House Prices and Politics

Does anyone know what is going to happen to Northern Ireland’s house prices? I am not going to post any links because there are so many of them. Clearly there has been a colossal rise but are we in a slow down or a crash?

Now in the Republic of Ireland or in Great Britain, a house price crash could easily spell major political problems for the parties of government. Of course the respective governments might be partially to blame in such a scenario but even if they were innocent they might well fear the consequences of a crash.

Here, however, would a putative house price crash (if it did happen) have any effect at all on support for the parties of government? I presume even the most ardent supporter of the SDLP or UUP (or the most deluded supporter of the TUV?) would not suggest that. Clearly in Northern Ireland it is not “The economy stupid.”

  • DC

    If things go really bad to the point of repossessions and people hit the street badly out of pocket, Ms Ritchie can always claim the 3 points in that the money wasn’t there to develop the social housing stock thanks to Mr Finance Minister. These efficiency savings are to be used to stimulate the economy, a gamble in this climate.

    There seems to be a real air of limbo blowing in, both in NI politics and economics. So far it seems good, structurally anyway both political and architectural, with new homes and commercial builds appearing all over town; but something just doesn’t seem right, given all the real-world reports telling us, rather, that it’s the stupid economy failing us.

    My finger points at the elite group of bankers who have turned houses into financial units when they are our homes. And sadly all of us have been at it of course, but the banks freed up the money to grow it widely.

    Will people care in N Ireland, yea I do think so, if a drastic fall in their standard of living is measured matched with a feeling of utter disgust over a palpable rip-off, such disquiet can always be meted out to the local politicians as a result. For the first time ever.

    This hasn’t been the case before in terms of there ever being a prolonged and indeed locally acceptable and accountable governance structure.

  • willis

    I really don’t know if this is all going to end in tears, but the housing stock in inner/mid East Belfast has been improved by the bubble.

  • DC

    Yea but are the same residents / tenants still living in the new from the old?

  • Dread Cthulhu

    DC: “My finger points at the elite group of bankers who have turned houses into financial units when they are our homes. And sadly all of us have been at it of course, but the banks freed up the money to grow it widely. ”

    Comme ci, comme ca.

    Housing crisis this is not… banking crisis is the accurate term — the problem is is that there is a greater liklihood of government intervention on the behalf of the banks if the home owners are high-lighted.

    Short form — like the Stock Markets of the Twenties, no one thought that prices might go down or that cheap money would become less available. Mortgages were sold to other institutions as investments, allowing the banks to loan more money, as, as the mortgages were removed from the banks books, reserves were released to allow new borrowing. Further, mortgages were bundled and securitized — made into a stock-like investment. For a time, investors and sellers were making too much money to wonder if these investments could collapse.

    Not that owners are blameless — as a minimum, they acquiesced to foolish loans, although there are some true victims in the mix — folks who, by dint of kiting the value of the house through straw buyers, overpaid. I suspect, however, most took out over-large adj. rate loans on the belief that, should the rate change became too burdensome, they would simply sell, because the value couldn’t possibly go down.

    Hopefully, there is a way to seperate the true victims from the fools and crooks.

  • Comrade Stalin

    Assuming the economy remains steady, the only losers out of the house price bubble bursting will be the speculators banking on capital gains.

    The trouble happens when people start losing jobs, and losing the ability to service their mortgages. A glut of repossessed houses coming onto the market is what will cause the price to dive, and it’ll be a snowball effect if it happens. The as-yet-unknown effect of the global credit crunch may well lead to job losses, equally the fall in house sales may lead to redundancies in banks and at estate agents.

    Me, I don’t care if there’s a crash, as long as I can service the mortgage. If prices rise or fall it doesn’t effect me; I have a mortgage as an economically convenient alternative to paying rent.

  • wallop

    Here we go then, there are major problems ahead for the UK and Irish economies.

    The bubble here in the north has been really interesting in terms of the madness of crowds and something about the parocialism of the place, people have mortgaged themselves to the throat.

    Thankfully I think NI politicians have no real power to stop the house price crash here, and no one in London or Dublin gives a shit about here (old story).

