Future price of Irish properties

[Loki]

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.

THere doesn't need to be a lot of them for them to own a large part of the market. So if your view is they aren't buying for the short term then the prices won't crash as people will be holding onto them and not panicing. Over the long term property does generally raise and I think that is what most small investors are thinking.

I get it is just your opinion but it is shared by many and nobody can say why they think there are so many investors casuing rises and why they assume so many will jump at the first sign of trouble.

It's not so much a differnt point of view as me asking why so many people think this, I just at this point would like facts that people are using. THere are a lot of factors and many people only use a few to base everything on but if it isn't even based on fact it is not opinion but a belief system close to religion

 

[Neffa]

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.

Sorry - this is not correct. I lived in London during that period. The UK was not even close to recession in 1987 - the Tories were returned in a wave of economic euphoria and the late 80's were the preserve of the champagne lifestyle and yuppies. The stock market crashed as it was overbought and by 1990, when the housing market crashed the stock market was back to 1987 levels:

See the FTSE graph here: [broken link removed]

The housing crash helped drive the UK into recession, not the other way round.

 

[Neffa]

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

Excellent post - reflects exactly the difference between something being overvalued inherently (e.g. Tulips at the peak of the bubble in Holland) and that being shoved aside because expectations are that this is a one-way bet. Take that away and the world looks very, very different. Remember the dot-com valuations in early 2000? Remember them in early 2001?

 

[Calina]

THere doesn't need to be a lot of them for them to own a large part of the market. So if your view is they aren't buying for the short term then the prices won't crash as people will be holding onto them and not panicing. Over the long term property does generally raise and I think that is what most small investors are thinking.

I get it is just your opinion but it is shared by many and nobody can say why they think there are so many investors casuing rises and why they assume so many will jump at the first sign of trouble.

The problem as I see it is that given the way that prices are rising, it is reasonable to suspect that quite a lot of people are panic-buying. In that case, you can't, per se, expect them not to panic when the prices either stop rising or are on the way down. There are a lot of people saying "if we don't buy now, we'll miss the boat, we'll never get our feet on the ladder, we'll be in rented hell at the mercy of landlords forever till we die". I actually can't call that a rational assessment. Queuing at new developments doesn't actually make me feel like anything approaching rational consideration is being applied.

 

[Loki]

Sorry - this is not correct. I lived in London during that period. The UK was not even close to recession in 1987 - the Tories were returned in a wave of economic euphoria and the late 80's were the preserve of the champagne lifestyle and yuppies. The stock market crashed as it was overbought and by 1990, when the housing market crashed the stock market was back to 1987 levels:

See the FTSE graph here: [broken link removed]

The housing crash helped drive the UK into recession, not the other way round.

A lot of people put the property crash down to a few things one of which was the stock crash , another was the council selling off houses to people but there are many and Neffa stating one and claiming it is the only one that is right is nieve.

Being in a place doesn't give you any incite into why it happened unless you studied everything that happened prior and afterwards.

Crashes are not a result in over pricing but sudden change in a point of view or fear. It is silly to claim there is a right price or wrong price for anything. I might as well claim that a sudden under pricing casues a crash than you claiming years of overpricing

Why not try and be a bit more balanced and argue your point instead of saying people are wrong and stop assuming you are 100% correct.

 

[beattie]

There is speculation from some commentators who I would have considered quite dovish that interest rates will hit 3.5% before the year is out. That will put a major squeeze on many in the buy to let sector as costs rise IMO

http://www.rte.ie/business/2006/0223/germany.html

 

[Loki]

The problem as I see it is that given the way that prices are rising, it is reasonable to suspect that quite a lot of people are panic-buying. In that case, you can't, per se, expect them not to panic when the prices either stop rising or are on the way down. There are a lot of people saying "if we don't buy now, we'll miss the boat, we'll never get our feet on the ladder, we'll be in rented hell at the mercy of landlords forever till we die". I actually can't call that a rational assessment. Queuing at new developments doesn't actually make me feel like anything approaching rational consideration is being applied.

