I am trying to determine how low prices will go for classic Ranelagh red-bricks.
Even with the recent price drops, there are several houses on sale at an asking price of €1.8M in Ranelagh that are also available for rent for ~€3000. This equates to a ridiculously low yield of only 2.4%. If you put down 30% on such a house, you would still pay €7000 per month on your mortgage! This is a bad deal.
Also, a quick run around town will reveal that there is actually plenty of stock available. There are thousands of red-bricks that have not been restored in decades, representing a huge available stock for the future home-buyer.
So - how low will prices go? To reach a ‘reasonable’ rental yield, prices would need to halve from current asking prices? To reach London’s average of 8% they shold fall 75% from current asking prices. Nottingham is at 10%.
So - where will the bottom be? Will the current €1.8M house bottom out at €900k or €450k?
I voted €400k as I’ve found a few D6 houses online which are also for rent or have similar for rent and the asked for rental payment is so completely out of line with the asking price for sale. The bottom of the market for these houses is a very, very long way off. My guess is that the Victorian/Edwardian 3/4 bed terraces and semis will be worth between €250-400k depending on size and condition. And the larger Georgian properties will be somewhere between €450-750k again, depending on size and condition. There are also some larger detached Edwardian and younger, properties like the one on half an acre Orwell Park Road, that may be actually worth €1m plus.
It’s quite hard to look at a house that is asking €1m+ and think that a few years from now it could be selling for €350k. You start to think that even with everything you know about the state of the economy and how comparatively cheap it is to rent the same property, that you are just being prone to wishful thinking.
But then a week ago I was looking at the auction catalogue of a UK auctioneer and I saw an attractive Edwardian house on a really nice street in Ealing, west London with a guide of £300-325k. I looked into it further and a house on the same street sold in '06 for £835k, which was a year before the London peak. Obviously the house could sell for well above the guide, and it appears to be a probate sale so will need at least cosmetic work. But it’s very telling that the auctioneer is setting the guide so low. Lower than one of the houses on the street sold for in 2000. There is also a house for auction on my street in Wimbledon with a guide of €325k, where the peak sale was €721k in '07. (This one is almost certainly a repo.) It’s still quite overpriced though, as my rent is only £1150pm. So if that is starting to happen in London less than 18 months after the peak, it’s more than possible that it will eventually happen in Ireland too.
The Optimists here will argue that Red-Bricks shouldnt be looked at in yield terms. One doesnt look at a rare Monet and ask what it yields, so why apply yield logic to a house on Palmerstown Road?!?. Obviously anyone making this argument now will justifiably look delusional!
While I think the average home in Stepaisde will reach a 7-8 % yield at some point (30yr Euribor is 4%; plus 2% Mortgage spread; Plus 2% Risk premium for investor say). However, I think 5-6% is about where the red-bricks will stop. A small premium, just because there will always be people thinking more with their hearts than their heads in these places. So, if todays prices equate to a 3% ish yield, they probably have another 40% to fall
Ps… Average London rental yields are not 8%. In Central areas like Kensington / Kinightsbridge etc, the yields are only marginally better than in similar places in Dublin…about 4%, which is still pathetic!
A nice georgian 2 storey over basement walking distance to town for €450k-€750k. there are plenty of people sitting on the proceeds of house sales well in excess of this. Are there enough of these properties for them?
Look around daft and myhome, there is no shortage of these houses for sale right now. Then look at what they rent for. This house in Ranelagh is detached, over 3700ftsq, redbrick, possibly early Victorian, though I’m not an expert - it could be Georgian and the bay may have been a later addition, but certainly very beautiful and in a great location.
And it’s asking €6000pm in rent, at a high 10% gross yield that makes the house worth €720k.
The other thing is that if I was sitting on €1m plus and that house fell into my price range I’d hold until prices fell further and I could have the house plus retain 30% of my cash or buy something like this.
I’ve been compiling the figures on the Ranelagh 3 and 4 bed redbricks since last June. Mainly because I don’t believe there is a premium on these and because I don’t think they are ‘trophy’ houses. In the 70’s these were bought typically by two Civil Servants (teachers or CS EOs). I believe we will go back to that demographic as these are the folks that the Financial Institutions know and love. So lets look at our couple - lets say a 65k EO salary and a 55k teacher salary. That gives us 120k joint income. If we go back to 80s multiples we have 2.565 + 1.2555 that gives us 200k but I do think that lower interest rates and more established two person working families have probably shifted that but the most I can go to is 3.5 * joint which gives me 420k. In the past our putative couple would have come to the table with some equity. Typically such a couple had been in their starter home for 3-5 years. Nobody in that situation is coming to the table with equity - at best they aren’t negative. They could easily have two flats that are down 50k apiece with their original 30k deposits swallowed and another 20k lost. But lets say they come up evens. To get the mortgage they currently need to put up 20% equity that means their 420k is 80% of 525k. So even with the best mortgage they can manage they need 105k. Realistically our couple doesn’t have that.
clairec mentions people who have sold up and are sitting on cash. I think that this is such a small proportion of the market that you can probably dismiss it. Anyway a lot of these people have their eyes on things further up the market - real trophy houses - the ones with big trees in the garden, driveways and two garages. The ones that will be ‘down’ to a million. Not a pokey redbrick in Ranelagh.
