Should I Buy Now?


#1

sherryfitz.ie/ABOUTUS/NewsItem.aspx?id=487

Michael Grehan, Managing Director, Sherry FitzGerald.

Investment in any market is not for the faint hearted. This is perhaps especially true today. Collapsing equity markets, turmoil in the financial markets, global credit crunch are all words that bring fear to any would-be investor of any asset class, be it shares or property. Yet the world will not stagnate as a result of these events, deals will be done, money will be made and lost, of that there is no doubt. Yet the global events will inevitably impact investment decisions here as abroad and brings perhaps even more concerns for Irish property buyers.

I am asked on a daily basis for advice from potential purchasers and vendors. Is now a good time to buy? Should I sell now or wait until autumn etc?

In the market that pertained for much of the 1990s and into the early years of this decade such questions were easier to address. Now the combination of local and international events mean that perhaps each question requires closer scrutiny with careful consideration of the personal circumstance of the person asking the question. However there is still an over-riding theme to the response. Property is a long term investment and history shows us that quality locations will sustain values better through periods of turbulence than developing locations.

There is no doubt we all got a bit carried away when the market was at its hottest. The current climate confirms that investing in any asset class is not always a one way bet and timing is important. However, surely when we look back at what our parents paid for the houses we grew up in and the comparable values that their houses are now worth, it is clear how capital appreciation has positively affected property over time. Talk to any of our parent’s generation and they can confirm that it was not always plain sailing, whether they bought in the emigration ridden 1950s, or the more optimistic 1960’s, the oil crises of the 1970s or the recessions of the 1980s, there were scary moments in the early years of any mortgage. However history you could say is predictable, in that it does repeat itself, as such I believe it is only a matter of time for the current crisis to pass. Equities will bounce back, property prices will rise and our sons and daughters will lament on how easy we had it when buying houses in the noughties.

That’s all well and good, many will say but just how is the market performing today. In short despite the doom and gloom which seems to surround all markets it must be said that the market, certainly the Dublin second hand market is surprisingly busy. If I had to call it I would say that the market seems to have bottomed out and activity levels are good.

There is also a lot more clarity about the market in the opening months of 2008, compared to the same period in 2007. At that point the question of “will he or won’t he amend stamp duty” was on everyone’s lips. Interest rates were rising with no clear sight as to where it would end. Negative sentiment pertained over much of the market.

Now the fog has cleared and there is a high degree of realism in the market place, particularly among sellers, in short the market is moving. If buying today, you can comfort yourself by the fact that the cost of the property is up to perhaps 20% less than you might have paid two years ago. Stamp duty will cost you less and mortgage interest relief has been increased significantly for first time buyers.

Such incentives significantly aid buyers, however, they are not the only ones affected in a positive way. Sellers also benefit from increased activity in the market. They may not achieve as much as they initially expected for their property however for the majority of sellers this is only a small dent on the significant gains they will have made on the property.

There is no doubt that it is still a buyers market. For the first time in over a decade, buyers have the chance to acquire a property of their choosing rather than a compromise to ensure their footing on the property ladder. However there are some gradual changes to the market place. Since Christmas the proportion of properties achieving in excess of amended asking prices has risen significantly. Furthermore, the stock coming onto the market remains tight. Both of these elements suggest to me that the market is gradually turning. The combination of this and a potential interest rate cut, however modest, bodes well for the year ahead. That is not to say that I anticipate a return to rising prices rather a new maturity where buyers and sellers can agree on a fair value for property which allows a healthy level of transactions.

After 18 months of uncertainty, a new certainty is perhaps emerging. We are, if nothing else, one year closer to the next property boom! I would conclude by saying some of the best decisions are made in face of adversity. I bought my first house in the middle of the currency crisis of 1993, and though I will admit to some sleepless nights in the early days, what a fantastic decision it turned out to be. Some of the wisest purchasers of the past decade signed contracts for properties in September 2001, they may not have received many accolades from friends and colleagues at the time but by February 2002, they were the ones smiling at all the dinner parties.

Date Posted: 2008-06-12T12:00:21.263


#2

I’m tired after a night out and articles like this cheer me up early in the morning, we are now fast approaching the next boom!..yippeee!

Comedians the lot of them.


#3

“We are, if nothing else, one year closer to the next property boom!”

Ha ha, that certainly raised a smile with me!! It is actually hilarious.


#4

“Sellers also benefit from increased activity in the market”

This guy is smoking crack. There is practically no market at the moment, and what market there is is largely vapour.

Mental.


#5

He’s not wrong. What he doesn’t say is that its decades away.


#6

Should i puke now :angry:


#7

I’m tired after reading that “article”.

That’s what matters people, smiling at dinner parties. How much are you worth?


#8

Basically if you buy how, you will be the one with the smug face at the dinner party :wink:
Because house price only ever go up :astonished:


#9

Not sure about about this statement:

If the fog is lifting, why do punters still make comments like this:

Where else, but:

askaboutmoney.com/showthread.php?t=84244


#10

On the same logic, we are also all one year closer to death. Time to celebrate indeed.


#11

This is another article equivalent to the classic line “I’m not a racist but …”, generally used by the middle classes to justify the outrageous argument they’re about to make. Except in this case it’s “investing in any asset class is risky but property property property …”

Of course Michael fails to bother to compare one asset class to the other or mention opportunity cost etc. Looking to the Irish markets at the moment it seems painfully obvious that the equity market is months if not years ahead of the property market in it’s correction. The ISEQ is down 50% from peak yet house prices are down circa 20% depending on who’s puke you read. Which one has the better margin of safety and which is more likely to rise rather than drop off a cliff in the short to medium term?

