Key Post Is buying your home the right financial priority?

There is no point referring to countries where the rental market is stable for comparision, we have what we have, Ireland with it's preference for home ownership.

After the recent stock market debacle I cannot see how anyone would suggest that gambling in shares would be better than purchasing a house.

As for pensions, my other half is in a defined benefit scheme for many years. Just today on the radio I've heard that these schemes may not pay out and we've seen what happened in Waterford Wedgewood. There are also many people who come to 65 and have to purchase an annuity and depending on the timing they may get a paltry return for all their years of savings. So much for gilt edged investments and solid pensions. None of this is told to people when they take out pensions etc. My advice to my children will be to purchase bricks and mortar and cash as a diversity, and forget about pensions and shares.

If a company becomes worthless your shares are worth nothing. If house prices collapse you still have the house. I've seen property go up by many multiples and collapse by half so what?
 
Bronte said:
If a company becomes worthless your shares are worth nothing. If house prices collapse you still have the house. I've seen property go up by many multiples and collapse by half so what?
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You don't "have" the house. You've put your savings into a product that has massive (x10 or more) internal leverage - a gamble by most other names - and lost.

Do you not see the vast real difference in the two outcomes you describe above?

You realise that if your child saves/borrows 60k to pay a deposit and stamp to buy a house (say 90% mortgage) and the house prices fall even 10% their entire net worth/savings will have been wiped out?

It would require every single company in the world to go bust for the same to happen with unit funds. If the equivalent happened to Irish property, your child would not only lose every penny of the 60k savings, it's likely the rest of their lives will be ruined as they spend every spare minute working to try to earn enough to pay the bank back 500k never mind all the court appearances, etc. they'd have to go through.

What do you think is more likely? The complete collapse of the entire global capital market system (somehow miraculously without having any affect on the Irish residential property market) or a 10% drop in Irish house prices?

Which financial outcome is worse: losing 100% of your investment or losing 100% of your investment and having to spend the rest of your life paying off a 500k debt to the banks?
 
Reading back over my previous postings, I think I want to make it clear that I am not at all against home ownership.

I would have very little problem agreeing with Brendan if his advise were to treat a house purchase somewhat the way I treated my "investment" in a filly; I could afford the upfront cost and the ongoing cost (share of trainers fees) constituted a smallish fraction of my monthly spend. If the whole thing goes bad, then well I'm not going to be happy but it is not going to wreck the rest of my life. I can walk away without being wiped out financially.

My objection is specifically to the advice that a young person should put every penny of their savings and income for the first 15/20 years of their working life into buying "the biggest house they can afford". This is simply awful advice and I'd really fear for a young person who actually believed this as they are likely to needless expose themselves to risk of 10x geared punt on Irish residential property. That's not investing - it gambling pure and simple.

Admittedly it's a gamble that has paid off big time if you were lucky with your purchase/sale timing over last three decades. But if you look at the historic movement of Irish property, then it is obvious that the last 2 decades have been a historical blip not some new trend.
 

Prove that those who invested shares and pensions have outperformed those who purchased houses in Ireland. Who is wealthier in Ireland the middle classes in houses, even at a 50% drop or those who have invested in the stock market? I seem to be under the mistaken belief that we have a global meltdown. Tell me the Bank of Ireland and Aib shareholders are sitting on a pot of gold (and Eircom), (abroad tell me Madoff shareholders/investors, Nicola Horlics shareholders/investors and Enron/Worldcom shareholders and pension holders). What about all the current pensions of Irish people invested over the last 10/20/30 years. The only people making money out of shares etc are the city boys. And there's no change in that.
 
Bronte said:
That's incorrect, maybe I'm not good at maths.
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A 51% drop applies to the new value, leaving you with 49% of 200%, which is 98%, less than the original value of 100%. Small percentage drops can be more significant than people realise.

Who is wealthier in Ireland the middle classes in houses, even at a 50% drop or those who have invested in the stock market?
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Asset valuation is based on current sale price. The stock market is far more liquid so you might expect prices to react more rapidly to downturns. In contrast to the property market where there is very little movement, therefore very hard to know the true value.
 
what i think is the most laughable thing is the way every person / analyst etc goes around saying that your house is ur biggest asset. this is such rubbish

a valuable asset is something that makes you money , not takes it as a house does

a house is a persons biggest liability. people spend their whole lives paying off for it, giving thousands and thousands of euro to the bank and spending thousands more for stuff to fill the house and do it up etc

its no more a valuable asset than ur big toe
 
I see what Bronte is saying and was going to post something similar yesterday. .

