Are we heading for another property bubble?

Barely Hedged

stevedublin wrote: »

if they are first time buyers, the deposit would only need to be about 15%, less if the bank makes an exception for them.

Even better - affordability for everybody in the audience...

gaius c

Repayments of nearly €1500 a month with ECB rates as low as they can possibly go.

Nothing could go wrong there at all!

Eugene Norman

Michael D Not Higgins wrote: »

Now we're getting somewhere, a quantifiable number we can use. I don't know what the average Dublin wage is but I have read the average household income for the country was 50k. The average house price in Ireland is now just over 200k so our ratio is 4X household income. So we could say, on a whole, property is not overpriced in Ireland.

Let's look at Dublin as a special case. The different areas are all listed as between 223k and 316k with South Dublin being a law unto itself so let's ignore it for the time being. That gives maybe 260k as the average in Dublin right now. Let's say Dublin household income is 10% above average so 55k. We're now looking at the same multiple being 220k to be equally affordable as the rest of the country. Of course, it's Dublin so it's more expensive (by about 20%) but hardly outside the bounds of conceivable.

The 3.5 is a maximum, not a requirement. I find relativities to income spurious, because it's gross income not net, and tax rates vary. You get a lot less for your 50K gross than you used to.

The question about any property market is "is this sustainable". In Ireland you need a combination of cash exiting the market in an orderly fashion, mortgage lending taking up the slack in an orderly fashion, supply meeting and not exceeding demand in an orderly fashion, and interest rates increasing in an orderly fashion. There are so many potential future headwinds, its hard to believe that anybody thinks any "recovery" could last any length of time.

It's better to compare house prices to rent, and on that prices are heading to overvalued, from under valued. But even there in our new open economy its hard to know if rent is sustainable. Take all the future economic demographic predictions with any amount of grains of salt, as they were also used to justify the 2006 boom.

Eugene Norman

gaius c wrote: »

Repayments of nearly €1500 a month with ECB rates as low as they can possibly go.

Nothing could go wrong there at all!

To be fair, teachers are generally a good bet.

Barely Hedged

gaius c wrote: »

Repayments of nearly €1500 a month with ECB rates as low as they can possibly go.

Nothing could go wrong there at all!

When the ECB base rate was 4.25% in 2007 you could get mortgages for 5% - 5.5%.

When the BOE base rate was 5.75% in 2007 you could get mortgages of 6.5%.

Ireland is currently uncompetitive in banking terms. Thats now and will change resulting in a similar scenario to the above when rates rise.

If even higher rates set in, the government will allow interest relief for mortgages.

All common sense really.

Panda_Turtle

Average salary in Ireland is about 34.5k according to wikipedia.

Let's bump this up to 50k and say you should be able to get something reasonable for 4 times that...200k.

That's my real estate economics analysis for the day.

riclad

I don,t think we are in a property bubble,
if prices are going up its in some parts of dublin or other citys ,
where theres a high rental demand and where the economy is recovering.
Most job growth is in dublin or other irish citys .

Michael D Not Higgins

Eugene Norman wrote: »

The 3.5 is a maximum, not a requirement. I find relativities to income spurious, because it's gross income not net, and tax rates vary. You get a lot less for your 50K gross than you used to.

The question about any property market is "is this sustainable". In Ireland you need a combination of cash exiting the market in an orderly fashion, mortgage lending taking up the slack in an orderly fashion, supply meeting and not exceeding demand in an orderly fashion, and interest rates increasing in an orderly fashion. There are so many potential future headwinds, its hard to believe that anybody thinks any "recovery" could last any length of time.

It's better to compare house prices to rent, and on that prices are heading to overvalued, from under valued. But even there in our new open economy its hard to know if rent is sustainable. Take all the future economic demographic predictions with any amount of grains of salt, as they were also used to justify the 2006 boom.

The 3.5 LTI was selected as an affordable amount, just because it's the maximum doesn't mean we shouldn't use it in our examples. It was also selected with Ireland's tax regime in mind. The UK's max LTI is 4.5, for comparison.

Also, you might get less for your 50k than you used to but you also get less from the bank for your mortgage than you used to as well. Swings and roundabouts.

I agree with your middle paragraph. Supply and demand is an issue in housing and will be a problem for the recovery of the property market to a sustainable level.

From the UK, 5-7% rent yield is a good return, 9% is exceptional on average. Looking at average 2-bed rent for D4 and 6 against average 2-bed prices for south Dublin City, you get a return of 7-8%. Looks still like good value. How about north Dublin City? 7.5%. West Dublin? 7.9%. City centre? 7.4%. Even South Co. Dublin is 5.4%.