It is equally logical to assume that people earning more money and high employment can afford more. The banks beleive the ability to pay back loans has increased and how people will be working longer mean house prices go up. Less assumption on what I have said as it is all common knowledge that we have more employment, banks give more money and longer terms. Yours is based on assuming intent of people and giving reason to peoples' actions. I don't think that is reasonable to assume, suspect or base your purchasing on that but it is personal choice

 

[Duplex]

Loki

Address the following points,

1. The level of debt to disposable income in Ireland is 140% and growing. Soon we will be the most indebted nation in Europe. This trend is not sustainable.

2. The construction industry is building 80,000 homes every year, the construction and related sectors employ 20% of the workforce, how many jobs in the wider economy rely on the building boom is anyones guess. This trend is not sustainable.

3. Ireland is falling down the competitiveness tables and is no longer a longer attracting inward investment on the scale of the mid nineties. How do we address our poor competitive situation without impacting incomes?
4. The Irish export sector is heavily reliant on foreign multinationals who are increasingly locating/transferring their operations in E Europe, China and India.

5. The United States the worlds largest economy has built up massive trade and government deficits, property prices are falling in some of the most expensive markets in the US. The Federal Reserve is set to continue raising interest rates, while long term rates remain low. America is reaching a point where servicing existing debt and accumulating more debt will become impossible.

6. I can provide many examples of a markets where prices have risen at a similar rate to the Irish property market and then crashed, can you provide an example which supports your hypothesis.

 

[Neffa]

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

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.

On your religion vs. science point - I am basing my argument on measurable quantitative (i.e. scientific) factors - relative prices, interest rates, debt/income ratios, rental incomes etc. I think those are scientific reasons and are as far from religion as you can get. Those lead me to believe that the market is inflated and over-valued. In the UK in 1989/90, prices relative to income were at an all-time high, the rental market was weak because "it is dead money" etc. Don't know the situation in Japan so I cannot comment.

On overvaluation, were tech stocks overvalued in 2000? Were tulips overvalued in Holland? Were football clubs overvalued pre-ITV Digital crash? Were railway stocks overvalued in the mid 1800's? Were houses overvalued in the UK and Japan in the late 1980's? Yes it is only observable afterwards, but that doesn't stop someone having a view prior to the event on there being a difference between what people are willing to pay and someone else thinks it is worth. If you think it is still good value and still going to go up every year and no wobble is ahead, I say good for you and good luck.

Coming back to Ireland (I came back 8 months ago after 18 years abroad) felt like (in property/gossip terms) like landing in London in 1989. "Property is my pension", "Sure you'd never trust the stock market", "Invest in Bulgaria", "Sure it's only ever going up - best time to buy is now" etc. etc. Read the RoboPaddy chapter in "The Pope's Children" - that's the best description I've read.

I've dealt with the UK recession influence point in an earlier reply - I lived in London through that period and worked in the City so feel quite qualified and confident in my judgement of what happened. The stock market crash affected a very small part of the UK population and did not cause the housing crash. It happened because houses became too expensive to buy and at some point, people stop. House prices cannot outgrow salary growth forever - that is economically impossible as people pay rent or mortgage through salaries - something has to give.

Final question - would you buy a €500K two-bed apartment in Dublin today with a view to good capital appreciation and being able to cover the mortgage through rent? What would you do if the mortgage rose by €250/month leaving you with a rental shortfall every month?

 

[ivuernis]

There is speculation from some commentators who I would have considered quite dovish that interest rates will hit 3.5% before the year is out. That will put a major squeeze on many in the buy to let sector as costs rise IMO

http://www.rte.ie/business/2006/0223/germany.html

The 3 related stories on the side of that page paint a more sobering picture of the German economy though.