In an extreme example if stocks and shares collapse and house prices collapse, you still have a house. It is hugely difficult for Irish People to discuss mortgages without putting some level of value on actually owning a tangible asset and the psychological comfort it brings many.

A financial priority (if that’s what this thread is about) is not soley dictated by how much money you can make but on what priorities you have as an individual. Nobody has a financial priority to go on holidays, buy and maintain a car, go out drinking etc. Many people in Ireland take great personal satisfaction about owning their house; it’s normally people who don’t agree with mortgages who cannot understand this very basic concept-desire. This thread seems to be more about living it up now, hoping that you get the returns on your shares and working off what works on continental Europe without factoring in national economic factors (many of which Brendan has highlighted).

If I take out a mortgage today, I owe x amount over x years. If I save regularly in shares I own x amount at any given time with no set years per say. Either way there’s no guarantee that you will be better off with either. If I bought a house in 1979 and my friend invested x amount (difference between rent cost and mortgage cost) since then, am I hugely better off one way or another (considering the crash in both areas).

You are relying on people being constantly prudent with their savings and regularly investing in monitored shares. With a mortgage comes unquestionable responsibility, you have to pay your premium monthly, again good and bad for different reasons, but still a point that should be acknowledged.

You are relying on market prices and fund performance to grow your investment. You are not relying on anything if you own a home, unless you are intending on selling it (this is a key factor in the psyche of shares v mortgage). If you are using the home daily the quality of life (even personally) can be unquantifiable in comparison to great share returns. Generally people won’t mope around a house thinking “my house has lost 50% of its value”, but I would imagine if you were saving for 20+ years and you lost 50% value you may even be suicidal in some cases!!!

By investing in shares and renting accommodation you are adding more variables to your life and reducing the control you have in general. Financially you are flexible in that you can move or sell up relatively easily, but as far as being in control of the stability of your life in general, I don’t see how anybody could say this is anymore prudent then taking out a mortgage.

I suppose I work off the saying "your health is your wealth". If you come to me with €x and say you want to invest it in high yield equities, I will advise you against it if you are the kind of person that will be looking at the share price daily and sweating over ups and downs. A large majority of people in this country have been totally burned by their stocks and shares, as much for their lack of understanding of the markets (ie that they can go up and down) as it is for their interest in investing their savings in something more exotic then deposits. I believe stocks and shares should be the Icing on the cake rather than the whole cake.

I think that while a huge loss on your house is upsetting, there is small comfort from the fact that losing a value on your house doesn’t mean you need to worry about making the money back, more worry about just being able to continue the repayments. In essence most people, while accepting a house is a financial investment, see it as an investment in their lives as much as anything else. Losing value on your shares you straight away look to how you can regain your losses. In essence owning a house can be a more prudent way of trying to invest (as you cannot change your mind on a whim like you can with shares).

On a different note, owning a car should be a similar topic. Why stop at owning a house!. Taking taxes, insurance and maintenance (not to mention initial purchase cost), owning a car is a luxury that most of us don’t require yet choose to pay for and it’s an asset that will nearly always depreciate in value. Over a lifetime cars probably cost us no less than the price of a small house (after factoring in equivalent public transport costs).

My main point is that a financial Priority is not based simply on what can potentially be made from an investment. If you like the idea of renting and investing and it suits your lifestyle then by all means, let yourself go . . Theres as much a chance that you will make your millions as there is ending up no better (or worse) then if you had taken out a mortgage.
 
My objection is specifically to the advice that a young person should put every penny of their savings and income for the first 15/20 years of their working life into buying "the biggest house they can afford".
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Hi darag , we might be getting somewhere here now.

I hope I have always been clear that people should not over-borrow.
I have been shocked at the size of mortgages quoted on askaboutmoney and by friends.
I have argued against 100% mortgages on radio, but more because of the risk they posed to the lenders than the borrowers. I admit to being somewhat by their arguments in favour of them.
I have made it clear that buying a house is the first financial priority.
I have also made it clear that getting the mortgage down to a comfortable level, is the next priority. For me "comfort" is 2.5 times gross salary and 50% LTV. But this changes depending on the security of your job and your expected salary rises.

As I have pointed out, there is a problem with the high levels of stamp duty and the transaction costs which makes it good advice for people to stretch themselves. Not to overborrow, but not to be to cautious either.