    NI will hang on until everybody else is on the slide then slide further than anywhere else, likeit diid on the way up, thats my prediction anyhow.

  • Lafcadio

    nobody can reasonably claim to know what will happen to prices of any asset class with certainty – but it certainly seems like house prices won’t be going north in a hurry anywhere in the UK or Ireland in the short-term. On almost any industry benchmark house prices in the UK and Ireland are over-valued and have been for some time – the consensus seems to be that we’re in for a period of flat prices in the UK rather than a crash in the UK, but who knows..

    In City AM (a free financial paper given away in London) I read today an article in the centre pages written by some property investment consultant basically saying to investors that this is the perfect time to jump in!! I’m not that wired into the property markets, but I’d say that is highly questionable advice, as we’re perched at the top of the market now.. but just goes to show how durable this idea that prices won’t go down is..

    in NI I have an appartment, last time I was over speaking to my fin adviser (oct last year) he was telling me anecdotally that he was seeing a lot of properties languishing on the market for ages, and prices coming 10% to 15% off the list price. It wouldn’t surprise me if prices are soft, but again who knows!

    CS – unfortunately a house price crash, if it comes to pass, won’t be as clinical as that, i.e. just burning BTL investors (although anybody who thinks that earning a net negative yield on an investment property is a sound investment thesis deserves all they get) a proper crash is likely to have a profound effect on the wider economy.

  • Lafcadio

    Dread – over here it’s not a housing crisis (yet) but it’s not looking pretty in the states, with some of the investment banks publishing very gloomy outlooks in the last couple of days.

    As for the mortgages, when they’re securitised the securities are more debt-like than stock-like. But yes fundamentally too many parties lost their thinking caps, whether they be borrowers gormlessly borrowing beyond their means banking on a capital increase, lenders losing the run of their risk appraisal to stay in the market, or investors in structured finance products who didn’t understand what exactly they were investing in.

    Not everyone fell down, in fact there were worried noises coming from the financial press for some time before the market turned, and some banks called the turn of the market whether by luck or judgment e.g. Deutsche were net short sub-prime, and Goldmans shorted the market massively just as the worm turned in a fast-becoming-legendary trade which was a large contributor to their record earnings this year (which should see the traders responsible getting vast bonuses this year)

  • The Raven

    This is an interesting topic.

    I had a conversation with an estate agent was a much older hand at the game than the young turks who have been swanning about over the past few years. He basically said that it’s going back to where it was and where it should be: houses taking 8 weeks instead of 8 days to sell. Those with the experience and the nouse of selling during our darker days can hack it. The multitude of new people in the trade and amateur so-called developers can’t.

    He also said “talk up a crash, and a crash will happen”.

    Here’s an interesting experiment, though not very scientific. Go to propertynews, and stick a mix of properties in your favourites folder. I did this about two months ago, with a few across Northern Ireland – and a mix of properties from detached bungalows to apartments. The apartments haven’t moved yet. The detached bungalows all shifted. The so-called townhouses did ok-ish, as did your average semi-d. Derry, North Coast, Ballymoney, Coleraine properties moved quickly, Belfast less so. Mid Ulster seemed slow, and the Portydown/Lurgan properties moved much more quickly. I suppose if you did it today, there could a greater difference in results…who knows.

    I think everyone agrees that outside of gold, property still gives the best, long term return. We’re not on a knife-edge, but I do think the caution that was always so prevalent before, and seemed to have disappeared, is back.

    I do want to say this though, as I have many times before. If anyone out there thinks that big cutbacks in the Civil Service would be a good idea right about now…think again. The private sector is still fledgling here – neither it, nor the housing market is ready to have a few thousand people dumped on it.

  • DC

    “Deutsche were net short sub-prime, and Goldmans shorted the market massively just as the worm turned in a fast-becoming-legendary trade which was a large contributor to their record earnings this year”

    Ah it seems those elite bankers are up to it again then. What a bunch, wish I knew one.

    As I have said before elsewhere, it’s not capitalism per se but the rotten financial services market taking liberties unregulated in many instances, too many.

    Jesus should return but he should submerge himself in that special elite group sticking some ethics on them.

