# FTB's vs interest rate rises



## Howitzer (14 Mar 2006)

A question to any FTB's who have purchased within the last 6 months or who are closing soon. Have recent rising interest rates, and the prospect of further increases (another in May/Jume, 3-3.5 by year end) had any impact on your outlook or indeed your pocket?

I'm in the process of becoming a fully fledged FTB and there seems to be a huge sense of bravado at the moment with regard to property prices and the prospects for 'guaranteed' price increases in the future. The prospect of taking on 300K, 400K, even 500K mortgages, is seen as a badge of honour rather than a milestone.


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## SteelBlue05 (14 Mar 2006)

As a FTB last May I worked out how much I could afford based on current ECB rates back then (2%) and added 1% on to that so I know I am comfortable enough with a 3% base ECB rate as is expected by the end of the year. If it goes to a base 4% or 5% then I will probably rent out a room.

The interest rate rises dont really concern me much unless we start moving to a base ECB rate greater than 5%.

I'd assume most FTB's have calculated the effects of an increase in rates on their mortgage payments when they first took out the mortgage. But maybe not!


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## Lauren (14 Mar 2006)

Yes same here...Had to contemplate the effect of a raise in interest rates to ensure that I still had room to move... I can't believe the rate of increase in prices, just in the last six months. Its astounding and the demand continues...

I watch similar properties in the area sell for higher prices and inwardly congratulate myself and then inwardly argue with myself for feeling that way! At the end of the day I bought a home, I needed somewhere to live so even if the prices take a dip later in the year I still have a home and with any luck I'll still have a job that pays the mortgage!


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## soma (14 Mar 2006)

Howitzer said:
			
		

> there seems to be a huge sense of bravado at the moment with regard to property prices and the prospects for 'guaranteed' price increases in the future.


When discussing the stages of economic boom-bust-cycles, what you describe is often referred to as 'euphoria'.


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## ClubMan (14 Mar 2006)

Or irrational exuberance.


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## walk2dewater (14 Mar 2006)

Lauren said:
			
		

> At the end of the day I bought a home, I needed somewhere to live


 
Well we all need somewhere to live.  You can either buy outright, take out a mortgage, or rent.  Lauren, assuming no.1 wasnt possible, did you consider renting?

My situation is I live in a very nice terraced house in south city centre on a nice street, I pay about 60% of what a conventional mortgage would cost me to live there, I get to keep my deposit (to invest as I like), I walk to work (8:20am wake ups), the owner is very obliging and is happy to have me for as long as I like, and I have way more money left each month to invest/save than if I were paying down a mortgage.

I can't for the life of me see why I should buy a similar place to the one I'm living in, let alone move out to the suburbs??


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## Lauren (14 Mar 2006)

Yes I considered renting and I even considered converting an attic in my mothers place! (scarey thought)...However, given I'd spent the previous nine years in Australia renting I decided to take the leap into home ownership even though I knew it would cost me more here in Ireland...I'm lucky enough to have a reasonably paid career with good future prospects..

The apartment I bought is close to town, a very easy 10 minute bus commute...Its equidistant from all close family members too! PLUS I can paint the whole thing purple with yellow spots if I want to!


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## bearishbull (14 Mar 2006)

i think ftb's on AAM are more informed and aware of the interest rate situation than most ftb's.


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## Howitzer (14 Mar 2006)

bearishbull said:
			
		

> i think ftb's on AAM are more informed and aware of the interest rate situation than most ftb's.


 
Yeah, I'd have to agree with that. Was hoping that by specifically asking only FTB's who've bought in the last 6 months or about to close, that I'd hear from those people who really are on the margin.


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## micheller (14 Mar 2006)

We were looking like we were going to jump in toward the end of last year. However, I had just moved jobs and the 100% mortgage was not approved. 
In hindsight I'm glad now. I think me and my partner were spiralling a little out control in terms of how much we would pay (i.e anything to get a roof of our own over our heads). When the 'dream' came apart at the seams, it gave us a nice breather to consider what we were doing. And this made us realise that we were committing, like another poster said to 300, 400,500K *for pretty much the rest of our lives. *Unlike our parents, we were nailing ourselves to the cross to get a foot on the ladder. And then it started to not look so attractive.
So, now, along with looking at building in a side garden we're content to rent stress free for a while


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## moneypitt (14 Mar 2006)

I bought my first property last May/June, which is nearly 8 months.

