# Sell now and buy again when rates go up?



## D7 (13 Jul 2004)

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.


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## Tommy (13 Jul 2004)

> if



...not a very big word, but a very important one...


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## Guest (13 Jul 2004)

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.


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## rainyday (13 Jul 2004)

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.


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## D7 (13 Jul 2004)

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.


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## gearoid (13 Jul 2004)

*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


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## D7 (13 Jul 2004)

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?


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## rainyday (13 Jul 2004)

> 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.


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## D7 (13 Jul 2004)

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.


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## oilean (14 Jul 2004)

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


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## Belaqua (14 Jul 2004)

*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.


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## tyoung (15 Jul 2004)

*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.


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## Pat (15 Jul 2004)

*Yields*

Belaqua

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

Pat


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## D7 (15 Jul 2004)

*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.


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## sol (15 Jul 2004)

*..*

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.


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## belacqua (16 Jul 2004)

*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.


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## N0elC (16 Jul 2004)

*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.


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## techman (16 Jul 2004)

*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.


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## WSL (16 Jul 2004)

*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?


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## funkdoggz (17 Jul 2004)

*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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## rainyday (17 Jul 2004)

*Re: response to D7*



> 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.


Don't forget that FTB's will typically be thinking about wedding and/or kids within a few years of getting their house, so there are lots and lots of other things that will soak up their salary increases.


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## funkdoggz (17 Jul 2004)

*Prospects for FTBs*

I guess I am in the same boat as a lot of hopeful FTB's out there - in my late 20's, making a good bit over the average industrial wage, no chance of ever owning a house the way things stand!  Even if I could get a mortgage, I just wouldn't pay x8 times my salary for a 2-bed apartment, I couldn't justify it.  I actually have a good deal saved in bonds and stocks (maybe 20% of the price of a nice starter home) but by myself could never get a mortage for the other 80%!
I have decided that unless there is a price crash - not a slowdown or 'soft landing', but a crash of 20% or more - I am going to emigrate in a year or two with 50% of the current asking price of a 2-bed apartment in Canada in my back pocket.  I know a few more in my situation - even couples who could scrape together the price of a home, planning to leave unless there is a crash.  We see our friends with houses not being able to do ANYTHING, go on holidays, save for the future, whatever, because of their massive mortgages.  Not a way to live, is it? It is fairly galling to see other countries in the Western world with starter home prices x3 or x4 times average salaries, then look at the situation here in Ireland!


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## N0elC (20 Jul 2004)

*Re: Prospects for FTBs*



> It is fairly galling to see other countries in the Western world with starter home prices x3 or x4 times average salaries, then look at the situation here in Ireland!



Is this really true ? You mention Canada as an example. I've got a good friend working in Vancouver who tells me that the mortgage multiples out there are very high too.

Don't forget that, in most Western countries, interest rates, and income tax levels are much lower than they were in the eighties, for example, so there is not really a like for like comparison.


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## funkdoggz (20 Jul 2004)

*Prospects*

Well, Vancouver is the most desirable place in Canada to live, with house prices to match!  2-bed downtown apartments run around $220,000 Canadian.  Not sure about average salaries, but I would expect about $50k based in salaries that my friends over there are pulling down.  In 2 years (when I would move) I would hope to have between $90k-$100k Canadian in liquid assets I could put towards a house there.
I know I could never buy anything in Dublin without getting someone else involved in the purchase, not the way things are right now.  Since interest rates will remain historically low for the near future, I don't expect prices to come down either.  I also strongly feel that stocks will remain generally flat for another few years, they are still historically over-priced and history does not like being mocked like that!  So for a nation without a tradition of investment in the stock market and an irrational love of property, I think Irish house prices will rise in the near future as people with money to invest with put it into property.
Though the fact that fear is now a large element in FTBs minds when they buy, makes me think that there could be a bubble in place - I beleive fear of being left out while others are making fortunes/fear of being priced out of the market for ever is one of the final stages of a market bubble.  Please correct me if wrong.


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## adrian (20 Jul 2004)

*Prospects*

"I beleive fear of being left out while others are making fortunes/fear of being priced out of the market for ever is one of the final stages of a market bubble."

You might be right... There is a double fear of missing the boat and buying in an overpriced market. Personally I've just had a property purchase fall through and have decided not to look (well maybe with one eye!) anymore. I can rent a new 3 bed semi in Galway for €750 and am happy with that, and the flexibility that goes with it. Also, I don't think a lot of house buyers understand the link between interest rates and inflation, i.e. the erosion of real value of mortgage debt over time with inflation. 

If I miss the boat here by not buying now, I'm with you funkdoggs, I'm taking the boat out of here! BTW what's a typical square footage of one of those apartments in Vancouver, any web links?


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