February 22, 2004

Young victims of property tyranny

Posted in Sunday Business Post · 10 comments ·

Tomorrow afternoon, Newstalk 106 will give away €40,000 to the winner of a very generous competition called Time to Move.

The money is earmarked for a deposit on a house. Not surprisingly, with this much cash involved, the competition has generated huge interest.

The drill is that a recently sold house or apartment is described to three contestants who guess the sale price.The contestant who guesses closest to the actual sale price goes onto to the next round and so on. Tomorrow is the grand final with �40,000 on the table.

Quite apart from the cash involved, what grabs you is that no one really has a clue about the price of property. There was a time when knowing the “price of everything and the value of nothing” appeared to sum up the great Irish property bubble.

Now, however, it is clear that we recognise neither value nor price. In almost every case, whether the property was a house or an apartment, the competition revealed a disparity of at least �100,000 between the lowest and highest of the three bidders.

Maybe it is just a competition that shouldn’t be taken too seriously, but it could be telling us we have lost the run of ourselves completely when it comes to property. We seem to have no idea where “fair value” lies. Is fair value for a twobedroom flat in Saggart �280,000 or �400,000? Who knows? Most people seem to forget the price in an attempt to get their hands on the cash.

Property mania is not limited to firsttime buyers. No way, Jose. Pick up this or any paper today and you will see ads for second, third and fourth properties in places as far away as Dubai and Bulgaria, let alone the Algarve.

But let’s start closer to home with the first-time buyer. Liza works in the cosmetic business. She is freelancing and is therefore not on a steady income. Work has not been too bad lately but is very erratic. Like many of her peers in their late 20s, she has decided to take the plunge.

Fed up with renting, she has just put down �4,000 to secure her first apartment. She lied to get the cash. She knows that she has lied about her income to the broker and the broker knows it too. She has invented “nixers” which she claims her annual P60 misses and she assures the broker that these will plug any monthly financial gaps.

The broker is also well aware that rent from the second bedroom is absolutely crucial to meet the monthly repayments. Without that, Liza will probably default. Liza has already moved back home to save and intends to stay there for the first year. She will initially rent the new place out.

On Friday, her broker told her that he had secured 93 per cent of the cost of the property. This figure is close to six times her earned salary and yet a bank in Ireland is willing to give her the cash. She has no idea whether the property is good value or not, all she knows now is that she is on the ladder.

Liza is going to take a big cut in her disposable income in order to have her own property. In fact, her mortgage (at the lowest interest rates in her living memory) will be twice the rent she pays at the moment but she is willing to take the plunge because she feels that every year she waits she is being left behind.

Who could blame her? In the past seven years, housing has been the single biggest creator of wealth in the country. Even the government gives you a tax break to buy a place. Now the biggest difference between the haves and have-nots in the “new” Ireland is when you bought your house – not what type of house you own but when you bought it.

There is a new category of person in Ireland today who we’ll call the “96ers”. Our society is divided between 96ers and the rest. 96ers are those who bought their houses before 1996. The 96ers are asset rich; the rest are indebted.

The question this year is whether the ’04 team will be the 96ers of the future? In truth, it is very hard to see how the ’04 team can replicate the 96ers because it is not clear now what is driving up house prices other than cheap money and irresponsible lending.

If simple demand outstripping supply were the culprit, as estate agents suggest, then rents should be going up commensurate with prices. But the opposite has occurred.

Since 1996, rents have increased by just over 50 per cent, in line with after-tax wages.Yet house prices are up more than 300 per cent. House prices rising six times faster than rents means that yields have fallen dramatically since 1996.This situation is made worse for today’s investor because rents are apparently falling.

Also, 70,000 homes were built last year, yet most commentators suggest that real demand is running at around 40,000. So around 40 per cent of all homes bought last year in this state were bought for capital gain. So where will this gain come from with supply outstripping demand to such an extent?

It can only come from more and more investors getting into the market craving capital gain, with neither rents nor large population increases to support this punt.