Well Michael ?


#12

Inasmuch as they’ll lament at the carnage easy money caused in the Irish economy, this is true.


#13

Indeed, paying for a house is the new buying!
:unamused:


#14

What it tells me is that I could sell a house now and only suffer 20-30% haircut, whereas if my pension was in the ISEQ my goose would be cooked. This is because in a highly liquid market and one where short sellers can thrive prices correct much more quickly. It’s also because valuation criteria for equities are completely different to properties.

Secondly, look at the return on property vs ISEQ 1989-now

ISEQ: 1360-5563: 409%
Quality Dublin 3-bed semi: c60,000-c600,000: 1000%

Imagine I had borrowed the money for both investments: I would have been given only 50% leverage on stocks instead of 90% on property. And I would have had the personal use of the property or could have rented it out for a yield at least as good as the ISEQ dividend yield.

When people look at this they will say to themselves that equities are for the birds while your money is safer in property - it will reinforce the asset choice people have made, and their prejudices - for now.

Ultimately, the ISEQ will overshoot on the downside and recover before the housing market but this is years away.

Buying a house before the peak in the current interest cycle can’t make sense because affordability is going to be squeezed further by interest rates and supply/demand imbalance and economic gloom has killed any urgency buyers might feel.

But the comparisons between asset class performance only goes to reinforce the current Irish homeowner’s prejudices.


#15

Who in their right mind asks an EA if they should buy now?


#16

That’s a very good indication of how outrageous prices got in housing in Ireland. Globally over long time equity indexes always out perform property indexes. Companies have to make money to:
pay employees to pay for shelter(through rent or purchase)
pay rent on commercial premises

See here infoproc.blogspot.com/2005/08/eq … state.html
for a comparison of S&P 500 to real estate in US.

The ISEQ isn’t too far from bottoming out IMO. I just can’t see < 4000.

Property has a long long long way to go.


#17

Re: the property v equities argument

Property has naturally outperformed in the last 7 years as its a much easier asset class for an individual to leverage. So its no surprise that through the final phases of the credit bubble its done much better as much broader class of people can borrow against it.

However, over a much longer time period the relative returns havet been much different. Each has had their relative booms and busts (.com bubble, property bubble etc)

The question now is which will do better as we go from a decade of excessive leveraging to a long period of de-leveraging.

Its hard to argue for property in that context, especially as its “earnings yield” is maybe 4.5% at best after all costs, while that of the average equity is more like 8% now

You can leverage an equity investment just as much as property without the hassle of finding a tenant, the stamp costs, the illiquidity etc etc

Assume a 5 year investment horizon. Imagine you had 100k of equity that you wanted to leverage 5 times into a LT investment

A] Buy a property. Borrowing 80% of purchase price, Investing 20% of your own equity and 8% for stamp. Equating to 28% cash investment upfront all-in
OR
B] Buy a 5year call option to buy the Eurostoxx @ 80% of where it is now. This will cost 28% as well

Economically you have the exact same exposure to leverage…if the value of either asset is 50% higher in 5 years you come out with 5.35x your original outlay (ie 150% / 28%)

Cool…

Advantage of the property investment;
1- You dont see the value of the investment every day, you just optimistically assume its going higher!

Advantage of the equity Option;

1- Your maximum loss is the 28%. [If the property falls > 28% and u sell u lose > 28%]
2- Its more liquid, you can sell anytime of the day Mon-Fri
3- You dont have to find a tenant or risk cashflow issues if it becomes hard to rent or int rates suddenly spike.

In any case, I guess my point is that we Irish are more obsessed than Americans say with property and it represents a much bigger % of our wealth. However, you can get the same investment profile with more liquidity / less risk in other asset classes that will most likely do better over the next 5 years.

Obviously this is much differnet to buying equities on “margin”, where you can get a mrgin call at just the worng time and be forced capitulate at the bottom, which has obviously happened to alot of people punting Irish bank shares through spread betting accounts

At least with a long dated option, you will never get a margin call as you have inevsted the maximum loss (28%). Your breakeven is the stock mkt being 8% highr in 5years (same as your peoprty investment assuming the rent actually covered the mortgage)

The reason it costs 28% and not 20% is because u have the protection that if equities collapse u cannot lose more than you invested even though your “effective exposure” is to a much bigger amount.

But at least this 8% extra cost goes towards something useful like limiting your downside etc. The 8% you pay on stamp etc in property is dead money

Anyway, just thought this was an interesting comparison considering that going fwd we all need to begin looking beyond property! :smiley:


#18

your basic sums are wrong … for a start.


#19

ISEQ: 1360-5563: 309% return
Quality Dublin 3-bed semi: c60,000-c600,000: 900% return

Happy now :laughing:


#20

If u compared the ISEQ at the peak (10,000 area) to the price of a 3 bed semi at the peak the returns are more comparable.

Also, to be fair, I think the points being made are;

1] that the ISEQ is adjusting to reality much quicker, the asking price of a 3 bed semi is sticky as sellers are still living in loo-loo land and as such nothing is selling, the price as such is an illusion as very few people will pay that anymore until it corrects, and

2] yes, property has trumped equities in last 10 years in Ireland, but over the course of the next 10 years it is unlikely to for the simple reason that the ISEQ is now much cheaper by almost any measure.

If the property market stabilises recovers, its pretty obvious the Irish banks/ISEQ will do much better and recover quicker. If this mess continues, at least the banks are already priced for armageddon (aall the adj coming since 12mos ago). The price of a 3 bed semi is not, but over 5 years, if this continues, it will get there