Future price of Irish properties

[woods]

The Economists are saying that there WILL have to be a house price correction. I think they resemble a broken clock. Yes they may be broken but they will tell the time correctly twice a day.

I would not be basing my investment stratagy on a clock that is only right for 2 secounds a day out of 8,640. Not very good odds. I am putting my money on a 3% to 5% rise for the next 3 years and a 0% rise for the 10 years after that.

 

[ivuernis]

I am putting my money on a 3% to 5% rise for the next 3 years and a 0% rise for the 10 years after that.

As most investment now in Irish property is primarily based on potential capital appreciation and not rental returns how will a flat property market for 10 years happen. Won't many investors who are in for the capital appreciation bail out at this stage as rental yields may not cover the mortgage and capital appreciation is zero? This could be the tipping point we're all talking about. Also, if prices didn't rise or fall for such a period as you suggest it would also take much demand out of the market as potential buyers will say to themselves that there is no panic to buy anymore because prices have stabilised. Much property buying now for first-time buyers especially is predicated on fear if they don't get in as quickly as possible they will miss out due to rising prices. In a 0% market this fear would be removed.

Sorry, I just cannot see a situation where property prices will remain flat for a period of years after the vast increases of recent years. It may have been a possibility if prices had only increased moderately in which case we'd never be talking about a property price bubble and the debate would be mute. Either prices will keep rising forever (nigh on impossible) or prices will peak and then fall IMHO.

 

[gearoidmm]

Sorry, I just cannot see a situation where property prices will remain flat for a period of years after the vast increases of recent years. It may have been a possibility if prices had only increased moderately in which case we'd never be talking about a property price bubble and the debate would be mute. Either prices will keep rising forever (nigh on impossible) or prices will peak and then fall IMHO.

You must remember that a flat market with 0% price rise over 10 years equates to a fall in value of 25% over the same period in real terms if inflation of 2% is factored in.

 

[ivuernis]

You must remember that a flat market with 0% price rise over 10 years equates to a fall in value of 25% over the same period in real terms if inflation of 2% is factored in.

True, I suppose what I really mean is that I can't see prices heading for this oft-quoted "soft landing" say even in the range of plus/minus 2%. I just think we've gone too far down the road of huge property price inflation for there to be a happy ending. I think the medium to long-term trend for western economies will be rising inflation and interest rates coupled with a slowdown in wage increases. We're living in almost optimal economic times now with historically low interest rates, full employment & high wages but this will change at some stage.

Even a small drop in prices, whether actual or inflation based might be the trigger which causes many investors to cash-in on their investments and thus causing some sort of domino effect?

 

[Loki]

As most investment now in Irish property is primarily based on potential capital appreciation and not rental returns how will a flat property market for 10 years happen.

What is that based on? I hear people say it but none actually give a reason why they say this is the case. Anybody I know that has rental property is looking for the rental return for retirement and maybe hoping for capital appreciation. To claim the whole property investor market is only in it for appreciation and are speculative might be over stating. Even if the new investors are doing this what about the ones that have been in it for years and haven't sold. When did it become most investors are just waiting for appreciation? I don't really need figures but it would be nice to clarify if this belief is true.

To then assume all investors will panic or cash in under a change is also a big leap if you ask me. Many people dig in once hard times come. THe only people I can see panicing and cashing out are thoses late in. The % of drop will determine how far and many years back people losing money would go back. A crash in the UK was brought on by a huge stock crash and business pulled out of investment property.

What problem would start our crash and how much effect would big businesses pulling out on investement property actually have on the Irish marke? THe bird flu could do it I guess. People seem to be ignore these issues completely and taking a real simple view of how a crash happens and how it effects things. Each market is different and even though people don't like it Ireland is different, not because of some misplaced paitriotic view but becasue each market has different factors. Traditional economic views ignore many contributing factors that actually effect the out come. Eventually prices will stop rising is a no brainer a sudden fall and calls of a bubble are all speculative on till something happens. Anybody calling it a property bubble isn't right but they may be proven right. If they said it 6 years ago it appears they were wrong then and 10 years ago they were wrong too.

