Selling to rent in anticipation of house prices falling?

I am thinking of selling my apartment in about six months, then going renting for about a year in the hope that interest rates will go up, forcing prices to go down and sitting on my hard earned equity.

Is this an absolute mad strategy?
Is anyone thinking the same as me?

I understand all the stuff about not being able to predict the future and all that, but just wondering if anyone is in my mindset?

Re: House Prices

There are significant risks to this strategy. What if the scenario you are banking on does not happen, you fritter the money away on rent etc. and then end up not being able to afford a house yourself? Why are you considering selling up rather than retaining the house? Are you moving job/location and/or need the money urgently and/or find it hard to meet the repayments etc.? Apart from rent what are you going to do with the money that you make from the sale? If you put it on deposit then you could be losing real value since gross interest rates are at best c. 3% and inflation is about the same so inflation is eating into your money even after interest. I don't think that this sort of speculation with one's PPR is a prudent course of action for most people to be honest? But maybe your situation is somehow unusual in that this is an appropriate course of action?

Re: House Prices

Very high-risk strategy - the costs of buying & selling are substantial (stamp duty, legal, survey, estate agents) - these will eat into any profit.

Re: House Prices

You're throwing every egg you have into one basket. Way too many ifs, whens and buts. Personally I think you'd be insane to consider something like this.

There is no guarantee that interest rates will rise. There is no guarantee that if they do prices will drop. No guarantees period. Unless you have a crystal ball you're hinging an awful lot on guessing games.

Re: House Prices

thanks for that.

Interesting thoughts. My main strategy here is that if interest rates do rise (and it not a huge if imho) the first thing to be hammered will be apartments. There are so many going up that it just seems to me, again imho, that all the property investors (not owner occupiers) will be haemorraging apartments like govt money to consultants. As hard as it is now (its fairly hard) to sell second hand apartments now, it will be nigh impossible in that market scenario.

Hence this idea.
Any thoughts from property pros, or people who are in the know of such things would be appreciated.

Re: House Prices

dieter1 said:

Interesting thoughts. My main strategy here is that if interest rates do rise (and it not a huge if imho) the first thing to be hammered will be apartments. There are so many going up that it just seems to me, again imho, that all the property investors (not owner occupiers) will be haemorraging apartments like govt money to consultants.

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I'm reluctant to get into discussion of hypothetical future scenarios as it is pointless but ... if this did come to pass then chances are many of those apartments will become modern day slums that many people will not want to buy to live in.

Hence this idea.
Any thoughts from property pros, or people who are in the know of such things would be appreciated.

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Do you mean people who can predict the future or someting?

As others have said this is an extremely risky and arguably foolhardy strategy. I still don't have a clear understanding of your goal here. Presumably to make some sort of quick (?) killing by cashing in gains on your existing property now and then making a bargain basement purchase when the alleged bubble bursts? Don't forget that people have been predicting such scenarios for years now and they have not come to pass. You could end up renting for 5/10/20/whatever years waiting for this to happen. Have you at least put hard figures on the best/worst case costs and benefits involved (along with a few configurable parameters like number of years before the bubble bursts etc.) to get an objective assessment of the viability or otherwise of this sort of plan?

Re: House Prices

I have heard of people who have taken a similar approach in the UK - Google for 'sell-to-rent' and you should find more details. Personally, I think you'd be crazy - the risk of being priced out of a rising property market is substantial, as is the risk of losing a pile of money on transaction costs.

If you want to short the property market, check out the spreadbetting companies - At least one of them was taking bets on one of the property indices.

At the risk of being shot by everyone else here I've actually done this recently but I'd add a few things to explain why my situation is slightly different.

1./(I know I can't predict the market but) I'm convinced at best we're at the top of the market and which will stagnate for years to come when it eventually dawns on ftbs that there simply isn't value for money out there. At worst.....

2./I'm back in full time education (something I've been planning for years) and didn't want to have to work during the college term. This way I can afford that and still have substantial funds once I graduate.

3./It's likely my career will probably take us abroad in 2 or 3 years and I was happier to take my profit now rather than potentially more or less in that timeframe.

4./We're paying roughly 60% of market rent in a 'family' property so also it's reasonably secure for the timeframe we have in mind. This last fact was important when looking at my overall financial situation over the next 36 months.