I have done up a working example of an unstretched borrower here and would be interested in your views on whether he should buy the house.

Brendan
 
Why would I "prove" anything, Bronte?

I threw out two very simple questions which I hoped might make you think a little about what you were claiming.

Your reaction is ignore them and to demand "proof" for something I didn't claim at all in that post.

Anyway it not a proof you're after, it's historical asset class prices and you can find them a lot quicker by googling if you were interested.
 
Howitzer said:
Do you know anyone who has rented for their entire life and put money aside in shares for the entire duration? If not your whole point is, well, pointless.

Apples and Orangutans .
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So you are saying that without question renting is the answer?

Please do elaborate . . or is Apples and Orangutans the best you can do . .
 
NorthDrum said:
So you are saying that without question renting is the answer?

Please do elaborate . . or is Apples and Orangutans the best you can do . .
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Do you know anyone who has rented for their whole lives and placed the difference in shares? If not what is the point of the comparison?

I don't think that needs elaborating, even though it's the third time I've made the point in a thread only 35 posts long.
 
Hi NorthDrum, there's a lot of stuff there. I'll have to break it up.

I think it would be better to simply discuss what is prudent for people to do rather than use the national psyche/stereotype to justify irrational behaviour. I realise Irish people are generally fixated with home ownership and struggle to imagine being comfortable renting for their lives. I also realise we probably drink too much, for example, but I should be allowed can argue against alcoholism without expecting a response along the lines of "a sure, you don't know how important the pub is to Irish people.". I know exactly how it is; it's taken me a while to deal with my own fear of not owning a home. Even now I cannot help having a look at daft/myhome once a week.

I've compared the outcome for an individual in the event of a share price collapse and a house price fall in a previous response to Bronte. Maybe you could respond to those scenarios? For a typical scenario, it is absolutely obvious that a house price collapse causes financial devastation on a scale which a share price collapse cannot.

Share prices are far more liquid and so people are aware their value can up and down and that is factored into their mental model. Irish people do not have the same experience of (nominally) falling house prices and so I think they are aware of the horrendous effects of falling house prices in a country where most of individual wealth has been leveraged to the hilt against property.

I really wanted to avoid anecdotes but a friend, for example, who bought 3 years ago is now effectively bust being about 40k into negative equity. Over the years I've spent some money on horses, poker and various types of gambling, I've "invested" in all sorts of rubbish like forestry funds, a bar of gold and whatnot but at least, even the stupidest of these "investments" were never even close to being a threat to my solvency.

Since buying a house carries the significant risk that it will make you insolvent for decades, I believe that such an "investment" decision should be subject to far more rigourous criticism.

Yes, if my friend had bought 10 years ago instead of 3, he would now be laughing and would probably be far wealthier than me. All highly leveraged investments behave like this allowing massive riches to be made or completely wiping out the investor. This is not a suitable vehicle for the majority of your personal wealth.

The stereotypical Irish person considers buying unleveraged shares to be gambling while buying property (even a "holiday home") leveraged 10 or 20 times is seen as financial prudence. This financial naivity in the extreme.
I have repeatedly acknowledged the extra benefits of owning your own home. Please, do the favour of pointing where anyone in this thread tried to claim that there was no utility, comfort of security in being the owner your own home? I'm repeating myself at this stage.

I also don't know where you get the "This thread seems to be more about living it up now" from? Everyone here was discussing financial prudence and how people should arrange their finances. Where did this come from?

Is it not completely obviously that you certainly can end up far far worse off with the mortgage? I refer you back again to my response to Bronte with examples of the sort of things that can happen with both. If I lose every penny I've put shares that's one thing; ending up owing the bank 10 times your initial investment is a different kettle of fish.

Sorry, this is a very very weak argument for buying a house; the inflexibility and unsuitability of the payment schedule is simply not an advantage. Your general point is an interesting topic but doesn't belong here; you should start another thread discussing what advice is appropriate for the feckless and financially imprudent.

I'm not from Mars, I understand how home ownership works and feels. I've already said I am not against home ownership. We are talking about the investment aspect of home ownership here. Home ownership is being proposed as offering the most prudent way for a young person to become financially secure; that's what I am arguing against.