 

[Neffa]

Economists therofore can't predict anything as people do things based on social order not on economic principle. If economists ignored the weather effect of food production they would always be wrong if they ignore social order on housing they will get it equally wrong. There analysis is either correct or not. If they say x will happen and it doesn't you don't get to say they got the calculations right so they are right. X didn't happen their prediction has been wrong I don't accept that as their logic makes sense that makes them right.
Property prices aren't hysteria people use a lot more reason. You may not agree but you calling it hysteria is actually the over reaction and as unreasonable as somebody yelling that prices can only go up.
Fundmentals you are talking about is not supply and demand but safe bets. The safe bet is to say house prices can't keep going up and must at some point drop. It is not quite like gravity and has a high probability of being right over time. It is not analysis of the real world but predictions that are vague enough to be correct. Buying a house makes a lot of sense for many people renting and wanting to seatle down.

What I am saying is that the economists are correct - I do believe houses are overvalued based on costs relative to rent, expected future rate rises, international comparisons and so on. And I think the reason most people use before they buy is "it went up last year, better get in quick while I can because it will be more expensive next time.") I really do not accept that the majority do anything more than this.

On your other point, I do agree that the economists ignore the human factor in all of this. What I am saying (and this is opinion, just like all our views) is that at some point soon the economic factors will make the insatiable appetite for property diminish and that will change people's views. That will see the economists view and the "hysteria" come into line and growth will slow/stall/decline depending on your view.

 

[Neffa]

A crash in the UK was brought on by a huge stock crash and business pulled out of investment property.

Sorry, but this is not right. The UK Stock Market crashed in 1987 and property in 1990 and it was a residential market crash, not investment. It crashed because property simply became too expensive and the whole pyramid collapsed like a house of cards. It then drove the UK into recession.

 

[ubiquitous]

Each market is different and even though people don't like it Ireland is different, not because of some misplaced paitriotic view but becasue each market has different factors.

This may be the case, but it is also true that the property price boom here, particularly in the past 5 years, has been mirrored by similar booms in the US, UK and most other developed western economies. This leads me to suspect that the factors behind the boom here are global as well as local in nature.

 

[glendale]

What is that based on? I hear people say it but none actually give a reason why they say this is the case. Anybody I know that has rental property is looking for the rental return for retirement and maybe hoping for capital appreciation.

My understanding is that yields are very low ~2/3/4% and an investment property is only justified by an expectation of capital appreciation. Yields will only get worse as interest rates and house prices go up and rents are not going up at all or too slowly to catch up.

When did it become most investors are just waiting for appreciation?

When the investment wasn't justified on the strength of the yield alone maybe.

To then assume all investors will panic or cash in under a change is also a big leap if you ask me. Many people dig in once hard times come. THe only people I can see panicing and cashing out are thoses late in.

House prices are set on the margin so only a small percentage of homes need to be sold to affect the general price. I think that someone who buys in now in a panic of missing the boat is just as likely to sell in a panic as well.

Eventually prices will stop rising is a no brainer a sudden fall and calls of a bubble are all speculative on till something happens.

The point is that a lot of investment properties are being bought on the assumption of good capital appreciation and when this stops which you agree it has to then it will no longer make sense to keep the property and there will be a large amount of properties on the market and this will have a downward affect on prices (which in turn will feed back into the loop).
Also FTBs are rushing to buy a place lest they can't afford it later as prices keep rising. If prices stop rising or fall there is no rush and the demand will reduce and this will further increase the downward pressure on prices.

 

[ivuernis]

What is that based on? I hear people say it but none actually give a reason why they say this is the case.

I don't have figures to back this up but I did read before where a lot (a sizeable minority) of new builds (mostly apartments) are left vacant by investors which leaves me to believe they are only in it for the capital appreciation. Any such activity which takes new builds out of circulation puts increased pressure on prices as people who may actually might want to buy and live there are priced out by investors who then leave them vacant while they wait for an opportune time to sell on. In the block of apartments where I live, of which there are 18, 2 have been unoccupied since they were completed over 2 years ago.

To then assume all investors will panic or cash in under a change is also a big leap if you ask me. Many people dig in once hard times come.

All investors may not panic initially as it might just effect say the most recent investors. But if a large proportion of that tier get out then this will have an knock-on effect on the next tier of investors who may not have initially been exposed but as the threshold at which they might sell is reduced they may also get out. True, some will dig in and ride it out but many may not especially when cash/profit is on the line.

