Good analysis but I think the prices drops are on the conservative side.
Very good report IMHO from MB…
One important thing that is missing is in theory the lump sum saved should go up IMHO and the LTV should go down which each year of passing…
I know this can be debated both ways but JMO…
Also LTV’s of 90% how realistic is that in current environment and in the future… Too me not IMHO…
But agree 100% that Finance Prices will go up when you compare apples to apples…
Again, I like the report and it will vary on the individual personal circumstance whether to buy or not …
Higher the cash balance you hold the better it is to wait…
Anyone that will have only 20-30K saved in a few years then ???
But anyone who has saved 100K plus now and this hopefully increasing with each year you be stupid to be buying (Bearing in mind LTV ratios etc)
JMO and not qualified in the field…
Point very well made MB, a model of clarity.
I accept that a 10 year fix will cost 6.5% if taken out in 2011. I have some issues with the 2012 estimate that it will cost 8% but lets assume it will.
I do believe as do other around here that price drops, CERTAINLY in 2010 and PROBABLY in 2011 will be higher than 10% per annum.
I am minded to run the same analysis at 20% per annum price drops so I am…in 2010 and 2011 that is.
A sophisticated shill nothing more. If repayments go up 20%, prices will come down by the same amount, but as wages are going down, prices should come down even more. Prices have to go back to mid 90’s levels with the way interest rates are going. Thats the upside. Downside is only way to get a house is to pay cash, with loans nonexistant. Ya, sophisticated shill alright
Good points - furthermore it’s still encouraging people to buy overpriced property, that’s wrong imo. Especially at a time when job security is shaky and even those that have that security are looking at further paycuts down the road.
Square peg - round hole.
I have a couple of quibbles - but it’s great to see someone talking about both costs of transaction - asset and finance.
Quibble 1 - If you have a 10% deposit of €200K in 2010, surely you would have the same €20K in 2011 and 2012 meaning a lower LTV?
Quibble 2 - If interest rates go from 4.5% to 8% in 2 years surely this will have an effect on the initial asset price along with the baked-in drop?
I heard MB making that point on the radio during the week.
At the end of the day, you want to lock in the lowest possible cost; both in terms of the property price/principal borrowing and rate (i.e. the cost of borrowing).
Save hard, pay as little as possible for the property and borrow accordingly. Shop around for a flexible mortgage with the lowest possible rates.
You will be stuck with the initial purchase price/borrowed principal as your starting point and the costs will be based on that. The cost of the borrowing (assuming you don’t go fixed) with fluctuate, as too will inflation and your income and bills.
Yes we are coming off historic and unsustainable highs in prices and also historic and unsustainable (economy permitting) lows in borrowing costs (excluding the lenders mark up). But the initial borrowing is “locked in” as the starting point for the life of the loan, you want that to be as low as possible.
Borrow as little as possible, as flexibly as possible and as cheaply as possible. The clear your debts as quickly as possible.
All this shows is how bad an idea it is to buy property now.
Sure, if you’re an indispensible public sector employee who finds their dream house at the right price then it is certainly better to buy now on a fixed interest rate.
However, the above highlights a number of problems:
people who work out what they can afford now might not be able to do so in a few years time on variable rates
prices are going to continue to drop, and the higher interest rates (in the absence of domestic inflation) will further this drop
if you are in any way at risk in your job don’t buy. Not only are prices dropping, but if you have to sell you’ll have to pay back the interest due.
That said, I’m not sure that we will see 8% interest rates in 2012. Even 6.5% in 2011 is towards the more severe end of what might happen. If growth in the eurozone is sluggish all this year, I can see interest rates being c. 5% in 2011.
I’m not advocating buying and prices will certainly fall further. However, not all property is going to fall in price to the same degree as is so often assumed. So, if the house you always wanted is in the category where the price drop is less, then MB’s advice might be good. There is no one size fits all in all of this.
