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!
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
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
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.
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
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.
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.
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.
cheers Steve, couldn’t have put it better myself, david
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
anymore”.
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?
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.
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
better.
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…………..
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
bubble.
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
anyway.