Banks finance this because they have to. They are in the business of lending money and the more money they lend the more profit they make. Every mortgage manager is set volume targets each year and these will be met.

As the banks take equity in existing houses as collateral for further property related loans, both sides of the bank’s balance sheet is tied up in the fortunes of the Irish housing market.

Central European housing markets are simply a play on the Irish property market for people priced out of the second home game in Dublin, Cork and Galway. With an average income per head of $7,000, central Europeans are not going to be buyers of $150,000 apartments.The game is to buy in Hungary today to sell on to a Paddy tomorrow. The golden rule in Budapest is: don’t be Paddy last.

The banks are involved in a dogfight for market share and will push lending to the max if they have to. Margins on lending have fallen, but fees on facilitating are still strong. So more deals means more fees means more clients. But if we are spending more than we are saving, where are the banks getting all the cash? They are borrowing on the European money markets to lend here.

This is simply a process where money moves from one country to another and they are borrowing cash from old Germans who have saved and lending it to young Paddies who are speculating.

Banks are also securitising mortgages. This is an instrument whereby the banks borrow against the stream of income coming every month from their existing mortgages. This allows banks to borrow twice for the same house more or less and make the new cash available for further mortgages.

So it is not hard to see why they might have an interest in keeping the whole show on the road. If you doubt that the banks are making good money on mortgages, check out AIB’s results on Tuesday.

What is all this doing to society? It’s engineering a huge transfer of wealth, from the young first-time buyer like Liza to the old landowner. A 10 per cent increase in house prices this year is like a 10 per cent tax hike for the young who are not on the ladder and a 10 per cent tax cut for the old who are happily ensconced.

It seems quite bizarre to allow the housing market penalise the 1.9 million young citizens of this country who are under 29 – the future of the country – for the financial benefit ofour older home owners, particularly half a million or so over 55s.

For every four impoverished first time buyers, stuck in traffic at the Red Cow Roundabout, there’s a rich, retired homeowner about to tee off in the Algarve. Ageism, my foot!

  1. Johnny Waldron

    With prices in the Dublin property market increasing since
    the early nineties we can comfortably describe it as a bull
    market. Over the course of any such “bull run” certain
    attitudes and behaviours develop and become ingrained in
    the collective psyche of market participants. These
    beliefs become self-sustaining, as increasing prices serve
    to justify the belief that prices will rise. The beliefs
    that money is safe in houses and that property will
    outperform other investments are now unshakeable in most
    Irish people’s minds. People further derive significant
    emotional benefit from being “home owners” and “being on
    the ladder”. Our society now attaches much status with
    home ownership and stigma to renting. By definition
    beliefs are founded on faith and are not subject to
    rational analysis. As such buyers’ critical faculties have
    become suspended and the market is now driven exclusively
    by emotion. Once the majority of people accept such
    statements as irrefutable truths, the price of property is
    irrelevant. The only question that remains relevant is
    whether an individual can raise the funds to buy.

    At the current lofty price levels the critical challenge
    for the market has become affordability. In this emotional
    market value per square foot is no longer a consideration.
    The only constraint is how much money buyers can raise.
    Banks eagerly lend increasingly large multiples of salary
    as mortgages. Buyers look increasingly further afield for
    their rung on the ladder. People now leave rented
    accommodation in the city centre to move to Kildare, North
    County Dublin and even Meath. Despite falling rents people
    still accept sacrifices in disposable income, commuting
    time and amenities just to own property. Notwithstanding
    the current benign interest rate environment, which is
    unprecedented, the market has now had to come up with
    further innovations to sustain the bull market. So we now
    have parents incomes submitted on mortgage applications.

    A scientific analysis of the Dublin property market would
    describe the market’s reaction to increasing price rises
    as “positive feedback”. Benign though this sounds, systems
    with positive feedback tend to meet with brutal ends.
    Another such system is a nuclear fission reaction. Once a
    nuclear fission reaction achieves critical mass we have a
    nuclear explosion. Carbon rods are used in nuclear
    reactors to counteract the positive feedback and prevent a
    run away chain reaction. With minimal lending constraints
    and blatant manipulation of the auction process by sellers
    and their agents there would appear to be no “carbon rods”
    in the Dublin property market.

