Here is a selection of my 2006 Sunday Times MoneyComments about residential property prices
ST Money Comment - March 26/06
A MODEST NATIONAL DEBT (SIC)
And you thought your mortgage or credit card bill was out of control?
Last week MoneyWeek magazine tried to put the new US national debt limit into perspective. Having just breached the $8 trillion limit earlier set by Congress, the limit was extended to $9 trillion to allow the US government to borrow another $781 billion this year.
Anyway the $9 trillion equates to $1,500 for every man, woman and child in the world, the value of all the tea in China for the next 2,000 years and enough money to re-house every Israeli and Palestinian family in a €2 million euro house in Henley-on-Thames, where the famous regatta is held every year.
With our own comparably modest national debt under the judicious control of the National Treasury Management Agency (even if our personal debt is now the equivalent of 180% of average incomes) it’s easy to ignore the massive indebtedness of the United States. Especially when a leading Irish stockbroker, NCB comes out with a hugely optimistic report that suggests that our own economic success is so secure that the good times are going to keep rolling for at least the next 15 years.
Let’s hope they’re right in suggesting that our younger population, higher birth rate and steady influx of immigrants and indigenous economy will be enough to buffer us from the day when other people stop lending to the Americans and they stop buying stuff (from us and everyone else) that they clearly cannot afford right now.
Just in case it doesn’t pan out that way, it might make sense to keep that $9 trillion figure in mind the next time you add another couple hundred to your credit card or your bank manager tries to convince you that doubling your loan is perfectly affordable.
ST – MoneyComment - April 3/06
INSATIABLE, GREEDY AND NAÏVE…IN DUBAI
Aer Lingus may not have filled its inaugural flight to Dubai last Tuesday, but there were plenty of people at the Dubai property exhibition at the RDS last weekend who said they booking flights to check out property there.
Dubai property prices appear very good value compared to here – which isn’t saying much anymore given our hyper-inflation – and the average size and luxurious finish of even the most ordinary buildings makes Dubai property very impressive. The concept of this brand new glittering city in the desert, with its combination of commercial and financial centres and world class tourist, sports, healthcare facilities is a remarkable one, but the danger of property exhibitions lies in the glossy front they put on everything from the brochures and glass-encased scale models of buildings still just in the planning stage, to the sales agent’s sharp suits.
What the promoters don’t emphasise is that Dubai will be the world’s biggest construction site and traffic jam until at least 2010. When you buy a property you automatically receive a residency permit, but it must be renewed every three years. There is no conveyancing system for property purchase – the developers and agents offer to undertake all contract exchanges on your behalf (not a good idea). It does enjoy all year sunshine (and indoor skiing), but this comes with 50 degree daytime temperatures for about six months of the year.
Nearly every promoter at last week’s show was offering rental guarantees of about 7.5% per annum for the first two years if you buy an investment property, Since so many thousands of apartments and houses are still being built and have no tenants, this is just another case of handing you back some of your money to secure the deal. Such returns may not be sustained.
According to official government of Dubai literature, the average per capital income is about $20,000 (and rising), and while this makes it among the highest paying workplaces in the Gulf, even with a tax-free salary there won’t be too many takers for ‘modest’ €250,000 apartments with monthly rents of €1,560 iof this is the equivalent of your monthly pay.
Meanwhile, you take up the all-inclusive management and maintenance packages from the promoter at your peril: one offered me such a service for the equivalent of 25% of the rent.
Irish property investors are insatiable, greedy and naïve, which is a dangerous combination.
One woman I spoke to, who was thinking of buying a two bedroom apartment in a soaring tower overlooking the Gulf for investment purposes, said “I was told property here comes entirely tax-free.”
“Sure, in Dubai,” I replied. “You still have to pay income tax and CGT on your return here in Ireland.”
“What?” she said. “I don’t believe you.”
ST Moneycomment – April 16/06
GOVERNMENT TURNS BLIND EYE TO PROPERTY BUBBLE
I’m not sure how to interpret the Taoiseach’s and Minister for Finance’s comments about the property market.
Last Tuesday, an AIB economic unit report stated that the ratio of house prices to incomes now stands at 11 to one, compared to just over seven to one in 1998. Wage rises are two or three times lower than the average house price increase.
Yet neither Mr Ahern nor Mr Cowan seem bothered about how this is impacting on young peoples’ debt levels or their family lives, especially those who want to have children but must also factor in crèche fees. They didn’t even express concern that it could discourage those all-important immigrants from planting permanent roots here, something AIB’s chief economist Dave Begg acknowledged last week.
Mr Cowan said that if prices fall he expected it to be a ‘soft landing’ rather than a sudden burst, but soft for whom? Himself? Well, that’s a given. He earns a huge salary and perks and no doubt bought his house (and perhaps even paid for it) before the boom even started. Ditto for the Taoiseach and probably the rest of the Cabinet. Prices could fall overnight by 30% and none of them would lose a night’s sleep over the notion of their homes falling into ‘negative equity’.
