Are we heading for another property bubble?

ionapaul

Are we not being a little short-sighted or in danger of forgetting recent history if we put too much emphasis on 'affordability'? Just because something is currently affordable, doesn't mean that we should assume that buying it would be a wise decision! Almost all properties bought at the very height of our last bubble were affordable at the time...

A litre of milk is affordable to me at €50, I could continue to consume the same volume of milk per year as I do paying €1 per litre with no change to my lifestyle, but just because I can afford it, doesn't mean it makes sense. Likewise, my wife and I could buy at the very limit of affordability today, and regret it for years into the future.

Unfortunately I understand that in the Irish property market I compete against other potential purchases who give zero thought to the future, the changes that may come down the line or anything like that (perhaps safe in the knowledge that if things go south, some group or other will be there to back them up and say "No-one told me it was a bad idea Joe!/Where's my NAMA Joe!/It's not my fault Joe!"), and so people who are frugal by nature are are disadvantaged by the fact.

Barely Hedged

ionapaul wrote: »

Are we not being a little short-sighted or in danger of forgetting recent history if we put too much emphasis on 'affordability'? Just because something is currently affordable, doesn't mean that we should assume that buying it would be a wise decision! Almost all properties bought at the very height of our last bubble were affordable at the time...

A litre of milk is affordable to me at €50, I could continue to consume the same volume of milk per year as I do paying €1 per litre with no change to my lifestyle, but just because I can afford it, doesn't mean it makes sense. Likewise, my wife and I could buy at the very limit of affordability today, and regret it for years into the future.

Unfortunately I understand that in the Irish property market I compete against other potential purchases who give zero thought to the future, the changes that may come down the line or anything like that (perhaps safe in the knowledge that if things go south, some group or other will be there to back them up and say "No-one told me it was a bad idea Joe!/Where's my NAMA Joe!/It's not my fault Joe!"), and so people who are frugal by nature are are disadvantaged by the fact.

The central bank has put in place international best practice on affordability criteria which is used by some of the leading economies in the world, often championed on this forum.

If that doesn't satisfy affordability bounds in your eyes, I don't know what else you suggest?

Michael D Not Higgins

ionapaul wrote: »

Almost all properties bought at the very height of our last bubble were affordable at the time...

Except that they weren't. The LTI and LTV ratios people were being granted by the banks were enormous. The current limits are prudent and backed by international practice.

Villa05

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.

Investec made an announcement of their intention to enter the irish mortgage market back in 2012, but changed their mind later after researching our backward system.

Margins are low considering the risks involved

ionapaul

Michael D Not Higgins wrote: »

Except that they weren't. The LTI and LTV ratios people were being granted by the banks were enormous. The current limits are prudent and backed by international practice.

By the criteria used at the time, they were affordable - even with the sky-high prices paid in 2006, 2007, 2008 there wasn't an arrears problem for another couple of years. Indeed, many people are continuing to make good on the commitments undertaken at the time, despite the fact that we'd now, with hindsight, view the financial burden as 'unaffordable'. Could the same happen in another few years to those rushing in now? Worth thinking about maybe - again, I'm a very cautious person so always choose a low-risk path when it comes to major financial decisions!

Eugene Norman

Michael D Not Higgins wrote: »

Except that they weren't. The LTI and LTV ratios people were being granted by the banks were enormous. The current limits are prudent and backed by international practice.

The current limits haven't had any effect yet. Lets see what happens in the rest of the year. Although supply seems to be increasing at a rate of knots on daft so maybe it will happen later this year, daft tends to be a leading indicator.

Eugene Norman

Villa05 wrote: »

Investec made an announcement of their intention to enter the irish mortgage market back in 2012, but changed their mind later after researching our backward system.

Margins are low considering the risks involved

The effective non-recourse mortgages we have would scare anybody else away.

Eugene Norman

ionapaul wrote: »

By the criteria used at the time, they were affordable - even with the sky-high prices paid in 2006, 2007, 2008 there wasn't an arrears problem for another couple of years. Indeed, many people are continuing to make good on the commitments undertaken at the time, despite the fact that we'd now, with hindsight, view the financial burden as 'unaffordable'. Could the same happen in another few years to those rushing in now? Worth thinking about maybe - again, I'm a very cautious person so always choose a low-risk path when it comes to major financial decisions!

