Property prices may fall, but finance prices won’t

You see here’s the thing MB - all I see when I look at your analysis is - If I go ahead and buy a property today, for 200k, it will have depreciated by 40k by 2012.

If I buy in:
2010 the total cost will be €300,000
2011 €328,150
2012 €333,424

So if I buy now it’ll cost me 33k more than if I buy the same property in 2012 that then costs 40k less (200k > 160k)?
Maybe I’m not looking properly at your figures and apologies if that’s the case - but that’s what I see.

Find me one person, just one, who is saying otherwise.

If that was really the point you were trying to make, then why not make it on the much more rational basis of a comparision based on someone who already owns a house with the variable being do they keep their interest rate as is, fix it for a few years or fix it for 10 years. It would also be quite useful to do an analysis for people to consider whether to stick with their tracker or to fix now.

It’s all very well to stay this in general terms, but as I said in the other thread, if you really want to make a convincing argument use a real world example e.g. a person with X job and Y salary able to afford Z type of property.

Well in that regard why not use the 20 year mortgage as a comparison to give a somewhat truer reflection than the 25/30 year mortgage.

Everyone else got a personalised response from you, but what do you have to say to my point that the main thing to be learned from your article is how bad an idea it is to buy property at the moment with prices likely to fall and if someone loses their job they will lose out more by selling than someone on a fixed rate?

Or even, as has already been pointed out, if someone puts off buying and saves, or buys on a variable rate but uses extra savings to pay off more of the principle then fixed rates are a bad idea.

The 10 year fixed rate is really only relevant to someone who is almost certain to have a job and stay in the same place for the next 10 years. This might apply to people who have already bought, but it’s just not relevant in my view to a first time buyer in the present market. Therefore, prices have to fall further before this changes.

I use a standard loan calculator and was taking the figures from payment 120 on the amortization table.

1: if you are a bear then you should be a greater believer in higher rates as a secular trend than in low
2. yes, you would have a lower level of life cover required, but you’d be two years older and it would be getting more expensive on the basis of your age at end of contract.
3. at the end of year 10 everybody takes a rate gamble, there is no way of determining the prevailing rate at that point in time so it isn’t a case that one capital value at the end far outweighs another because the cost of finance determines the speed of repayment (along with term etc.). Look at the balance after year ten given these scenarios and the capital difference isn’t necessarily made up and then you have the ongoing cashflow element to consider too!

it surely didn’t? do you have a different chart?

Eh, not if you are a deflation bear. Only inflation bear really believe in long-term high rates. Look around you. Do you see many inflation bears? You may wave at Professori, he’s had his jabs… While ECB rates are abnormally low and bank margins are too, it doesn’t mean that they will get very high, mortgage rates topping out at 8% would be high and temporary. And, if you are a deflation bear, we may be in for Japan…

Even at 8% you have a lower balance on 160k borrowings remaining after ten years. After 25 years, it is cheaper to pay 8% for ten years and 4.5% for 15 years on 160k than it is to pay 4.5% on 200k…

As johnnyskeleton points out, few FTBs buy houses for ten years. Fewer still will fix for that length of time.

moneyextra.com/dictionary/in … 03455.html

No, but I had a mortgage in the UK through the 'nineties…

edit: when I bought, the mortgage rate was 14.5% with the base rate 14%
The low point of the decade had the mortgage rate at 6.85% with the base rate at 5%

So while margins increased from 0.5% to 1.85%
The cost to the punder decreased from 14.5% to 6.85%…

the lesson on margin and variable rates is the same for everybody, even existing owners, a refinance to a better rate is a buyer as well (of the finance not the property), if you can get an existing biz rate from your bank all the better (factor that price against cost of a refinance - most banks don’t give the good stuff to loyal customers).

sadly many people who do want to move rate are stuck in place due to negative equity, then you have lenders like BOS who are offering a 1yr fixed rate at over 6% - which essentially keeps people on variables, I wonder why that is?

that is essentially picking the property, then underwriting it as well, while at the same time applying my own bias toward what a person on X should be allowed to borrow, I don’t set the market, I work in it. If a person came along and said 'i’m looking at x property and I earn Y then I would naturally see how it might work out for them, but I’m not the universal gate-keeper and can’t say what job is secure to what degree, what salary i believe justifies a loan (that is up to the banks) and what property a person should have to buy.

the majority of mortgages are not issued on a 20yr basis is the reason, but if you felt there was a compelling reason for doing a comparison along those lines let me know and I’ll run the numbers

I don’t get the first bit, a person on a fixed rate would have a penalty so they would lose more I figure - if they sold during the fixed rate period.

if you save: watch where deposit prices are going, banks will decrease deposit prices in 2010 (trend started since 08’) and they will increase lending margins so I don’t know that the argument applies, if you have evidence to the contrary post it, i’m not so bull-headed as to be unable to change my mind if an answer is in front of me!

on 10yr fixed rates: I always wonder at the Irish psyche, we sign loan offers for 20yrs + but don’t want a guaranteed price for much of it? rather than viewing it as a bad thing, longer term fixed rates would probably be a good idea, they are generally more prevalent where sustainable prime lending exists, for a comparison of fallout look at price trends in New England (20-30yr fixed rates) versus that of the variable rate states (CA., FL etc.)