What problem would start our crash and how much effect would big businesses pulling out on investement property actually have on the Irish marke? THe bird flu could do it I guess. People seem to be ignore these issues completely and taking a real simple view of how a crash happens and how it effects things.

I don't see bird flu being the cause. There's a lot of media hype about it to be honest. The potential is there for a mutation of course but that is most likely to occur in Asia if it happens. I'm not ruling it out though but there are many other geo-political issues which may impact on western economies in the coming years such as rising energy costs (if anybody has read about Peak Oil they'll know what I mean). Tensions in the Middle East have the potential to draw China and Russia into the mix. American is in Iraq for the long haul regardless of what George Bush spouts. The billions being spent on 14 "enduring bases" (i.e. permanent) in Iraq is testament to that. It's no coincidence that the world's major oil reserves are located in Iraq and the country to either side of it. There's also the precarious position of the US dollar and the ever-present threat from China and India w.r.t. their vast resources of cheap and educated labour which we have to compete against. These situations are and will continue to effect causes on over-exposed western economies for the foreseeable future and some of them may not be pleasant to bear for us.

I know I've gone a bit off-topic on some of these issues but the world is in a far more precarious position now than it has been for quite a while. Globalisation is now a fact of life but with it comes new dangers and the balance of power is slowly shifting from west to east. It would be remiss to think that Ireland can go along on its merry way and remain immune to changes that are being effected on the global stage.

 

[Loki]

What I am saying is that the economists are correct - I do believe houses are overvalued based on costs relative to rent, expected future rate rises, international comparisons and so on. And I think the reason most people use before they buy is "it went up last year, better get in quick while I can because it will be more expensive next time.") I really do not accept that the majority do anything more than this.

Well that is a belief system close to religion not science or even close. Nothing is ever overvalued if people are willing to pay for it is a fact not beleif. THe economists can't be wrong and right. What you are saying is you believe the economists are correct.There is belief that what they say is correct by not what is happening but "signs" that lead to show how they are right yet the end figure is still not going down. If you use international comparisons what were the signs accross the world telling the UK? Japan? US? You only believe house prices are overvalued it is not a fact no matter what you say now it is only a fact after the event. At what point in your belief were they right? I have never beleived there is a direct correlation between rent and house price. Rent is more based on location than house price is and always has been from my experience

On your other point, I do agree that the economists ignore the human factor in all of this. What I am saying (and this is opinion, just like all our views) is that at some point soon the economic factors will make the insatiable appetite for property diminish and that will change people's views. That will see the economists view and the "hysteria" come into line and growth will slow/stall/decline depending on your view.

Economists are a bit like chess players the calculate possible ways for the person to move into check mate and ignore the threat. They are also assuming the pieces the other player is trying to go for. THey are ignoring cultural issues and various other real world factors cumilatively they effect the market. Re you considering the change in demographics in terms of increased single people and marriage break ups? What about the post colonial driven demand to own housing? THe fact that irish home ownership will probably have to drop in line with most other EU countries?

I disagree with you I believe that the stock crash casued the housing crash in the UK as do other people.


ubiquitous>
I think that is belief in understanding of the facts. I remember the experts talking crash 10 years ago when house prises had risen. Suddenly linking us after 5 years to another market is I think is unrealistic. I am sure you can claim loads of links but you can see patterns in static too. Weren't the economists at this time saying to expect a crash here but not saying it about the UK and US untill later? How did we suddenly get linked in that case?

People are too sure of themselves for speculation that has been proved wrong. I again asked what are the economists actually saying about the fact they have been wrong about the outcome they predicted more or less year on year for 6 years. If they are claiming to be correct as suggested here that is a complete cop out and would not be accepted from most other profession.

 

[Glenbhoy]

Sorry, but this is not right. The UK Stock Market crashed in 1987 and property in 1990 and it was a residential market crash, not investment. It crashed because property simply became too expensive and the whole pyramid collapsed like a house of cards. It then drove the UK into recession

My understanding had always been that this was all linked - ie, stock market crash, followed by economic recession, followed by decreased economic confidence, job losses etc which inevitably led to a crash in house prices.

 

[walk2dewater]

Some posters have said that there's no bubble, will be no crash etc. Other posters have pointed to economic reasons why there should be a crash etc. I will cut the bone and explain why a severe collapse in prices is an inevitable dead certainty.