Unless interest rates stay low for ever and ever and ever, then there is another crisis looming for tracker mortgage holders when interest rates increase. We all know people with their 400K mortgages on 1% paying 1K or so a month, until that doubles when or if interest rates go up.

Theboinkmaster

Eugene Norman wrote: »

Unless interest rates stay low for ever and ever and ever, then there is another crisis looming for tracker mortgage holders when interest rates increase. We all know people with their 400K mortgages on 1% paying 1K or so a month, until that doubles when or if interest rates go up.

I'd be more worried about those on variable rates!

Eric Cartman

Eugene Norman wrote: »

Unless interest rates stay low for ever and ever and ever, then there is another crisis looming for tracker mortgage holders when interest rates increase. We all know people with their 400K mortgages on 1% paying 1K or so a month, until that doubles when or if interest rates go up.

this people would be smart to give every penny they have into depleting the principal on that before rates go up , if you only have 150/200k left on your mortgage a tracker would be very affordable, even at 5-6%

Greyian

Eric Cartman wrote: »

this people would be smart to give every penny they have into depleting the principal on that before rates go up , if you only have 150/200k left on your mortgage a tracker would be very affordable, even at 5-6%

It would be even smarter to save the extra money now, at higher interest rates (e.g Nationwide UK's 4% account), then use all of those savings to pay a lump sum off the tracker as soon as rates rise. You'd get more in savings interest than you'd save on the tracker mortgage by paying it off now, and you'd have some savings in the event of something unforeseen happening (e.g. job loss)

Eugene Norman

Greyian wrote: »

It would be even smarter to save the extra money now, at higher interest rates (e.g Nationwide UK's 4% account), then use all of those savings to pay a lump sum off the tracker as soon as rates rise. You'd get more in savings interest than you'd save on the tracker mortgage by paying it off now, and you'd have some savings in the event of something unforeseen happening (e.g. job loss)

Well BOI give you 1.25% on the first 10K and 0.25% thereafter. You have to give them 7 days notice to exit the savings account, and can't issue more than one request to move money at a time. You can only transfer from your current account and only 1.5K a month. Meaning somebody look for the 0.25% on this 100k would take years to get it in there.

I imagine thats not too popular. Sterling rates are better but sterling could fall in future wiping out gains.

Greyian

Eugene Norman wrote: »

Well BOI give you 1.25% on the first 10K and 0.25% thereafter. You have to give them 7 days notice to exit the savings account, and can't issue more than one request to move money at a time. You can only transfer from your current account and only 1.5K a month. Meaning somebody look for the 0.25% on this 100k would take years to get it in there.

I imagine thats not too popular. Sterling rates are better but sterling could fall in future wiping out gains.

But you don't have to go with BOI....Nationwide are offering 4%, that's not some made up example, it's currently on the market, and it is in Euro, not Sterling: http://www.nationwideuk.ie/

As things stand, right now, people on trackers are likely to be better off saving any extra in a high-interest account, compared with just paying off the tracker.

Eugene Norman

Greyian wrote: »

But you don't have to go with BOI....Nationwide are offering 4%, that's not some made up example, it's currently on the market, and it is in Euro, not Sterling: http://www.nationwideuk.ie/

As things stand, right now, people on trackers are likely to be better off saving any extra in a high-interest account, compared with just paying off the tracker.

That 4% maxes out at 15K, but I take your word for the calculations.

Greyian

Eugene Norman wrote: »

That 4% maxes out at 15K, but I take your word for the calculations.

KBC offer 3.5% up to €50,000, so if the 2 were used in unison you could get up to €65,000 at an average of about 3.6% (2.124% after DIRT).

Obviously, if interest on savings was to fall, or tracker mortgage rates rise, it would then be better to withdraw the savings and pay a lump sum off the total. I was just more interested in explaining that, as things currently stand, overpaying a tracker mortgage (under/at about ECB+1.5%) is actually not the best allocation of someone's funds.

riclad

IT could happen that in certain areas, prices will rise ,past the reach of most first time buyers, if you want to live in area x, you,ll have to pay rent.
Thats what happened in london,
certain areas ,only rich people can afford to buy there .
OR maybe people who have rich parents to help them to get a mortgage .

gaius c

Michael D Not Higgins wrote: »

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

So don't have a family and then you'll be able to afford a family home in Dublin?