Eugene Norman

Barely Hedged wrote: »

When the ECB base rate was 4.25% in 2007 you could get mortgages for 5% - 5.5%.

When the BOE base rate was 5.75% in 2007 you could get mortgages of 6.5%.

Ireland is currently uncompetitive in banking terms. Thats now and will change resulting in a similar scenario to the above when rates rise.

If even higher rates set in, the government will allow interest relief for mortgages.

All common sense really.

The gap between the ECB and retail will probably drop but it's still not going to be pretty for the people who have over-stretched now. And "common sense" != "my best guess".

Eugene Norman

Michael D Not Higgins wrote: »

The 3.5 LTI was selected as an affordable amount, just because it's the maximum doesn't mean we shouldn't use it in our examples. It was also selected with Ireland's tax regime in mind. The UK's max LTI is 4.5, for comparison.

Also, you might get less for your 50k than you used to but you also get less from the bank for your mortgage than you used to as well. Swings and roundabouts.

I agree with your middle paragraph. Supply and demand is an issue in housing and will be a problem for the recovery of the property market to a sustainable level.

From the UK, 5-7% rent yield is a good return, 9% is exceptional on average. Looking at average 2-bed rent for D4 and 6 against average 2-bed prices for south Dublin City, you get a return of 7-8%. Looks still like good value. How about north Dublin City? 7.5%. West Dublin? 7.9%. City centre? 7.4%. Even South Co. Dublin is 5.4%.

Still dependent on very high rental rates, which could of course ( and will fall) if there is any recession.

I see you are sticking to 2 bedrooms, can you post your working out ( even to say that the average price is 200K, the rent is 17.5 K per annum etc.).

Michael D Not Higgins

Eugene Norman wrote: »

Still dependent on very high rental rates, which could of course ( and will fall) if there is any recession.

I see you are sticking to 2 bedrooms, can you post your working out ( even to say that the average price is 200K, the rent is 17.5 K per annum etc.).

I'm using the daft report data from the latest sale and rental figures.
https://www.daft.ie/report/ronan-lyons-2014q4-rental
https://www.daft.ie/report/

As an example, SCD 2-bed average 1476/month, average price 326k, yield 5.4%. And that's the aberration, everything else is 2% points above that.

The_Conductor

Barely Hedged wrote: »

2/3 years saving.

I used this an approximate benchmark as its a quantifiable example.

A teacher on a salary of 45k, after the usual public sector deductions- would be making in the region of 1065 net a forthnight (or just under 28k net per annum).
Two teachers in the same position- would net in or around 55k per annum after tax and deductions (presuming they're not paying towards private healthcare).

If they saved half their net income- it would take them almost 4 years to get the suggested deposit. Its highly unlikely they'd manage to save half their net income- so in all probability it would take even longer to save the suggested deposit.

woodseb

The_Conductor wrote: »

A teacher on a salary of 45k, after the usual public sector deductions- would be making in the region of 1065 net a forthnight (or just under 28k net per annum).
Two teachers in the same position- would net in or around 55k per annum after tax and deductions (presuming they're not paying towards private healthcare).

If they saved half their net income- it would take them almost 4 years to get the suggested deposit. Its highly unlikely they'd manage to save half their net income- so in all probability it would take even longer to save the suggested deposit.

you're forgetting that teachers can work 15 months a year;)

gaius c

Barely Hedged wrote: »

When the ECB base rate was 4.25% in 2007 you could get mortgages for 5% - 5.5%.

When the BOE base rate was 5.75% in 2007 you could get mortgages of 6.5%.

Ireland is currently uncompetitive in banking terms. Thats now and will change resulting in a similar scenario to the above when rates rise.

If even higher rates set in, the government will allow interest relief for mortgages.

All common sense really.

You're forgetting that in Ireland, those who pay their mortgages, pay more in order to subsidise those who won't/don't pay. Margins of 1% over ECB rate won't be coming here until the arrears are dealt with.

Idioteque

Michael D Not Higgins wrote: »

...what I want to know is what people think the actual value of property in our capital is, how we determine this and stop worrying about what this month's % change is.

I think all of this messing around with potential different scenarios (teacher €45K etc.) is a waste of time.

Property is worth what people are willing to pay for it.

Given the myriad of personal circumstances that exist for people it's hard to justify working out market "affordability" based off a multiple of Gross Income.

