Rapidly increasing house prices don't do anything for group 1.

For people in group 2 it may prove somewhat of a relief as they can sell at less of a loss and carry less debt with them.

But the most misrepresented position is for those in group 3. Rising house prices are NOT GOOD for this group. I will outline an example below.

They took out a mortgage of €300,000 for a 2 bed apartment in Dublin city centre of which there is €250,000 outstanding. Their apartment is now worth €150,000. They wish to trade up to a new house which is priced at €400,000. As things stand if they negotiate a new mortgage and dispose of the existing property they will be left with a new mortgage of €500,000 ((€400,000 + €250,000) - €150,000).

Apartment worth|€150,000
New House worth|€400,000
New Debt|€500,000


So lets take a 10% rise in property prices.

Apartment worth|€165,000
New House worth|€440,000
New Debt|€525,000


So as you can clearly see, despite the fact that their current apartment increases by €15,000 there is a net loss of €25,000 in a market rising 10% for those "trader uppers" in negative equity. Rising house prices will help very few "ordinary people" and will only stand to further enrich the already rich. The message to the people of Ireland is not to fall for the bluff of the "property pornographers", as David McWilliams puts it.

the house they are buying is only worth 400k in good times when the apartment was bought for 300k the house could have easily being worth 750k+

so had property prices remained unchanged the debt would be the same. the only difference now is that the cost of borrowing now is significantly higher

techdiver

ted1 wrote: »

the house they are buying is only worth 400k in good times when the apartment was bought for 300k the house could have easily being worth 750k+

so had property prices remained unchanged the debt would be the same. the only difference now is that the cost of borrowing now is significantly higher

That's not what I'm trying to compare here. All I'm saying is at the moment as things stand, this house is listed for €400,000.

It is irrelevant what it was "worth" in 2006/2007. I am looking at the here and now.

The Spider

techdiver wrote: »

That's not what I'm trying to compare here. All I'm saying is at the moment as things stand, this house is listed for €400,000.

It is irrelevant what it was "worth" in 2006/2007. I am looking at the here and now.

It's not irrelevant to people selling, especially when they see prices rising, they'll hang in there for as long as they can.

techdiver

The Spider wrote: »

It's not irrelevant to people selling, especially when they see prices rising, they'll hang in there for as long as they can.

What I am saying is, that it someone is "trading up", it doesn't matter how long they wait. If prices continue to rise they will loose more in the long run and the rises in the larger property will outpace their smaller property.

The people who will gain are the ones waiting to sell and then just bail out.

The Spider

techdiver wrote: »

What I am saying is, that it someone is "trading up", it doesn't matter how long they wait. If prices continue to rise they will loose more in the long run and the rises in the larger property will outpace their smaller property.

The people who will gain are the ones waiting to sell and then just bail out.

I agree with that, and in the boom there were a lot of people buying the 'starter home', never liked that term.

However I think that people who are in apartments at the moment, would prefer to be shot of them and have no debt, and do a restart whether that's commuting renting in Dublin, or buying a bigger place.

These people will be in a better place with no debt regardless of house prices, that I think we can take as a given.

I find that it may be more worth while to pay attention to the people looking to trade down, these are the people who currently reside in most of SCD, and Northside equivlants. There's probably a time limit on when they do sell as they're getting older, however they're not in negative equity and are more about making capital on their house sale.

duffalosoldier

Dont forget many people in negtive equity bought houses on tracker mortgages whereas todays buyers are on fixed or variables. Add in rising house prices and things are not looking too bad for SOME house buyers of the boom.

Ray Palmer

Some issue with the groupings and the beliefs stated.

Group1: Is better off with house prices going up. Their credit rating is increasing. They may have more income as time has moved on. This may mean they can now buy another property to rent out

Group3: Just because house prices rise doesn't mean the rise equally. What tens to happen is the lower end of the market rises first. So you have a 25% rise on your property and the property you want to trade up to is only up 5%. The trade up property may even have dropped much more. It really depends on the specifics.

