Is property investment becoming a Pyramid scheme

Re: boom boom bust

Some might say that praying for the market to stay level is actually the selfish approach

Hi rainy,

I'd have to say I agree with Repaymentator on this.

First of all, I'm not praying for the market to level off at all. If I had a preference...that would be it.
In my opinion, it'd be the best solution all round. But not the one which would necessarily suit me best.
Stating the obvious here but houe prices can only do three things. Go up, down or stay where they are.

Going up just makes it harder for people to get on the ladder.
Going down, or crashing would be disastrous for the whole country.

Re: boom boom bust

Going down, or crashing would be disastrous for the whole country

Click to expand...

Absolutely not. My mortgage repayments won't change, regardless of whether the paper value of my house goes up or down. A price drop will make it considerably easier for FTB's to get onto the ladder. How will a price drop of say 20% be a 'disaster' for the whole country?

Re: boom boom bust

Praying for a market crash is rather selfish in that it ignores all the other people who have property as an investment - such as for their retirements.

Click to expand...

Those who invest in property for whatever reason take a risk in doing so. I don't see why those who are buying for the first time should feel one ounce of guilt, by hoping that prices fall significantly. Nor do I think there is anything wrong with hoping for high capital appreciation on a property investment. And why would those who invest in property for retirement feel the pinch if prices fell?

Re: boom boom bust

How will a price drop of say 20% be a 'disaster' for the whole country?

I'm no economist but this article provides some insight into how a price crash would affect the economy (albeit in England).
business.scotsman.com/eco...1276932002

Re: boom boom bust

Hi Piggy - The article says very little - other than saying that some households will get pushed into negative equity, and there may be some dampening of consumption.

Nothing quantifiable here - maybe a bit of dampened consumption wouldn't be such a bad thing here - might make it a bit easier to get some value for money, or to get a tradesman or whatever. I still don't see what the problem is?

Re: boom boom bust

Hi rainy,

Like I said I'm no economist so I'm basing my hypothesis on what I've read. You could be right...but there are those that believe that a sharp price reduction/correction could be very bad for an economy.

www.thisismoney.com/20040...77280.html

"A sharp decline in house prices can be costly for the economy. Evidence suggests that housing price declines tend to be protracted and are often associated with declines in economic activity and financial instability"

boom boom bust

a property crash would not be an enjoyable experience for anyone. everyone in the country would be effected. for a start a huge amount of paper wealth would evaporate and a lot of people would find themselves with repayments on assets that may never see their purchase price. ok, so initially this will only really effect those who have extended themselves but the implications for the whole economy would be very serious. For a start construction accounts for a disproportionately large share of GDP and GDP growth. So economic growth would slow considerably. Every business in the land that relies on consumer spending would feel the pinch (and not just restaurants!). Furthermore all these consumer businesses do not exist in isolation from the rest of the economy, the invisible hand will be felt everywhere.

Moreover, why would anyone buy property if prices fall 20% - why not wait for a 40% fall (some Japanese prices fell 90%!). Confidence would leave the housing market & labour mobility would be severely effected. Do not count on hoards of FTBs rushing into the market - you could find a lot of them out of work as the economy slows and even if they did have a job a lot of people would not be inclined to get into debt in a downturn if they cannot avoid it. Not to mention that the banks are now carrying a huge load of bad mortgage debt & do you think that they are going to be in a position to increase their exposure to the residential property sector (assuming they have not gone bust).

Think of the effects of the unwinding of the tech boom in the US but on a much greater scale. Moreover, as the economy slows tax receipts fall thereby preventing the government from boosting consumption via spending (not to mention the fact that the EU budgetary rules could severely limit the the gov's room for manouvre). With fewer jobs immigration would slow thereby further dampening domestic demand.

I know that if you have a small mortgage and have managed your finances prudently you may think that this will just be a spectator sport but a general slowdown in the economy would hit almost everyone's wallet. You could be stuck in your home for a long while - unable to sell it to part-fund your retirement.

In sum a property crash could easily precipitate a much deeper slowdown (our could easily be a casualty of one).

a pyrimad scheme is what it is

The way it works is like this.

Real life example.
Someone pays 700,000 for a 1300 sq ft semi because they sold their old house for 400,000. They justify the new price by subtracting the equity in their old house from the new price. They only owned the old house for 4 years and bought it for 80,000.

