Property bubble finally bursting or the hoped for soft landing?

Indicators seem to show the Irish Republic’s booming property market finally seems to be running out of steam, no doubt helped by the fact that first-time buyers are most certainly feeling the pinch of six interest rate hikes between December 2005 and December 2006. You certainly know something is up when Dublin developers offer free mortgages for six months to first-time buyers.
While Twinlite Developments is offering its mortgage deal to attract customers, Gannon Homes is offering free kitchen appliances, timber floors, carpets and landscaped gardens at its Clongriffen scheme.

The slowdown is also clearly in evidence with data from the Irish Banking Federation (IBF) showing the value of mortgages switched between lenders rose to a record high in the final quarter of 2006, accounting for 16% of the market as the rate rises began to bite. There was also a 620 million euro fall in the value of new mortgage business. New lending in the final quarter of 2006 remained stagnant at 10.3 billion.

Not surprisingly, the main cause of the slowdown is the lack of affordable housing for first-time buyers. There were less than 9,000 in the final quarter of last year compared to over 11,000 in the same period of 2005.

With the first-time buyers at breaking point the banks are turning to those older homeowners sitting on equity. AIB, National Irish Bank (NIB) and Halifax have all cut the interest they charge on mortgages worth less than 80 per cent of the value of the property.

Admittedly it has to be taken with a pinch of salt but it’s worth mentioning that Daft.ie has reported a substantial (thanks to Finfacts) fall in asking prices for Irish houses in the last 3 quarters of 2006.

Overall growth in asking prices last year was just 3.8%.

Although substantially lower than other market indicators, the Daft Report identifies trends far faster than other sources as calculations are based on asking prices as opposed to closing prices. Since it takes three to four months from when a property is first advertised to when a sale is finally closed, the trends in the Daft Report are up to four months ahead.

Finfacts point out that there has been a substantial fall-off in second-hand property advertising in the traditional media, since late September 2006. Compared with an average of 45 full pages carrying multiple advertisements in the Irish Times Property Supplement, up to September end, the numbers in the four weekly issues in 2007 were 1, 2, 5 and 5.

Meanwhile, the number of houses advertised on Daft has quadrupled; up to over 55,000 in the last quarter of 2006 compared with 12,000 the previous year.

There are also major regional variations:

Sligo +18% in the last six months of 2006
Swords + 13.5%
Tralee + 11%
Dublin City 0% since July last year
have not grown since July 2006.
Clondalkin and Mulhuddart + 7%
Clonee – 9.4%
Maynooth – 8.8%

The last two figures would point to what most people think, that it will be those who have bought houses in the extended Dublin commuter belt who will suffer most.

Damien Kiberd, Economic Commentator, said:

“With the capital gearing up for significant high rise development the appetite for some suburban locations may be on the wane. Very significant competition among developers, particularly in North and West County Dublin where new suburbs are under construction tilted the market balance in favour of buyers, with developers forced to offer “extras” such as top class kitchens, designer planned gardens and “neighbourhood/lifestyle concepts” in order to achieve sales”

Brian Fallon, Director Daft.ie, said,

“With the now clichéd ‘soft landing’ being the consensus amongst economic commentators, the real news from 2006 is the transition from a sellers to a buyers market. First-time-buyers can breathe a sigh of relief as the double-digit house price inflation of the last 10 years is finally over and with it the pressure to get on the ‘ladder’ before it’s too late.

Supply is now at an all time high. There were over 55,000 properties for sale listed on Daft in the last quarter of 2006 compared with 12,000 the previous year. This vast choice means that buyers can afford to be choosy and also take their time finding the right place without the fear of prices shooting up.”

He would say that.

  • You certainly know something is up when Dublin developers offer free mortgages for six months to first-time buyers.

    Or in plain English, when developers offer to play pass the parcel with a couple of kilos of Semtex with any fool willing to play the game.

  • Crataegus

    Much now depends on the attitude of Banks. In my experience what usually causes either sharp recessions or crash landings are Banks tightening their lending policies and calling in unsecured loans.

  • eranu

    investors in the south totally ruined the market for people who just want to buy a home. now they’re ruining it up north too… im hoping for a big crash sooner rather than later. then i might be able to afford something. i think there is a problem with the housing market when a single person on a fairly good wage still cant afford a modest terrace house in a city. hopefully things will drop that far, but there is just so much money about that its not going to totally crash.
    the higher end is definately in trouble though. ive heard that 70% of houses dont sell at auction.

    in my street a terrace house has been on sale for the last 3 or 4 months. its 4 bedroom and has a small back yard and a tiny front yard (about 5 ft wide) guess how much? 450k? 550k? surely not 1mil ? na! its only 1.75mil !

  • Crataegus

    eranu

    I also hope there is a crash and I am a developer! What you have are idiots buying houses who are relying on capital growth to make profit. If the rent doesn’t cover the mortgage then they shouldn’t buy.

    It is driven by pure greed on one side and desperation on the other. In the North the growing house shortage doesn’t help.

    At the minute property is seen as easy money and you need real pain to correct that mentality.

    To me the lower the cost of sites with a resultant lower sale price suits. Less risk for everyone. Right now there is very little I would invest in in Ireland North or South, better propositions elsewhere and I would suggest others do the same. You don’t buy into a market that is peaking unless you see an unusual opportunity.

  • GrassyNoel

    I would absolutely love to see the property bubble burst, and see the oh-so-f*cking-smug smiles wiped off the faces of half the population down here who walk around thinking they’re some kind of Gordon Gekko because Mammy and Daddy raided the piggybank to help their little Marys and Johnnys to build up portfolios and equity mountains.

