# Some ideas to get your foot on the housing ladder



## Brendan Burgess (25 Mar 2004)

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


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## <A HREF=http://pub145.ezboard.com/baskaboutmoney.s (25 Mar 2004)

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



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


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## daltonr (25 Mar 2004)

Shares in a building firm?

-Rd


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## Brendan Burgess (25 Mar 2004)

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


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## <A HREF=http://pub145.ezboard.com/baskaboutmoney.s (25 Mar 2004)

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



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"?


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## Statler (25 Mar 2004)

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.


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## <A HREF=http://pub145.ezboard.com/baskaboutmoney.s (25 Mar 2004)

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



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


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## Statler (25 Mar 2004)

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


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## <A HREF=http://pub145.ezboard.com/baskaboutmoney.s (25 Mar 2004)

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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## Statler (25 Mar 2004)

> 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.


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


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## <A HREF=http://pub145.ezboard.com/baskaboutmoney.s (25 Mar 2004)

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


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## Statler (25 Mar 2004)

> Apologies for the confusion...


That's usually my line.


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## daltonr (26 Mar 2004)

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


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## Brendan Burgess (26 Mar 2004)

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?



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


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## Brendan Burgess (26 Mar 2004)

_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.


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## Dogbert (26 Mar 2004)

*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 ?


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## <A HREF=http://pub145.ezboard.com/baskaboutmoney.s (26 Mar 2004)

*Re: Residential Tracker*



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



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


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## Dogbert (26 Mar 2004)

*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.


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## Brendan Burgess (26 Mar 2004)

*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


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## Dogbert (27 Mar 2004)

*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.



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.


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## Dogbert (27 Mar 2004)

*Residential Tracker*

Furthermore, Brendan, I don't see any financial institution linking payouts to residential property and investing the proceeds in equities, no matter what their views on the respective markets. It's just that kind of mismatch (promising payouts like fixed interest, but with the underlying investment in equities) that has caused so many of them so much grief (and worse) in the recent past.


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## Tommy (27 Mar 2004)

*Re: Residential Tracker*



> Don't forget it's in the interest of potential purchasers that house prices fall



I very much doubt if this is true. The main cause of price increases in the past 10 years has not been a sudden surge of cash in everyone's pockets (although that has helped to an extent) but looser lending policies by banks and mortgage companies. This has been based on the banks' strong confidence in the property market. If the property market was to experience volatility or price falls, the first thing to happen would be an immediate tightening of lending policies by the banks. This would make it harder for borrowers to source mortgage finance, and harder for them to afford their chosen property. (This is why a house prices fall could conceivably degenerate into a self-sustaining downward spiral.)

Remember 10 or 15 years ago when good Irish properties were ridiculously cheap. The reason they were so was because it was almost impossible for many people to obtain mortgages - many banks would only lend to people with a long savings track records, or to people known to them via family connections etc.


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## rainyday (27 Mar 2004)

*Re: Residential Tracker*



> Remember 10 or 15 years ago when good Irish properties were ridiculously cheap. The reason they were so was because it was almost impossible for many people to obtain mortgages - many banks would only lend to people with a long savings track records, or to people known to them via family connections etc.


Hi Tommy - While not questioning the substance of your point, I think you need to go back further than ten years to get back to the auld ways. When we got our 95% mortgage ten years ago, we had a number of competing offers from financial institutions with which we had no track record or family connections.


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## Tommy (27 Mar 2004)

*Re: Residential Tracker*

Hi Rainyday

I am simply using this as an example and any doubts one may have about anecdotal evidence should not detract from my main point - that a fall in house prices may well make housing less affordable (not more affordable) to FTBs.

However, I remember friends and acquaintances (as late as 1995) saving like billyo with the likes of Irish Permanent and First National in the hopes of eventually being approved a for (modest) mortgage. Obviously, depending on income criteria etc, this would not have been necessary in all cases.


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## Brendan Burgess (28 Mar 2004)

*Re: Residential Tracker*

Hi Dogbert

I am trying to design a product which allows people to get onto the housing ladder. I am not interested in designing a product for property investors who don't want the hassle of running a property. 

I suppose my first step is to design a product which appeals and then see if a financial institution could do it profitably. I take your point about mismatches - that's why I pointed out the risk involved to the supplier of the product. Mismatched products only cause problems if they are a significant element of the company's business e.g. guaranteed with profits products killed off the Equitable. 

If a product cannot be designed profitably, then maybe the EBS could launch a limited version of it as part of their commitment to mutuality. 

Brendan


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## Brendan Burgess (28 Mar 2004)

*Re: Residential Tracker*

Tommy 

I do think it's in the interest of potential buyers that the product they are buying is falling in price. 

Warren Buffett makes the point about cattle farmers. They want to see the price of beef rising and the consumer wants to see the price of beef falling. Investors who are buying for the long term welcome a stockmarket fall as a buying opportunity.

The optimium scenario for a first time buyer is:
Falling house prices
Low interest rates and a great supply of credit
A booming economy
A deposit which is rising in value

Unfortunately this is unlikely to happen. 

It cannot be in the interests of someone who is planning to buy their first property in 2 years, to see house prices rising by 20% a year, while their deposit is rising by 2% a year. 

Brendan


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## Dogbert (29 Mar 2004)

*UK Residential Tracker*

This is (was ?) offered by Newcastle Building Society [broken link removed].

The NBS tracker was capital guaranteed. From the tenor of the press release ("repeating it will not be easy") and the fact they're offering a mixed tracker of the FTSE and the Halifax index, they may no longer have a residential-only tracker. Also, not sure if there are others in this market. But the attached may give some pointers for Irish providers.


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## Brendan Burgess (29 Mar 2004)

*Re: UK Residential Tracker*

Dogbert - that's very interesting. I will follow it up with the Newcastle to see how they did it.

Brendan


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## Tommy (30 Mar 2004)

*Re: UK Residential Tracker*

Hi Brendan,

Every time livestock prices fall, farmers exit the market - in spades. Remember prices only fall when there is oversupply. We won't eat twice as much steak just because its price halves. Contrarians who invest in agricultural markets when they are cheap can do so - but only if they have their own equity as banks won't touch a falling market with a bargepole. Read up on the Irish pork market collapse of the late 90s if you doubt this.


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## Brendan Burgess (30 Mar 2004)

*Re: UK Residential Tracker*

Hi Tommy

But that's my point entirely. Falling prices suit the purchaser. You don't have to increase your consumption of pork, but you will have money left over for other things. 

I have run the idea by a few first time buyers and they like it. The one thing they don't want is rising prices. They would love to see a price fall. They would get more house(pork) for their money or the same house(pork) and have money left over.

Brendan


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## Tommy (30 Mar 2004)

*Re: UK Residential Tracker*

Hi Brendan

Falling prices suit the purchaser, but only if they have, or can raise the equity to take advantage of the falling prices.

As a rule, banks don't like increasing their exposure in markets where prices are volatile or falling. That's why banks are not keen on financing heavily geared equity investments even though they may offer, on paper, more attractive returns than alternatives. 

Of course all prospective first time buyers would love to see property market price falls. After all, everyone loves a bargain. However it is not as simple as saying that in the event of a price fall, all buyers would get more house for their money. In the vast majority of cases, they will be using the banks' money. Any tightening of banks' lending policies will reduce the availibility of credit to FTBs. Even though the price of their chosen house has fallen, the typical FTB will still struggle to afford the purchase, because their borrowing power will have decreased.


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## Nexus (30 Mar 2004)

*Residential Tracker*

Would a product like this not just inflate an already overpriced residential market and add to the fortunes of existing home owners and specifically residential investors?


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