The reason is precisely this: There is a widespread EXPECTATION that you cannot lose, that property is a one-way bet, “money for old rope” as someone once put it to me. Under these expectations dips would mean “buying opportunities” and everyone expects the “the long-term” will bail them out under all circumstances. In the frenzy to grab a piece of the perceived risk-free action no one wants to be left out. This is the essence of asset bubbles, this is why we’re in one, and this is exactly the reason why a severe fall in prices is guaranteed.

Here’s why price stagnation after a classic speculative bubble tops out doesn’t happen:

Imagine if you took away these expectations of price growth and replaced them with expectations of price stagnation? Would first time buyers be scrambling to get in at ANY price? No, they are expecting prices to stagnate. Would existing owners want to trade up at ANY price? No, they too are expecting prices to stagnate. What would owners of property do where monthly revenues fall short of monthly costs and there’s no more price appreciation? Would all of them take it on the chin forever? Remember they're not expecting further price growth. Under these new expectations of the future, which side of the transaction would have the pricing power, buyers or sellers?


And all bubbles top out. Eventually the game ends cos there are no more participants. Buyers simply dry up, either they can't find the means to participate or they cop on to what's going happening. What happens next is sellers have no one to pass the bag on to-- that's why the price growth slows, next it stops, then next, expectations of further price growth are ruined.

A bubble by definition is price growth based on EXPECTATIONS of further on-going price growth and NOTHING ELSE. €700k apartments in Dundrum only make sense if you think you can sell them for more later. Otherwise, why on earth would you pay that much?

Ireland is full of people who cannot imagine the market going against them because it’s psychologically too painful. It means early retirement replaced by working longer. Well I have news...

WTTW

 

[Glenbhoy]

There is a widespread EXPECTATION that you cannot lose, that property is a one-way bet, “money for old rope” as someone once put it to me. Under these expectations dips would mean “buying opportunities” and everyone expects the “the long-term” will bail them out under all circumstances. In the frenzy to grab a piece of the perceived risk-free action no one wants to be left out. This is the essence of asset bubbles, this is why we’re in one, and this is exactly the reason why a severe fall in prices is guaranteed.

I don't accept that this is the case - possibly amongst the Sean Dunne's of the world, who probably forget just how close they all came to the precipice they came 20yrs ago. But the ordinary man in the street in my opinion does'nt believe it's a one way bet!

 

[Loki]

My understanding is that yields are very low ~2/3/4% and an investment property is only justified by an expectation of capital appreciation. Yields will only get worse as interest rates and house prices go up and rents are not going up at all or too slowly to catch up.

Then it is assumption that people are doing this. Who is to say they aren't buying expecting rents to increase or they see it as an investment where the rent pays a divident like a pention fund?

I don't have figures to back this up but I did read before where a lot (a sizeable minority) of new builds (mostly apartments) are left vacant by investors which leaves me to believe they are only in it for the capital appreciation. Any such activity which takes new builds out of circulation puts increased pressure on prices as people who may actually might want to buy and live there are priced out by investors who then leave them vacant while they wait for an opportune time to sell on. In the block of apartments where I live, of which there are 18, 2 have been unoccupied since they were completed over 2 years ago.

Well that would not consider the other investors in the market. How many of the investors in Ireland are actully these new speculative investors who are going to get caught at the tail end of the price "bubble" that will crash the market at first sign of danger. I do believe there are new investors but I reckon people are better hedged than people give them credit. If I have 3 properties I own 20 years and I buy another two with equity and the market drops I may easily being doing very well. The same applies if you bought 5 years ago but your liability is a little higher but maybe not that much. i can leave my property vacant for 2 years easily and be making money off my portfolio

When the investment wasn't justified on the strength of the yield alone maybe.

It is assumption that people are doing it speculatively on house gain only in the short term.



House prices are set on the margin so only a small percentage of homes need to be sold to affect the general price. I think that someone who buys in now in a panic of missing the boat is just as likely to sell in a panic as well.

The point is that a lot of investment properties are being bought on the assumption of good capital appreciation and when this stops which you agree it has to then it will no longer make sense to keep the property and there will be a large amount of properties on the market and this will have a downward affect on prices (which in turn will feed back into the loop).
Also FTBs are rushing to buy a place lest they can't afford it later as prices keep rising. If prices stop rising or fall there is no rush and the demand will reduce and this will further increase the downward pressure on prices.