    In fact, I have to concede that it would probably be fair to say I’m somewhat bitter about it.

  • Greenflag

    Crataegus,

    ‘You don’t buy into a market that is peaking unless you see an unusual opportunity.’

    And there aren’t too many of them about in the Dublin area although with prices softening this may change in a year or two . There’s no question that the property bubble is bursting although I don’t expect a total crash and a return to 2000 house prices . The

    Grassy Noel ,

    First law in property : Your home is not an investment -it’s your home . Anyone who forgets this and takes too much ‘equity’ out of their home to spend on non productive ‘toys’ runs the risk of losing it all if there is a major downturn /crash or the economy takes a dive .

    Second Law : A second or third property is an investment and like any other investment has to be looked at from the investment return on the capital invested . Timing is everything in property investment and while appreciation is not guaranteed it’s usually one of the attractions of this kind of investment .

  • Crataegus

    Greenflag

    Just to add that property is a long term investment and the big downside in property investment is, unlike shares, you cannot off load quick. When the market goes sour you are stuck with a whacking great liability.

    Property investment isn’t as easy as some think and it certainly isn’t entirely safe. It goes through cycles of good and dreadful. Every downturn there is the ritual culling of the stupid, in a recession even the clever go down.

  • David

    “I would absolutely love to see the property bubble burst, and see the oh-so-f*cking-smug smiles wiped off the faces of half the population down here who walk around thinking they’re some kind of Gordon Gekko because Mammy and Daddy raided the piggybank to help their little Marys and Johnnys to build up portfolios and equity mountains.”

    Unfortunately they are the kind of people that can afford a crash. The average mortgaged to the heavens home owner or recent first time buyer will be the one to suffer most in a crash.

  • Crataegus

    David

    Unfortunately they are the kind of people that can afford a crash.

    No many can’t.

    If you have bought the house to live in the value may drop for a few years but you will be living there for a while and these things even out.

    Many of the STUPID investors have mortgaged to the hilt and are running on interest only repayments. Their rents don’t even cover the interest and they are relying on capital growth to make a gain. These are the one’s that will go under and we all need rid of them. They deserve all that’s coming.

  • DK

    This is exactly what happened in England. The price rises were fastest in the capital, then they stalled there and the rises gradually spread outwards to the regions.

  • Droch_Bhuachaill

    I’m another of those who would like to see this much-hyped bubble burst. I’m not an economist and probably don’t understand the affects of this, but down here in the sticks the property boom meant one thing; rich outsiders building huge houses wherever they please while the native mugs like myself can’t get planning permission to even pitch a tent

  • Greenflag

    Crataegus,

    ‘Just to add that property is a long term investment and the big downside in property investment is, unlike shares, you cannot off load quick. When the market goes sour you are stuck with a whacking great liability.’

    True if you wait until the market goes sour -then it’s a question of whether you can hang on till the upturn . This will depend on your liquid cash reserves and whether you bought in at the bottom and had a large enough deposit to keep the required amount of rent/mortgage payments in line with market affordability .

    Banks and building societies in recent years have been making it easier for people to buy into the property boom with smaller downpayments /second mortgages etc . But try going to a bank and asking them for a 200,000 euro/sterling loan and tell them that you don’t believe in property investment but would instead like to invest in the stock market :). As you exit emptyhanded it should give you pause to contemplate the many mysteries of the financial world .

  • Crataegus

    Greenflag

    The point you make about banks lending preferences is very important with regards to the overall economy. I ended up in property because I eventually realised that I was banging my head against a wall when trying to finance other types of business. However go in and say you want to buy to let or develop and it becomes how much do you need!!

    I suppose it was to my long term benefit as there is no point in trying to manufacture in our high wage economy. In fact I now also have an interest in importing goods from the East to Europe. Easy money and can’t last but don’t make the rules.

  • joeCanuck

    Been there, saw that, in Canada mid to late 80’s.
    There won’t be any soft landing.
    Happy days ahead for personal bankruptcy lawyers.

  • Crataegus

    Crataegus,

    ‘I suppose it was to my long term benefit as there is no point in trying to manufacture in our high wage economy. ‘

    I would not say no point -just that in most cases it’s capital prohibitive .In ‘manufacturing’ you need state of the art capital plant and technology -necessarily expensive- which can deliver the productivity to compete with lower labour cost countries.

    Banks will always have the capital to lend as regards property . They can’t lose .You buy a property for say 200,000 – borrow 180,000 from the bank . Property prices decline by 30% . You now own a property valued at 140,000 . Guess how much you owe the bank ?

    I see interest rates as remaining relatively low for the next decade maybe 15 years . By that time the money making machines that are China and India etc will have ramped up their economies so much that they will have little capital left over to ‘invest ‘ in the West and thus keep the US dollar afloat?. At which point the supply of capital in the west will dry up thus raising interest rates . So if you’re out there in mortgage land pay off that house asap .

    Admittedly it’s a long range forecast and anything can happen but thats how I see it.
    The Republic is a special case re it’s property market . There will be a bubble burst but most people will not be affected . Population growth /job growth and the need for major infrastructural development in the National Development Plan will keep the construction sector busy for the next decade . Thereafter when the dust settles new challenges will be presented . By then labour costs in much of the now fast developing East will have caught up with the West. The Chinese will have revalued their currency which at present is very much undervalued (30% IMO) .Barring a major economic or environmental catastrophe the economic outlook for most of the world’s people will be positive IMO.

    Anyway good luck in your endeavours .

  • Crataegus

    I didn’t post 15 above in case everyone suddenly things old Crat has started posting replies to himself.