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.

Aye. Foreign banks are climbing over each other to get a piece of markets where it's impossible to repossess the security on loans when they go bad.

riclad

I know its off topic ,but we could be heading for a property bubble in the buying of agricultural land, farm land that can only be used for farming.
ie prices are rising rapidly ,farmers are getting massive loans from banks , to buy ordinary farm land.

dont worry,
The goverment will bail out all the farmers ,and all the banks in 3 years time,
and the taxpayer will be left to pay the bill .
did we learn nothing from the 2007 housing crisis .?

This was discussed on newstalk radio this morning ,on the pat kenny show .

The_Conductor

It is off-topic and more relevant a subject for the Farming and Forestry forum.
However, we've had two bubbles and busts in land prices since we joined the EEC- on the 1st of Jan 1973. Now- if you'd like to discuss it- please start a thread over in the Farming and Forestry forum.

Michael D Not Higgins

gaius c wrote: »

So don't have a family and then you'll be able to afford a family home in Dublin?

I went into more detail which showed the particular example was cherry picked by Karl Dieter to show issues with the lending. The second child unduly affected their affordability according to the bank's criteria. No children - 300k, one child - 270k, 2 children - 160k. This hypothetical family lost 110k in credit for one child however that's not the usual scenario.

Barely Hedged

Greyian wrote: »

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.

But only a few weeks ago BoI summonsed 5k of people for repossession. Hardly unsecured loans?

Interest rates are higher because of the number of tracker mortgages and lack of competition in the market. Arrears of the kind you refer to have long been written off by the banks as bad debts. A return to profitability in the past year doesn't support your point that the mortgages in arrears and not being repossed and are causing higher than the EU avergage for variable rate mortgages.

Sure even PTSB offer lower interest rates for new customers than existing ones. Hardly the actions of a bank struggling under the weight of unsecured loans?

Barely Hedged

gaius c wrote: »

So don't have a family and then you'll be able to afford a family home in Dublin?


Aye. Foreign banks are climbing over each other to get a piece of markets where it's impossible to repossess the security on loans when they go bad.

BoI have recently summonsed > 5k of people for repossession. Its a logical assumption that other banks will soon follow.

Insolvency and debt resolution laws have changed, are currently changing and will ultimately be more representative of other EU countries. Change in legislation is slow but has and is currently being enacted.

You're making a point that something won't change in the future because of old practices but ignore the fact that these old practices have come about because of a situation that has changed and is changing further to ensure that it's easier to reposess?

Barely Hedged

Villa05 wrote: »

Investec made an announcement of their intention to enter the irish mortgage market back in 2012, but changed their mind later after researching our backward system.

Margins are low considering the risks involved

That was in 2012 so it would have been talked about by their management internally since 2011. That's 3/4 years ago and a lot has changed in terms of the Irish economic outlook and legislation since then. Investec also underwent restructuring around then selling off a pool of bad mortgages from Ireland so I'd say senior management put the brakes on expansion plans on Irish mortgages.

To dismiss the idea of future banks entrance or expansion plans in Ireland because of a decision made in 2012 doesn't stack up for me

Villa05

Barely Hedged wrote: »

That was in 2012 so it would have been talked about by their management internally since 2011. That's 3/4 years ago and a lot has changed in terms of the Irish economic outlook and legislation since then. Investec also underwent restructuring around then selling off a pool of bad mortgages from Ireland so I'd say senior management put the brakes on expansion plans on Irish mortgages.