Actually the point is who is telling you that and is it true? I am not convinced it is true and I am in the property trade and know many investors. I am not convinced that the investors are going to need to sell and the portion that may need to may be very samll. Whty everybody assumes it is a big portion has yet to be explained.If people are buying a home to live in investment is not the key issue.

I think there is too many assumptions about the market and a lot of hearsay about how and what is currently happening. AFAIK crashes normally need a cause other than the sturcture itself. Demand still seems high and supply near cities is limited I can see part of the market failing alright.

 

[roryodonnell]

The only crash I can foresee in the near future will effect "the buy to let" market. There is too much supply out there at the moment. Just go to daft.ie and see what I mean.

Investors are thinking to themselves, "Sure, the price will rise and I can just sell in a year or two and make some profit."

I know a couple of people who have bought properties, or investments, as they call them, to let them out. Their mortage is around 1200, they expect to get around 1300-1400 in rent. When I ask them how much they will clear after tax, they just give me a blank stare.

 

[walk2dewater]

the ordinary man in the street in my opinion does'nt believe it's a one way bet!

The opinion of the ordinary man on the street doesn't matter a tot!! He doesn't set the price. It's the opinion of the buyer and sellers in the last trade that matter. THEY set the market price for EVERYONE. Sellers are asking for ever higher prices and buyers are paying up. Sellers and buyers are bidding up prices together. Why are buyers not rejecting offers? cos they like the look of rental returns, cos they think "Jezus" prices are such great value? No, it's their expectations for the future (higher prices)that's driving them. There's simply no other rationale for todays price action, the sums stopped adding up ages ago.

Ask yourself why are buyers at Adamstown accepting whatever price is thrown at them by the developer? Answer: Because they expect they will lose out it they don't, fear of being left out, off "the ladder", marginalised and never able to buy cos prices will shoot to the moon and leave them homeless. They feel they have ZERO power in the transaction. Buyers at Adamstown arnt exactly asking for discounts are they?

Again, and I don't mean to pick on you Glenbhoy, but it's apparent that there's widespread misunderstanding of the mechanics of markets.

WTTW

 

[glendale]

Ok Loki, what do you think is the average yield on a buy to let?
Do you think this alone justifies the investment.
Its may opinion that taking capital appreciation out of the equation at the moment a buy to let is not a good investment, do you agree?

I don't think they a lot of investors are going to need to sell but that they will want to sell.

I don't think FTBs are going to rush into buying into a market that is flat or going down, the sense of urgency will be lost and people will be able to save money by sitting back.

 

[Loki]

Ok Loki, what do you think is the average yield on a buy to let?
Do you think this alone justifies the investment.
Its may opinion that taking capital appreciation out of the equation at the moment a buy to let is not a good investment, do you agree?

I don't think they a lot of investors are going to need to sell but that they will want to sell.

I don't think FTBs are going to rush into buying into a market that is flat or going down, the sense of urgency will be lost and people will be able to save money by sitting back.

You seem to have some problem with me asking people to justify what their belief is. A buy to let now is probably not a good idea in the short term gain. I don't think people are buying for the short term in mass. I am asking you to say why you beleive they are. If you arte a real investor you may increase your protfoli due to the gain on your other property. Where you planed to have two houses for retirement you now have 3 giving you more income. Tax breaks make this worth while. So asking about revenue misses what the reality is for many investors. The point is your believe is based on who you think is in the market and what they are doing. I am asking you how do you know? I think your logical arguement to what will happen is so heavily based on knowing other people's intent that it is flawed. It also seems to miss the people I know in the market that probably own a larger portion of the market overall. There will always be idiots in the market doing the wrong thing logically but it working out but the same is also true.
The simple truth is if you listened to the economists you would have been boned.

 

[glendale]

I don't think a lot of these people are 'real investors' with substantial porfolios.I don't think people are buying for the short term gain I think people are buying becauase they think that the current captial appreciation will continue for a long time. I think it won't, when they realise this they will sell. Some people have blind faith in property, ""you can't go wrong".

This is what I think, it isn't fact but opinion. You obviously have a different point of view. None of us can predict the future.

I think its the people who are as you say "doing the wrong thing logically" that will cause problems.