    It’s scary to hear how perverted people’s beliefs in
    property have become. I have two friends who currently
    hold senior management positions and are about to start
    their own business. Despite having the experience and
    education to know better they are both considering getting
    large mortgages before they leave their steady jobs. It’s
    always dangerous to stand in the way of a rampaging bull,
    but with all lending parameters relaxed, low interest rates
    and supply now outstripping demand it is hard to see how
    much further the hysteria can go. The tragedy is that the
    only way to unseat deeply held beliefs in property is via a
    massive shock which is coming soon to a street near you

  2. ronnie

    in the long run the supply of houses will meet the demand
    and income levels will stabalise and grow roughly at
    inflation rate plus any productivity gains,also interest
    rates will tend towards the long run average. the average
    house is ten times the average wage,obviously this cannot
    continue,interest rates will rise, wages will not rise
    much, supply of houses will rise, demand will weaken .all
    these likelyhoods mean that bar a miracle the current
    relative prices of houses is unsustainable

  3. conor

    Ronnie, you remind me of how I used to feel when I came out
    of college. Nominal, relative and real prices dont really
    mean anything to young people who really want things to
    happen for them in the short term. Johnny, economists and
    forecasters have been predicting the great house price fall
    for a few years now – it didnt happen and with the pending
    payout of the SSIA accounts in the next two years, it aint
    gonna happen for some time.
    David , I am renting in Dublin at the moment and to me its
    an absolute fallacy that the price of rent is dropping.
    Perhaps there may be a drop out in the sticks but in the
    city centre and walking-distance surrounding areas,
    (realistically these are the areas where people want to
    rent), rent has risen if anything.
    The economics degree I did a few years back didnt explain
    this one!
    Eternally rising property prices, banks who are
    screaming ‘Yes’, rises in rental prices where they need to
    fall and rising unemployment in the country. I can see John
    Keynes scratching his head in economist limbo.

  4. David Mc Wiliams

    Hi conor, although i know what you mean about the laws of
    economics breaking down, i think johnny and ronnie have
    good and persuasive points when they suggest that the laws
    havn’t broken down rather been suspended. thanks david

  5. steve

    I’m surprised how often rational people use the argument
    that “economists and forecasters have been predicting the
    great house price fall for a few years now” to reassure
    themselves before discarding sound economic analysis.

  6. steve

    I’m surprised how often rational people use the argument
    that “economists and forecasters have been predicting the
    great house price fall for a few years now” to reassure
    themselves before discarding sound economic analysis.

  7. steve

    I’m surprised how often rational people use the argument
    that “economists and forecasters have been predicting the
    great house price fall for a few years now” to reassure
    themselves before discarding sound economic analysis.

  8. David Mc Williams

    cheers Steve, couldn’t have put it better myself, david

  9. lachdoug

    Before we were married my future wife owned a house in
    Ranelagh with her sister, which they inherited when their
    father died at an early age. In 1996 the sister, who is
    eight years my wife’s senior, was married. As a newly-wed,
    she wanted to buy a family home, so she told my wife that
    she wanted to sell-out so she could use the money to buy
    her own place.

    My wife seriously considered renting the place, taking a
    mortgage against the rental income and buying her sister’s
    half, but she didn’t and the house was sold. Since then
    the value of that place has gone from the equivalent of
    200,000 euro to 800,000 euro. Ouch. She is a “96er” that
    never was.

    At the time my wife struggled with the decision. The
    property had experienced a few years of solid capital gain
    through the early 1990’s, but my wife had vivid memories
    of the instability of the Irish property market through
    earlier years. Furthermore, she was a student with no
    means of supporting a mortgage should the property sit
    untenanted for a while.

