Future price of Irish properties

[Duplex]

If the Irish Central Bank still had control of interest rates what base rate would we have today?

 

[soma]

If the Irish Central Bank still had control of interest rates what base rate would we have today?

At a guess.. somewhere between 5-7%. (my $0.02)

For all intents & purposed, 'real' interest rates are virtually zero when take into acount I.R.s minus inflation.

It's been said before, but we're a boom economy operating under interest rates suitable for an economy in recession, anyone know of an international precdent for this..? May be hard to find as I think the concept of sovereign nations not determining their own interest rates was relatively rare before the EU. (?)

 

[Glenbhoy]

hard to know exactly, if we go to high our exports become too expensive, thus we may not be so attractive for the US mnc's. Though on second thoughts, maybe they would not mind, after all the reason for having multinational european hq's here is so that they can charge inflated transfer prices to their european subsidiaries and thus pay irish corporation tax (great for us), hence it does not matter what price they charge the subsids. However where mnc's are involved in selling to the european market we could have problems. As usual we would probably stay somewhere similar to UK rates - say 5%

 

[joe sod]

It may well prove to have been a massive mistake by McCreevy to reintroduce the deductablity of mortgage interest for investors back in 2001. Then we probably had the so called 'soft landing' however as we know the builders' lobby is a strong one!!

Yeah i agree fully with your posting. The nettle should have been grasped in 2001. Up to 2001 the government was very worried about the then house price inflation what with the bacon report etc. However when the measures started working and prices started to drop in 2001 they quickly backed off. It was then a case of shoot the messenger ie "bacon". It is notable that as more and more people have got on the property bandwagon and as it now constitutes such a big part of the economy, any measures to bring down property prices are a "political no no". So Germany and the ECB will eventually decide its fate now that the irish government has abdicated responsibility.

 

[Gringo78]

My own opinion of the holiday house schemes in certain coastal towns is that while definetly causing a rapid increase in house price in these areas, it did have the desired effect of tourism growth. In my own hometown with a population of around 8000 people there have been over 500 new houses built over the last 5 years as holiday houses and these are actually being successfully rented out and due to the terms of the tax incentives are not available for year round lettings and so have not damaged the normal year round rental market. The increase in tourism to the town has been invaluable to the local economy and the rental returns from holiday letting during June/July/August means the rental yield on a property costing c. 220,000 is very good and covers complete mortgage payments, not just interest repayments. I think people buying houses, leaving them vacant, expecting that in 3 years they can sell them on with a nice capital appreciation are getting themselves involved in a pyramid scheme. If growth slows to 1 or 2% a year, never mind a property price decrease, these type of investors are in trouble. Houses are barely affordable as it is and rents do not cover repayments on apartments so if people are relying solely on capital appreciation to make money and would lose money if they cannot sell the property, then they are playing a dangerous game. Perhaps in a few years time there will be some bargains to be had. With the price of hotels in Dublin at the moment, I think there may be signifcantly higher rental yields to be had in renting out apartments week by week to tourists as an affordable alternative to hotels so maybe some people would be forced to go this route.

 

[ubiquitous]

It may well prove to have been a massive mistake by McCreevy to reintroduce the deductablity of mortgage interest for investors back in 2001. Then we probably had the so called 'soft landing' however as we know the builders' lobby is a strong one!!

The so called "soft landing" in 2001 was nothing of the sort. Landlords were coining it as rents had ballooned in the absence of competition from new lettings. At the same time, tenants were experiencing problems in sourcing accommodation due to shortages of properties for letting. Had the Bacon measures (then almost five years in operation at the time) not been repealed, prices would have continued to rocket, shortages of accommodation would have worsened and existing landlords not wholly dependent on mortgage finance would have found themselves in an uniquely profitable position.

 

[Smi1er]

At a guess.. somewhere between 5-7%. (my $0.02)

It's been said before, but we're a boom economy operating under interest rates suitable for an economy in recession

I disagree.

The Irish economy is certainly not operating under interest rates more suitable for a country in recession. You need high interest rates to calm it all down.

IMHO Ireland was booming before joining the Euro so you were unable to increase rates as you had to meet the low interest rates needed for Euroland. This in fact fuelled the boom. Remember that the Euro is geared around France and Germany.

Your high interest rates will come, but only when France and Germany say so. Until then your boom will continue.

Mrs Smi1er visits Ireland 2-3 times a year and ever since the Euro came in Ireland has got unbelievablely expensive.

I hear people saying it will never end. But it will. And an awful lot of people will be hurt.

