February 22, 2004
Tomorrow afternoon, Newstalk 106 will give away â‚¬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 ï¿½40,000 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 ï¿½100,000 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 ï¿½280,000 or ï¿½400,000? 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 ï¿½4,000 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!