ivuernis said:
It beggars belief the faith that some people have in the long-term health of the property market especially when many have little or no grasp of local or worldwide economic trends and potential pitfalls. I know of FTBs who are currently buying at very high prices and taking out variable rate mortgages at a time when rates are rising. Some were unable to tell me (a) the projected market outlook for ECB rates in the next 12 months or (b) how much their monthly repayments would rise given a further 1% rise in rates. Given the financial outlay for a FTB I find this lack of knowledge amazing in otherwise intelligent and successful people.
Maybe I'm worrying too much but when I read about economic developments both here and abroad it seems obvious to me that there is certainly potential for tougher times ahead in the coming years and I find it astounding how some people can brush these concerns aside when they are put to them for the first time especially vis a vis the future health of the Irish economy and property market.
Am I being overly pessimistic? Should I just go-with-the-flow and hope for the best as everyone else is? My head tells me no, but every now and again going against the prevailing thinking raises such doubts in my mind.
I think the same thing periodically. Here is how I see the bear vs. bull arguments stack up:
Reasons why the property market is overvalued and likely to fall (Bear arguments)
1. Interest rates are rising so people's ability to fund increasing prices is diminishing rapidly and could go into reverse
2. Rent levels relative to purchase price (rents at 50% or less of purchase costs)
3. Irish price/income ratio for houses at the highest level in Europe (you can argue about this, but it is around 8-10x in Ireland when the long-run average is 3-5x)
4. Exotic loans becoming commonplace (IO, 35-year terms etc.)
5. 200,000+ empty properties (census figures)
6. Prices rising faster than incomes, gap financed by huge debt increase (Central Bank reporting almost 30% increase in debt levels annually)
7. Irish property now very expensive relative to international norms
8. Irish estate agents employ economists on their staff - this is astonishing - it would be laughed at in most other countries.
Reasons why it is undervalued and you should buy now (Bull arguments)
1. Celtic Tiger continuing to grow and we are getting richer (not really true as output growth is tracking population growth so the net wealth generated in the economy through productivity improvements is close to zero, and also we are starting to lose FDI jobs to Eastern Europe)
2. We've never had a crash in living memory (hard to disagree with this)
3. Demographics and immigration (but most immigration is to do property-related work, so it is linked)
4. Errrr...rent is dead money
So I think that the rational economic arguments point to some structural problems but the belief and mindset of the public at large is that it is a one-way bet and you should get in before it is too late. Most people shun the bearish view on the basis that "they've been saying this for years". So I expect prices to increase further in 2006.
However, when some of the rational economic effects take effect (and they will, very soon - some "investors" will not be able to fund IO mortgages on rental property doubling if the rent is static), you'll see some softening in the market. I think that will still take another 6-9 months to kick in and then we will see some interesting times ahead.
There's a good piece on the UK Motley Fool site on this - and they are concerned when the price/income ratio is at about 6 !!
[broken link removed]
Personally, I think Ireland will need a lot of pain to really understand that property is a not a one-way bet. It left a nasty mark in the UK and Japan - more of the same is coming here, I think.