OK so my belief is that you might be able to get around 450-500k for the very best for these properties (i.e. the ones currently selling at 1-1.2m) by Summer 2010 . I actually think that this figure will decline further but more slowly for a few years after. Somebody mentioned the condition of these houses - a few years ago that was a fair point but a huge proportion of these have been refurbished and are in much better shape now. They’ll get the top prices - you can already pick up D6 ‘dross’ for 600k or less - they’ll be down in the 250s - 300s next year. The 1.8m jobs will be around 800k I would guess.
My figures for 3 bed redbricks in Ranelagh show the prices are remarkably sticky - but they really aren’t selling. The percentage of 3 beds asking 800k or less has increased from 11% last June to 43% last week. The median asking price has dropped from between 900k and 1m to between 800 and 900k. The number of properties on offer rose from 29 last June to a peak of 45 in November and have been hovering from 37-39 since New Year.
A lot of these houses changed hands in the last 5 or 6 years. The 70s Civil Servants kids have grown up and they’ve bought their place in France and an apartment in Dublin with the proceeds. Most people stay in their family home for 25 years or so. Maybe not many of these will come on the market in the next few years. But there will still be a proportion of people who will die, move into homes etc, releasing their homes on to the market. Perhaps their families are choosing to keep these homes till ‘the market picks up again’ but generally in a family there will be a desire to release the cash and I suspect that there will be pressure building up on the market. I wouldn’t be surprised the numbers on sale rise to 60 by the summer. I think at that point asking prices will take a fall and deals will be done (but we will probably never know the price!).
If you look at the ‘near-D4’ areas e.g. Churchtown, and Milltown prices have started to come down to 500k already for 3 beds.These were up in the 8 and 900s 18 months ago.
Agreed whizzbang! I’ve been looking for a redbrick in Ranelagh since last summer, one big plus I think with them over modern houses (and esp apts as I live in now) is that they are more spacious and they have real walls and not sheets of paper through which you can hear every word of your neighbours next door.
You’ve done your homework alright metalmike, are you looking to buy there too? I had just one offer on a redbrick last summer for €700k, original asking price was 7 figures then it dropped to below €900 after a few months. I couldnt see the sanity in offering any more. Probably sold for €800. A similar house on same road is asking 25% than the highs of last yr but I still feel it has more to go to become a realistic price.
I think prices could come off 50% max but not much more for a few reasons:
biggest property crashes so far that spring to mind have never really exceeded this - 40% in Sweden, 60% in Tokyo but that was over 15 years (can’t wait that long!). Correct me if I’m wrong on the figures.
agree that some new houses on the outskirts will go 70% lower but not in Ranelagh, so close to town, luas etc
economy is still relatively strong both historically and relative to European neighbours, and although unemployment will be double digits (if it’s not already), a lot of the workforce will migrate back to their homeland (e.g. my 2 flatmates gone), thus easing a jobs crisis. I think we’ll have tons of empty houses in the outskirts but not so much in southcity Dublin.
I think the bottom is close (maybe not timewise but at 40% lower prices then pricewise, yes); the stock market has weathered the freeze in credit and I believe has bottomed out.
What’s the standard internationally in stable markets for rental yield vs cost of servicing the mortgage? I know economists always say in the long run they should equate but realistically there’s a middle-ground?
Thank you for the responses, and the highly informative posts!
Almost 70 votes. 48% reckon the €1.8M house will go down to €600k. On average, across the 67 voters, the median price was €635k. Clearly, Estate Agents are active on this site, as a couple of people voted that such a house will go no lower than €1M, which is fanciful thinking in my view.
Personally, I think Dublin house prices, even in premium areas, are in for a sickening drop in 2009. Sickening if you are a seller, that is. Compared with historical averages, comparable cities, the economic situation, current borrowing capabilities and rental rates, house prices are still ludicrously high. As one of the posters pointed out, there are tons and tons of Ranelagh Redbricks to go around. Supply constraints are not a factor in today’s Dublin.