Sell now and buy again when rates go up?

D

D7

Guest
I am nearing the completion of renovating a house I bought at the start of the year. My intention was to let the house out for a couple years and then move in myself. However, with all the news of increasing interest rates I have been contemplating the idea of selling now, waiting for interest rates to rise and then buying again.

My logic is based on the following example. A person can afford to pay 1100 pm in mortgage payments and at typical variable market interest rates of 3.5%, this allows them to borrow 240,000 to finance a house worth 260,000. So they and many others are in a position to bid on a house up to that price.

However, if in two years the interest rates rise by 2%, this would push standard variable mortgage lending rates to 5.5%. So putting this into the example above, the same person can still only afford to pay 1100 pm in mortgage payments, but at this interest rate it would only allow them to borrow 190,000 to finance a house worth 210,000.

I would appreciate other peoples thoughts on this as I think the figures are a bit scary. Does it not show how the banks are lending money with a short term view as opposed to medium to long term one. As a homeowner the last thing I want to see is a market crash but I can't help but wonder what might happen if rates do push up by one or two percentage points.

I got the figures in the examples using a mortgage calculator from an estate agents website.
 
This strategy is predicated on you attempting to accurately time/predict the market and nobody can do this with any accuracy. Attempting to time any market is a mug's game. You would be better of making asset acquisition and disposal decisions based on your needs and means rather than based on predictions that may or may not come to pass.
 
The transaction costs of buying & selling property are considerable. Your plan is a guaranted path to riches for your solicitor/estate agent/surveyor. You might get lucky, or you might not. A lot of people have been predicting a property crash for the last five years. They've been wrong so far.
 
I am interseted in this scenario not just because I am a home owner playing with the idea of selling up. Putting that aside, do you not think that its a dangerous situation when house prices rise on the back of interest rates falling?

I was under the impression that interest rates were cyclical and that they will always go back up after they have gone down. Forget about accurate predictions regarding these movements, I am more concerned that a rise in rates will happen sooner or later.
 
Interest rate hike hypothesis

Hi
The interest rate hike has been broadly predicted. Rate changes of the order of 2-3% have been predicted in the States and the ECB may gradually follow. Just because a crash hasn't happened yet doesn't mean it won't happen particularly as salary increases aren't matching house price inflation. The three factors that would indicate aprice fall to me are falling rental yield, average salary to mortgage multiple increasing and the future interest rate increases. I am holding out from buying due to this, and as previously stated, this is a risk, however buying now is also a risk. I take the point re transaction costs for someone selling their property but it depends how sharp the fall is. It could be major - we just don't know, or things could level off. It is a scary decision for a FTB whatever happens.

As an aside ... the exotic property buyers to me are the equivalent of the proverbial shoe shine boy giving share tips.

Regds, Gearoid
 
Thats a fair point rainyday, and one that I have thought of.

On the subject of incorrect predications of a crash over the last 5 years, I'm not sure on what evidence those people based their predictions on. I am not saying that there is going to be a crash in the market, I am just trying to explore the point and get opinions on what could happen to the market if interest rates did rise by 2 percentage points over the next year or so.

In addition, why do you think that the people that made these predicitons over the last 5 years were wrong? Do you not think that it was falling interest rates that kept the market racing ahead over the last 5 years?
 
Do you not think that it was falling interest rates that kept the market racing ahead over the last 5 years?
That was an important factor, but not the only factor. There are many, many other factors driving house prices, including housing supply, government policy, general economic conditions, etc etc. It would be very dangerous to base a substantial investment decision on just one factor.
 
Gearoid,

The story of the shoe shine boy has always facinated me and so has the saying, "sell when everbody buying and buy when everybodys selling". Especially when the banks are throwing money at people so that they can buy.
 
D7, you are correct in one of your assumtions about the FTB market

The increase in prices, for the best part, in this market has been fuelled by falling interest rates

There are numerous factors but the main one being that young people (majority purchases of these properties) have been able to afford monthly mortgage payments on ever increasing capital borrowing amounts, as you stated

But your attempt to beat the market may not work, one of the main reasons is that the banks still have a number of cards that they can and possibly will play, to this market buoyant
They are now offering interest only mortgages and 3 year interest only periods at the start of ordinary annuity mortgages
They also kep extending mortgages terms, creeping towards 35-40 years terms
All of these enable the FTB to be able to afford ever increasing capital borrowings

Personlly, I would not try to beat the market
Always try to buy when people are selling and sell when people are buying BUT people are selling as much as buying at present
 
Trumps

People are always buying as much as selling, that's what makes a market.

At the moment much of the selling is being done by house-builders and canny investors. Much of the buying is being done by FTBs and much of the "hanging on" is being done by pavlovian types who have had the notion that 'you should never sell a house' drummed into them by 15 years when anybody who ever sold lived to regret it.

It would be interesting to see a study as to whether the supply of 2nd hand property for sale in Ireland has risen in proportion to the increase in overall stock. Or whether, as I would surmise, there has been a measurable increase in the tendency of people to hang on to property when they trade up or inherit or move to Cork. The resulting reduction in supply only re-inforces the self constructing market.

