# Saving for a House



## bob (8 Jan 2004)

My partner and I have saved 80k for our house but don't want to buy yet as we feel the prices have to come down and we eventually want to move out of dublin maybe in 6 or 7 years and would therefore have to sell the house and be left with negative equity. Also if you save the money you don't have to pay the interest rate to the bank for getting the mortgage.
What would be a good place to invest our savings in for the short term then?
Thanks a lot


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## rainyday (8 Jan 2004)

Hi Bob - You'll find the best rates for deposit accounts in the Best Buys list. If you are thinking about a timescale of 6-7 years for your investment, it might well be worth thinking about a stock market investment instead. Have a read of the Guide to get a better feel for your options.

Note that you are taking quite a gamble by choosing to stay out of the property market. I haven't seen any sensible economic forecasts predicting substantial drops in property - the most pessimistic forecasts I have seen predicted slower growth than we have seen in recent years, but growth all the same. If you are right and property prices are about to drop, then you can reasonably expect to similar drops in the prices outside of Dublin - so you may still have options for moving in the future. If you are wrong and prices continue to rise, you might find yourself priced out of the property market for a further 5-10 years, maybe even for ever. Are you really prepared to gamble on this?


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## <A HREF=http://pub145.ezboard.com/baskaboutmoney.s (8 Jan 2004)

Check the best buys for the best deposit rates available. For short term savings with (presumably) capital security there's not much option other than a deposit account. Unfortunately the rate of inflation still outpaces even the best deposit rates so your money is losing a certain amount of value.


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## hooper (9 Jan 2004)

I am in a similar situation to you Bob, but with a fraction of your savings  
I've had my money in a term deposit for about 18months now and it is unbearable. Right now I figure it is less of a gamble to put my money into the SM for a few years and hope I am in better shape to buy at the end of it that to hang a millstone around my neck with a huge mortgage on a small house right now. 
For what it's worth I think the risk of ending up out in the cold because you played it safe is significant in this case. You have to figure out if you could live with yourself if that happened!


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## gearoid (9 Jan 2004)

Hi Bob,
I'm in the same situation as you but slightly further down the road, with 100k+ saved, but single, and so reluctant to hang a millstone of more than a 220k mortgage around my neck. I disagree with rainyday re property. So do a lot of other commentators Central Bank, Economist, Davy's etc.. I take the point that there is a risk that some people may be shut out forever if they don't risk it and go in over their heads now, but if you have had the fiscal prudence to save 80000 euros and still feel shut out then this to me is a very bad sign. To me it says that the market is highly inefficient, over-priced, with little value for money, OR that people are putting too high a value on owning property. 

I'll give an example - if someone pays 900-950 euros per month they can rent a one bed apartment in Dublin but if they want to buy that apartment then they will likely have to pay a 250,000 to 300,000 mortgage in central areas. That mortgage will be between 1 and 4/5ths and twice the rental cost. This is not dead money as the difference can be invested. 

The other example I'll give where an analogy can be made is with the taxi drivers - if the supply of land goes up then I believe the person buying the 300k one-bed is going to be sitting on a substantial loss, particularly if the interest rate rises. Remember those guys paying 80K for a plate?

I'm going to invest on the stock market in broad international indices until my experience is better and I may dabble more.
I held off buying a house last year, and yes prices went up 10-20k on the back of another spurt but the stock market has gone up 35% in a year. Your 80k would have been 108k if you had invested it back last march with as far as I was concerned limited downside at that time. Granted I wouldn't advise putting all your dosh in but my feeling is don't just bank it!

I am far more comfortable now with investing and renting until the infrastructure, demographic, and economic situation reduces demand. The most recent economist mag has already shown that increases in interest rates in Australia are feeding into reductions in prices for apartments in the big cities.

Believe in your own ability to educate yourself, save and invest. Prudence and cautious investing will I think win out in the end over the hoopla and hysteria over property in recent years. We would be owning houses or apartments everywhere else in Europe save perhaps London. 

On another hobby horse ... I see the property "economists" from the big estate agents are out again today forecasting the goldilocks 8-10% rise. The Times and Indo should be ashamed of themselves touting this piffle as independent research.

As Greenspan says you can never predict when a bubble will burst - but when it does ... that 80K will have a lot more buying power than it does now.