    The most important reason of all, however, was that her
    friends and family advised her to sell: “The value of
    Irish property”, they attested, “can drop like a stone
    without warning”; “Be careful – remember how things were
    in the 1980’s”. How wrong they were. How unfortunate my
    wife was to listen to those around her, but she’s not an
    economist and she felt it was important to listen to the
    advice of others. One family friend is a real estate
    agent, and even she felt it would be prudent for my wife
    to get out while she could get a good price.

    The funny thing is that today these same people are
    comfortable reciting different mantras; “The value of
    Irish property will never drop”; “Property out-performs
    all other asset classes”; “You can’t go wrong with bricks
    and mortar”; “Safe as houses”; Demographic change will
    underpin Irish property for decades to come”; “Ireland’s
    new economy has delivered a complete restructuring of the
    property market”; “The old valuation rules don’t apply

    The same friends that warned my wife away from property in
    1996 are leveraging themselves to the hilt to buy property
    today. My wife’s closest friend has just bought a house,
    using a parental guarantee and a few lies about here
    income, which she doesn’t even like. It is miles from her
    place of employment, but she is relived that she is on her
    way up the property ladder.

    It will be interesting to see how our friends go with
    their new-found financial leverage into property.
    Hindsight tells me that our friends and family were once
    property forecasting incompetents. For our friend’s sake,
    I hope that eight years later they are equipped with
    profound economic insight.

    If my wife’s thirty-year-old friends and their family
    advisers get it wrong this time, with all the debt they
    are carrying, they will be in big trouble.

    Another thing that strikes me about this experience is
    that economic luck can favour some over others, just
    because they were born at different times. While my wife
    was certainly lucky to have received a 100,000 euro asset
    as an inheritance, she is nowhere near as wealthy as her
    slightly older sister. The elder sister was married in
    1996 and was able to use her 100,000 euro as a deposit to
    buy a large, very nice family home in a lovely location.
    This house is now worth a lot of money.

    My wife and I married recently and we too now want to buy
    a family home, but we won’t be buying anything like our
    elder sister’s home. Our 100,000 euros (plus a bit of
    interest) will help us into a small house or an apartment.
    By the time we are 38, it is unlikely that we will have
    the same asset base as our older sister, even though we
    probably work much harder than she does.

    I am just grateful that we have some money; others our age
    are in much worse financial state than us.

    This reminds me of two school friends. One worked very
    hard and did well in his leaving certificate, the other
    did not. Both were interested in architecture. When we
    finished school my hard-working friend went to University
    to study for a degree in architecture, while the other
    took an apprenticeship as an architectural draughtsman.

    My draughtsman friend had a modest income and was able to
    buy a small house in 1994, which he then rented. In the
    late 1990’s he bought two more properties my borrowing
    against the increase in equity in the house and the rental
    income he was getting. He bought when prices were low and
    is now well on his way to paying off his debt.

    Meanwhile, my degree-qualified friend missed the boat. He
    was unable to participate in the property boom because he
    was studying for so many years. He now earns a higher
    salary than my draughtsman friend, but has few assets and
    no rental income. Today he is struggling to try to buy a
    tiny apartment. I can’t see him ever catching up; the
    difference in wealth is just too great.

    You do the right thing and study hard, but you get
    screwed. What sort of economy does this to people?

    How do you think my wife and my architect friend feel
    about the Celtic Tiger?

  10. shoegirl

    Fair point and its very true about the 96ers. The only
    thing we really know about the property market is that it
    is unpredictable. A rising population will definitely push
    up property prices, but there is a point which is now being
    reached where low income couples and single people are
    forced out of the market. What started as a Dublin
    phenomenon has now spread countrywide and into places where
    traditionally wages were extremely low and unemployment
    rife. Much of this has been down to the folly of schemes
    like section 48 tax breaks on holiday homes which serve
    little useful purpose as they lie idle for much of the
    year, and server as a tax shelter for the well off.