To dismiss the idea of future banks entrance or expansion plans in Ireland because of a decision made in 2012 doesn't stack up for me

Sorry it was 2013/2014 when the decision was made and the reasons. This article was written before the decision to to abandon thoughts of entering the Irish Market

It is understood that Investec, headed by Michael Cullen, views the Irish mortgage market as increasingly uncertain because of recent changes to the repossession and insolvency regimes. These changes make it harder for banks to repossess properties if they are Personal Dwelling House (PDH) loans.
Sources told the Sunday Independent that while Investec remains interested in entering the mortgage market, it has growing reservations about being able to get its money back if loans go bad because of new repossession and insolvency regulations. The rising cost of litigation has now to be factored in to mortgage pricing.

http://www.independent.ie/business/irish/investec-puts-300m-plan-for-new-mortgage-lending-on-hold-29818741.html

Villa05

Barely Hedged wrote:

To dismiss the idea of future banks entrance or expansion plans in Ireland because of a decision made in 2012 doesn't stack up for me

No sign of any new entrants when mark up is at twice the rate of the eu average is enough for most reading here that the current mortgage market is so messed up and as a result is blocking new entrants.

Villa05

Barely Hedged wrote:

Interest rates are higher because of the number of tracker mortgages and lack of competition in the market. Arrears of the kind you refer to have long been written off by the banks as bad debts. A return to profitability in the past year doesn't support your point that the mortgages in arrears and not being repossed and are causing higher than the EU avergage for variable rate mortgages.

The banks cost of funding is very close to the average mortgage tracker rate. It is now believed that that trackers are breaking even.
Banks rising profits are due the gouging of variable rate customers, no competition and writing back losses due to the rise in property values

The_Conductor

Michael D Not Higgins wrote: »

I went into more detail which showed the particular example was cherry picked by Karl Dieter to show issues with the lending. The second child unduly affected their affordability according to the bank's criteria. No children - 300k, one child - 270k, 2 children - 160k. This hypothetical family lost 110k in credit for one child however that's not the usual scenario.

From personal experience- the costs and the manner in which your income is rapidly diminished with a second child- are broadly accurate. The figures look startling- but they are by and large a good yard stick to go by. Anyone who disbelieves this- have 2 children and see what happens.......

Baby01032012

The_Conductor wrote: »

From personal experience- the costs and the manner in which your income is rapidly diminished with a second child- are broadly accurate. The figures look startling- but they are by and large a good yard stick to go by. Anyone who disbelieves this- have 2 children and see what happens.......

Ok I went and took your advice and had 2 children..so now what?

I think having 2 children is probably double the expense of 1. But I don't see the correlation between moving from 300k to 270k with 1 to 160k with 2. Unless something like the fact that having 2 children may result in either parent deciding it's no longer viable to work and pay for crèche for 2 kids.

A lot is due to level of income stage of career potential to earn more in future industry that they are employed in.

The_Conductor

Villa05 wrote: »

The banks cost of funding is very close to the average mortgage tracker rate. It is now believed that that trackers are breaking even.
Banks rising profits are due the gouging of variable rate customers, no competition and writing back losses due to the rise in property values

Not exactly.
Even Bank of Ireland get over 50% of their total funding as short term funding (about 52% of their outstanding bond are 0-1 year bonds with a yield of 50-80 basis points over mid point swaps for covered bonds (pfandbriefe - where borrowings are fully covered with defined assets- and are thus viewed as secure by lenders- in Bank of Ireland's case- more secure than Irish sovereign debt).

Bank of Ireland's profits are due to the imposition of, and increase of, charges for services that many people presume are free, or were free. I paid over 400 Euro in bank charges last year- where 10 years ago I had free banking....... Most other customers are the same- if they bothered to check.........

mickman

The_Conductor wrote: »

Not exactly.
Even Bank of Ireland get over 50% of their total funding as short term funding (about 52% of their outstanding bond are 0-1 year bonds with a yield of 50-80 basis points over mid point swaps for covered bonds (pfandbriefe - where borrowings are fully covered with defined assets- and are thus viewed as secure by lenders- in Bank of Ireland's case- more secure than Irish sovereign debt).

Bank of Ireland's profits are due to the imposition of, and increase of, charges for services that many people presume are free, or were free. I paid over 400 Euro in bank charges last year- where 10 years ago I had free banking....... Most other customers are the same- if they bothered to check.........

why would you pay this ? you can avoid it just by having 3k in your account. If you move to aib then you only need 2500 -- unless you are talking about a business account ?