Some ideas to get your foot on the housing ladder

One big problem facing people saving up to buy their first home, is that they must leave their money on deposit at 2%, while house prices normally rise far faster. So a deposit worth 10% of the value of a house, might be worth only 5% after a few years.

They can risk investing in the stockmarket and most of the time, their 10% will rise as a percentage, as equities tend to outperform house prices. But a lot of the time, stockmarkets fall and their 10% falls.

What I would like is ideas for a savings product which would rise or fall roughly in line with house prices.

Anyone any suggestions? Do such products exist in other markets?

Brendan

What I would like is ideas for a savings product which would rise or fall roughly in line with house prices.

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Some sort of (domestic?) property fund? Securitised mortgage bonds? Not sure if such products exist on the Irish market though?

Shares in a building firm?

-Rd

How about a Building Society paying deposit interest linked to the change in value of house prices?

You invest €10,000. If house prices drop by 10%, you get back €9,000. If house prices rise by 20%, you get €12,000.

On the other side, they lend money to house buyers at rates linked to house prices. So let's say someone is borrowing €300k to buy a house. They could borrow €200k in the normal way and €100k with the rate linked to the price of houses.

Brendan

On the other side, they lend money to house buyers at rates linked to house prices.

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But if you did that then surely rather than paying c. 3% on mortgage loans people would be paying something like 20% (or whatever recent annualised domestic house price inflation has been) in recent years?

I'm not sure if the idea you're proposing is as much to influence the market as to help FTBs get a "foot on the property ladder"?

To achieve the above the deposit would have to be placed as an equity investment in domestic residential property. The closest proxy for this type of investment I can think of is estate agents earnings, but as there are no longer any publicly quoted estate agents in Ireland this is a non-runner.
Perhaps a way to achieve this objective would be to piggy-back off the affordable housing scheme. As far as I am aware, the county council is entitled to a portion of the income from the sale of the property. If county councils were to issue bonds with a variable coupon related to this it could potentially mimic the performance of the domestic housing market. I do not know the scale of the affordable housing scheme or how liquid the properties in it are, and know there would be a raft of other issues, but I am just floating the idea.

I do not know the scale of the affordable housing scheme or how liquid the properties in it are

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Aren't purchasers effectively locked in for ten years or so, so presumable they're not that liquid at all?

My reading is that purchasers can sell when they want but I'm not too familiar with the scheme.

Actually, they're not locked in but there are conditions on any subsequent resale:

Selling your house

If you sell your house within 20 years, you will have to pay the local authority a percentage of the proceeds of the sale. This is expressed as the percentage difference between the sale price and the market value of the house. This amount will be reduced by 10% each year after you have owned your home for 10 years. So, if you sell your home after 20 years, you will not have to pay anything to the local authority.

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you will have to pay the local authority a percentage of the proceeds of the sale. This is expressed as the percentage difference between the sale price and the market value of the house.

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Yes this is the county councils' participation in the value of the house that could be used as the basis for the bonds.

OK - I get you now! Apologies for the confusion...

Apologies for the confusion...

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That's usually my line.

Of course it might not be as difficult for First Time Buyers to get on to the Ladder if we didn't have a government intent on meddling in the market.

* Bacon
* Bacon Undone
* Rent A Room
* Development Levies
* Stamp Duty as a percentage of house price, despite
astronomical increase in house prices.
* Scizophrenic about whether they want to help investors
or owner occupiers. (But on balance favouring investors).
* Scizophrenic about whether they want people to live in
cities or the country side.

If you are going to intervene in a market it should only be to help the little guy. Investors don't need the governments help. When you try to help both investors and owner occupiers you end up helping noone except the builders.

Get the hell out of the Market!

-Rd

0 said:

But if you did that [lending to borrowers at a rate linked to house price movement]then surely rather than paying c. 3% on mortgage loans people would be paying something like 20% (or whatever recent annualised domestic house price inflation has been) in recent years?

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There is no risk for the person borrowing at a rate linked to house price movement, because they own an asset rising at the same rate. This would suit people who are overborrowing to buy property. It would reduce the risk of a house price collapse as the amount owed would collapse in line with the house price.