  • Dread Cthulhu

    lafcadio: ” over here it’s not a housing crisis (yet) but it’s not looking pretty in the states, with some of the investment banks publishing very gloomy outlooks in the last couple of days. ”

    The problem in the states is, generally speaking, a banking crisis, not a housing crisis. There is no shortage of housing and housing prices are going down. The problem is that the banks have pushed a lot of bad paper on some bad assumptions.

    The Raven: “He also said “talk up a crash, and a crash will happen”. ”

    Economies rest, on some level, on the state of mind and confidence of the consumer. Scare the bejeebers out of the consumers so that they stop spending and the whole machine starts to creak to a halt.

  • Today I heard a figure quoted that only 10 percent of the UK is buit upon. What would the figures for NI alone be, anything comparable?

  • lafcadio

    Dread – “The problem in the states is, generally speaking, a banking crisis, not a housing crisis. There is no shortage of housing and housing prices are going down.”

    in fact the problem is that in the states you have both! a credit crunch which looks like it has some way to go, and what looks like a prolonged downturn in the housing market (although I’m not that keen on overusing the term crisis..) As you say, there is a large overhang of unsold properties, i.e. oversupply which will continue to press prices down – the futures markets suggest by up to a further 20% – which will begin to affect borrowers other than the subprime borrowers suffering at the minute..

    Mortgage lenders are under pressure, Countrywide in particular can’t shake off rumours of bankruptcy and is being caned at the minute. and while banks have already written off billions of dollars of subprime exposure, everyone knows there is more to come – Citi and Merrill report next week on their Q4 earnings and whopping further writedowns are widely expected..

    So there’s more pain to come for the banks – more writedowns, more layoffs and in a slower economy (or recession) lower earnings likely for the forseeable future. None of the big banks look like they’ll fall over however.

  • Jamie Gargoyle

    I was amazed the turnaround in the market has been so quick – early last year the house three doors down from my folks (south Belfast) was bought by a family acquaintance who, having lost about six bidding wars in the previous few months, had a bid of 30K above the asking price accepted – quite a pricey way of getting onto the property ladder. In October last year the (very similar) house across the road was taken off the market following a bid for the asking price, but the buyers told the sellers a few weeks later that they were dropping their offer £20K on the advice of their solicitor, given the fall back in prices of property in the area. Unsurprisingly this annoyed the sellers, so they put it back on the market – the for sale sign is still there, and this in a street where houses were regularly selling before the For Sale sign had gone up this time last year.

    I suspect HIPs will be dropped if they are shown to be having a detrimental effect on the market, and as soon as Gordon decides who will carry both the cans for a balls-up and a climb-down…

  • Paul

    Has anyway taken a more strategic look at what the next 10-20 years may bring? Let’s say prices stay reasonably static over the next few years, what is to become of the next generation, those under 21 currently who would find purchasing a property an insurmountable obstacle. Will the majority of people be renting in say 10 years?

  • DK

    DC: “Ah it seems those elite bankers are up to it again then. What a bunch, wish I knew one.

    As I have said before elsewhere, it’s not capitalism per se but the rotten financial services market taking liberties unregulated in many instances, too many.”

    Don’t forget that Goldman’s gain was citibanks lost. Works both ways

  • Nestor Makhno

    Property News have a very informative graph showing the totally unsustainable growth in house prices in Northern Ireland. If anything ever screamed “tipping point!” then it is this.

    Personally, looking at it, I think this would be an insane time to buy a house here. It looks like we’re in for a market correction of some a scale.

  • Rory

    “…a house price crash could easily spell major political problems for the parties of government.”

    True enough, Turgon. On the other hand it might help create a lot of bust estate agents qnd the happy spectacle of that alone should be enough to put a smile on people’s faces.

  • Rory

    “a house price crash could easily spell major political problems for the parties of government.”

    Very likely, Turgon but it also might have the beneficial consequence of creating misery for estate agents. And that would cheer the rest of us up no end.

  • Crataegus

    I have been away most of last year, reason for absence, basically involving myself in investment in the rising economies and getting out of here and out of sterling. So I am feeling very smug.

    My guess is that you will see a 15% down turn in house prices this year, but you need to set this against the ridiculous rises of last year. Prices will remain sluggish through 2009.