As long as credit is restricted to a sensible level, the market will dictate prices based on *supply & demand. That, in my opinion is what property is worth.
If there's only 10 houses in Dublin for sale, naturally they'll be ridiculous prices...people can't turn around and say "well it's not affordable for me".

*Supply is a whole other discussion as there's multiple factors at play, including but not limited to people in negative equity and at what pricepoint will they sell their house/apt. to trade down.

I've been looking at houses in the Leixlip/Celbridge/Maynooth area and I've seen some houses at what I consider stupid prices but people have gone and paid them (for lots of reasons...tired of looking for so long etc.).

Equally, I got an alert for a house drop €41K from €340K - €299K...so I'm hoping what I think a 'fair price' is might begin to appear while all the time being aware of basic supply/demand economics

Dwalsh58

Dog of Tears wrote:

The current prices are being driven primarily by lack of supply which is unlikely to alleviate in the medium term.

What about the medium to long term?

dasdog

I would be slightly bearish but with lack of supply who knows. Interesting article on Bloomberg this afternoon.

Home prices in Ireland surged 16.1 percent last year — more than four times the average 3.9 percent increase for the 23 countries tallied in Federal Reserve Bank of Dallas data.

http://www.bloomberg.com/news/articles/2015-04-08/home-prices-are-surging-in-these-four-countries

Note the language (home + increase) compared to the indigenous tabloids. YoY vs Disposable Income changes stand out as not sustainable but data doesn't appear to matter when it comes to this asset class.

Barely Hedged

Eugene Norman wrote: »

The gap between the ECB and retail will probably drop but it's still not going to be pretty for the people who have over-stretched now. And "common sense" != "my best guess".

1) Define overstretched in numeric terms?

2) What are the exact numbers of people who have over stretched, in your definition, and what are their exposures to a 1% rise in interest rates?

When rates rise, as I say, the spread between the central bank rate and mortgage rates Will tighten. Were agreed on that.

Of course it is debateable what a government will do if mortgage payments become onerous on citizens but if you can't think of an alternative to what they would implement, and they will implement something, it's hard to think beyond tax breaks for mortgage interest repayments

johnp001

Barely Hedged wrote: »

When the ECB base rate was 4.25% in 2007 you could get mortgages for 5% - 5.5%.

When the BOE base rate was 5.75% in 2007 you could get mortgages of 6.5%.

Ireland is currently uncompetitive in banking terms. Thats now and will change resulting in a similar scenario to the above when rates rise.

If even higher rates set in, the government will allow interest relief for mortgages.

All common sense really.

gaius c wrote: »

You're forgetting that in Ireland, those who pay their mortgages, pay more in order to subsidise those who won't/don't pay. Margins of 1% over ECB rate won't be coming here until the arrears are dealt with.

Very true, altough even when arrears are dealt with we are still paying for the bank bailout for a generation. This will include higher margins over ECB rate and additional tax burdens (e.g. USC)

dasdog wrote: »

I would be slightly bearish but with lack of supply who knows. Interesting article on Bloomberg this afternoon.


http://www.bloomberg.com/news/articles/2015-04-08/home-prices-are-surging-in-these-four-countries

Note the language (home + increase) compared to the indigenous tabloids. YoY vs Disposable Income changes stand out as not sustainable but data doesn't appear to matter when it comes to this asset class.

Also note the headline

Now might not be the best time to buy that Irish cottage.

A lot of investors prefer to buy assets that are dropping in value on the expectation that they will subsequently increase. It is the less experienced investment money that flocks to buy into a rising market.
International investors are profit taking from Irish property investments currently
http://www.irishtimes.com/business/economy/international-property-investors-selling-off-dublin-offices-bought-in-crash-1.2164583

Affordability for owner occupiers is not there in the Dublin market currently.
Today's Indo article is very clear on this:
http://www.independent.ie/business/personal-finance/property-mortgages/bottoms-up-dispelling-firsttime-buyer-myths-31128120.html

The example given here is of a couple with a joint income of €4200 after tax and gives their purchasing power as:

The answer is that it will support a mortgage of about €145,000, which implies a purchase price of just over €181,000.

I would see these figures as better indicators of affordability than the example in this thread of a couple on roughly the same salary who are able to save between 1/3rd and half of their gross income and afford a house for more than twice that amount if I am reading the posts correctly.

gaius c

Don't forget that 56% of households have a gross income of less than €50,000. That's households, not individuals.

