There is an ongoing debate about the time that property prices are likely to bottom out, there are many different timeframes in circulation, but what do YOU think?
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The government is doing what it can to restart the property market. While I personally think this is mistaken policy, it is the course they have taken – and for good reason, a functioning property market can be a key economic driver, it is also one of the main routes of credit and wealth creation for regular people.
What has been done to make buying attractive?
- Stamp duty is well below historic levels, 1% below €1,000,000 and 2% above that
- Tax Relief at Source has been continued for first time buyers
- Banks have been pressurised politically to drop rates – best example being AIB
- There will be no capital gains for the next 7 years on investment property bought this year (although full details are not out until the Finance Act next week).
Other factors are...
- ECB rates are at historic lows with a strong chance of going lower (granted this is not 'Irish' monetary policy but it feeds into the equation)
- Yields in many arears are in the double digits, this makes the argument for investment a strong one.
- NAMA is not offloading properties rapidly which can help create a misleading floor in prices
- The stock of second hand houses in cities is dropping – this is the most sought after property stock at present.
So who would be crazy enough to buy a house in 2012? Actually, it may not be a bad decision. Next week we will have a 'rent or buy' calculator that lets you calculate the cost and capital balance after ten years (and you can factor in property and rental prices too!). Preliminary results indicate that when you take TRS into consideration that in many cases a buyer will not be disadvantaged financially.
You'll need to wait and test your own scenario to see if it makes sense for you, but if other countries are anything to go by then we are merely in the 'pre-boom' period at present – we just have to hit rock bottom first.
A paper by the Central Bank on 'Scenarios for Irish House Prices' clearly states that prices are likely to fall 56% and may go beyond that, but taking that guide it also means that most of the losses have already occurred.
The chart below takes a look at what happened in other countries.
The area is red is of particular interest, beceause that is the 'below fundamental value' section of the graph. In fact, it has tended to last longer than the boom, so when property prices take a beating they stay down – kind of the reverse of Sylvester Stallone in a Rocky movie. For Ireland that would mean that 'property general' may hit bottom c. 2015.
That is why reaching the bottom is a milestone – you can see from historical precedent that rock bottom is below what is calculated as 'fundamental value' and that you can expect to spend about 6 or 7 years below it. During that time there tends to be a reversion to the fundamental value – and that is why the new 'no capital gains' give away is of such interest.
If you can get 7-8% of a yield and appreciation during that period without tax the argument becomes compelling. Stocks have had a terrible decade – although great cycles within that – bonds have been a rollercoaster ride, again some great profits are being made but many have booked great losses as well. Property is no different, lots of people have lost their shirt, in fact, it is our property situation and associated debts are the driver behind the new
Personal Insolvency Act which we covered last week.Take a property like this one on Collins Avenue between the main thoroughfares of the Malahide Road and the Howth Road on Dublins Northside (Donnycarney). This property needs about €10,000 of work done to get it ship shape – cost c. €160,000, lots of room to extend if you wanted to.
As for the location, you have a school across the street, Parnell Park is there for the sports fans, Artane Castle for shopping is 3 minutes drive away, the Dart is a 5 minute walk – as are the bus corridors on two main roads, Killester shops are a 2 minute drive and there are churches, hospitals (Beaumont) and every other amenity close by.
That same property will get about €1,000 in rent (a big question is where rental prices will go- having stabilised in cities, reductions in rent subsidies may change that), giving a yield of 7.5%.
From a simple cost perspective you'd borrow €135,000 over 25 years and it would give a mortgage (not factoring in TRS if you are a first time buyer) of €790 a month. That's cheaper than renting a similar property in the same location! (oddly, there are no properties to rent in Donnycarney at time of writing this even on the competitions site – I'm using a figure of €1,050 which a local agent told me was the regularly achieved price).
What does it mean? I don't know, what I do know is that the market is being primed to get started, when financing returns (and it will eventually) it will be a key element of returning to health from the current state of pallative care. This week the SCSI released their annual survey, worth a read – and it also points towards credit being a missing vital ingredient.
Of late we can't help but think we are in a bust heading towards another boom/bust having learned nothing from the past, time will tell!
@karldeeter
Irish Mortgage Brokers