At its simplest, if you want to lend me €300k linked to the price of houses + 1%. It means that the real cost of borrowing for me is €3000 per annum. When I want to move, I will sell the house and repay the loan. No loss and no gain.

Brendan

This is a hypothetical product.

Introducing...

The XYZ House Price Tracker Bond

Product summary

If you are saving to buy a house, invest between 5k and 30k in this bond and its value will rise or fall in line with Irish house prices.

Important terms

There is no guarantee - if house prices drop by 20%, the value of your investment will drop by 20%.

If house prices rise by 50%, the value of your investment will rise by 50%, but the "profit" will be subject to 23% exit tax.

You will receive no other interest and you will not receive rent.

The bond is open ended with no entry or exit charges.

XYZ has the right to terminate the bond at any time.


If this product existed, would it make an attractive savings vehicle for those saving for a house?


Could a financial institution offer this bond?

Ideally, the fund would be invested in residential property. In practice, this would not happen because it's very difficult for an institution to manage residential property.

But the stockmarket has outperformed residential property over the longer term. So they could invest the fund in commercial property and or shares. Over the longer term, this fund should make money. It could lose significant money in periods where house prices rise while shares drop.

XYZ would need to manage the risk. If house prices rise dramatically while shares fall, they would have the right to terminate it but the investors would get the full house price return up to the date of termination.

Residential Tracker

Hi Brendan,

Great to see you recommending a tracker bond (gasp !).

You could indeed create such a product ... if you could find an institution with an exposure to house prices (eg a building society or bank) which wanted to hedge that exposure by offloading some proportion of it to other parties - who would probably be either investors who wanted exposure to residential property without the hassle, or ftbs trying to ensure their savings kept pace with the inflation measure that really matters to them, which is house price inflation.

Effectively the lending institution would create a derivative based on a house price index, so there would indeed be a direct link to house prices. There's a residential property tracker linked to the Halifax house price index in the UK, so it shouldn't be impossible here.

There are a few features with any tracker which make it more suitable to a lump-sum investor than an ftb saving on the drip (fixed term, money upfront, etc), and you'd need to take account of charges (it's unreasonable to expect anyone to do it for nothing), but it could certainly work. Why not ask your good friends at Irish Nationwide if they'd like to be first into the breach ?

Re: Residential Tracker

Great to see you recommending a tracker bond (gasp !).

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Isn't it more akin to an index tracker rather than a tracker bond?

Residential Tracker

Hi O,

Yes, I guess it is as Brendan outlines it. Brendan referred to it as a tracker bond and I confess I followed him unthinkingly.

On mature reflection, as they say, I'm not so sure it'll work as an open-ended fund, because you'd need a constant supply of the derivative asset. I'd envisage it more as a tranched product like a tracker bond. You could also build a guarantee around it, which might make it a more attractive proposition to the customer, though obviously there's a cost to that.

Re: Residential Tracker

It's a bit of both, but let's not worry about the name until the product is being launched. Let's get the principle right.

A guarantee would be completely against the purpose of the product. If I have a deposit which is worth 4% of the value of a house, by investing in this product, I will always have 4% of the value of the house, whether house prices fall or not.

Don't forget it's in the interest of potential purchasers that house prices fall. So they would be delighted to see this bond falling in value.

An open ended product would be much more suited to the customer. Most house buyers wouldn't want to lock their money away for three years.

Forgetting about derivatives for the moment, an organisation like the EBS could offer a limited version of the product and take the risk themselves. Cut out the profits going to the derivative provider. Let's say they limited their exposure to €50m. When that is reached, they would close it to new money. They would have the fund invested in shares. The fund should outperform its liabilities in the longer term. I would guess that this would be a good launch time as property looks fully valued and equities look less risky than they did in the recent past. If equities do outperform residential property in the next few years, it could be a very profitable product for them.


Brendan

Residential Tracker

Why Brendan is an accountant rather than a financial adviser ...

Don't forget it's in the interest of potential purchasers that house prices fall. So they would be delighted to see this bond falling in value.

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I don't fundamentally disagree with you, Brendan, but I do think you're being a bit naive about how this product will sell. If I can get the upside of house prices, but not the downside, so much the better. Also, I was aiming my product not just as savers, but also investors who couldn't be bothered with actually running a property - a guarantee might be attractive for them.