At the time of purchase I was completely aware of (then) looming interest rate hikes, and knew its likely to go up by 1pc by end of 2006. That probably was a wishful thinking as well, as we don't know how far its going to go. 

Being single and of modest spending habits (at the moment anyway), I was (still am) confident that I would be able to set aside upto 50% of my income to pay off the mortgage (its about 40% now). I have also compromised my luxury by renting out a room, income from that covers about 30% of the monthly payments for now.

I believe I am okay if the rates going up and if it goes up to 3% ECB,  but if it goes around say 3.5% etc I would really be worried. Keeping the same in mind, I am not considering the fact that similar houses are already selling 50K up from what I paid, beause its like others said, not real at the moment.


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## Howitzer (15 Mar 2006)

Trichet's comments today indicate a May increase is on the cards, which I felt meant 3.5% by December, or at least the option of bringing rates to 3.5%.


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## hmmm (15 Mar 2006)

moneypitt said:
			
		

> I believe I am okay if the rates going up and if it goes up to 3% ECB,  but if it goes around say 3.5% etc I would really be worried.


I find it interesting that you are worried about what would be a relatively modest rise in interest rates. I don't want to sound alarmist, but "reports" indicate that 3.5% is almost a certainty by 2007 at latest. And you have to remember that that is only restoring rates to a "normal" position, they may go higher than that if a recovery picks up steam.

Just as a matter of interest, how hard did the bank stress-test your repayment ability?


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## ivuernis (15 Mar 2006)

hmmm said:
			
		

> I find it interesting that you are worried about what would be a relatively modest rise in interest rates. I don't want to sound alarmist, but "reports" indicate that 3.5% is almost a certainty by 2007 at latest. And you have to remember that that is only restoring rates to a "normal" position, they may go higher than that if a recovery picks up steam.


 
As a FTB of 2.5 yrs I would have no problem meeting repayments on an interest rate hike of 2% from current levels. However, I think if interest rates reach 3.5% before the end of the year a lot of people will start to become a little nervous as the rate hike will have been faster than expected. If Germany continues on the road to recovery and if eurozone inflation doesn't slacken then we could easily see 4% by mid-2007.


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## soma (15 Mar 2006)

Howitzer said:
			
		

> Trichet's comments today indicate a May increase is on the cards, which I felt meant 3.5% by December, or at least the option of bringing rates to 3.5%.


Which comments were these..? I did cast my eye over the interview with him published on the ECB website today (I didnt see him saying anything new to be honest) and I havent seen anything else come across the newswires..?


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## ivuernis (15 Mar 2006)

soma said:
			
		

> Which comments were these..? I did cast my eye over the interview with him published on the ECB website today (I didnt see him saying anything new to be honest) and I havent seen anything else come across the newswires..?


 
Trichet did say that the ECB would act to counter inflation risks even though it has raised rates in December and March, which is taken that they will continue to raise rates if needed so as to counter inflation.


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## Howitzer (15 Mar 2006)

Comments

[broken link removed]


Analysis (needs log in)

http://www.unison.ie/irish_independent/stories.php3?ca=185&si=1580535&issue_id=13803


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## moneypitt (15 Mar 2006)

hmmm said:
			
		

> Just as a matter of interest, how hard did the bank stress-test your repayment ability?


 
Not sure!

To give you the figures, I an 29 and earn 50K a year, which works out around 2600 euros take home per month, after max AVC to pension etc. I don’t have any other loans and had a saving of about 40K liquid at that stage (saved over five years). The bank (FA) approved me 253K for over 40 years (Ouch!!), which works out around 1000 pm on mortgage payments. With or without a tenant, its affordable at the moment, and it will be even if it goes up say another 300 euros. After which (ECB 4% and above) my bed would turn very uncomfortable!
If the market remains buoyant for another year (at the current rate), I might get a better interest rate with mortgage < 60% of value of the property, but thats not my plan A.


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## sonandheir (24 Mar 2006)

I think it's unethical the way the banks are lending people money. I did a semi-survey of some of the people i work with and found only 2 out of 15 truly understood what the ecb base interest rate meant to their repayments. Several told me that their mortagage brokers told them how to switch loans out of their name, borrow from the credit union for depoist etc. I didn't bother asking them about stress testing, but I found that even the older ones (i'm only 24) had irrational ways of justifying they're borrowing, such as one who told me their house could be sold for 20% more than when they brought it so leverage that to buy an SUV. We're all fooling ourselves with this "if the base rate stays below 5% I'm safe" argument. Stays below 5% for how long 1 year, 5 years? Most first time buyers are getting 30+ year mortagages, and they're stretching themselves by hiding debt and borrowing for depoists while the base rate is as low as it's going to be ever!!!!!