    As pointed out by Raven much also depends on property type and location.

    The big problem with the current market is that many first time buyers simply cannot raise the money to buy a home. £180,000 or there abouts in many areas is beyond many people. This then has a knock on effect as those wishing to move can’t sell.

    Currently many sellers are holding to prices that belong to the market of last summer as the reality of the position has as yet to sink in. However if they are purchasing another house then if it is 15% less and their own house sells for 15% less they are better off as it reduces stamp duty etc.

    It is important to remember that there is a housing shortage in Northern Ireland and a rising population. In some areas there is an acute deficit of housing. I would not expect a dramatic crash unless there is an economic crisis of a global nature, which is a possibility. (in which case we are all in trouble).

    If you are thinking of buying I would suggest remaining liquid and wait to the summer or perhaps Autumn to get a better feel for the underlying trend. You will see an increasing number of repos as the year progresses especially property owned by would be investors who have little experience. Property is a good investment but if the figures don’t add up walk, don’t ever assume profit from a rising market.

    One other point, another reason for my departure from this place is the Planning Service. This department is costing the local economy billions, it is slow, it is inconsistent and in my opinion serves little purpose in its current form. Planning Policy helped create the steep rise in prices by over restricting availability of development opportunities. It will also be the main reason for many good people becoming insolvent.

    I was talking to a colleague involved in a scheme where the the land cost was about £2,000,000 That application has been with the said department for 18 months (I think). A revised, revised, revised scheme that was basically agree is now being recommended for refusal. How much is the interest on £2,000,000 for 18 month? This is just one application, and it is happening over and over. It delays employment, delays investment and costs increased interest liability. NI PLC really cannot afford it. At the very least we need a Planning Appeals procedure that is prompt.

  • Aaron M

    In years to come, the housing boom of the last decade will be seen as nothing but a temporarily blip of insanity. 5-10 years is but a blink of an eye in macroeconomics. Those who are currently in denial will look back and wonder how they ever thought house prices could stay so high. The upcoming 50% fall in NI prices will look unsurprising in hindsight.

    The sad fact is that people should look at their flatscreen TVs, their holidays, and so on and ask themselves a simple question: “Have I paid for this?”. The answer is probably not. Borrowed money is borrowed money and needs to be repaid eventually. ‘Equity release’ is just a fancy name for ‘borrowing’. The reality is that most people have simply not done a hard day’s work for some time – they have just been borrowing. We should not be scared of the idea of paying for what you’ve bought – we can’t avoid it and it’d be selfish to try.

    To justify the price increases, we are told there is a great desire to own property in Ireland. This is irrelevant. I can’t believe that after centuries of sensible prices, that the Irish people would suddenly desire they want to own homes and thereby double house prices in a few years. Did we never want to own homes before? And here’s the kicker – even if everybody owned their homes it’d propably push prices down, not up! Consider cars – a higher proportion of cars are owned than are houses, yet car prices are in a speculative bubble. Renting is supposed to cost a little more than owning, this is simply because the ability to move around is actually the commodity that people pay for. In a normal market, owning is simply the ‘second-rate’ product – it may be cheaper but it’s very restrictive unless it suits your lifestyle at that point in your life.

    A few facts:

    This is not a (Northern) Irish property bubble. It’s a global bubble, and it’s not just residential property. There are no local effects. The same reasons that caused the bubble around the world were in effect here, and the crash will be mirrored around the world too.

    There is literally nothing that can be done to stop the crash.

    EVERY so called justification for the price rises doesn’t stand up. For example, the South have been building property faster than the immigrants have come in. And believe me, every other excuse has been heard and demolished. And don’t talk to me about the ‘good economy’ – wages haven’t tripled so why should house prices triple?

    The cause of the bubble was quite simple. The first part, the insanity of crowds, is easy to understand. What kept it going was the banks were happy to lend money. They too were fooled into thinking that the collateral would only go up in price, therefore they kept lending. Another factor was how the ownership speculation led to wasting of property (young people owning one house instead of renting part of a house; and also buy-to-keep-empty-and-speculate). This led to an artificial constriction on supply, which then was misinterpreted as an increase in demand. We will now see a prompt return to normal efficient use of property. Young people will share houses instead of buy, this will keep rents and prices down as there are fewer houses needed. Owners of empty properties will be compelled to let them, and prices will fall further.