When I traded up my home the first house had gone up and the house we wanted had not gone up nearly as fast. For an extra 80k I doubled the house size. If I wanted to build an extension on the original house to get 50% increase in area I was quoted 100k-120k.

If you look at your local market you will see some funny anomalies. A road near me had property that was more or less the same houses. The road was split by a main road. One side had a 8k difference in price. There was the usual reason of being in a better area but not really. What happened as prices rose? The 8k difference disappeared as one side rose to match the other side and then they remained matched.

Talk about the market in general terms but don't forget there is massive variations on local levels and at the points people are buying.

stevedublin

Ray Palmer wrote: »

What tends to happen is the lower end of the market rises first.

Isn't it the other way around?

marathonic

stevedublin wrote: »

Isn't it the other way around?

No, in general, the cheaper properties will rise first, and fastest. This is usually for a number of reasons including, but not limited to:

• the more expensive properties tend to have dropped by a smaller percentage than those in the cheaper areas during the downturn;
• the more expensive properties are limited by salary levels. If the average salary of the highest earners in an area are increasing by 4% per year, it's difficult for the expensive properties to rise by 10%+ per year as the higher earners would eventually be unable to afford the mortgage, especially considering the banks tightened lending criteria. The lower end properties can rise significantly and the purchasers will be on progressively higher earnings as prices continue to rise

stevedublin

marathonic wrote: »

No, in general, the cheaper properties will rise first, and fastest. This is usually for a number of reasons including, but not limited to:

• the more expensive properties tend to have dropped by a smaller percentage than those in the cheaper areas during the downturn;
• the more expensive properties are limited by salary levels. If the average salary of the highest earners in an area are increasing by 4% per year, it's difficult for the expensive properties to rise by 10%+ per year as the higher earners would eventually be unable to afford the mortgage, especially considering the banks tightened lending criteria. The lower end properties can rise significantly and the purchasers will be on progressively higher earnings as prices continue to rise

That doesn't seem to be happening though, family homes in SCD are rising fastest, while other areas of Dublin are stagnant, rural areas may be still falling (not sure about that).
I don't think I agree with your two reasons: 1. I thought the most expensive properties had the greatest drops, whereas the cheaper properties (in major population centres anyway) have a floor, since first time buyers and investors always want to get their foot on the property ladder.
Your second point seems to assume that high earners get less pay increases as the economy grows than the lower paid - again its the other way around, high earners are the first to see their pay increase.

marathonic

stevedublin wrote: »

Your second point seems to assume that high earners get less pay increases as the economy grows than the lower paid - again its the other way around, high earners are the first to see their pay increase.

My second point makes no such assumption. For simplicty sake, picture three workers:

Worker A: Earns €100,000
Worker B: Earns €20,000
Worker C: Earns €25,000

Let's say worker A is at the upper end of the earnings scale and can, after including a deposit, afford a €500k house. Worker B can afford a €100k apartment after including the deposit.

If house prices rose 20%, Worker B could no longer afford the €100k apartment but Worker C could swoop in and pick this up. However, worker A could no longer afford the €500k house and, as he is at the upper end of the salary scale, there's noone above him to replace him as a buyer. This is what I mean by saying that houses at the higher end of the market will be contrained by salaries at the higher end of the market.

Of course, the above is overly simplistic and there will be those on significantly higher earnings and those with significantly higher deposits. However, the above scenario is probably representative of the 'average' scenario.

marathonic

stevedublin wrote: »

I don't think I agree with your two reasons: 1. I thought the most expensive properties had the greatest drops, whereas the cheaper properties (in major population centres anyway) have a floor, since first time buyers and investors always want to get their foot on the property ladder.

In my locality, lower-end houses dropped from €215,000 to, currently €69,000 - or 68%.

Higher-end houses dropped from €565,000 to €275,000 - or 51%.