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## beattie (24 Mar 2006)

sonandheir said:
			
		

> I did a semi-survey of some of the people i work with and found only 2 out of 15 truly understood what the ecb base interest rate meant to their repayments.


 
Have to agree with the previous post, a colleague of mine is looking to buy now and I asked her what she would do if interest rates went up by 1%, would it influence the amount they would borrow etc. This questioning was met with a shrug of the shoulders!!!!!!


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## soma (24 Mar 2006)

beattie said:
			
		

> Have to agree with the previous post, a colleague of mine is looking to buy now and I asked her what she would do if interest rates went up by 1%, would it influence the amount they would borrow etc. This questioning was met with a shrug of the shoulders!!!!!!


I've met mortgage holders who thought a 0.25% interest rate rise meant that their monthly mortgage *payments* would rise 0.25%!! (i.e. A holder with a €1000 mortgage was going to be paying 1002.50/mth!) 

This happened *twice* - it does not bode well for the state of financial literacy of the nation.


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## Eurofan (24 Mar 2006)

soma said:
			
		

> I've met mortgage holders who thought a 0.25% interest rate rise meant that their monthly mortgage *payments* would rise 0.25%!! (i.e. A holder with a €1000 mortgage was going to be paying 1002.50/mth!)
> 
> This happened *twice* - it does not bode well for the state of financial literacy of the nation.


I've had a similar conversation with a few people recently where they hear .25% increase and assume thats roughly how much the repayment will rise by (i.e. not enough to worry about).

I don't think interest rate rises have gotton to the point where they're biting yet but i feel that will change.

Using Karls mortage calculator i just did the maths on something i find interesting though.

Generally 'affordability' is bandied about as the all important sum, i.e. whats your wage etc. and _we'll tell you what the max amount you can 'afford' to repay each month._

Taking a sum of €300k over 35 years @3.1% works out at €1171.35 per month.

But now (before any future increases) 35 years @3.6% with roughly the same per month 'affordability' means you're only getting €279k for €1169.30 per month.

In other words *today* real mortgage affordability is *already down 7%!*.


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## anseo (31 Mar 2006)

had to laugh at this one:

[broken link removed]

[FONT=Verdana, Arial, Helvetica, sans-serif]   					   					 It is a disgrace to put up interest rates, especially for new people starting off and it will affect me.
*Marie, Co Monaghan* [/FONT]


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## bearishbull (31 Mar 2006)

anseo said:
			
		

> had to laugh at this one:
> 
> [broken link removed]
> 
> ...


 
ha ha , "it will affect me me me me"(in broad monaghan accent!!). it was a disgrace that rates were so low in our high growth economy which fuelled the house price bubble and allowed rampant inflation in this economy.


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## darex (3 Apr 2006)

As a potential FTB the predicted rise in interest rates would have an impact. A couple of weeks ago was thinking of taking the plunge (against my better judgement) but am now thinking of renting for a while.
Problem is as a FTB you are caught between a rock and a hard place - see prices rise by another 50 K every few months, or take on a mortgage that will screw you with negative equity if there is a bust.

Does anyone know of a good way to hedge against further rises as a FTB without actually buying?


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## Theo (3 Apr 2006)

darex said:
			
		

> As a potential FTB the predicted rise in interest rates would have an impact. A couple of weeks ago was thinking of taking the plunge (against my better judgement) but am now thinking of renting for a while.
> Problem is as a FTB you are caught between a rock and a hard place - see prices rise by another 50 K every few months, or take on a mortgage that will screw you with negative equity if there is a bust.
> 
> Does anyone know of a good way to hedge against further rises as a FTB without actually buying?


 
Lease option contracts when renting have been common in the US and starting to come here.  The idea is that the landlord grants the renter an option to purchase the property at a fixed price in 5 years in exchange for paying a premium over and above market rent.  If prices crash in 5 years, the renter doesn't exercise the option, if prices go up, the renter can get a good deal.  The advantage for the landlord is higher yields plus greater certainty about investment exit.


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## darex (3 Apr 2006)

Theo said:
			
		

> Lease option contracts when renting have been common in the US and starting to come here. The idea is that the landlord grants the renter an option to purchase the property at a fixed price in 5 years in exchange for paying a premium over and above market rent. If prices crash in 5 years, the renter doesn't exercise the option, if prices go up, the renter can get a good deal. The advantage for the landlord is higher yields plus greater certainty about investment exit.