Keep up the good work,
Gearoid


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## rainyday (9 Jan 2004)

Hi Gearoid



> I disagree with rainyday re property. So do a lot of other commentators Central Bank, Economist, Davy's etc..


You need to look behind the headlines. For example, from the recent [broken link removed]



> *A number of factors appear likely to impart a moderating effect on house prices in the near term. *On the supply side, new house completions were 16.5 per cent higher, year-on-year, in the first half of this year, and current indications are that in excess of 60,000 units will be completed this year. If this were to be realised, it would represent the largest ever number of completions in a single year. At the same time, a more moderate evolution of domestic incomes together with increased uncertainty regarding employment are likely to be associated with some easing of demand conditions. *When both supply and demand side factors are taken into account, the outlook appears to be for a moderation in the rate of house price inflation going forward.*



So no imminent crashes predicted there, just a moderation in the rate of increase - but increases all the same.

And from the [broken link removed]



> • Further rapid increases in house prices are most unlikely. The risk of a price correction has increased.
> Locally, any relaxation of restrictive zoning policies, especially around Dublin, should see price
> pressures reduced sharply.
> 
> ...


So they are saying there is increased risk of price correction, but they are not exactly coming out and saying prices are on the way down.

The Economist did predict a 20% drop, but they were pretty much out on their own.

I had a long drawn out debate on these boards about three years ago with somebody called 'bearish' who was absolutely convinced that a crash was imminent then. He was wrong. Unless he changed his mind, he has probably been priced out of the housing market by now.

Note that I'm not trying to convince you that property prices could not fall - they could. I'm trying to convince you that the impact on your life of being priced out of the property market is way more serious than the impact of a bit of negative equity.

Have you given due consideration to what happens if you are wrong, and property prices continue to rise?


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## hooper (9 Jan 2004)

*.*

Rainyday, you seem to be trying to have your cake and eat it by arguing for moderation rather that crash and then saying "but what if the boom continues"? 

You make a well supported argument for moderation.  In this case wouldn't it make sense for Gearoid to continue saving and investing to try and up his buying power if he feels he can't get what he wants right now?


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## tedd (10 Jan 2004)

*Re: .*

I accept the points you both make, but I think it shows that the market cannot be predicted. In the meantime you need somewhere to live. 

Personally, I think a home is not purely an economic decision. I know a lot of people who didn't buy a house because of the crash that is just around the corner. They have been worrying about this for years. So what? If you can afford a mortgage and think you will be able to continue doing so, why wouldn't you buy? If the market crashes, it has no impact on you unless you have to sell. Even if there is no capital appreciation, you have an asset in which you are accumulating what would otherwise be your rent.

Buying a house isn't the right decision for everyone, but I think not buying a house solely on the grounds that the market might crash is unwise.

tedd


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## rainyday (10 Jan 2004)

*Property*

Hi folks - My own personal view is that house prices are likely to level out. I don't expect any substantial drops. But that is just the opinion of an unexpert observer.

The smart approach is not to opt for one expert or another (i.e. prices will rise or fall) and base your plan around that. The smart approach is to consider both possibilities and build a plan that will get you the best outcome, regardless of what happens.

The impact of staying out of the market when prices continue to rise is huge. It is not too difficult to see how you could be effectively priced out of the housing market for ever if house price inflation exceeds your personal income growth. Or if not priced out completely, you might well have to adjust your expectations re house size/location downwards.

However, the impact of getting into a falling market is not really that bad. So you have a little bit of negative equity, so what! Your monthly mortgage payment stays the same, regardless of whether the house price falls or rises. When you want to move house, the prices of your trading-up home will have dropped correspondingly.

As Tedd says, this isn't really an investment decision. You are buying a home. If you can afford it now, buy it.


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## XXXAnother PersonXXX (11 Jan 2004)

*Re: Property*

How about this, spread the risk. Put 40k into a property and the rest into another investment.


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## Brendan Burgess (11 Jan 2004)

*Re: Property*

Hi Gearoid - your analysis is way out. 



> ... if someone pays 900-950 euros per month they can rent a one bed apartment in Dublin but if they want to buy that apartment then they will likely have to pay a 250,000 to 300,000 mortgage in central areas. That mortgage will be between 1 and 4/5ths and twice the rental cost. This is not dead money as the difference can be invested.