Sorry this analysis is wrongheaded and misleading. Getting into the market now involves taking on significant risk that there isn’t a complete meltdown in the finances and economy of the country as a whole and prices (asset & financing) do not offer enough potential reward to justify taking on that risk. Rent and be patient, there is no rush and there is real risk.
More to the point, if you have 10% deposit of 200k in 2010 and keep saving then you might have 30-40k in 2011-12. With the value coming down and the deposit going up the LTV will take a hammering and youll borrow much less. Perhaps the theory can be configured to include a rising deposit. I bet you could make a great excel spreadsheet out of that (you not me, im crap with excel).
While there is no one size fits all in this, it’s also fair to say that it is almost impossible to predict with any certainty that a given property is in any given category. This is why I think this is still akin to gambling per se. You’re relying on things to swing one way.
MB in the other rather more contentious thread said people should look on this from more of an investment point of view. I think that there’s a balance to be found. The primary focus should really be the utility value of the property -can you live here, could you live here for a given period, say 5 or 6 years. Let’s face it, even in 2005, there were still people claiming property would continue to rise and some of them were perceived as influential. Property, we were told, would slow to inflation growth.
However, if you’re going to put an emphasis on the investment side of things, you also need to look at the costing of the property from an investment point of view, and most studies still suggest property in Ireland is overpriced by 30% or so. Possibly more in certain subsets, possibly less in others but on average. And if rents continue to slide, then that will have no beneficial impact on that figure unless property prices slide faster.
MB’s advice is dangerous if it’s not done on a case by case basis and even so…let’s face it, most people who bought 2 bedroomed apartments in the suburbs in 2005, 2006 did everything to convince them that though the market would correct, their apartment would be okay because it was somehow special (access to Luas, builder reputation). In reality, this hasn’t turned out to be the case.
We need a stable property market. Suggestions like this do nothing to stabilise it; only to draw out the crash further and further. I had been hoping that we’d get a short sharp crash but as we are now 4 years or so into it, I think we missed the boat on this.
Ultimately, the objective of the average buyer should be to spend as little on a property as possible when buying it. I have some sympathy for those who are now spooked out because they bought high and fewer people are willing to buy high. But that in itself is not a reason against correction back to the norm.
i think the idea is being lost in the big picture, the point being made is that financing costs are going to go up, even if the ECB doesn’t move the cost of finance will - we think it will be c. 150bps over two years.
if you found a property you like that you believe is overpriced then you can always make an offer that you feel is correct and the vendor can accept it or reject it. If it was possible to lock in the rate today but only buy in 2yrs that would be great, but in the absence of that you have to weigh up the pro’s and cons and make a decision accordingly, that isn’t a call to run out and buy buy buy, but it is a call to recognise that there are good properties at proper valuations (using the investor method) and at the moment there is financing that is priced well.
@jimbob yep, i’m a schill, thank you for the ‘sophisticated’ comment, I take that as a compliment!
@bluehorseshoe are you not broadly in agreement based on what you’ve said?
@WhatGoesUp Quibble 1: fair point, you can apply a 20k deposit at 160k purchase price, do the calcs and you’ll see it still doesn’t undo the idea behind the point. Quibble 2: not sure I agree, I have a chart on the mortgage market outlook 2010 that shows the margins in the UK after their end of the world property crash in the late 80’s and despite margins going up prices didn’t fall further.
@OneStepBehind I wouldn’t go as far as saying i’m calling for all people to go buy houses! I am saying that price alone isn’t the only thing, there is also the matter of cost and virtually nobody ever brings that up. as for jobs being uncertain etc. - if unemployment peaks at 15% then 85% of people will have jobs, do you envisage 70% unemployment or something?
@2Pack if you thinking about being a buyer if the price goes to level X, then why don’t you offer that now and see if there are any sellers who will accept it? The idea that people will buy when prices reach a certain level mitigates the fact that on the buy side you have the right and ability to offer whatever you want. Run the figures and factor in 20% p.a. drops and that will be your guide.