The Spider

On the other side, Ireland looks like a good investment property wise at the moment, could the same thing happen to Dublin that happened to London, with the worlds ultra wealthy buying up all property?

http://www.irishtimes.com/life-and-style/homes-and-property/ultra-rich-target-irish-property-1.2168532

Michael D Not Higgins

johnp001 wrote: »

The example given here is of a couple with a joint income of €4200 after tax and gives their purchasing power as:

I would see these figures as better indicators of affordability than the example in this thread of a couple on roughly the same salary who are able to save between 1/3rd and half of their gross income and afford a house for more than twice that amount if I am reading the posts correctly.

But remove the children and they can afford something in the region of 300k.

johnp001

Michael D Not Higgins wrote: »

But remove the children and they can afford something in the region of 300k.

I'd guess "removing children" is something that most couples would find difficult
There will be a limited amount of work for your teacher couple too if only the childless are able to buy in Dublin.

Michael D Not Higgins

johnp001 wrote: »

I'd guess "removing children" is something that most couples would find difficult
There will be a limited amount of work for your teacher couple too if only the childless are able to buy in Dublin.

What's the actual profile of people as first time buyers? I'm removing people who already own as they can have equity built up which can change our assumptions.

Among my own friends, there were no people applying for mortgages with kids already. I know this is anecdotal but in my own view, the majority do not have kids in the equation during a house buying situation. Feel free to correct me with available stats, but if you're carrying kids into the equation, it will obviously affect the bank's view of your affordability.

Michael D Not Higgins

I did the maths with one kid instead of two and the example couple can afford nearly 270k. In other words, it looks like an example generated to show a large decrease in affordability for an average looking situation and not really representative of the situation as a whole.

johnp001

gaius c wrote: »

Don't forget that 56% of households have a gross income of less than €50,000. That's households, not individuals.

And also that the average income of Angela Kerins and 10 minimum wage workers is above the average industrial wage.

The Spider wrote: »

On the other side, Ireland looks like a good investment property wise at the moment, could the same thing happen to Dublin that happened to London, with the worlds ultra wealthy buying up all property?

http://www.irishtimes.com/life-and-style/homes-and-property/ultra-rich-target-irish-property-1.2168532

That Knight Frank report quoted by IT in your link does give a good outlook for Ireland but it is similarly positive for most other countries in Europe with the exception of the Ukraine and Greece.

Last Saturday's IT story, linked in my post above, is talking about international investors currently selling up and the Bloomberg story in Dasdog's link above opens with an admonition not to buy Irish property so at best the indications of the worlds wealth going headlong into Irish property are mixed.

Barely Hedged

gaius c wrote: »

You're forgetting that in Ireland, those who pay their mortgages, pay more in order to subsidise those who won't/don't pay. Margins of 1% over ECB rate won't be coming here until the arrears are dealt with.

gaius c wrote: »

You're forgetting that in Ireland, those who pay their mortgages, pay more in order to subsidise those who won't/don't pay. Margins of 1% over ECB rate won't be coming here until the arrears are dealt with.

You're forgetting that banks that currently don't operate in Ireland and free to come and operate in Ireland providing competitive margins.

You'd be right if things stayed the same as they are right now, but that's the problem. Things won't stay the same as they are now and banks entering and lending into an improving economy is a logical step

Barely Hedged

gaius c wrote: »

Don't forget that 56% of households have a gross income of less than €50,000. That's households, not individuals.

So pretty much 50:50. Hardly worthy of note

Barely Hedged

johnp001 wrote: »

And also that the average income of Angela Kerins and 10 minimum wage workers is above the average industrial wage.



That Knight Frank report quoted by IT in your link does give a good outlook for Ireland but it is similarly positive for most other countries in Europe with the exception of the Ukraine and Greece.

Last Saturday's IT story, linked in my post above, is talking about international investors currently selling up and the Bloomberg story in Dasdog's link above opens with an admonition not to buy Irish property so at best the indications of the worlds wealth going headlong into Irish property are mixed.

The worlds wealth couldn't care less about the Irish property market. They care about more established property markets.

One of the biggest international investors in Irish property, lone star. One of the top blokes in there - he's Irish

Greyian

Barely Hedged wrote: »

You're forgetting that banks that currently don't operate in Ireland and free to come and operate in Ireland providing competitive margins.

You'd be right if things stayed the same as they are right now, but that's the problem. Things won't stay the same as they are now and banks entering and lending into an improving economy is a logical step

Mortgages to-date in Ireland have effectively been unsecured loans, due to the shockingly low levels of repossession. It's hardly surprising that interest rates are higher on mortgages here as a result.