I think the first time buyers out there now are actually the reverse of the people who were buying in the bubble, they were buying anything in order to get on the ladder with a view to moving to where they ‘really wanted to live’ at some point in the future, a move which would be financed by ever rising asset prices. that error doesn’t exist today, and if you don’t have an inkling of where you want to be in 10yrs that may be a lifestyle or personal decision as much as anything else, and if prices fell further I don’t know that a person would decide to live in one place or another on a 10yr horizon?

i don’t buy the japan analogy for many reasons which we can go into some other time

run your calculator again, I did say the capital balance would be higher in 10yrs on the larger loans - we are in agreement form the outset on that, but it is the cost - look at your capital + Interest columns (if y’have them - if not them pm me your mail I’ll send you an excel calc that does it) and the actual cost is greater during the 10yrs on the higher margin/rate loan.

the point on lower level of life cover is not sufficient to be a determining factor imho

on UK rates - the high rates of 90/91 were an intentional effort to quell the economy, but the average base running (outside of the spike in rates) was c. 10%, when the bubble was forming. the margins however, increased x7 after the crash while base stayed fairly consistently over 6%

No, once you come off the ten year, you have another 15 years to go at whatever rate is prevalent at the time. This is likely to be the same for both of them. Over the 15 years you save more with lower capital than you lose over the ten years… though, I admit, it is hard to capture this as calculators don’t work well when you change the rate part way through.

Not true, or not generally true. Look at the link I provided. It has both base rates and SVR on it. Margins tripled and a bit. (You’re being totally lied to by your MB album cover…).

Hi Mortgage Broker,

Just curious… what’s your cut on a transaction like this?

This is a great example of using bizarre scenarios to suit your needs. Firstly, it is important to recognise that 10yrs or more of a fixed rate period is required for the example to work. These examples are not true for shorter fixed terms or SVRs. 10yr fixed terms are uncommon in Ireland due to break penalties and typically appear expensive (even in the first of the examples the current 10yr fixed is 4.5% vs the 2.8% 2yr fixed currently available). Secondly, the change in the 10yr fixed rates between examples are remote. Remember that the 10yr fixed in 2010 has a nine year overlap with the 2011 10yr fixed. I’m not sure what the “base rate” refers to in the context of 10yr fixed - where the expected rate over the duration is the key. The point about margin is reasonable, though if a 4.5%+ margin comes true, anyone on SVRs will feel equal amounts of pain - enough to make the crash crashier.

In short, nice try MB, but no cigar.

Marginal gains driven by benign price falls and aggressive finance cost increases.

I think anyway you have to take an extra thing into account - take 12 years to allow for the rent saved while property is declining. RL figures rental yields are around 3%. Taking this saving against the higher finance costs means at the end of the day there is no difference between buying now at the lower rate and buying in 2 years time at 8%.

C-

‘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)’

Would any of you have some advice then on what to do with 100k ? - a bond will mature on the 2nd of Feb. The bank are suggesting a 40 Day set notice account with 3% interest ( paid annually). I don’t know what to do at all any more. I was thinking that year would be my year to buy so I was going to put it some where that I could get access to it when needed but based on the pin I may hold off another year or so ? Single mum so want to finance as little as possible and advice much appreciated.

Do some quick math.

In 2008 100k was less than 40% of the price of an AVERAGE home.
In 2010 100k will be over 50% of the price of an AVERAGE home.

You are gaining quite handsomely while doing nothing. See the PTSB thread below for links to the house price stats.

I would split the 100k between 2 Irish banks that are (a) likely to be alive and (b) prepared to give you a mortgage in 2011 or 2012 by the way which means no Nationwide under any circumstances.

And keep saving into each, it demonstrates capacity and commitment.

Thank you 2Pack

I have no idea where you hope to buy but other than in certain parts of the big cities most houses are AVERAGE.

This was the PTSB comment early this week ( from RTE)

Average fall in 2008 and 2009 was 14%. Has anything changed in 2010 ??? No!

In early Feb you will have nearly 50% of the average price and will be looking at a 50% mortgage or so. If a FTB the tax optimum time is Q1 to use up your annual allowances. These last for 7 years. You will be looking at Q1 2011 or Q1 2012 then. No point in buying in 2010 because the FTB allowances are gonna be better…if anything, in 2011. Most likely not worse.

Finally

So ask yourself!!

Which of those factors will change in 2010 leading to a stabilisation or recovery in house prices. Answer = none.

By the end of 2010 you will have over 50% of the average house price, ca$h. Your time to strike is when the mortgage for the remainder is no more than 3x your gross income and when YOUR industry sector has stabilised at whetever level it will stabilise at.