You are suggesting that it is cheaper to rent than to buy, because the rent is less than the repayments. What you are forgetting is that the repayments include capital. The correct analysis, using your figures is as follows:

Interest on a 300k mortgage @3.5% = €10,500
Rent on a €300k property = €11,400 ( €950 x 12 months)

So it's actually cheaper to buy than rent. This could change if interest rates rise. 

The comparison with taxis makes little sense either, I am afraid. The real cost of a taxi license is zero - the government sets the price and has decided that there will be no limits set on the number of taxis. 

I do not know what will happen to house prices. I would have thought that the key risk is the interest rate risk. Interest rates will only rise if the economy booms which in itself will boost the demand for houses. 

Bob should almost definitely buy a house as he intends to live in it for 6 years or so. With €80k to spend, he is very unlikely to end up with negative equity in 6 years. And if he is buying another house, it should be cheaper, so lower prices might suit Bob. 

Sorry XXXAPXXX - your suggestion doesn't work. If you buy a property for €200k with a €40k deposit or with an €80k deposit, you are still putting €200k into property. Given the risk of negative equity, it is best to get your mortgage as low as possible. It would be a big mistake to put €200k into property and €40k into the stockmarket. It's effectively borrowing €40k to invest in the stockmarket, which is not a good idea for someone who already has high borrowings. 



Brendan


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## gearoid (12 Jan 2004)

*Re: Property*

Thanks for the analysis Brendan,

I don't claim to be an expert but my concerns were with interest rates.

Maybe a slightly far fetched analogy with taxis - but I was linking the supply of taxis to the supply of building land.
Granted it's more likely that building land remains very scarce..

Anyway, 

These are calculations on a 250k - 25 year mortgage with the interest rate on the right hand side. I'm using the same calculator as the one on www.jeacle.ie/mortgage

1185.54&nbsp &nbsp &nbsp &nbsp 3
1211.7&nbsp &nbsp &nbsp &nbsp 3.2
1238.2&nbsp &nbsp &nbsp &nbsp 3.4
1265.01&nbsp &nbsp &nbsp &nbsp 3.6
1292.14&nbsp &nbsp &nbsp &nbsp 3.8
1319.59&nbsp &nbsp &nbsp &nbsp 4
1347.35&nbsp &nbsp &nbsp &nbsp 4.2
1375.42&nbsp &nbsp &nbsp &nbsp 4.4
1403.8&nbsp &nbsp &nbsp &nbsp 4.6
1432.48&nbsp &nbsp &nbsp &nbsp 4.8
1461.48&nbsp &nbsp &nbsp &nbsp 5
1490.76&nbsp &nbsp &nbsp &nbsp 5.2
1520.33&nbsp &nbsp &nbsp &nbsp 5.4
1550.19&nbsp &nbsp &nbsp &nbsp 5.6
1580.33&nbsp &nbsp &nbsp &nbsp 5.8
1610.75&nbsp &nbsp &nbsp &nbsp 6
1641.45&nbsp &nbsp &nbsp &nbsp 6.2
1672.42&nbsp &nbsp &nbsp &nbsp 6.4
1703.67&nbsp &nbsp &nbsp &nbsp 6.6
1735.17&nbsp &nbsp &nbsp &nbsp 6.8
1766.96&nbsp &nbsp &nbsp &nbsp 7
1798.98&nbsp &nbsp &nbsp &nbsp 7.2
1831.25&nbsp &nbsp &nbsp &nbsp 7.4
1863.77&nbsp &nbsp &nbsp &nbsp 7.6
1896.54&nbsp &nbsp &nbsp &nbsp 7.8

It still looks to me like it's cheaper to rent BUT on your analysis I guess I should also buy! 

There seem to be quite a few out there who have got a considerable sum put together for a deposit but are holding off, it's good to hear both sides of the argument.

I've been spectacularly wrong re property for the last 6-7 years and have paid the price dearly.  I'm just gutted that I may have to get in right at the zenith of prices as it doesn't look like rates in euroland are moving upwards too quickly. When they do I'm guessing there'll be blood on the floor - perhaps 18 months to 2 years away.

