What to pay?

Hello everyone,
It’s head on the block time! I’m just new here, so please forgive my ignorance. Single, approaching the half century mark and want to buy my first house, being sick of landlords. Not interested in apartment living.

Some time ago I got approval in principle from B of I for a mortgage of about €250,000—reasonably secure state job, a bit saved etc. It wouldn’t have bought a lot back then but things have changed since. I work near Donnybrook and live in Milltown at the moment.

Ideally, I’d like to stay within a short commuting distance of Donnybrook—by bike or public transport. There seem to be plenty of reasonably priced properties in places like Crumlin and Drimnagh and north of the Liffey but I think they’re a bit too far away. Don’t fancy being stuck for hours along the canal or in the city centre. Then again, maybe I’m being too choosy.

My question is this: should I only look at properties at or below €250,000 or should I consider those say around €300,000 or even €350,000 in the hope that the sellers would be open to bargaining? Places like Wedgewood in Sandyford look attractive but they’re asking quite a lot for small ordinary houses, whatever about location.

Will prices fall even further because of Nama?

All genuine advice for a confused first-time buyer would be appreciated.

Asking prices mean nothing. Everything you see out there will be cheaper in a year or two. So you look at Drimnagh and Crumlin now and think ‘250? Im not paying more than 200!’ but then if you wait you will have exactly the same thought in a better area that is much more suitable. Meanwhile Drimnagh/Crumlin will have come down to 130k or so and if you wanted you could live there with much less debt.

Hi tionantach,

If you have a look around this site - which I highly recommend - you’ll see that the overwhelming view of most posters is that property prices will continue to fall for a few more years. In my opinion this conclusion is based on very sound reasoning and a (largely) objective assessment of the relevant evidence.

To get an overview before plunging into this, take a look at this graph which charts Irish second hand house prices from 1979 up to September 2009:



Now, as a layman when I look at that graph, even assuming one might know nothing about economics (which isn’t far from the truth with me!) a whole bunch of things spring to mind:

  1. Just on a simple visual inspection and not even applying any economic or financial knowledge one might have, wouldn’t that graph look most odd if that line didn’t keep heading down before levelling off? To my eye that graph would look weird as hell if the line suddenly turned horizontal. It just kinda defies simple logic.

  2. To try and put some meat on that rather simplistic initial inspection, if that line were indeed to level off sometime soon, what would need to happen to cause that? Essentially we’d need to see a reverse of what has happened since the graph turned down in early 2007. Namely, mortgage lending would need to loosen up again, job growth would need to return, disposable incomes would need to stabilise (no more pay cuts or tax rises), immigration would need to return to outweigh emigration to bolster demand for housing, the oversupply of housing stock in the country would need to be reduced…basically, all the terrible things we’ve seen in the last 3 years would need to turn around. Personally, I think we’re more likely to be struck by a meteorite than any of that stuff happening. Seems to me that corroborates our initial inspection outlined in 1. above that the blue line will keep going south.

  3. There are also couple of rather interesting coincidences if you study the graph. Notice how between 1979 and 1995 the gently upward line broadly reflects house prices rising with inflation before going totally nuts between 1995 and 2007. Now, take a pen and rest it along the pre-1995 line (alternatively, go to the link above and look at the red line in the second graph). This should broadly approximate where house prices *should *have travelled had there been no bubble. Then, follow the actual blue line down until it hits your pen (or, see the black line in that second graph at the link). If you try and guesstimate where that intersection will happen, it is probably some time in 2012 or 2013. I say this is a coincidence because as a rule of thumb (and a lesson from history) housing bubbles tend to take 7 years to unwind. So, from 2006/2007, that would be 2012/2013. To me, it is too much of a coincidence that the evidence of history about asset bubbles unwinding happens to give us the exact same result as working out where we should be based on the long term trend. To me, these two things corroborate each other with spooky precision.

  4. Another coincidence: if you take your pen again and trace how the blue line *should *have gone, it suggests that in 2010 we should see house prices at c. €120,000 - €150,000 (25%+ below where we are today). The coincidence comes when you consider that €120,000 - €150,000 is broadly 3 or 4 times a median salary in the country (which is c. €40k in Dublin and something less outside Dublin). This is another coincidence because 3 or 4 times income was the traditional level for being granted a mortgage. Isn’t it another odd coincidence that long term trend almost perfectly predicts what people’s salaries suggest they can afford to borrow? I certainly think so and don’t know why we wouldn’t be heading to precisely that position again.