    We are often told about the pensions crisis, but rarely
    about the future property crisis that will ensure (whatever
    happens in the next 10 years) in 20 or 30 years time when
    the population starts to age. One of the biggest problems
    with the currently vibrant trend of the amateur landlord is
    that many of these people live on equity alone and
    according to stats from council inspections, as much as 50%
    of all private rented properties are considered to be sub-
    standard. By the way, the Irish definition of “sub-
    standard” is considerably more liberal than that in most EU
    countries so its is clear that a large percentage of rented
    properties are – or will be – in serious need of repair.
    The one and only thing that has articifially propped up
    huge property prices is the SWA Rent Subsidy – as many as
    one third of all tenants and possibly more are in receipt
    of a rental subsidy, which not only lines the pockets of
    the amateur landlord class for little effort (with
    taxpayers money), but guarantees a continued occupation of
    properties as most landlords will not take RA tenants! It
    still remains to be seen how much the imposition of
    limitations has on rentals – my theory is that the rent
    falls of the last year has been due to a more hostile
    environment for immigrant workers and a virtual shutdown on
    new rentals for RA tenants. If the planned transfer of
    responsiblity for RA tenants goes ahead as planned to the
    local authorities this will result in an even more dramatic
    collapse in the market for subsidy friendly tenancies. At
    the moment the only people who can really get RA are people
    already habitually renting who become unemployed (and in
    many cases these will not be long term recipients as most
    regular renters need to be on good incomes to pay the rent
    and maintain a lifestyle) and homeless people (who are
    almost ritually discriminated against).

    A study by the ERSI, and almost every mortgage study done,
    shows that of new home buyers, very few are hard pressed.
    On the other hand, there is a growing trend of renters
    paying rents that are unsustainable. It appears to me that
    most new home buyers are either extremely wealthy (earning
    35-40k or more), from wealthy backgrounds where parental
    assistance is easy to get, or couples on moderate incomes.
    A combined annual salary of 50k will easily get you a
    mortgage outside the greater Dublin area. But the size of
    the mortgage after tax relief will be less than paying the
    rent on a house of the same value. So many people are
    actually buying (in desperation) as an alternative to
    extremely high rents for what is often extremely poor
    condition properties. Its a way of assuming control, as
    rent hikes can and do still happen. Its not just a
    question of being on the ladder, its a question of
    security. The ERSI study suggests that the rented sector
    is actually the problem. And I would suggest that much of
    the problem of the rented sector is its use as a dumping
    ground for social welfare recipients who have little chance
    of social housing – but some of whom may actually have
    reasonable alternatives, but choose to rent for
    independence reasons, while their working friends cannot
    afford to leave home. Those hit hardest are those earning
    between the minimum wage and the average wage as they are
    unable to buy, cannot afford more expensive properties and
    sharing is actually the most unregulated of all renting,
    often causing problems due to the non facilitation of HMOs
    by utility companies. (Ex co-teants emptied my pocket to
    the tune of several thousand pounds between 1999 and 2002
    in unpaid bills in my name and lost deposits). Contrary to
    popular opinion, it is these and not those on RA who are
    actually most vulnerable since landlords perceive them as
    a “soft touch” for rent hikes.

    Our real danger at the moment is the fall in immigration as
    mmost immigrants rent. Lowering the demand for rentals
    will cause landlords to sell in order to cover their costs
    (and make a quick buck). The problem at the moment is that
    if large numbers of speculators and landlords sell out,
    there is too much of a gap between prices and the price
    range of median income buyers to continuously guarantee the
    market will maintain itself. This will only be plugged by
    a continuous loosening of lending tactics – which in itself
    heaps higher risks to lenders. There has to be a point in
    which lenders decide to no longer take risks. What I would
    predict is that demand in certain areas will collapse while
    others will remain high – so a two tier ireland will
    develop where negative equity is a sourge in certain areas
    but not in others. And the post 96ers will the main
    victims, unable to buy up, and unable to sell out.

  11. Damian

    I can completely relate to lachdoug and i have to laugh
    when people refer to first time buyers as being under 29
    years of age. I’m a single professional, 36, single, self-
    employed and renting in Dublin because my not even a six
    figure salary can buy me a decent house in Dublin.