 

[Calina]

It is equally logical to assume that people earning more money and high employment can afford more. The banks beleive the ability to pay back loans has increased and how people will be working longer mean house prices go up. Less assumption on what I have said as it is all common knowledge that we have more employment, banks give more money and longer terms. Yours is based on assuming intent of people and giving reason to peoples' actions. I don't think that is reasonable to assume, suspect or base your purchasing on that but it is personal choice

That's assuming you consider longer term loans to be a good thing, along with higher salary multiples when calculating how much someone can afford to pay back.

For that assumption to have any merit, I would say that it needs to be backed with the following certainties:

1) near full employment will continue ad infinitum. Show me an economy where this has actually happened and I'll believe it's actually possible.

2) interest rates remain low. This is also unlikely. Currently our rates are a couple of percentage points below the rates in the UK, for example, and although it's too early to see a trend, there is some evidence to suggest that the ECB is looking towards moving them up again over the coming while.

Unfortunately, I'd question the "we can afford more" scenario, given that the bulk of our consumer spending is based on credit rather than hard cold cash which we own. In the past, that used to be called "living on the never-never" and was never advisable financially. That is completely aside of our mortgage lending. You could claim that well, the banks wouldn't give it to us if they didn't think we could afford it. But you also have to accept that it is in the banks' interest to be able to charge us interest, not to have us clear off loans.

For the record, I'd have to say that I think longer term loans and higher salary multiples are not good things, as ultimately you're exposed to the vagaries of interest rate movements over a longer period and they have been known to be double what they are now within recent memory. Realistically, I'd say the primary beneficiaries of them are banks, not consumers.

 

[Neffa]

Crashes are not a result in over pricing but sudden change in a point of view or fear. It is silly to claim there is a right price or wrong price for anything. I might as well claim that a sudden under pricing casues a crash than you claiming years of overpricing

Why not try and be a bit more balanced and argue your point instead of saying people are wrong and stop assuming you are 100% correct.

A price is what someone pays which is objective. How much value there is is subjective. I think current prices offer poor value by historic/international standards and therefore I believe that they are too high.

Actually, I do believe that the present boom (i.e. a positive crash) is caused by years of under-pricing and pressure being released as prices catch-up. I lived in London during the 1990's and property there was certainly very cheap through 1992-93. At some point, we crossed over into a world of over-pricing and only time will tell when that was.

I'm open-minded to data arguments about why the present situation is sustainable but I've not heard any other than "Ireland is different", "It is a post-colonial phenomenon" etc. Can you present any data/fact based arguments to support a long-run 5%+growth in the market? All I hear sounds a bit like "technology is different", "the old economy is dead" all over again.

 

[Loki]

That's assuming you consider longer term loans to be a good thing, along with higher salary multiples when calculating how much someone can afford to pay back.

Actually I was not assuming good or bad about it it one way or the other. I stated as other possible reasons than the view people were panic buying which I beleive is assuming intent which can't really be calculated.

A price is what someone pays which is objective. How much value there is is subjective. I think current prices offer poor value by historic/international standards and therefore I believe that they are too high.

Property means such radically differnt things culturally that internationally there really isn't a standard. I have been saying that if you keep staing they are too high it is skant amount to a religious belief. "The crash has come the crash will come again"

Actually, I do believe that the present boom (i.e. a positive crash) is caused by years of under-pricing and pressure being released as prices catch-up. I lived in London during the 1990's and property there was certainly very cheap through 1992-93. At some point, we crossed over into a world of over-pricing and only time will tell when that was.

I don't disagree about the causes of rises but it is this vague "at some point" I think is a weak arguement. People quote 30% construction cost and claim super normal profits but foreget the tradition of construction market then jump back into traditional models claiming it is a problem. There really has to be a general formula to say a true value. If you were to believe some of the reports houses would be worth less than the materials it is built of in the heart of the capitol. It is possible but extremely unlikely.

I'm open-minded to data arguments about why the present situation is sustainable but I've not heard any other than "Ireland is different", "It is a post-colonial phenomenon" etc. Can you present any data/fact based arguments to support a long-run 5%+growth in the market? All I hear sounds a bit like "technology is different", "the old economy is dead" all over again.

