House Prices

As someone who was also in London during the house price boom and crash I'd like to point out four factors, three of which are unlikely to happen in Ireland;

1. Interest rates went from 7.5% to 11% and then to 15% in a very short space of time whilst the Govt were trying to defend Sterling (I recall the day 15% was announced as it coincided with my moving into a new flat!)

2. Nigel Lawson repealed multiple tax relief on properties and limited it to £30,000 per property not per person. This was in the April 1988 budget but there was a "window" until the August. The result? Buyers completing mortgage applications at 10pm on a Friday evening with 3 buddies/colleagues/almost complete strangers to beat the deadline.

3. House builder (Wimpey/Barratt, etc) and lenders offering 100% packages with no legal fees - young couples found it very easy to buy a house with no commitment either financial or to each other (no moral highground here - that's just the way it was).

And finally - people were panicked into buying one bed and studio flats which were quickly outgrown once children came along but due to high mortgages, reduced incomes and falling prices they could not move. In a lot of these examples they justed handed the keys back and started again. I guess conceivably this could happen here but i think it's inlikely.

House prices, IMHO, will only fall if there is a big increase in unemployment - say a couple of the US employers pulled out - and people simply could not pay their mortgage. Interest rate rises, whilst painful, can be absorbed as long as they are slow (as ECB moves have been to date) by adjusting lifestyles as long as the income is still there....

Regards,

Sarah

www.rea.ie

"Interest rate rises, whilst painful, can be absorbed as long as they are slow"

You mean a slow road to a property crash?

People are having to take out loans of 40 years these days.

Experts, convince me nothing untoward will happen interest rates or the economy in that time period.

If these persons could afford even a slight interest rate increase don't you think they would be going for 25 or 30 year loans instead? But is this too obvious?

To most people when Interest rates go down they simply borrow more and you know what that does to prices. Just look at the trash you get in your letter box every day. In addition to mortgages the money is there yours for the asking, have it for whatever you want.

I've heard people comment pacifying regulators stating people are stress tested is a load of boloney. Wheres my umbrella ...

Sarah,

All valid points, but the situation of Ire vs UK is radically different.

The first 3 are unlikely to happen. The fourth has a more than probable chance of happening as Ireland is way to expensive to run a business in. We gained all that investment because we were a cheap economy, we are now an expensive one. Does anyone really believe that those big cos have loyalty to one particular country? Not on you nelly. Dollars, and how to save them, is what counts. Ireland costs dollars, not saves them.

Although interest rates are unlikely to rise, taxes, be it direct or indirect, will. And just because Bertie say's they won't, well anyone who believe's that has obviously not learnt much about FF. This directly impacts affordability of houses.

The banks are practicing very liberal terms of credit of late. They have already received a slap on the wrists for this, with no effect. We all know the boom has been created by cheap and affordable credit. There is more debt out there than there has ever been.

If the banks are forced to tighten their lending policies, less money available for property, correction happens.

While i'm on this, how many more avenues of credit can be exploited? Lets look at this for a moment:

20 years ago, the norm was for one income families to really really stretch to buy a house.

For the last number of years, it has 2 incomes (in the case of young couples, mates whatever) which need to really really stretch to afford a house.

Nowadays, its 2 incomes + renting out rooms to afford to buy a home, while also borrowing the deposit from the CU or another financial arm, and committing to a 40 yr mortgage.

Borrowing deposits seems rather more commonplace these days than i would ever have believed.

What further lines of credit are available??? It looks like we are at the absolute limit as to what desparation tactics people have to exploit to make a house in any way affordable. This is not sustainable, and nor should it really be tolerated.

Maybe I'll get me mother to go back into the workplace!:rolleyes

On the flip side, a bit bitter I know, but if the benchmarking goes ahead, probably expect to see another nice surge in the $%#*&# house prices.:mad

When you purchase a house these days when can you expect to replace the wiring, plumbing, heating, windows, roof?

Surely most of these items will need replacing before the 30 or 40 year loan has been repaid? Is this factor included in the liberal terms of credit and so called stress test? Inflated house prices, 30 and 40 year loans coupled with other factors doesnt sound too healthy to me.

Hi All,

I deal with house buyers and lenders day in, day out. The vast majority of borrowers are taking 30 or 25 year terms, not 40 (I have never arranged a mortgage in excess of 30 years in Ireland). In reality these mortgages will last 5-7 years before the borrowers trade up or change the mortgage provider to extend or upgrade their homes. The days of remaining in the first house you buy for life are gone, the housing market is far more fluid than for previous generations.

The mortgage payments are normally equal to or below the rent FTB's are paying. Lenders are NOT relaxing criteria - of late they are not taking irregular or non guaranteed income (overtime, bonuses, etc) into account in their calculations. All lenders are stress testing mortgage repayments at between 1-2% over current rates. People are saving for at least part of the deposit, most are getting some parental assistance but, in my experience this is coming from the parents savings rather than the parents having to borrow themselves.

The downside is the easy availibility of unsecured credit - car loans, personal loans, credit cards. Again in my experience it's not the FTB who is loaded with debt but newish homeowners who "have" to have the plasma TV, landscaped garden, new car, etc and are lulled into believing they can afford it based on the increase in their house value. In some cases borrowers are remortgaging short term debt where the total unsecured repayments exceed the mortgage repayment.

I make no comment about the rights and wrongs of the above or whether house prices will go up, down or sideways.

Just a view from the front line......

Sarah

www.rea.ie

Experts, convince me nothing untoward will happen interest rates or the economy in that time period.

Click to expand...

Don't forget that from the day you take out your mortgage inflation is hard at work effectively reducing the amount you pay each month.

So, in 10 years time if interest rates have doubled or even tripled, the chances are that you will still be better off than you are today.

Take the example of people who bought houses 25-30 years ago, whose mortgages are ending around now. At the time they pushed themselves to the limits of what they could afford. But today their monthly mortgage payments sound tiny. Inflation is a homeowners best friend.

Having said that, looking at what you can get for 700K to 1m in Dublin, I don't think they are worth it. But as long as there are people who do, the prices will stay up, and keep increasing.

-Rd

"So, in 10 years time if interest rates have doubled or even tripled, the chances are that you will still be better off than you are today."

I don't know, I think it's different now. If interest rates trebled, then affordability would obviously be affected. This in itself would probably keep houses prices down, at least lower than inflation.

"At the time they pushed themselves to the limits of what they could afford. "

Again the key word here is afford. Inflation and interest rates were higher back then. So house prices needed to be a smaller multiple of average salary, to keep houses affordable, i.e. to afford the high interest payments. But I think house prices are too much of a multiple of salary at the moment to really benefit from any increase in inflation.

Trying to illustrate my point, let's say I'm the average FTB on an average salary of €50K and qualify for a €200K mortgage today, so bank thinks I can afford it. I decide not to buy until next year. Next year inflation increases to 10%, interest rates treble, now at 8%. Well, I'm now on €55K (wage increase in line with inflation) but the bank will only lend me 170K (just a guess). I can no longer afford the house I wanted to buy for 220K. Well Actually neither can the other average FTB's. The banks would lend less to everyone in a higher interest rate environment, now what effect would that have on house prices? An adjustment closer to historic house price / salary ratio perhaps?