Interesting idea Theo...
Questions:
1) Any idea on a typical premium?
2) "Greater certainty on investment exit"? how is this so given that if prices crash the renter isn't going to exercise the option
3) Would the norm for the fixed price be the current market value?
4) If the landlord sells the property presumably the opiton dies - or does the option have to remain attached to the property?


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## Theo (3 Apr 2006)

darex said:
			
		

> Interesting idea ...
> Questions:
> 1) Any idea on a typical premium?
> 2) "Greater certainty on investment exit"? how is this so given that if prices crash the renter isn't going to exercise the option


 
The premium will be whatever you can agree on.  I don't know of any precedent here.  It would be interesting to hear from someone if they have concluded such an agreement.

The greater certainty means that a prospective buyer already exists, there is a price agreed and so an investor can know what return he/she will likely get (and is happy with) from day 1 so the greed and emotion is gone out of it.  If the deal goes ahead, it can be quick with minimum transaction fees.

If the deal doesn't go ahead, its likely the tenant will remain and the house/garden etc. is more likely to have been kept well by the tenant.  The landlord/tenant may even re-negotiate a new option.


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## darex (3 Apr 2006)

Thanks for the info
2 further questions (since added to my original post)

 3) Would the norm for the fixed price be the current market value?
 4) If the landlord sells the property presumably the opiton dies - or does the option have to remain attached to the property?

Also from what you are saying this isn't common here so on a practical level it would probably be hard to find a landlord who would go along this route


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## Theo (3 Apr 2006)

darex said:
			
		

> Thanks for the info
> 2 further questions (since added to my original post)
> 
> 3) Would the norm for the fixed price be the current market value?
> ...


 
In answer to your questions:

3) I would doubt that. The landlord is an investor (presumably) and will want a capital return over the 5 year period (or whatever period is agreed). Again, its down to bargaining.
4) I would imagine that no renter would sign a lease option contract that would give the landlord this right. The renter is, after all, paying for the right to have the option.

Yes, i don't believe this is a common practice here but asking is a good habit to get into. All they can say is no.


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## walk2dewater (3 Apr 2006)

What a silly thread. Darex, here's some free advice: property prices are coming down in a future near you. Despite the deafening roar on this little island, preserving and growing your wealth does not begin and end with property. Property right now is about the WORST invest you can make, on a pure risk/return basis, yes you read that correctly. There is a WORLD of investing out there. Get a cheap brokerage account, like www.internaxx.lu and start learning [Irish brokers are expensive and limited in scope]. You can make money under any circumstances, up or down or sideways markets in any asset-- you just have to have a bit of know-how.

But before you do anything make sure your debt in zero. The world of free money is ending as of right now, and cash, your own cash that is, not someone elses, is king.


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## kane3000 (4 Apr 2006)

Hi WTTW,
A bit off-topic however I have noticed from other posts that you are interested in commodities,shares and other vehicles. May I ask how you started out learning about all that stuff. There seems to be so many options that it is difficult to know what to do - even with diversification.

Cheers


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## walk2dewater (4 Apr 2006)

kane3000 said:
			
		

> Hi WTTW,
> A bit off-topic however I have noticed from other posts that you are interested in commodities,shares and other vehicles. May I ask how you started out learning about all that stuff. There seems to be so many options that it is difficult to know what to do - even with diversification.
> 
> Cheers


 
I got a brokeage account when I was a student in Canada;  have had one ever since.  They give them out like smarties there.  Best thing I've ever done/been given in a financial sense.  At first I invested tiny amounts, made big mistakes and big gains with those little amounts.  In other words I learned by doing with play money.  There is absolutely no better way to concentrate your attention on something when your money at stake.

It’s amazing that just about anyone with any money at all in Canada has a brokerage account and actively invests in stocks, bonds etc etc. you name it. Here?  Apart from a select few,  whom I know represent a minority, virtually no one does this.  So guess where all that investment money flows?


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## anseo (4 Apr 2006)

walk2dewater said:
			
		

> property prices are coming down in a future near you.



Can't agree more.

David McWilliams has some great articles on the ecomony:

[broken link removed]

The party will be all over soon. People will talk about Irish property and the Albanian pyramid scheme in the same breath.