What percentage of the Irish property market does SCD represent? Judging by the level at which it is used on various boards as a basis for discussing the Irish property market, one would almost think that SCD represented 90%+ of it.

stevedublin

marathonic wrote: »

In my locality, lower-end houses dropped from €215,000 to, currently €69,000 - or 68%.

Higher-end houses dropped from €565,000 to €275,000 - or 51%.

What percentage of the Irish property market does SCD represent? Judging by the level at which it is used on various boards as a basis for discussing the Irish property market, one would almost think that SCD represented 90%+ of it.

I get your point about high earners will buy a cheaper house if prices rise, fair enough, that may be happening.

people consider family homes in upmarket areas of SCD as representing the higher end of the market. They definitely starting rising first and fastest, one reason why they are focussed on. Cheaper houses in urban areas seem to have taken longer to rise.

No Pants

For domestic property in negative equity, has a bank ever asked for additional security?

marathonic

No Pants wrote: »

For domestic property in negative equity, has a bank ever asked for additional security?

They cannot do this. It's not within the terms of existing mortgage agreements. It may be asked for if a person was borrowing more money and willing to sign an updated mortgage agreement.

Ray Palmer

stevedublin wrote: »

I get your point about high earners will buy a cheaper house if prices rise, fair enough, that may be happening.

people consider family homes in upmarket areas of SCD as representing the higher end of the market. They definitely starting rising first and fastest, one reason why they are focussed on. Cheaper houses in urban areas seem to have taken longer to rise.

SCD does not represent the higher end of the market. Parts of it do but the price rises are for "normal" residential houses in the generally more expensive areas. The higher end of the market is really the very large houses which are scattered around in exclusive areas.

The market has been disrupted by the largest housing crisis the country has ever seen. There will be some odd things but not as odd or in the way as the discussions would have you believe.

If you really paid attention to the market rather than relying on media reports you would see house prices for first time buyer has been rising. The other things is many of the high paying jobs in Dublin did not disappear so the talk about income and house prices stays in place.

I know near my properties house prices have been rising and they are mostly North Dublin.

stevedublin

Ray Palmer wrote: »

SCD does not represent the higher end of the market. Parts of it do but the price rises are for "normal" residential houses in the generally more expensive areas.

Well this is the type of house people mean when they say SCD.

Ray Palmer wrote: »

The higher end of the market is really the very large houses which are scattered around in exclusive areas.

I would call that the "highest" end of the market myself. I'm fairly sure houses in that category fell a greater percentage from the peak than "normal" residential houses in the generally more expensive areas.

Ray Palmer wrote: »

If you really paid attention to the market rather than relying on media reports you would see house prices for first time buyer has been rising.

Thats true, but it is the "normal" residential houses in the generally more expensive areas that rose first and most.

Eric Cartman

marathonic wrote: »

In my locality, lower-end houses dropped from €215,000 to, currently €69,000 - or 68%.

Higher-end houses dropped from €565,000 to €275,000 - or 51%.

What percentage of the Irish property market does SCD represent? Judging by the level at which it is used on various boards as a basis for discussing the Irish property market, one would almost think that SCD represented 90%+ of it.

south dublin is a world onto its own and I think should really be left out of all property stats (as should donegal for being at the complete opposite end of the scale)

the logic was - houses in south dublin always worth money, 'everyone' wants to live there supposedly , investors are buying up everything they can knowing that they wont really end up in negative equity and there will always be a high rental demand even if they do, its a fairly safe investment with low risk.

house sales are still slow, although picking up casually, the carcass has pretty much been picked clean by cash buyers at this stage which explains the fall in prices again for the last month or two (on paper) . we're starting to phase into actual mortgageable buyers buying houses which if everyone keeps a sane head will slowly float the price in line with inflation, but ofcourse this is Ireland and its really down to a coin toss as to whether it goes like that or right back to 300k apartments on a backroad in portlaoise.