Despite many people thinking I'm nuts selling up I'm actually very happy with my decision. I've now no debts at all, more than enough funds to put myself right through to masters level and will still have a six figure sum at the end of that to start ourselves up wherever that may take us.

However it is important to 'do the maths'. I was positively anal about running through various scenarios about the next three years of my life with a variety of variables (working/not working, property gains/stagnent/falls, cost of living etc.). While potentially there may have been more money to be made with another choice there was also risk involved too so ultimately this was the choice I was most comfortable with.

I don't regret it for a minute.

Just to be clear - I, for one, did not rule out this strategy in absolutely all cases but I certainly don't believe that it is prudent in most cases. As ever (and as I have said) a lot depends on the specific circumstances and plans on the individual(s) involved. In your case you have obviously weighed up the options and have good reason to sell up and rent (at a discount) while you pursue some clearly planned goals. However, in the absence of any specific reasons as to why this strategy would be apt for dieter1 one would have to be conservative and assume that is does not. But it's up to dieter1 to clarify.

Lots of very well respected economists and financial pundits have been confidently predicting imminent interest rate increases and/or property price falls for some years now. Either or both may happen shortly, they may not.

Re: House Prices

dieter1 said:

thanks for that.
My main strategy here is that if interest rates do rise (and it not a huge if imho) the first thing to be hammered will be apartments. There are so many going up that it just seems to me, again imho, that all the property investors (not owner occupiers) will be haemorraging apartments like govt money to consultants. As hard as it is now (its fairly hard) to sell second hand apartments now, it will be nigh impossible in that market scenario.

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Today Daft.ie shows that in Dublin City alone 523 houses, 192 apartments and 12 sites are "for sale" and 1,124 houses, 1,248 apartments, 75 flats and 40 studios available "to let".

If you want a quantitative back-up for your plan of sell-to-rent one method would be to monitor these figures on the daft website for a few months. The Autumn Daft survey quotes the influx of immigrants from the Balkan states as a 'stabiliser' on rent-levels which are still however 15% lower than the 'highs' of 2002.

Re: House Prices

RainyDay said:

Very high-risk strategy - the costs of buying & selling are substantial (stamp duty, legal, survey, estate agents) - these will eat into any profit.

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Yes, the costs of buying back in are about 8% (mainly stamp duty for non first time buyers and reduced income tax relief) so the market will have to fall about 15% in one particular year to cover your buying back in costs and the rental costs incurred .

Its not an insane strategy but you would be better off keeping some money handy to hoover up a distressed investors exit from the rental market in 2 or 3 years time owing to gross oversupply in the rental market although I would personally buy nothing in this country until prices drop back a fair bit....20% -25% average correction required I'd say which will take a few years to unwind ! The banks wil only give 70% mortgages by then for investors , having been burnt rotten on the 90% lads who legged it so you will need a warchest to get into the market by then .

As I anticipate a long slow unwinding of the enormous Irish Housing bubble I cannot personally see a single given year where prices drop 15% , per my above scenario. I see a situation more like 8% down then 7% down then 10% down where the price drops continue steadily over a 5-10 year period until some normality is restored.

Re: House Prices

euphonyTEL said:

As I anticipate a long slow unwinding of the enormous Irish Housing bubble I cannot personally see a single given year where prices drop 15% , per my above scenario. I see a situation more like 8% down then 7% down then 10% down where the price drops continue steadily over a 5-10 year period until some normality is restored.

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How/where do you see all of this? What sort of "normality"? The property market is generally free and open and, as such, determines what constitutes "normality" at any point in time based mainly on supply on demand. How do you consider things to be abnormal right now? This all sounds like meaningless attempts to time the market and predict the future to me. I wouldn't base significant (or any) investment decisions on such analyses to be honest.

Prices have had an extradinory run over the last 10 to fifteen years. A reversion to the mean period is likely.
Price to median income is at very high levels.
Price to average rents is at very high levels.
Investor interest is at very high levels. It is unlikely to be an undiscovered asset class.
The best explanation for the global/ Irish property boom is a credit boom. Credit markets are likely to tighten in the future.
Ireland is part of the Eurozone which is dedicated to low inflation. It cannot devalue it's way out of any problems and unless productivity grows rapidly median incomes will grow inline with the Eurozone average.
No predictions here but there are enough reasons for the investor to be wary.
Regards

The banks fixed interest rates seem to indicate they don't expect signifigant increases in the next couple years, but even when they do start increasing it will very likely be slow, the ECB push it up 0.25% per quarter normally.

