Although they may not realise it, most people* who bought property at the height of the boom are onto a winner.
If you think, as you should, that your mortgage repayment is essentially twofold: an interest payment and a capital repayment. The interest repayment is really the equivalent of rent on a property, while the capital repayment is a form of long term saving.
A large mortgage of say 500,000 euro taken out in 2007 on a typical tracker would have current monthly repayments of around 1,900. Of the 1,900, around 500 is for interest. The remainder is repaying the capital.
Now, on any reckoning, 500 euro a month for rent for a property that cost in excess of 500,000 euro 5 or 6 years ago (and thus worth probably around 250k – 300k now) is a good deal.
But homeowners may feel that repaying ‘negative equity’ on the capital sum negates any benefit. I would disagree. Over, say, 25 years, the homeowner is slowly buying an asset. What will be the relative value of that asset in 25 years’ time? Impossible to say, of course, but is it likely to be worth more in real terms than the same amount saved in the bank or invested in equities? I would say the lessons of history (eg, with regard to private pensions) are that it will be worth more. So, despite all the complaining, tracker-holding buyers at the top of the market are enjoying a good deal, if only they would recognise it.
*Subject to the following conditions:
You have a tracker mortgage
You are still in employment and can pay your mortgage
You are not desperate to move
You bought in a reasonably good location
Not much use to you though if you consider that realizing the value of what you’ve saved puts you out on the street and in need of housing at a much higher cost than the equivalent of the 500 you’ve been paying.
Hmm… there’s a couple of assumptions that You are making implicitly -
House prices in the long term will outperform inflation
Interest rates will remain low.
On 1 - Historically house prices in the long term (and I think its safe to assume that 25 years is long term) have kept pace with inflation. However that assumes that you buy on the long term curve - this won’t be the case if you bought at the peak.
On 2 - we may be in for a long spell of low interest rates so if you bought say 7 years ago your interest rate over the 25 years may be lower than the long term average for Ireland - on the other hand if the German economy starts overheating you may find that your rate spirals - this one is just a gamble.
There is no doubt that a mortgage for most of us is a good method to force us to save and to at least have something sellable at the end of the process. As a rule of thumb the overall cost of your house is about twice the price you paid for it - this hasn’t really changed over the years - the old 20 year mortgage with a higher interest rate is pretty much the same as the new variable over 25 years (trackers are probably slightly better). So your 500k house will cost you 1m in the end or 40k pa out of your after tax income. Assuming some inflation that 40k will be less in real terms as the years go by. You will have an asset that in real terms will probably still be lower in value than its original price (You could be lucky and hit a peak when the next generation forget the stupidities of their parents) but probably higher in 2032 Euros.
You can probably achieve the same result by renting and putting the rest of your money in a pension (where you will get tax relief) but it requires some discipline and you have to watch fund managers rip you off mercilessly and the Government stick its big hairy paw in and rob you when it feels like it.
Either way somebody is going to . the only other way is to make enough money that you don’t have to pay tax.
Yes, there are certain assumptions made above, not all of which may hold true. But my basic point is that for many who bought at the peak, there may be considerable silver linings to what they perceive as a purely negative situation.
(By the way, a new variable rate mortgage on the same property at its 2013 value would probably come in around 1,700 (assuming you could get finance), so not hugely different.)
I keep talking to people who think this will be normal in Dublin. Get the usual excuses of supply and demand, population, lack of building, and yet none of them are to explain what happens in 5-10 years of prices going up above inflation. Beggers believe than the bubble has been forgotten so soon by so many.
House prices can outstrip inflation without necessarily creating a bubble. Manufactured goods continue to become relatively cheaper. Economic growth - when it returns - will mean more disposable income. The money has to go somewhere, and housing traditionally soaks up the extra income available, particularly if the population is growing.
Good luck ever trading up. Ever. Slight negative there.
It doesn’t make sense to only consider the interest as the rent. This notion of a house being an asset is still nonsense. If you’re making repayments of E1,900 per month, that’s equivalent to a rent of E1,900. Your money’s no good locked away in bricks until you die.
Someone else has mentioned that the deposit would be worth more offset against a smaller mortgage at a higher rate.
Yeah, it can be a benefit, but only if you’ve bought the house you’re happy with for the rest of your life. If you’ve bought an interim house, buying at the peak definitely has its bad points.
So it’s ok to be trapped in an apartment the no longer meets your needs or that job you alway wanted but now can’t take because you need to move. Or you bought with miss right who has dumped you and wants you to buy her out. There are so many ways buying at the peak is wrecking people’s lives
The whole argument basically revolves around this utterly subjective assumption; quantifying the excess return the renter makes on his savings.
At the moment the renter is way ahead. I don’t expect the owner will catch him.
Well, I think as I showed in my example, the ‘rent’ being paid by the buyer at the peak (ie, the interest on his mortgage) is way below what the actual rental value of his property likely is. The reality is that many people’s total tracker mortgage repayment is not far off what they would be paying in rent alone for the same property.
As for the arguments about how property will fare over the next 25 years - well, no one knows, but today’s CSO figures show Dublin house prices up 7.5% year on year (with a strongly accelerating trend).
Taking my numbers from TheJackal’s post in the CSO thread: Dublin house prices are 52.2% off peak price, so 47.8% of peak, and up 7.5% y.o.y., if it’s strongly accelerating, what increase do you expect for this year? Maybe 12%?. So long as it’s well ahead of interest rates you’re making money even if you stand still on the mortgage.
The opportunity is the rural stuff, that’s still down y.o.y, but it has to go up in value soon (they’re not making any more of it you know). I’d suggest filling your boots with it (or at least filling your crocs).