The rule: "thou shalt never attempt to time a market" is useful in normal circumstances when markets may be assessed to be efficient. Gross yields of 3.5% are not normal though. No more than the S&P at a PE of 35-40 was normal in late 1999.

That is to say: common sense and observable over-valuation trumps the perfect market hypothesis.

When the market is offering you 40 years of current net rental income for the property its time to sell up and say goodbye.
 
Rising interest rates?

Belaqua,
I agree with you that the market is over priced. What could trigger a reversal? I think the US economy is going to be suprisingly weak going in to 05 and therefore global rates will not rise that much.
Therefore the party in Irish property has a bit to go yet.
 
Yields

Belaqua

What are normal gross yields?
Is there any source or study saying what are normal yields?

Pat
 
Rising interest rates?

I've just seen an article on Abbey, a house building company that operates both here and in England. The company is reporting its yearly results which were good, but most interestingly it also made statement about what it is seeing in both markets.

They said that they expect the Irish property market to moderate, but that the British market is heading for a crash. It noted that the "Recent rises in interest rates are now impacting on the market and the risks of a market reversal are higher than usual"

Surley this must lend some weight to the idea that interest rates play a far bigger part in property prices than demographics etc. I know that the banks throwing money at people doesn't help, but the banks don't care that a house they have financed is worth 50 grand less after a couple of rate increases, their only concern is that the payments keep comming in.
 
..

Between estate agents fees, solicitors fees (buying and seeling) and stamp duty the market would need to fall by considerable amount to make it worth your while IMHO.
 
more bearish malingering

No one can point to an imminent catalyst for a reversal in the Irish property market. In all likelihood once that catalyst is visible the reversal will have already begun. Interest rates are the obvious candidate but with the exception of currency prices nothing is harder to reliably predict. What can be said is that the balance of risks is now firmly weighted against continuing property price increases being sustainable.

While scanning the horizon for a catalyst here are three tidbits to intersperse in your weekend property price conversations:

- Davy’s (Stockbrokers) now estimate that there will be 80,000 units constructed in Ireland in 2004. This is an 18% increase on 2003 and nearly a 100% advance from 1998.

- As a component of our GNP Ireland’s building and construction industry is now three times larger that the OECD average.

- Demographic pressures were often sited as underpinning the run up in house process in the UK in the late 80’s. What transpired was that the rate of household formation, the rate at which people decide to move out from parental or shared accommodation and start their own homes, turned out to be much more elastic than demographers had believed. In the short term people will postpone forming a household if they believe prices are falling, so compounding the fall in house prices. Be warned that a key element of the ‘demographic’ support for ever increasing house prices is based on assumptions of increases in the rate of household formation that could rapidly cease to be true in the event of a reversal.
 
Re: more bearish malingering

Guys,

I've been posting on here for about 4 years now, and every now and then someone predicts that the sky is about to fall in on house prices.

I know, personally, of a large number of people who have been holding off buying waiting for the "crash" to come. There is a possibility that it may come one day, but not in the near future.

Betting your home and your future security on the off chance that you can time a fall in the market is a mugs game.

If you can afford to buy now, and have found a house you like, well go ahead. If not: don't.

Short / medium term variations in house prices should not be a factor in a long term investment decision.
 
response to belacqua

"As a component of our GNP Ireland’s building and construction industry is now three times larger that the OECD average"

A very interesting fact you brought up here. It shows the dangerous state the Irish economy is in now and how devastating a property collapse would be. Not only would a collapse in prices cause a huge collapse in consumer confidence it would also cause big losses in employment in the construction industry. Would this then be the real recession where the phony recession was the high tech collapse of 2001. The phony recession that the government is praising itself on how adebtly it managed. One of the biggest growth areas of employment growth over the last few years was in construction. The construction industry also has a big weighting on the Irish Stock exchange. The fact that the tech collapse of 2001 had little effect on Ireland shows that Ireland isn't really a high tech economy it is a "construction" economy.
 
response to D7

D7 your logic in your initial post ignores the impact of future wage increases. It is not correct to say that: ‘the same person can still only afford to pay 1100 pm’. They can afford to increase their repayment if their salary increases at the same or greater rate than the rate of increase in mortgage repayments. If the purchaser also believes the house prices will increase in the long term they could also switch to a longer repayment term or to an interest only mortgage and still be able to afford the repayments. If you really believe that house prices are going to fall, rather than selling your house, you could short the house price index or buy a put option on it. But does any commentator who believes that house prices are going to fall do this?
 
Re: response to D7

Those who are bullish on the Irish property market:
What do you base this opinion on? Been watching it closely for a while and obviously it is impossible to either predict a market peak or when it will find a floor during a fall, so just am curious as to why people feel the way they do! If property is over-valued when seen in a historical context, does that necessarily mean prices will drop, or has a historical shift taken place? Thanks :)
 
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