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## darex (4 Apr 2006)

walk2dewater said:
			
		

> What a silly thread. Darex, here's some free advice: property prices are coming down in a future near you. Despite the deafening roar on this little island, preserving and growing your wealth does not begin and end with property. Property right now is about the WORST invest you can make, on a pure risk/return basis, yes you read that correctly. There is a WORLD of investing out there. Get a cheap brokerage account, like www.internaxx.lu and start learning [Irish brokers are expensive and limited in scope]. You can make money under any circumstances, up or down or sideways markets in any asset-- you just have to have a bit of know-how.
> 
> But before you do anything make sure your debt in zero. The world of free money is ending as of right now, and cash, your own cash that is, not someone elses, is king.



Good advice im sure w2dw - my debt is currently zero.

However had just about made up my mind not to buy when this came out this morning (I live in Dublin by the way):

The average  price of a second-hand property in Ireland rose by 7.6% during the opening  quarter of 2006, Sherry FitzGerald estate agents said today.

This follows growth of 17.3%  during 2005.

The pace of inflation in the Dublin second hand market  however was notably stronger at 11.2% for the first quarter, bringing the rate  of increase to 30.5% for the twelve months to March 2006. This compared to a  national average growth rate of 23.3% during 2005.


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## bearishbull (4 Apr 2006)

darex said:
			
		

> Good advice im sure w2dw - my debt is currently zero.
> 
> However had just about made up my mind not to buy when this came out this morning (I live in Dublin by the way):
> 
> ...


 
and you think this is sutainable in the increasing interest rate environment?


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## darex (4 Apr 2006)

bearishbull said:
			
		

> and you think this is sutainable in the increasing interest rate environment?



Long term no of course not - but how long before interest rates start to take effect? - with the current upward momentum I would say min 1 yr possibly 2.

Given that the momentum is so powerful then it is going to take a lot to stop it - my opinion anyway


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## beattie (4 Apr 2006)

darex said:
			
		

> Long term no of course not - but how long before interest rates start to take effect? - with the current upward momentum I would say min 1 yr possibly 2.
> 
> Given that the momentum is so powerful then it is going to take a lot to stop it - my opinion anyway


 
I would tend to agree, it will take interest rates to hit 3.25-3.5% before sanity takes hold IMO, though I do notice that some investors might be bailing out before the ship hits the iceberg.


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## ivuernis (4 Apr 2006)

beattie said:
			
		

> I would tend to agree, it will take interest rates to hit 3.25-3.5% before sanity takes hold IMO, though I do notice that some investors might be bailing out before the ship hits the iceberg.


 
We could have those rates by the end 2006 / early 2007 if the ECB continues to raise rates as expected which isn't too far away at all. 

If ECB rate continues to raise every 3 months or so at 0.25% I wonder how many FTB's will be persauded to hold off on buying for the time being to see how things pan out in the next 12-18 months and what possible market consequences this might have?


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## darex (4 Apr 2006)

ivuernis said:
			
		

> We could have those rates by the end 2006 / early 2007 if the ECB continues to raise rates as expected which isn't too far away at all.
> 
> If ECB rate continues to raise every 3 months or so at 0.25% I wonder how many FTB's will be persauded to hold off on buying for the time being to see how things pan out in the next 12-18 months and what possible market consequences this might have?



The concern as a FTB is that the market may rise another 10% at least before leveling out. Note leveling out not falling. While leveling out has to happen falling is not garaunteed - see the UK, some small falls but not enough to justify not having bought until very late on the price rise upslope.


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## bearishbull (4 Apr 2006)

darex said:
			
		

> The concern as a FTB is that the market may rise another 10% at least before leveling out. Note leveling out not falling. While leveling out has to happen falling is not garaunteed - see the UK, some small falls but not enough to justify not having bought until very late on the price rise upslope.


the uk market is still precarious-lowest number of first time buyers in 35 years ,low numbers of sales completed which can distort average prices,many areas in uk were down 5-12% last year add in inflation and its even more, outside of london not much is rising,it remaisn to be seen if they level off and rise slowly especially with signs uk economy may beslowing with gnp growth down to 2% or nearly same level as europe


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## Howitzer (4 Apr 2006)

What surprises me is that affordability amongst FTB's doesn't really seem to be an issue. Now obviously people aren't over the moon with having to pay 400K for a 2 bed apartment but this hasn't stopped them. The average age of FTB's is at it's lowest level ever. Even with rising interest rates I don't hear many FTB's crying into their cornflakes.

Is there a possibility that poverty, or indeed not being rich, is such a bad word nowadays that people can't admit it. I can't believe that. Maybe everyone IS loaded these days.


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