Capitulation?

The Irish Property Bubble (2006) Sell, Buy or Rent?
1

Hi guys,

Like a lot of people here, I’ve been following Ireland Inc and the property boom since the great AAM thread in 2005. I finally convinced my other half to sell our sub standard apartment in 2008 and we’ve been renting since.

We have €70K in the bank, no debt, we’re both 32 and our joint annual earnings are €80K. We also have very inexpensive lifestyles. We will be looking for a 3 bed close to family in Wicklow, nothing fancy, just a functional, decent house like what we grew up in. We will be looking to spend no more than €290K as we value time and getting our mortgage paid off before a “nice house”.

I thought I firmly believed we could rent for a few years and then jump in when property prices were rock bottom. However I’m beginning to get a little worried about that plan for the following reasons:

Job Security

We both work in the private sector. My other half’s job is not as secure as mine and we wouldn’t be surprised if it was gone by next year. You may say that now would be the worst time to get a mortgage but our argument to that is that we will be able to afford the €230K mortgage no problem on one wage and the dole. If, however, she does loose her job, we won’t be able to get a mortgage until she’s a couple of years in a new job.

Ability to get a Mortgage in the Future

We are not public service workers and we are not first time buyers. Although we do have decent savings and just above average salaries, we are hearing stories of people who would have gotten a mortgage last year being refused now.

Protection of our Savings

I think it’s going to be very difficult to protect our savings if one of us is not working. I understand we’d be allowed have a certain amount but given the state of the country I would expect the government to make us spend all our excess savings before giving us social welfare. And you may say that we could hide it etc but we are not willing to have tens of thousands hidden somewhere in our rented accommodation for years.

Time (for us the most important factor)

If only we could suspend time and not get older during this recession everything would be fine. Unfortunately by the time this whole cycle plays out we could be heading towards 40 and to be honest we really want to avoid starting a mortgage then. If we got a mortgage now and albeit it might be higher than we would have to borrow at 40, we would still have significantly reduced it. Like with our previous mortgage, as long as our jobs continue we will significantly overpay this mortgage (by about 10K a year).

Does anyone else who’s waiting to buy their home worry about the above factors? After all, the reason property goes so low in a bust is because the people who thought they’d be able to buy at rock bottom can’t get the finance or they loose their job. I have zero faith in the government and to be honest with you, I have zero faith in any future governments too and I just know it would be our luck that they would keep this stalemate going for years.

2

All very relevant points and all equally relevant to anyone thinking of upgrading (my situation).

Regardless of what happens a metric I think you should focus on is your “cost of housing”.

(1) For an owner this is essentially the interest paid on their mortgage (plus any maintenance required, poss property tax etc) - although primarily this is a function of the cost of the property and your mortgage rate (currently rock bottom but obviously variable)
(2) For a renter this is essentially rent (plus whatever other costs are associated with renting).

I do a similar calculation to you - I consider what I’m clearing off my mortgage principal plus what I’m saving now and use
drcalculator.com/mortgage/
to calculate how much easier / closer this makes the much larger mortgage my dream house would require (while not actually living there ! - a middle class classic)
You are effectively thinking 2 steps ahead to retirement as well as the dream gaff.
(Most just think about the dream gaff)

Consider where you want to live Vs the “cost of housing”.

BTW Don’t jump in. At least wait until An Bord Snip is implemented (Decembers budget will be worth waiting for) - it will even up the playing field for those of us not in the public service or married to a public servant :slight_smile:
The biggest fish in our little pond (the government fish) is in an unsustainable position - at least wait until you know where it is going to move.

3

The dole (Jobseeker’s Benefit - supported by social insurance contributions) only lasts for a maximum of one year. This gets paid no matter how much savings you have, since it is not means-tested. After that you move to the means-tested Jobseeker’s Allowance. If either you or your partner were earning 40k, then the person looking for Jobseeker’s Allowance would be entitled to nothing. The savings wouldn’t even come into it.

If both of you were seeking Jobseeker’s Allowance your savings would be assessed as means, and 70k would result in a deduction of about 150 euro per week off of a maximum payment for a couple of 340 euros per week.

4

The bigger game at play is the law of supply and demand, demand has to catch up with supply, and at the moment supply is still growing and will continue to grow as a lot of people in NE will try to cash in parental homes too. The more you save in deposit, the smaller your mortgage and the shorter its term. I’ll be hitting 40 in the near future but I’m not worried about it. I’m more concerned about my ability to get off this rock if things get intolerably bad.

5

What i would do if I was you is: “do the math”

At the moment 290 - 70 = 210
I.e. the mortgage you are currently willing to take out

I don’t know what you are looking for but this is on at 319:
www.daft.ie/1445071
Applying 20% discount - 255 to get realistic current purchase price
Assume a further 20% discount over next 2 years (which is very conservative imho) to get: 204

Take attitude that your partners job is gone - and save all that salary
say 24 k savings before job is lost

Hence you now have 94K savings to buy a 204K property - therefore mortgage of 110K required

Single salary of 40K will get you a mortgage of 2.5 times income = 120K
therefore you are home and dry.

All this comes with the caveat that it is pure guesswork - in particular that the banks will lend out 2.5 times income in 2 years time - however if they are lending out less prices will be less.

6

I would not be convinced that North Wicklow will fall to the levels I would expect in North Longford either. Therefore it may be quite difficult to ‘buy back in’ in the absence of a second income . South Wicklow and Gorey… no problem . But then there would be the hideous commutes and the difficulty of maintaining family lives.

I have a long standing policy of not discussing ‘family’ matters with persons who do not have kids and who are aged between 35 and 50 . Too many awfully complicated stories . I have absolutely no problem discussing these odds with 25 year olds or 30 year olds but after that the statistics get too complex .

But I do know many 35-45 something couples who have been destroyed by fertility issues and that is as bad as financial problems any day of the week. Honest.

So yeah , you got rid of the apartment (fair play) but you must also give yourselves space with ‘family’ issues now. That may preclude buying at all …and you may be all the happier for it .

If I could advise you I would say that running a sprog is as expensive as running a beemer …if both of you work and use childcare.