Also remember you need Mortgage Life assurance and the shorter the term the cheaper that is , check here. Sneaky banks give you longer mortgages to get more €€ out of you for insurance upselling and stuff. Make sure you plan on paying the eventual mortgage off as fast as posssible and with the cheapest insurance possible. Clearing it by the age of 40 is a very good idea if possible. The insurance will be a lot cheaper.

The difference between 100k over 30 years and 50k over 10 years is about €30 a month in insurance costs and you get no tax break on that. The magic number is a max 7 year mortgage because the interest will be fully deductible unless you but a €500k gaff or something mad like that.

And do not even THINK of buying an apartment.

Thanks for the advice 2Pack. I’ll sit tight another year so- have been waiting since late 2006 so another year won’t hurt and should give me a much better advantage. I doubt I am going to qualify for FTB allowance because I had a property in England and made a profit upon selling it. I was talking to a solicitor and he seems to think there could be a case because I am divorced and buying a family home to live in but I’m not counting on it.

You may quailfy for an enhanced tax relief if divorced not separated, there was some change in recent years to the tax system depending on whether you were married when you bought in England or whether you owned the gaff pre marriage…do check that detail out with the revenue when calculating and have the correct paperwork to hand before you buy because you may have to prove it properly.

See

revenue.ie/en/tax/it/leaflet … l#section2

and

finfacts.ie/fincentre/firsttime.htm

I made myself a little excel spreadsheet this morning that allows me to enter variables for:

House Price 2010
Drop at end of 2010, 2011 => Feeding into prices in 2012
Fixed interest rates for commencing each year
Our current deposit
Our current rate of daily savings
fixed term in years for each mortgage at the beginning
estimate of rate at end of the terms

And with a little token on rent vs principle savings at the end.

Using Karl’s estimates of interest rates, 10% drop each year (more conservative than Karl), and our rate of saving for our deposit (varies from person to person admittedly), this is what I get.

Sufficeth to say, I’m glad I can calculate this type of thing for myself. If I put my faith in a blog, I could get creamed on repayments.

Everything you save yourself over the next couple of years magnifies the price drop. Who cares if you pay some rent in the mean time, you’re still saving overall, and you’re getting a couple of years of shelter for your money.

Glad I did this now, I’m slapping it down in front of the old doll when I get home.

If anyone wants the calculator to play with I can send it to them.

Edit: I haven’t even mentioned equity here, which would obviously be greater if one waited

Ok, but would you accept that your point could be better made using the example of a fixed rate v. variable rate for an existing owner, rather than rehasing the message of the bubble times - “buy now before interest rates get so high that you can’t afford your dream home anymore”

Well you did suggest earlier that there were such properties available. The example you used was a 200k property. To afford that, what would someone have to earn - say 50k p.a. So let’s take an example of someone earning 50k in Dublin at the moment - it would be someone at management level in a fairly large company or someone who is highly skilled e.g. insolvency accountant/specialised IT consultant/teacher. This person is probably in their late 20s early 30s due to the amount of time required to get to where they are. Lets also say that their reason to buy is to start a family. So they want at least a 3 bed, ideally a 4 bed, they want it to be habitable and they want it in a reasonable area. Find me a property that fits that bill. It seems to me that they can have a shabby 2 bed apartment or an old 3 bed in Finglas. There are 4 4 beds in Dublin under 200k, all in Tallaght or Finglas. Now there is nothing wrong with either of these areas, but are you suggesting that now is a good time to buy because a mid level professional person can afford to buy a house in Tallaght or Finglas. If so, what chance non professional people have of buying a family home?

That is a recent trend because in recent times people have been encouraged to borrow as much as possible and longer terms reduce the monthly payment.

Neither you nor I have evidence of future trends, so clearly I’m not going to put forward evidence of that. Besides, you haven’t put any evidence of that view forward, so why should the onus be on me?
The point is that your examples assume that someone’s financial circumstances make a 10 year fixed term the most suitable product. For a myriad of reasons, people will want to pay more off their mortgage, clear it etc during the 10 years. Because of the penalties for doing so.

As was pointed out earlier, if there was a fixed rate which allowed you to make capital repayments and/or redeem the mortgage during the fixed period then it would be ideal. But such products, available in other countries, are not available in Ireland. Instead, we have a nasty type of fixed rate which gives you the benefit of certainty in repayments but gives the bank 10 years guaranteed interest, even if you win the lotto the following week and want to repay them the whole loan.

You’re either missing or refusing to understand the point. I am not talking about this buy and sell every three years ladder mania rubbish that you seem to attribute to me (and to the Irish psyche). I am referring to the main problem with Irish fixed rates, which is that if you get a 10 year fixed rate, you cannot make any payments off your outstanding mortgage during that time in order to reduce your repayment. Suppose in 3 years time you get a much better job with a raise and all the rest of it and you want to put an extra 500 p.m. against your mortgage. In a variable rate mortgage this will reduce the interest you owe, but in a fixed rate you will still have to pay the same amount of interest that you would have anyway.