 

[Glenbhoy]

Ubiquitous,
I don't know that I fully agree with you, from my recollection was there not a cgt of 20% on development land at that stage, however that was supposed to be for a limited time only, the belief being that developers would free up their land banks before the rate increased again to 40%. This should have meant that the supply side of the market was incentivised (is that a word) to release land for development. The figures show that completions in 1999, 2000 and 2001 were approximately 50,000 per annum. The fact that property prices had slowed down shows that without the super-extra demand created by investors, demand and supply were in quasi equilibrium. In addition, given that rents were rocketing, surely there was enough premium in rent to attract a certain amount of investors regardless. (I',m only bitter about all of this cos I was a student and missed out on it all, leaving me to purchase at exorbitant prices!!)
Also, i may be wrong on this, but i think Bacon only came in mid 98 did it not?

 

[ubiquitous]

Hi Glenbhoy

Problem was that by 2001, the rate of demand for residential accommodation in Ireland (mainly due to immigration) had far outstripped the forecasts of Bacon and other economists from the 1997-98 period.

There was no real slowdown in property prices in 2001, except for a temporary nervousness in the market for a couple of months following the September 11 2001 terrorist attacks. This nervousness had dissapated by the time Charlie McCreevy launched the 2002 Budget in early December 2001 and McCreevy was sufficiently confident at that stage in the soundness of the construction sector that he increased the VAT rate on construction from 12.5% to 13.5% in that Budget

It is wrong to say that investors created the demand that there was for rented accommodation. That demand was there anyway due to demographic factors and the booming economy. Investors and developers merely serviced this demand by providing additional accommodation. They were extremely inhibited in doing so by the Bacon measures up to 31/12/2001. This inhibition caused a bubble to occur in the rental market in 2000 & 2001 as existing landlords increased their rents in the absence of competition from new landlords. Once Bacon was scrapped this bubble disappeared, normal market conditions resumed and rents quickly decreased.

The Bacon anti-investor measures were introduced in March 1998 and remainded intact until the end of December 2001 - 3 years 9 months and not 5 years as I stated above.

 

[CoffeeBrew]

Other than waiting for oversupply and the ECB to end this binge, what can be done now ?

Some possible solutions I've seen:

• We can't increase interest rates but the financial regulator can increase the banks' capital reserves on mortgages. This would reduce the amount the banks would be willing to lend and in turn reduce the debt burden that people can assume. Going after the source of the problem like this could cool things down very quickly. The regulator has been threatening to do this but has not acted on it yet.

• More balanced reporting in the Irish media to raise awareness of the risks of overheated housing markets.

• Tax on hoarded land to encourage its release for development as suggested by Hobbs.

• Tax on second properties as suggested by ESRI.

Anything else ?

 

[soma]

I disagree.

The Irish economy is certainly not operating under interest rates more suitable for a country in recession. You need high interest rates to calm it all down.

Sorry mate but you've got it completely backwards.

Sovereign nations have low interest rates (in this case, incredibly low) to stimulate growth by making money cheap when there is very little activity in the ecomomy. The only reason we still have these low IRs, is that we dont control our interest rates, otherwise we'd have a minimum IR of at least 5%.

As you say "You need high interest rates to calm it all down" - you're talking about high interest rates to calm down heating economy - exactly what will happen when france/germany/italy get out of the doldrums.

Just look at the USA, Greenspan had interest rates extremely low due to their recession, but once the economy started to get healthy & busy, the interest rate increases started - they had ten straight interest rate hikes.

recession = low interest rates
strengthening/overheating economy/massive credit surge = rising interest rates (when you can control them)

 

[Glenbhoy]

I worked for a while with one of the banks, checking to ensure that branch managers and underwriters etc were applying the correct criteria to mortgages issued, ie ensure that wages stated by applicants were realistic and that deposits came from verifiable sources etc (ie not loans). My remit was to ensure that mortgages issued by the bank complied with central bank guidelines which were essentially:
92% LTV max.
Remaining 8% was not a loan, ie had to be savings, giift etc.
Affordability - loan repayment was no more than 35% of net income of borrowers.

That was 2 years ago, since then most of these guidelines have gone out the window, Ulster bank started it with the 100% mortgage for professionals, and now they all offer a 100% mortgage, surely at this stage in the cycle it is dangerous to offer these products? Whilst it is acknowledged that the central bank cannot be responsible for peoples actions, maybe if these guidelines had been enforced, things could have slowed down earlier? I dunno, probably just being pessimistic, now where's that half empty cup of coffee i left somewhere?

 

[CoffeeBrew]

Glenbhoy you just reminded me of a 'fifth' bullet in my possible solutions list above.

• Clamp down on cheating and the banks collusion in cheating during the mortgage application process.

Did you have any direct experience of this ? No worries if you can't discuss.

 

[Duplex]

The question is why do central banks attempt to reign in liquidity by raising the cost of borrowing. The Federal Reserve has upped rates, if you read Greenspans statements, to address the US housing bubble, what threat was the bubble to the American economy if CPI was steady at around 2%, what happens to an economy if an asset bubble bursts?





