Posted by Jill Kerby on February 25 2009 @ 23:07
HAS THE PROPERTY WORM TURNED?
There’s a hint of spring in the air, and if the estate agents are to be believed, there is also considerable interest by perspective buyers in the huge inventory of unsold properties that are on the market.
According the Sherry Fitzgerald CEO, Mark Fitzgerald, over 4,000 viewings were recorded by their company on the Valentine’s Day weekend and many first time buyers are simply aching to buy a home, if only they could raise sufficient finance.
I think we should take what Mr Fitzgerald says with a pinch of salt: the bursting of the property bubble and the collapse in prices has hurt his business badly, and any glimmer of hope is going to be blown out of proportion.
But he is right when he says that the property downturn is now entering its third year and that people “can’t put their lives on hold indefinitely”. What those buyers need however, is to go into any house purchase with their eyes wide open, a firm hold on their wallets, and a total understanding that what they are buying is a home, not an investment, an alternative pension or anyone other than a very expensive consumer item that is going to carry a number of on-going costs in addition to the monthly mortgage.
Mr Fitzgerald’s note of optimism last week, was of course, also encouraged by the announcements by the major banks – AIB and Bank of Ireland, Ulster Bank and Halifax of finance packages for first time and trading up buyers.
The two main banks are offering lower, one year fixed rate interest rates of c3.5%APR for loans up to 95% of the purchase price while the Halifax has one year fixed APR rates of 3.17% and 3.14% until July 2010 and July 2011. Ulster Bank has a slightly different deal on offer of a five year fixed rate of 4.1% if the FTB agrees to buy a house listed amongst the inventory of eight of their property development clients; the bank will guarantee up to a 15% mortgage capital reduction if the house has fallen in value by up to 15% at the end of the five years (as determined by an independent valuer.) If it has fallen by more than that amount, the loss is yours alone.
Needless to say, none of these deals comes without conditions and the most obvious ones are that you have a sufficient down payment, a secure job and the ability to repay the loan.
So is it time to get onto the property ladder or not?
My first instinct is an emphatic “no”: not only are house prices still falling, but the latest DAFT report showed that rents are falling too – by a whopping 12% last year with 21,000 properties now available to rent, twice the number from the same time last year. This is not the sign of a healthy property market.
Unemployment is also still soaring under the weight of the on-going global credit crisis, low consumer spending and falling productivity and tax revenue. The income tax and pensions levy are both going to take yet more spending power out of the economy.
This deflationary period means that any house you buy is going to keep going down in price until the bottom is reached: astonishingly, 19 years after Japan’s great property crash, prices there are still 80% less than they were in 1990.
On the plus side, buyers are firmly in the driving seat and sellers are open to offers and negotiation. If you are interested in a property offered by one of the eight Ulster Bank developers (see Secure Step Mortgage link at www.ulsterbank.com) it might be worth getting that price down at least another 15% (but ideally even more) before taking up the 15% refund insurance offer; call me a cynic, but I expect the developer may have already priced in the refund.
Whatever about the tempting mortgage offers, you should keep the following in mind before buying any property this year, even if you are certain that is the ideal house for your long term needs and the location is perfect:
A one-year fixed rate may end up resetting at a higher rate in 12 months time, resulting in a higher repayment. Look into fixed rates as well.
In addition to the monthly mortgage you will have on-going insurance, utility and maintenance bills. Factor in a property tax and local authority rate charge going forward that might be a flat rate (perhaps €1,000) but more likely a percentage of the rateable value of the property. In most countries this is between 0.5% - 1%.
Price falls could continue: if you buy now with just 5% down, you could be in negative equity within months of taking on the mortgage.
Don’t count on the lender or mortgage broker to properly stress test the loan. Do it yourself by asking if you could still afford the mortgage if the repayment rose to 5%-6%.
Aim to pay off your mortgage as quickly as possible, especially while interest rates are low. The more equity you own, the better to command the best mortgage interest rates.
Offer to rent the house for a year or two, with an option to buy.