How am I "reducing the control"? I have instant access to my wealth; I have no fear of a rainy-day situation as I can liquidate some of it. I can vary how much I save with my personal circumstances (very useful during the last year as I was out of work for a while). Someone with a legally watertight contractual obligation to pay 300k back to the bank over a period of 20 or 30 years in amounts determined by the ECB has more financial control? I can't agree.

I've snipped some of the rest because I think you have essentially repeated some points which I addressed above, particularly I think you've gotten completely wrong about the effects of share price and house price movements on individuals.

Ok, I suspect we have radical different world views. If I could rent a car for half the money it cost to maintain an "owned" car, I would do it in a heartbeat. This simply makes complete sense to me, does it not to you? You'd rather drive an 20k Ford that you own than a 40k BWM that you rent if both cost the same including all the expenses?

I'm wondering whether the fact that I seem to be struggling to get my point across here is because I actually think about things exactly in this way. I very nearly got rid of my car 2 years ago because it was only marginally cheaper than renting cars for the weekends I got out of Dublin. If it had been cheaper, I wouldn't have hesitated. That's just the way I am.

People have all sorts of non-investment motivations in life sure but we are discussing the investment value of owning your own home here.
 
NorthDrum said:
I see what Bronte is saying and was going to post something similar yesterday. .

In an extreme example if stocks and shares collapse and house prices collapse, you still have a house.
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I'm glad someone sees what I'm saying. I agree with all of your post.

For the rest of you who seem to be experts I will never be convinced that 'investing' in stocks and shares is not gambling same as I will never be convinced that buying a home or even an investment property is gambling. Even if it is gambling I'm willing to take that risk. It's the Irish in me if you like. Maybe it's because I've been lucky. If you bought at the height of the bubble, have a 100% mortgage plus consolidation resulting in more than 100% borrowings and even worse in negative equity plus other borrowings and used your home to leverage the purchases and went on to purchase more property based on the 'false' equity in the original property than that could be called gambling but I'd actually call it stupidity. Same for the people who purchased Eircom and didn't sell immediately and same for the people who thought Bank share can only ever go up. If you can't take the hit/heat or risk don't buy anything.
 
MugsGame said:
A 51% drop applies to the new value, leaving you with 49% of 200%, which is 98%, less than the original value of 100%. Small percentage drops can be more significant than people realise.



.
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As usual I don't get this, more simply if I purchase a house for 10K and it goes up by many multiples say 10 times = value of 100K and it collapses by 50% ie half it's now worth 50K.
 

You don't have to prove anything, I don't properly understand your posts, that's not your fault it's mine as I'm no financial expert. My point is forget about what is 'supposedly' better to purchase shares or houses. My question was can you or someone else tell me which class of people in Ireland are relatively wealthy (nice house, 3 holidays a year, 2 cars, nice lifestyle) as a percentage of the population. Is it the rental class, the rental class with shares, the home owner with a good job, the home owner with shares, the home owner with shares and cash, the home owner with investment or commercial property, the farmers with 50 acres etc. I don't know the answer but I suspect it's the home owner with some type of investment and a steady income during their working life which is normally of a professional type.
 
Brendan said:
Hi darag , we might be getting somewhere here now.
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Hopefully.
I hope I have always been clear that people should not over-borrow.
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Surely if you think that it's a good idea for people to go interest only in order not to compromise their lifestyle initially during the initial stages of paying a mortgage, then you are suggesting borrowing to hilt is not a bad idea?

Maybe I recall incorrectly or read it wrong but haven't you suggested putting all your spare money into home ownership, at least until you hit 35 or so? Including at the expense of contributing to a pension or having savings or investments in any other asset class? If so, that's over borrowing to me.
You have also made it clear you believe there are big financial benefits to owning a house but I can't see on what basis? It's a poorly performing asset class with a long list of negative attributes as I listed earlier. I'm simply waiting to be convinced; that's all. Why do you feel that at the age of 35, it is prudent to have the entirety of your personal wealth tied up in a highly leveraged, undiversified, illiquid asset class? It makes about as much sense to me to advising people to borrow to the hilt to buy shares in a single company.
I have also made it clear that getting the mortgage down to a comfortable level, is the next priority. For me "comfort" is 2.5 times gross salary and 50% LTV. But this changes depending on the security of your job and your expected salary rises.
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Just because I could afford to throw 100 euro on black the roullette wheel doesn't mean it's prudent.

It's important that people can afford to keep up with the contracted payment schedule but that says nothing to me about where it's prudent to invest in the first place.

Ok I'll take it over to the other thread.
 
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