Money Times - September 9, 2014

Posted by Jill Kerby on September 09 2014 @ 09:00




It was certainly a déjà vu moment:  the sight of half a dozen 20 something’s last week camping outside a newly finished estate of 60 semi-detached and terraced houses on the outskirts of Swords, Co Dublin for five days in an effort to be the first buyers.

The houses -  two, three and four bedroom properties - will undoubtedly be snapped up for their respective asking prices of €239,950k, €279,950-€289,950 and €399,950 respectively.

This isn’t a bubble, say the (delighted) property experts, it is a sign of recovery off a very low level of sales and prices and the big demand for family homes in the greater Dublin area. 

The rise in sales and prices is also happening in other parts of the country.

Unemployment rolls are finally dropping and the people who have secured the best paying full time jobs are stoking that demand. Others, already in work, who luckily missed the last boom and bust have accumulated jumbo downpayments to impress the cautious mortgage lenders.

A recovery in property prices is a good – and inevitable – event after a financial collapse. Even in our debt burdened economy, there is no stopping the desire of people to pair off, start families and have a home of their own.  When the collapse was as great as ours, it is also inevitable that there will be a construction lag and shortages.

What is worrying is the age of the people exhibiting such desperation to get on the property ladder again; buying a millstone, er, house, at such an early age sharply reduces your employment flexibility and immediately limits your ability to save and invest.

Judging from the media reports, they also seem, in their haste to sign up for hundreds of thousands of euro of debt that they will also be sharing the Miller’s Glen estate not just with other eager young buyers, but with a large number of renters, such has also been the interest in these properties by cash-buyers.

The rents haven’t been revealed yet, but based on current rents in Swords, the three-bed semi-d’s in this estate are unlikely to go for more than €1,350 fully furnished.  

And that is bad news for these buyers.

Professional landlords, regular readers of this column will recall, work out net yields before they buy property.

Before the great era of credit creation (from thin air), landlords would assume a return of capital from the rent charged within a 12-14 year period.  Using this formula in which monthly rent is multiplied by 12 months, then multiplied by a factor of 12 to 14 (the lower the factor the more attractive the location) the prospective investor would come up with a “fair value” price.

I’m told the factor used today has risen to 15 (years) as it takes better account of the generally poor economic conditions – stagnant wages, high unemployment and debt.

So let us do the landlord “fair value” formula for the new owner occupiers in Swords.

The 3-bed purchase price is just under €300,000. For the rent to repay that capital outlay in 15 years, it needs to achieve just under €1,670 or about €20,000 per annum.  (€1,670 x 12 x 15)  The top price of c€400,000 for the four bed detached houses should command a rent of €2,200 or €26,400.

Given that three bedroom houses in Swords are mostly renting for €1,300-€1,400 a month, buying these new houses for €300,000 suggests that the “investor” will experience a shortfall of about €400 a month to recoup their capital within 15 years.

Aside from all the other costs of home ownership (insurance, utilities, security systems, bin and water charges, etc) the other big cost issue for owner-occupiers or landlords is property tax.

Just 0.18% of the market value until 2016, the annual tax on a €300,000 house is currently €540, or €720 for a €400,000 one.  

But with typical property taxes in most major western cities closer to 1%, new buyers in 2014 should expect a much bigger tax outlay over their period of ownership. At 1%, even if the price of these three bed semi’s never rise, a 1% property bill would amount to €3,000. (€4,000 for the four bedroom house.)

Landlords might be willing to overpay for property this year because they will avail of the seven year capital gains tax exemption on house purchases up to December 31, 2014. The gamble is that prices will rise over the next seven years and they’ll recoup their losses.

The danger for owner occupiers (and amateur landlords) is that they seldom get their timing right.

So the question every new buyer in our still struggling property market needs to answer before they sign away their financial independence, is the one credited to John Maynard Keynes during the Great Depression: 

“How long can I remain solvent while the market remains irrational?”


If you have a personal finance question for Jill, please email her at jill@jillkerby.ie or write to her c/o this paper.






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