    The lesson is that the value of houses never really changed. We simply saw a temporary blip in prices caused by a mixture of herd mentality and loose credit.

    The financial markets are simply returning to normality, but it’s not easy to get there. What we are going to see is a nasty but well deserved hangover, not a nasty illness.

  • Crataegus

    Aaron

    I share your concerns on using borrowed money to purchase consumer products. However a portion of borrowing against property has also (as always) been to finance investment in business. A tightening up will hit this sector and that could have grave consequences.

    To try to judge the amount of adjustment necessary it is perhaps worth outlining some of the reasons for the sharp rise in the first place.

    1 Ridiculously lending by financial institutions which allowed silly multiples of personal income to be borrowed.

    2 A lack of confidence in pension companies that has caused many to consider property as a safer option of investing for their old age.

    3 A lack of opportunity and diversity in investment opportunity in the Western economies. There is a severe limit on the range of small industries that are viable here compared to say India or China. This again has resulted in over investment in property.

    4 Utterly incoherent planning policy which has created a shortage of available development land and little sign of any overall future direction.

    5 Smaller house holds and more single occupiers.

    6 Affordability, historically low interest rates over a sustained period.

    7 Building year on year about 5000 houses less than estimated need (note not demand estimated NEED) and this was before East European migration.

    8 Lack of social housing. There are major shortages in this sector, and many families in emergency housing.

    9 Southern Money looking for investment opportunity in the North.

    So what has changed;

    1 Lending policy has tightened and as with all cycles will do so for about 18 months as banks batten down the hatches to reduce their own exposure. However Banks are in the business of lending and can only be extremely prudent for a relatively short period. As with previous dips they will ease lending criteria once they have a clearer view of global markets. It may not reach the ridiculous as recently seen but it will ease.

    2 Lack of confidence in pension funds and financial institutions will rightly remain.

    3 Lack of investment opportunity of Mr average will remain.

    4 Planning issues are worsening not improving. It is so bad that there really should be a complete overall of the running of these departments and the removal of senior Civil Servants responsible and now any local Minister involved who fails to grasp the nettle.

    5 Social trend that shows no sign of abating.

    6. We are entering a period of less stability but will interest rates hit 14% in the next few years? I doubt it for if they do we risk a global depression.

    7 I can see no major upturn in year on year unit construction. The approvals are not there and there isn’t the skilled work force. A sharp increase would cause us to suck in migrant labour who would YES have to live somewhere. Also related to this are many of the inefficiencies in the system and regulatory structures, these are a major overhead, and add to the final cost. (Really Really needs streamlining if unit costs are to reduce.)

    8 There is no real political interest in social housing.

    9 Relative falls in Sterling make the North more attractive for Southern Investors.

    Many of the underlying causes of the sharp rise are still there. It would be wrong to think that all investors or holiday home owners are doing so on borrowed money much of it is real money and these people are not going to be panicked into selling. Often the importance of investors is over stated.

    In my opinion the key to the problem is first time buyers. Once basic houses fall back from say £180,000 to about £130,000 – £150,000 you will see an upturn in activity, but prices will remain in the doldrums for a few years and will fall in real terms. You may also see a very patchy housing market due to local variations in price. Places like South Antrim are a lot more affordable than North Down.

    15% fall this year followed by uneventful markets for a few years then in all probability all hell lets lose again. We never learn.

  • Aaron_M

    Hi Crataegus,

    Points 2 and 3 are irrelevant unfortunately. Prices are driven by demand. However, demand is not about the desire to own. Demand equals consumption, whether renting or ownership; This is a pretty fundamental rule of markets. Basically, renting is no different than buying when it comes to its affect on prices.

    The fact that rents have not increased by very much over the last few years is proof that there is no reason for high prices.

    If every renter bought the house they were living in, it would have no (sustainable) affect on house prices.