@Calina it isn’t about drawing out a crash or making it happen quick, the utility of a house/shelter is required for everybody, the idea of looking at it as an investment isn’t saying to buy it as an investment but rather to value it the way an investor would using a model based on rents. The rationale being that you can value a house to live in by considering the comparables in the area - which would otherwise be a suitable substitution. the figures worked on a further 20% price drop, you mention 30% - in that case run the figures and see what you get, the issue I have is everybody talking about price price price but nobody mentioning cost. this will become a bigger story later in the year when all the righteous indignation boils up as lenders push up borrowing costs independent of the ECB. if people are focused on price then why is it always the price of the gaff and not the price of finance?
Do we know something the banks don’t know? Will the banks end up losing out by selling people such a ‘give-away’ product?
Are interest rates certain to rise to the extent alluded to by most of the financial press?
What happens if (when) new waves of default start to occur? Or other catastrophic (black swan) events that put the ‘recovery’ in jeopardy?
Low interest rates are pretty much the only tool available to mitigate against such events. No doubt, the authorities will make an attempt to raise them soon enough. But how long will they stay there? Will the recovery pan out without real hindrance?
I would not like to bank on the kind of probabilities needed to come out on top the scenarios painted.
The following article may be useful in answering some of these questions (posted previously).
It has been suggested to me that if I think houses will fall by X then why don’t I just offer X on a number of houses till someone takes the bait. My personal theory is that I don’t have the ability to guess exactly how much they will fall by. I can however look at leading indicators like the GNP and employment and make a call that way readjusting the amount they will fall by safe in the knowledge that if I’m wrong I won’t miss the bottom by much.
Thanks for your analysis but I think you are being a bit bullish on rates in 2 years time.
There are a couple of severe caveats to this.
- If 10-year rates are 6.5%, I would be reluctant to fix for that long. Perhaps for a couple of years on an introductory offer. I certainly wouldn’t fix for 10 years at 8%. But then I’m no expert…
- What about the cost of mortgage protection insurance? If you buy reducing balance insurance, having a smaller balance will be cheaper, but this is a minor quibble.
- What happens when the ten years are up?
After 10 years:
(Not sure where MB gets his figures from, mine are from drcalculator.com/mortgage/ )
S1: email@example.com% - 145k remaining
S2: firstname.lastname@example.org% - 139k
S3: 160k@8% - 129k
You then have another 15 years at the prevailing rate.
Let’s look at three scenarios for each of the three remaining amounts above:
rate: 8% 6.50% 4.50%
15 year 249,000 227,000 199,000
10 year 133,399 133,399 133,399
Total 382,399.20 360,399.20 332,399.20
rate: 8% 6.50% 4.50%
15 year 239,000 217,000 191,000
10 year 145,844 145,844 145,844
Total 384,844.40 362,844.40 336,844.40
rate: 8% 6.50% 4.50%
15 year 221,000 202,000 177,000
10 year 148,189 148,189 148,189
Total 369,189.20 350,189.20 325,189.20[/code]
So, madly enough, 180k @ 6.5% for ten years is more expensive over 25 years than 200k @ 4.5%, but both are more expensive than 160k @ 8% for ten years, where all three revert back to the save average rate for the next 15 years.
You are, then, basically into interest rate gambling. What will the rate be next year, or the year after? What will it be for the 15 years after the first 10 year fix? What will the differential between 2020, 2021, and 2022 be?
Finally, if margins in Ireland become juicy, do you really think that other banks aren’t going to come in and start offerring good margin products? Other banks with cheaper funding? If banking does become a utility business again, banks are going to have to go back to originating mortgages and keeping customers…
What meaning has all this is the Bank have defaulted on their responsibilities There is no game any more they broke the rules they should be out. Stockholm how are ya.
Tut, tut, tut…
Look again young man. What did interest rates do from their highs? Did the fall in interest rates during the 'nineties outstrip the rise in margins? It surely did…