As for measures that the Irish Central Bank could take, any credit squeeze would more than likely wreck the economy and I can’t see anyone volunteering to take action, gust a little gentle chiding, it’s easier to blame irrational exuberance, ask Greenspan.-

 

[Glenbhoy]

Coffeebrew

Whilst I won't discuss my own experiences, I would be quite sure that this goes on in places, I'm sure we've all heard the stories of which broker/bank etc to go to if you want a mortgage forced through. It would be extremely easy to do given the laxness of checking procedures.

Duplex

Perhaps if the central bank guidelines had been enforceable (and enforced, policed by the CB) and remained as they were 2 years ago that would have helped keep the upward momentum in check slightly, I agree with you things are very delicately poised at the moment and no-one want to be the one to do anything to disturb it, however the reality is that rates will rise in this country, then we will see how accurately the stress test applied by banks on new borrowers works!!

 

[CoffeeBrew]

Macfarlane the Reserve bank governor in Oz, Mervyn King Bank of England, Greenspan of the US Fed have all now taken action to protect their economies
and citizens from overheating housing markets.

They obviously figured that doing nothing would have worse consequences than taking some proactive steps - despite the risk of a reaction to those steps.

Same figuring should be applied here, I think. To use Joe Sod's phrase, we can attempt to "grasp the nettle" now in a measured sense or we can face potentially worse consequences by continuing to do nothing on the "easy credit" side.

 

[tyoung]

Duplex
Low interest rates discourage saving and encourage borrowing consumption and debt accumulation. They also can lead to inflation and asset bubbles. Asset bubbles whether in stocks or property make people feel wealthy and so further encourage debt and speculation and discourage savings. This has happened in the US. the UK and Australia. So far I don't think the saving rate has fallen dramatically in Ireland.
Bursting asset bubbles make people feel poor. They stop spending and increase saving. Think of the 1930's or Japan in the 1990's.
There has been a lot of debate about what central banks should look at when setting interest rates. Should it just be the CPI or should they include asset prices? My opinion is they should look at the price of everything money can buy including stocks bonds property and commodities as well as the CPI.

 

[Smi1er]

Sorry mate but you've got it completely backwards.

Apologies. I took your context wrong in your original post. You are correct.

I wouldn't quite say the likes of Germany, France, or indeed are in a recession. Certainly a light recession.

However, tougher times are around the corner and looming quicker and quicker.

 

[CCOVICH]

So far I don't think the saving rate has fallen dramatically in Ireland.

But it will be interesting to see what savings rates do after the SSIAs have matured. And also after the launch of 100% mortgages.

 

[Duplex]

I believe that any debate on the state of the property market and the existence or otherwise of a speculative bubble should tackle the issue of behavioural economics and investor psychology.



Classical economic theory ignores to a great extent human psychology and the concept of heuristics, the short cuts the human mind is designed to make in accessing new information. Issues such as positive affirmation, herding, low risk weighting and denial all play a part in irrational exuberance and the formation of speculative bubbles. People can make money in bubble markets, but not all the people all the time, (avoid being Paddy last as David Mc Williams says).



The problem is that most people believe themselves to be shrewd investors, some are, most are not. Attempting to persuade someone that they are mistaken by investing in an off plan apartment in the Costas in today’s market, is akin to talking down a jumper on a skyscraper, people do not like to be told they are behaving irrationally.

“You'd think these people would've recognized by now that whatever investment success they had in the late '90s was due solely to one of the most massive bubbles in the history of stock markets, and that they should get out while they still have even a little bit of money left. I'm sure some are doing so, but many aren't because they'd have to acknowledge some extremely painful truths (e.g., they should not, and should never have been, picking stocks; they speculated with their retirement money and frittered most of it away, and so on).”

Charlie Munger

There are styles in securities as there are in clothes. A security may be undervalued, but if it is also out of style it is of little interest to the speculator. He is, therefore, compelled to study the psychology of the stock market as well as the elements of real value. - Phil Carret

..if anything, I make as many mistakes as the next guy. But where I do think that I excel is in recognizing my mistakes, you see. And that is the secret to my success. The key insight that I have reached is recognition of the inherent fallibility of human thought. - George Soros

Never adopt permanently any type of asset or any selection method. Try to stay flexible, open-minded, and skeptical. - John Templeton

"The market does not move consistently with interest rates, consumption," dividends or productivity, he said. He believes investment bubbles such as the Internet stock craze of the 1990s in the United States and the tulip bulb mania of the 1630s in Holland drive a stake through the heart of rational-expectations theory.
Robert Shiller Professor of Economics Yale University