    Prices can never stay much above rents for long. The only reason to own a home is to rent it out or to avoid having to pay rent yourself (by living in it). And just like any other asset throughout history, if the return is low (high prices while rent/return is low) then the price will fall as much as it takes. The return on property is very low nowadays. Since year dot, the only real value on any asset is its usefulness or the rent that can be got from it; capital gains are always pretty much irrelevant (apart from perhaps capital gains equal to everyday inflation). Given that rents have not risen, why should a small little corner of the world (NI) during the short little bit of history (2000ish to 2007) suddenly break all the rules and jump from three-times-income to eight-times-income?

    If house prices fall only 1% a month from now on, then the price is falling faster than any mortgage payments or rent payments. This means that the best option for me is to continue renting. Effectively, every 1000 pounds or euros I spend on rent is saving me 2000 on owning a house.

    In effect, the wisest investment option for me is to continue renting. It is the cheapest and most reliable way for me to gaurantee owning a home in 2033 (today + 25 years). This is not just canny financial sense on my part, is simply the market at work. Everybody else will act the same as me and prices will return to sensible prices – it’s not difficult to do the sums and see that the price/earnings multiples of the year 2000 were approximately the last time it made sense to own.

    You can’t say the the fall will drop after 15% and then prices will go up again. Ask yourself what you would do in early 2009 is prices had been falling by 1% or 2% for each of the last twelve months. Obviously is would still be cheaper to rent and save up a deposit for the distant future (2012 maybe). Then ask yourself about 20%, 25% and so on. In fact, even if prices do pause for a month in 2009 potential buyers will see that it’s still much better for them to rent and save. If you do the sums compared to rents you’ll see that a 50% drop at least is required before owning makes even a little sense.

    Rule number one of bubbles is that bubbles do not remember how big they had got. If the bubble causes prices to triple, then prices will fall all the way back again.

    Northern Ireland is no different from the rest of the world. There are countless excuses brought up to explain that ‘this location is different’. NI is no different. Rental returns are even more pathetic in NI than anywhere else that I am aware of.

    Falling sterling is actually going to deter foreign investors even more. They will see potential investments losing 4% a month, not just 2% a month, and will stay away in droves.

  • wallop

    Crataegus, Aaron,

    Interesting stuff and thanks because like everyone else I’m trying to wrap my head around what has happened here in terms of housing.

    Ultimately I’m a youngish professional with fairly good prospects in a field that in ordinary circumstances would have equipped me to make a good go of life, business and all that jazz here in NI.

    However I didn’t buy a house pre 2004 because I didn’t want to be tied to a mortgage and have silly views on landlordism which mean I couldn’t “just rent it out”.

    Long and short is I now find myself ready to buy in the next year or twoish.

    However, despite a good income and savings I just will not buy a house here. I reckon I could buy a house in Omagh at 20% less than it’s price last May, but I’m not going to. The dog on the street knows this and yet house prices aren’t being advertised lower yet.

    In the meantime I have a huge choice of rental accomodation and just negotiated a 20% discount on renting a really nice newish 3 bed rental property. It costs £80 per week, ridiculous in that I once paid £500pcm for a room in a shared house in London.

    This place was advertised for sale at £205k, 8 times my salary.

    Out here in Omagh there are many good houses. Three of the 4 houses opposite me are rented out to young unmarried mothers and one DLA. They are a quiet and friendly lot and I like the fact they are home all day keeping an eye on my bike.

    But I’m not going to lie for a mortgage to have the same home as those guys with the added problem of having to work for a living.

    Anyhow, sorryfor a bit of a rant but the housing thing is nuts/depressing/outrageous.

    Sir Reg was saying he wanted graduates to return home to our new cheaper housing market or something like that at christmas. Sorry Reg, love the place but I’m thinking of Oz or NZ if they’ll take me.

  • Cratgaegus

    Wallop

    I spent most of last year out East. I would recommend for anyone to leave here if they can. OZ and NZ are terrific places. There are so many reasons for leaving, the least of which is housing. Why live in a place where attitudes are so mean and begrudging, where everything has the potential to be made into a political football. Life is too short GO and let this place fester.

  • joeCanuck

    I left and I’ve never regretted it.
    So cheap to visit too.