But you aren't providing any data either. All you seem to be saying is Ireland can't do this because people say it won't. Ireland is differnt and time is differnt the same situations have not been created so to claim they have somewhere else is flawed. If you were to indicate more links to the other markets it occured you might have a point. THe UK price rise had different causes than here so I don't see them as the same. As far as I am concerened that applies to current markets and all historical markets. I think you are comparing apples and oranges and have provided no reason why these are the same.
I suspect the whole market will change. I can see more €1million 3 bed semis but they won't belong to a single family and will be changed into at least 2 different house.holds and I base that on the history of buildings which has a visable history in this city now. I look at 15 years not 1 or 2 as you seem to. I am a property investor and I look at property not vodoo economics that ignore social models and large chunks of reality

 

[Glenbhoy]

Hiya again Loki
we're all ganging up on you here and it's not fair
Anyway, I think Duplex laid out some excellent questions there which may merit some consideration - your thoughts would be appreciated.
Thanks.

 

[Duplex]

Loki

Correct me if I’m misrepresenting your views, but basically you’re saying that the price of property in Ireland is more to do with the cultural context, than with what you call ‘voodoo economics’. And am I right to believe that you consider Ireland’s present position to be fundamentally different than any similar set of circumstances that have existed in the past?

If my reading of your views is correct then my response is, that;

1. The marketplace (particularly the global one) is not a place that deals kindly with unsustainable economic foibles.

2 . Economic history is littered with the victims of those who have prophesised that ‘it’s different this time’. Its not different this time, there is nothing new about financial manias and the madness of crowds.

 

[thewatcher]

Loki,
you remind me of a conversation i had with a friend of mine one night.This girl was quiet intelligent and a primary school teacher no less,for two hours she tried to convince me that the scheme she was about to get involved in was the greatest thing since sliced bread and you could not lose.That time it was the "women empowering women" gifting scheme,she had completely convinced herself there was no downside to the scheme and everyone would win.You seem like a fairly intelligent person who has their head stuck in the sand,just this time it's the property pyramid.
you can't beat the fundamentals !

 

[Neffa]

Some interesting posts from everyone, pity I'm busy today!
Neffa:
A quick point on UK and Irish wage to house values, to my mind this pretty much identical:
UK National average wage: £22,411 Average House Price (per friday last) £185K ratio is therefore 1:8.4
Irish national average wage €32K (couldnt find confirmation) Average House price €278K ratio is therefore 1:8.5

OK - just checked on this - the UK's average house price in Jan reported by Nationwide (largest UK Building Society) was £158K. Your earnings figure is roughly right - it is about £23K so that makes the ratio 6.9. Source: UK CSO and the Nationwide data is at [broken link removed]

For Ireland, CSO reported Sept 2005 ([broken link removed]) weekly Industrial earnings of €580, annualised to €30K against average price of €278K (ESRI/TSB) giving ratio of 9.3

Quite a big difference - Ireland is 35% higher on this measure

 

[joe sod]

From the tone of these postings most commentators are bearish on property now. Even the media seem to be sensing that the game is up and are starting to switch sides. It is interesting that the independent now has david mcwilliams writing very controversial weekly articles on the madness of the property market in ireland etc. He said as far back as 2001 that property in ireland was overvalued. He was very much on the outside then but the mainstream media is cosying up to him now

 

[Loki]

Loki,
you remind me of a conversation i had with a friend of mine one night.This girl was quiet intelligent and a primary school teacher no less,for two hours she tried to convince me that the scheme she was about to get involved in was the greatest thing since sliced bread and you could not lose.That time it was the "women empowering women" gifting scheme,she had completely convinced herself there was no downside to the scheme and everyone would win.You seem like a fairly intelligent person who has their head stuck in the sand,just this time it's the property pyramid.
you can't beat the fundamentals !