  5. Finally, big changes are coming to the property market. It seems we’re going to have a house price database by the end of the year so that we’ll know actual sales prices (which we don’t know at the moment). This could cause a lot of people to sit back and not buy as they wait to see what actual prices (not asking prices) are doing. We also found out this week that Anglo and Nationwide will not be lending anymore, and of course Bank of Scotland Ireland are gone too. So the number of mortgage providers is thinning. Then we also have NAMA which holds a lot of property that will need to be liquidated some time soon. That’s in addition to normal repossessions and firesales that might increase as the mortgage moratorium comes to an end in the coming months. And of course also in coming months is the budget, which might add a property tax and God knows what else. All those things are potentially huge land mines waiting to blow property prices out of the water even more.

Anyway, upshot is I think house prices will fall for another 3 or so years, and that fall will be c. 30% more (for houses…for apartments the fall will be more). At the kind of prices you are looking at, that could be the guts of €100,000. I know this isn’t really the question you asked, but for me in light of the above, the key consideration for you should be whether another few years waiting is worth that much money to you.

All this is just my opinion as a non-economist layman. I could be totally wrong, but logic won’t allow me come to any other conclusion.

Very helpful response and timely analysis of the market, thank you.

Exceptionally clear and well reasoned post. Deserves to be made a stickies called “Why to might want to wait a little longer before buying…”. Or “Mean reversion for beginners”

Larry, excellent post - thank you for taking the time to write it - well done!

Post of the year Larry, it should definitely be made a sticky.


Great post Larry but I think you should have used the guinness index chart instead.

Thank you all so much, especially Larry; you put a great deal of time and effort into that reply. It explains the ins and outs of the market really well. I’ll have to have an in-depth look at it tonight.

I tend to be over cautious by nature and my friends say that the time to buy is when you need a house and not when the prices come down. But, as you say Larry, there are bound to be many factors affecting prices in the coming twelve months. It’s tempting to keep renting for another while. Thanks again.

Another point is interest rates. They will definitely become higher, some people guess 6-8%, when this happens it will reduce the amount the bank can lend since repayments shouldnt be more than a 1/3 of income, thus providing further downward pressure on prices

Amazing what you can get from a ruler and a bit of charting!

If you’re considering taking the plunge, you have to examine the fundamentals of the investment.
Technical analysis or relative analysis, whatever you want to call it, might give you a warm cuddly feeling that you’re doing the right thing but no professional will ever value an asset based on a plot, a ruler and a pen. Use yield, price-to-earnings etc.
The previous trend tells us nothing about future trends - it’s a central tenet of financial markets.

Which was roundly ignored in Ireland during the period 1996 - 2007…

And not forgetting that public sector pay will likely shrink another 20% and that taxes will be higher too, all over the next 3 years.

Exactly and we can see where that got us

+1 on the graph, that must have been some genius who drew it. :smiley:

Fantastic post - definitely one to print and keep.

Yield is a heap of shite in the current environment.

Yield is static at about 8% for commercial because both rents and prices are falling in lock-step. Eh, infacta, prices are being driven by yield - rents are falling, therefore prices are.

To get 8% yields for residential would mean some class of reversion to trend in price, as rents will continue to be stressed by over-supply and limitations on affordability (reduction in SW rents, reduction in after-tax incomes).

P/E is yield by a different name, but also suffers from “now-error” - I can earn x on a residential investment now, therefore I will continue to earn x. Never mind that the growth area in government revenue is in restricting unproductive tax reliefs (think interest on investor mortgages) and in increasing standing taxes on property.

The now-error also takes no account of changes in interest rates or margins.

You are substituting a pen and a ruler for a single point.

Indeed, the granularity of the data is a real problem with yield analysis. A ‘professional analysis’ (for what it’s worth), would probably use multifactor cross-sectional panel methods to figure the dependence on a large number of variables, controlling for the effects of each. You could even incorporate some of the mysticism of the pen and paper method if you wanted, (although I’m quite sure you’d find little or no value in them). However, as with everything in Ireland, the powers that be don’t want us to see the real data, so doing this analysis in any significant way is impossible.

I guess we’ll just have to resort to pen, paper & the stars for guidance so!

The Guinness Pint Index is yer only man…