At no times do the purchasers consider the price of the new house - they only consider how much they have to borrow and how much the repayments are and do the sums on that basis.
Both prices are inflated but the new higher one can only exist if the cheaper price is attainable by the buyers.

That is a pyramid I'm a afraid - just like the dot com boom when company A would go up in price only because it started to look cheap against company B when went up in price the previous month; one valuation being entirely relative to the other.
It is worth remembering that the cost of building a 1300 ft semi is around 150,000. That leaves the tiny site worth 500,000.

The situation I'm quoting is real and is the way the house boom has been created – (that and the restrictive planning permission – but that’s another story)


I for one would like a 50% reversal in prices – otherwise my children are going to be living with me for ever. Then big question is how badly will it effect the economy. Might not be so bad at all. After all we might regain our competitiveness due to cheaper rent and all the glorious knock on effect that will have.

Ps there are certain groups in society that don’t have to beg banks to give them money. Professions such as solicitors and doctors can borrow any amount they want due to the fact that they operate in a protected environment that will always make money regardless of whether the economy is on the way up or down. This adds to inflationary pressure at the top end of the market which then has a knock on effect at the bottom.
This is how doctors or solicitors can and do move from 1st job & no house to 1 million euro houses in 5 odd years with as little as 2 house moves.

Re: a pyrimad scheme is what it is

At no times do the purchasers consider the price of the new house - they only consider how much they have to borrow and how much the repayments are and do the sums on that basis.

Click to expand...

Right you are. These days it's "buy if you can afford", or "the price of the house doesn't matter, affordability is all that counts". I'm always flummoxed by why this type of advice is so widely accepted, how can the capital portion of a loan not be important? Just because you can afford something that doesn't make it worth it.

The pyramid analogy is a poor one though. The mathematics are completely different, and pyramid schemes are always doomed to failure, boom cycles are not.

Re: a pyrimad scheme is what it is

Consume, Consume, Consume

Maybe our society (as opposed to our economy) would be a better place if there was a little less consuming and a little more living.

boom

Must admit, the construction argument used to start this thread is one of the most pursuasive i've heard for a while. It rears its head again in todays indo...


"FORMER Taoiseach Garret FitzGerald has warned of the danger of a building slump which could cost thousands of workers their jobs and severely dent economic growth.

Speaking at an Economic and Social Research Institute (ESRI) conference on the background to the December Budget, Dr FitzGerald said forecasts of continuing growth of 5pc a year were under-estimating the risk posed by the booming house market.

Over 80,000 houses are due to be built this year, to add to more than 70,000 completed last year, and with little sign that the pace will slow by much in 2005.

This is far in excess of the estimated need for new homes, which analysts say is 50,000 a year at most.

"In these circumstances, even a small fall in house prices could produce a huge fall in the level of building, as developers and builders respond by cutting their output. That could happen at any time in the next couple of years," Dr FitzGerald said.

"With over 200,000 people working in construction, it could have a severe effect on employment. House building is also contributing one fifth of total economic growth.

"Any fall below this year's level of building means a reduction in growth," he said.

Ulster Bank economist Pat McArdle also challenged the ESRI forecast which sees Irish output (GDP) growing by 5.4pc next year, after a 5.2pc increase this year.

"Why should Ireland grow faster when most of the rest of the world is seen as slowing down?" he asked.

Senior ESRI researcher Danny McCoy said the US economy was still expected to grow by 3.6pc and the eurozone by 2pc. "That should mean good growth for an open trading economy like Ireland."

Brendan Keenan
Group Business Editor"

www.unison.ie/irish_indep...e_id=11534

<rant> IMNBAM (I may not be a moderator) but a yellow-card reprimand (and © content removal) is due for as was done .</rant><!--EZCODE BR START--><!--EZCODE BR END--><!--EZCODE BR START--><!--EZCODE BR END-->Ever considered what kind of mentality is required to believe in an economy based largely on the construction sector?

The construction economy

Davy's web site made the point today that industrial production was down sharply in Sept. and consumer spending is sluggish leaving construction as the main growth area of the economy.
Can anybody spell malinvestment?
I think the epidemic of one and two bedroomed hutches springing up all over the country will be this generation's Ballymun Towers.