    I was one of those poor unfortunates who happened to be in
    university in England from ’94 till ’97 studying for an
    Engineering Degree, thinking it would all be worthwhile.
    When i return home to Dublin i couldn’t afford a home of my
    own cos i was too busy paying off a student loan. Then by
    the time i was able to put a deposit down i couldn’t afford
    anything. Even if i could afford it i am too bitter about
    having to fork out 400K plus 40k stamp duty for an average
    3-bed semi-d home that i have now decided to give up on
    Ireland and emigrate to Australia. I leave at XMAS. I
    beleive that at this stage of my lifei have no choice.

    Feck all the D4′s and their soft-top poxy cars. Feck all
    the scumbags with their sports-up mini-metros and chav
    clothing. I’m ashamed to call myself Irish. Theres only one
    good thing about Dublin and thats the Airport cos it lets
    you get the hell outa dodge city. I reluctantly call it a
    city……more like a shithole.

    So i’m getting the hell outta this dump and going to live
    my life in Australia……..for better or worse. Its got to
    be better than this kip. At least the weather is 10 times

    And don’t think for one second that i’m a minority. The
    young educated people of Ireland will be leaving in their
    droves soon and all that will be left in Ireland is the
    have’s, with their 4-bed detached in Dublin and the holiday
    home in Brittas Bay or Wexford and the have nots with fuck
    all but whip marks on their backs. Mark my words. This
    place is on the slide…………..

  12. F. Leonard

    This article was written in 2004 and prices have continued
    to rise. This is not confirmation that McWilliams is
    incorrect, it is an example of the positive feedback
    mechanism continuing. The SSIAs will mature and prices
    will continue to rise in the near future barring major
    global economic upset. Positive feedback mechanisms wear
    out, whether with a bang or a slide. No-one knows the
    timescale. We can only work with the information available
    to us. EUR 3.7M for a semi-d in a nice part of town?
    Value? What do you think?
    I currently live in Key Biscayne, Florida – one of the
    wealthiest parts of Miami. Here they are already talking
    about a bubble – yet prices are by, square foot –
    (excluding waterfront property) between 50% – 75% of well-
    to-do Dublin prices. I have left Ireland, pretty much
    since 2001, living in various cities – Lagos, Dubai and
    now Miami. Dublin priced me out in 2003 when I decided
    that I could not afford to live in the kind of
    accomodation that I felt I deserved (more than 450sq ft,
    and the ability ot park my car in relative security and
    unble to hear my neighbours television). Prices in Miami
    have started to fall – but only in some areas – South
    Beach and certain price ranges $250 – 350K. The flipping
    phenomenon (buying and selling in a short time frame)
    generated huge profits and pushed up prices, people jumped
    on to the property ladder, developers built comdo after
    condo and now, even with a huge population influx every
    year, asking prices are in many case no longer being met
    and are starting to fall.
    What happens in America, happens in Ireland – Boston v
    Berlin. The American’s just raised their national debt
    limit to $9 TRILLION. When America sneezes, the world
    catches a cold. With its dependance on multinationals,
    Ireland will get the flu. Berlin (ECB) will be raising
    interest rates, so for the property market at least,
    Boston and Berlin may combine to burst the irish property
    It’s a matter of time, can ’06ers, be the new ’96ers? What
    do you think? Can prices rise another 300-350% by 2016? Or
    will they fall to reflect people’s incomes? Will newly
    graduating nurses / teachers / guards / BESS students /
    engineers choose Dublin / Galway / Cork or the cities of
    the world that will reward them with a decent quality of
    life? It is a global marketplace. Educated people can
    choose where they want to live, and if they think about
    it, it will be a place that offers them the quality of
    life that they desire. Ireland is no longer offerring that
    to its 20 and 30-something non-houseowners.
    I can only go back to Ireland if prices fall, and after
    seeing a bit of the world, I’m not sure I want to return

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