January is traditionally the tumbleweed month in the property market so it’s certainly an odd time of year to be musing on property. It’s not something I do much of and it’s certainly not my area of expertise. And of course Irish people have talked enough property over the last decade to do for a generation and are so hung-over from the bust that the thought of another “launch” or “opportunity” would probably turn them green.
Anyway, what’s the point? The banks aren’t lending, people can’t sell and prices still seem to be falling. The once hallowed Irish Times property section is rarely even a supplement anymore, its been reduced to little more than a sad page or two at the back of the paper. All neighbourhoods have houses that have been for sale for years – and we snoop online every now and then and hope that they don’t slash prices any further, as it gives us that queasy feeling about the value of our own homes.
So what am I doing writing about it then? Well, a few interesting things have happened recently. Our government has finally realised that there is not going to be any money in stamp duty for a long, long time so they’ve decided to slash it and slowly bleed us dry with a property tax instead. Then there were three new year’s reports that said property prices had fallen by another 14% (ish) in 2010 – so you can now buy a house for 2002 money. Well, if you have the money, that is.
With the stamp duty cut, there was lots of chatter about how it *might* apply a jolt of life to property market, and it just might. It means that people with deposits could theoretically use them as actual deposits instead of having to save up two of them to cover the stamp duty as well. So good news for home buyers in all price brackets right? Well yeah, but what about home owners who’ve already paid 9% stamp duty?
As a bit of a cynic, I’d also like to point out that if you buy a home and own it for say 40 years, and the government charges an annual property tax of 1%, you’ll fork over at least 40% of the price you paid for the house in taxes (depending on how the tax is calculated, and you can bet it won’t be favourable to the homeowner). So good news for getting a home, bad news for home-owners in the long term, good news for the government. See, no kindness there.
Next there’s falling house prices. 14% is extraordinary hammering for any market to take. It’s luxury car type depreciation and none of the guys at Daft, MyHome and Sherry Fitz who produced the new year’s grimmest news expect prices to stop falling. And that’s coming from estate agents!
Prices may not fall that much further though. I know there’s no confidence in the market, there’s no credit out there and the banks are broken and owned by the State. But there is one thing to hang a little hope on…
Last July, the Economist magazine published a report that said that Irish homes were about 16% overvalued at the start of 2010. They base their analysis on what they call “fair value” which is a comparison between what it will cost you pay down the loan and what you’ll get back in rent. Face-washing basically.
So if we’ve lost another 14% then surely we’re reaching “fair value” now? Of course, property could continue to fall and become undervalued which given the fact that you can’t borrow a cent, taxes are up and jobs are scarce is certainly likely. We’ve also got the problem of oversupply. But there’s something in the Irish psyche that is attracted to bricks and mortar as an investment and there is still an awful lot of money in Irish bank accounts.
The question then is: can you really cover of a loan with rent on a standard house in a desirable neighbourhood? For the sake of simplicity, we’ll go with a couple of semi-detached homes in neighbourhoods that are well serviced by public transport, schools and amenities. According to estate agents, these seem to be the only homes that are selling at the moment.
In Blackrock, Co Dublin, Allen and Jacobs Estate Agents are selling a 4-bed semi in the Coppinger Glade estate. At the risk of sounding like an estate agent myself, it’s a nice recently built home in a cul-de-sac overlooking a green and is close to public transport, shopping and schools. Thanks to the magic of The Irish Property Watch website at www.irishpropertywatch.com we can see that the house has been for sale since June 2009 when it hit the market at a €650,000.18 months and several price cuts later, the house is now for sale at €419,950. A drop of 35%.
In the same estate, there’s a similar 4-bed semi for rent. It’s the same design but a little smaller, as the one for sale has a kitchen extension. The house comes furnished or unfurnished and is in good condition. The owner is looking for €1,750 per month rent. Which I’m sure he’ll get.
For the sake of this wheeze, let’s imagine you have the 10% deposit, 1% stamp duty and could get a loan to finance the house for sale. So, asking price is €419,950. We borrow 90% which is €377,955 on a standard variable rate of 3.5% over 30 years. The payment without any breaks or reliefs comes to just under €1,700 per month.
I know that landlords would say that there’s vacant months, upkeep and taxes to consider, but for the purpose of this exercise, it looks like “fair value” has been reached in this sought after South Dublin neighbourhood.
How about another one. In Clonskeagh which is also a well serviced neighbourhood in South Dublin, Lynam Estate Agents are selling a 3-bed semi in Roebuck Downs for €465,000. Roebuck Downs is also a nice estate with open areas and parkland. The house has been for sale for about six months and so far, there have been no price cuts. In the same estate there’s a similar 3-bed semi for rent at €1,800. It’s unfurnished and in very good condition.
Using the same criteria as last time, payments on the house for sale would be €1,880 so rent of €1,800 would leave a small shortfall, but again, we’re very close to “fair value” and I’d bet that for a buyer with the cash, that sale price is very negotiable.
Another way of deciding whether property is worth investing in is to look at the rent as the yield on an investment rather than the recent Irish method of looking at the appreciation in the property’s value. Suppose you buy one of these houses for cash. The rent you get is then the yield on your investment. With both of the Dublin houses above we’re looking at a yield of about 5%. That’s the best I’ve seen in a very long time, but with the specter of further drops in value haunting the property market, it’s probably not high enough to attract cash investors yet.
There are plenty more examples of “fair value” in Ireland now but for house prices to stop falling a number of vitally important things to happen. Firstly, cash investors need to come back into the market and with yields at about 5%, there’s probably still a good way to go before investors return. Next, credit needs to become available. It’s been very well documented over the last year that the banks are simply not lending. I noted here last June that lending had fallen by 85% from the top of the market. Third, nobody knows what’s going to happen when the moratoriums come to an end. There are tens of thousands of householders that are seriously behind in their payments and if these houses are repossessed and sold openly for whatever the market will bear, we may finally see what true Irish market value actually is.