Regards,
Gearoid.


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## househunter1 (12 Jan 2004)

*Re: Property*



> I've been spectacularly wrong re property for the last 6-7 years and have paid the price dearly. I'm just gutted that I may have to get in right at the zenith of prices



If you take a look at historical figures, its highly unlikely you'll be buying at the zenith. Sure prices may fall over a few years, but this is a usually a blip on an otherwise ever rising graph. 

Something has occured to me lately; Most consumer items are falling in real price year on year (eg food, electronics, cars) due to effects of digital deflation etc. What about property. The real price is increasing all the time. Is it maybe that we have more disposable income due to otherwise cheaper cost of living and we have nothing better to spend our money on than overpriced property?


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## <A HREF=http://pub145.ezboard.com/baskaboutmoney.s (12 Jan 2004)

*Re: Property*



> the real price is increasing all the time.



Anything to do with the fact that zoned/serviced development land is a finite, scarce and diminishing resource - i.e. simple supply and demand again?


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## daltonr (12 Jan 2004)

*Re: Property*



> Interest rates will only rise if the economy booms which in itself will boost the demand for houses.



And during the recent boom which was one of the biggest and most prolongued in the history of the state, we had historicaly LOW interest rates.

This shows that we are in a magic place at the moment, like Alice through the looking glass.  Nothing is working like it should.

The bottom line that many people simply refuse point blank to accept is that houses are actually more affordable now than they were 10-15 years ago.  Sure they cost many multiples the price they did then, but when wage inflation and low interest rates are taken into account houses right now are more affordable than they used to be.

People have a habit of projecting their current financial status and income into economic situations of the past.

I have no idea what's going to happen. But here's a long term prediction,  30 years from now (if not sooner) a 3 bed semi in Ballinteer, or Firhouse will cost you €750K to €1m

And people will still be buying them.

For the record I don't own a house right now and have no interest in talking up the prices.

-Rd


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## <A HREF=http://pub145.ezboard.com/baskaboutmoney.s (12 Jan 2004)

*Re: Property*



> The bottom line that many people simply refuse point blank to accept is that houses are actually more affordable now than they were 10-15 years ago.



Isn't this David McWilliam's argument - i.e. that notwithstanding the fact that house prices are measured in hundreds rather than tens of thousands these days mortgage repayments as a percentage of disposable income (and often two incomes rather than one in the past) are lower than ever before and, as such, houses are arguably more affordable than in the past? Of course raising the deposit is often the hard part for first time buyers!


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## rainyday (12 Jan 2004)

*Re: Property*

I think the McWilliams view is contradicted by the fact that average mortgage durations are now increasing - whereas it used to be 15-20 years, it is no 25 years and upwards.


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## hmmm (12 Jan 2004)

*Affordability*

I don't agree with the affordability argument, but then again I'm not an economist   Interest rates are in many countries at an all time low. I can't find a nice graph online, this might be of interest which illustrates German interest rates from '87
[broken link removed]

and the Euro following conversion
[broken link removed]

Right now, you might say that "sure paying 1000 pm for a 200k mortgage is affordable" but what happens when the interest rate cycle turns. The German table above illustrates that the long term interest rate cycle is about 4 or 5% above where they are currently (which is something you can also see from the long term fixed rate pricing). On a 200k mortgage you will be adding c.500/600 a month in mortgage repayments. More than that, it will be more difficult for people to obtain mortgages as the stretch figure used by the banks will also be correspondingly higher, which of course will mean a hit on housing stock demand.


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## <A HREF=http://pub145.ezboard.com/baskaboutmoney.s (12 Jan 2004)

*Re: Affordability*

Anybody got any stats on averages for the following:

(1) mortgage loan size
(2) initially agreed mortgage term 
(3) actual effective mortgage term
(4) loan to value ratio

Just curious...


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## daltonr (21 Jan 2004)

*More Affordable*



> I think the McWilliams view is contradicted by the fact that average mortgage durations are now increasing - whereas it used to be 15-20 years, it is now 25 years and upwards.



Was the average mortgage length ever 15 years?????

I think there probably are more 30 year mortages than before, but is that because houses are less affordable, or because people are now buying luxuries that they never bought before and are using more and more consumer debt to finance it.

-Rd


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