The fundementals are supply and demand. I am not advocating a pyramid scheme and I never said there wouldn't be losers. A crash is not an inevitability. THe irish property stock is due a change which will effect the markets and economists aren't examininng it.
Houses get changed over time and people are changing. In the 80s ahuge amount of 3 bed semis was built. It appears they are due a change as the demographic is changing. A lot more single people housholds are coming about and right now the property ins't there to cater for this market.
When prices fall in any market it is not even and many times housese in certain areas drop. In certain parts prices have doubled others only a small increase. The figure of a 5% increase is an average wwhich often doesn't reflect the real property changes in areas.
The building of houses in corner sites and extentions so an adult child lives in the house with theri children. These ttypes of things are skating underneath the economists radar. I live on a street where 7 housese have been split 5 in the last 2 years, there are no corner sites left and the extensions have increased. That is what happened to the terrace houses all around London. That happened before the crash using other people beleif that means that has to happen here first.
The family structure is strong in ireland so family aid and ineritance might come into play. Grandchildren in houses which is currently in play will likely be two grandchildren if it hasn't already been taken by the children. THe change in the market may mean more businesses own property. WHo is to say a more Germanic market of home ownership. THe highest home ownership in the world is Ireland maybe that will give well before the price. Maybe the prices will reflect the new market where people are out priced and rent returns stabalise.
Parents have bought property as investments for their children also. My parents did it a long time agon but many people do it now. THey have 1 or 2 kids and buy 1 or 2 properties becasue they want to make sure the kids have a home. THese people aren't going to sell when there is a price problem. My parents did this for me when every body was telling them property was a disaster in the 80s.
People here seem to be obseesed with only one possibility not becasue it inevitable but they assume views and reason.
1) People are pannic buying
2) There is a property bubble
3) That only one thing can give and it is price
4) That a crash will happen without any casue
5) Investors are all short speculative investors
These are all ssumption
Duplex
I never said fundementally different not the same would be accurate. Tell me why the other booms happened and compare why they happpened here. Compare why they crashed with each other. To say they over heated is simply wrong and simplistic. There were actual casues. INstead of saying there will be a crash due to overheating look at what would casue it. Mass unemployment is a possible one but something would have to casue that , huge interest hikes but again there would need to be a casue.
One huge differnce between the other markets would be our central bank don't control interest rates and as far as I know the actions of the banks may have been a large contributor to the crash. We are considerably smaller closer to just one city in some the markets people are using as an example.
There are some big differences and little ones too to ignore them and property stock history and social changes can easily mean you get the wrong view. We aren't special we are simply our own and forcing comparisons is.

I do think some property will devalue in the medium to long term and it will be unserviced estates that require cars for everything. Bored teenagers will tear the places a apart. It won't be a problem for the poor but those in baddly built estates. Generally houses in Ireland aren't price sensative enough to condition and location and that is what will bite a lot of people. The adjustment does not mean crash and there are still good buys out there if you look at it right. I would not suggest anybody buy for the sake of price rises.

 

[gearoidmm]

Even with nothing else changing (ie interest rates, US economy etc) as Duplex pointed out, we are building 80,000 house each year. This kind of a building rate is not sustainable in Ireland, eventually demand will begin to slow and the building rate will begin to fall.

The problem is that so much of our economy is tied to the construction industry (and so much of government revenue is not coming directly and indirectly from construction) that even if there is only a small fall in the number of houses being built, this will have a disproportionate effect of the economy as a whole and could, in itself, lead to a significant fall in GDP growth.

Even with the loose lending practices being followed by the banks over the last 2-4 years, there is still a limit that they will have to apply and start refusing mortgages to first-time buyers. Whether that limit is 40% affordability or more, house price rises can only exceed salary rises for a finite amount of time and at that stage it will have to stop. This is basic economics. This in itself doesn't say for sure that there will be a crash but if there are a lot of rental properties lying vacant and no buyers in the market, it increases the risk of a crash significantly. I'm willing to accept that, given the Irish love for property, people are more likely here to try and ride out the storm and not sell their investment properties and you could be right about there being no crash but you have to accept that the longer this goes on and the higher prices go, the more likelihood there is of them coming crashing down in the future. Blindly saying that there is no chance of a crash is unrealistic and over-optomistic.