What can happen in slowdowns is not that house prices drop but that they flatline, buyers and sellers disappear, and builders slow down the release of new units. While several years of flat prices could have the same end price as a big drop followed by modest gains it wouldn't be what you'd need.

Even if house prices drop 20% timing your rentry to market could be even more anxious than the exit. Good luck if you try it though.

As most posters have suggested your proposed strategy is risky, but probably no less risky than investing in an apartment in Ireland or Spain, (the Spanish Costa’s market is falling at a fair clip currently). Selling to rent, needless to say, is highly contrarian to the prevailing view among most Irish people that property is the best investment.



By the way, being a contrarian investor shouldn’t require external validation, kind of defeats the purpose.

Re: House Prices

ClubMan said:

How/where do you see all of this? What sort of "normality"?

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price / average income multiples below what they now are, <HINT> Wages will not rise significantly so house prices must drop </HINT

The property market is generally free and open and, as such, determines what constitutes "normality" at any point in time based mainly on supply on demand. How do you consider things to be abnormal right now? This all sounds like meaningless attempts to time the market and predict the future to me. I wouldn't base significant (or any) investment decisions on such analyses to be honest.

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I'm sorry but I have not hidden under or near a rock recently. House prices are an ENORMOUS BUBBLE , caused not least by the willingness of the banks to lend into and fuel the bubble and the gullibles who believe that house prices simply CANNOT fall.

Every bubble bursts in the end but I predicted a slow puncture not a bang and advised accordingly .

What exactly is your analysis , if any ??????

Hi dieter

If you are planning to sell your apartment anyway, for example, because you are going to trade up, then selling your house now is a calculated decision which may have some merit. It is important that you are able to handle the risk that property prices may continue to rise. If you wait and house prices fall, then you will get a good payoff.

But it is a bad idea to sell your current home with a view to buying back the same type of home after a fall in house prices. The cost of buying and selling is probably going to be at least 10% in terms of stamp duty, selling costs, redecoration of the new home etc. If house prices drop from 20%, then the most you can gain by this strategy is 10% if you sell at the top and buy again at the bottom. In reality, you will sell a bit away from the top and buy a bit away from the bottom, so you may not gain anything at all for all the hassle.

But if you are going to be selling you apartment anyway, then put it on the market. If you get a good price for it take it. If you are buying again, don't be in too much of a hurry. Wait until you see the house of your dreams at the right price.

Brendan

Duplex said:

As most posters have suggested your proposed strategy is risky, but probably no less risky than investing in an apartment in Ireland or Spain, (the Spanish Costa’s market is falling at a fair clip currently).

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I disagree - Playing around with your primary residence in this way is likely to have a much larger impact on your lifestyle than playing around with investment properties.

Re: House Prices

I'm sorry but I have not hidden under or near a rock recently. House prices are an ENORMOUS BUBBLE , caused not least by the willingness of the banks to lend into and fuel the bubble and the gullibles who believe that house prices simply CANNOT fall.

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I disagree.

• 1st Look at the affordability.

Here's an example:

• Look at the amount of people viewing houses in new developments. Went to Hampton Wood in Finglas at the opening weekend and there were 100s of people viewing them.
• There still seems to be a huge interest in property - second hand or new. I've a few friends that are buying a house/apt to live in themselves at the moment and the market is a seller's market.
• There is net immigration into Ireland. Look at hard figures of PPS numbers being registered. 80-100K plus people only last year. They all need somewhere to live.
• Look at the increase in the price of new apartments since January. If I was looking for an apartment and I could find a second hand decorated for the same amount it would make sense to look at them. Location is of course relevant.
• What happens if prices go up so much that you can't get back on the ladder. Bought a house in April myself and it's already gone up by 10K which I wouldn't qualify for the mortgage for now. I don't fancy retiring in rented accomodation.
• Have you ever rented before on a long term basis? Dingy accomodation that there's point in doing up because it's not your own. No thanks.

This is only opinion of course. House prices do fall - Boston Toronto UK in 80s. But people still need somewhere to live and affordability is better measure than income multiples.