How ironic is it when the only one worried about house prices last week was a senior bank employee?
I’m not very good at reading politician-speak at the best of times, so I’m not sure if Messrs Ahern and Cowan just don’t want to risk slowing down the economy by even daring to suggest that a property bubble even exists.
But the Central Bank, the IMF and independent (of the property industry) commentators have been warning for some time that there is something desperately wrong when two salaries, a generous cash gift from your family and a 35 or 40 year mortgage is needed before you can afford a home of your own in Ireland today.
What bothers me most however is that an industry full of vested interests – lenders, estate agents, brokers and property media don’t need another cheerleader.
Mr Ahern is deliberately feeding the bubble by saying that anyone who listened to the critics over the last year or two ended up making a big mistake and will now have to pay even more for a house.
He might as well be endorsing the notorious Liberty pyramid scheme that is hoovering up millions in the south west: it has been thriving because of the steady stream of punters who are worried that they won’t get their payoff if they delay handing over their money.
Its operators will also no doubt blame its critics – the media, the local churches and Gardai – for frightening off new participants who are the only ones holding the pyramid up.
STMoneycomment – May 7/06
THE PROPERTY PORN JUST KEEPS COMING
Do we really need yet another property show on RTE?
While scanning RTE's website I came across an invitation for anyone who is thinking about building their own house to contact the station. It seems your licence fee is being earmarked for a property TV programme for next year that will feature architects who will help you with your new-build plans.
This new show, which will undoubtedly encourage everyone with a site of land to slap on some hideous, once off 4000 square foot 'Southfork', will join the endless list of shows here and in the UK which have helped feed the property porn frenzy.
This proposed new show yet again reflects the need to find new ways to keep the lucrative property bubble inflated in a country where first time buyers are all but priced out of the major cities and where rental yields are desultory. Very simply, if the market for existing property is out of reach of the very viewers such shows appeal to, then create a new show that encourages them build their own affordable ones.
By Bank of Ireland's own admission, nearly half of all its first time buyers are opting for 35 year mortgages, compared to just 25% in 2004 and a paltry 4% in 2000. The majority of such borrowers said they needed such a long repayment term in order to maximise their loan and minimise their repayments.
Yes, I know I'm being terribly old fashioned, but isn't that just another way of admitting, "I can't afford this house unless you let me go into horrific debt that I may not be able to pay off until I retire?"
Since the banks have absolutely no compunction about extending so much credit, should the national broadcaster really be colluding with them and the commission-paid estate agents and brokers to further to further encourage an overheated property market?
Isn't there any room on next season's schedule for a more balanced view of the market, where rents don't always meet mortgage costs, the sea views in the brochures don't exist, and apartments and villas in falling value markets (like Florida) can't be given away?
Obviously not while SSIA money is coming on stream.
ST Moneycomment – May 28/06
SUB PRIME LENDING INTO AN ALREADY DISTORTED PROPERTY MARKET
One of the two companies that specialises in arranging sub-prime mortgages claims to have done €350 million in business since they set up a year ago. This product is obviously filling a gap in what is acknowledged to be a growing market made up of people willing to extend expensive credit to people who are so desperate to buy property that they will pay over and above the usual asking price.
The market is there because even with rising interest rates, they are historically still quite low, and because the stigma of debt has pretty much disappeared.
The mortgage brokers – naturally enough – soften this perception by saying that times are so good that mortgage lenders can pick and choose who they give their money to and even a single missed credit card payment can cause you to be seen as a risk. The sub-prime mortgage is your only recourse in such a situation, and you then have to rebuild your credit record until you can return to mainstream lending rates.
But sub-prime lending is also another indicator of how the insatiable property machine keeps finding ways to feed itself: we also now have 100% loans extended to first-time buyers who could otherwise not afford repayments; 40 year repayment terms for the same reason and also the encouragement of equity release loans, especially to buy yet more overpriced property.
The property market is so distorted now by cheap credit and loose lending practices that unregulated foreign (and domestic) property promoters are selling individual hotel rooms in popular resorts where price inflation has squeezed out the traditional holiday home buyer. And now ‘land bank’ sellers are popping up too – selling parcels of agricultural land that the promoters say ‘may’ some done be rezoned.
Anyone tempted to pick up a few sea-side acres of bargain agri-land in Bulgaria, for example, might want to read up on the reservations being expressed by the EU Commission about the crime and corruption issues that still haven’t been addressed there in the run-up to their joining the union: the local version of Tony Soprano might very well be at the other end of your deal.
* * *
“INDEPENDENT” MORTGAGE BROKERS ARE JUST LENDERS’ SHILLS
On the subject of mortgage brokers I laughed like a drain – deep and hollow – last week after listening to a spokesman for the mortgage broker’s trade association on the radio justifying bad selling practices by some of his members who claim to give objective independent advice when they are nothing other than trumped up agents of the lenders.
Responding to a newspaper article that had revealed that some self-proclaimed mortgage brokers only sell the products of a single lender, or of a few (as opposed to the dozen represented in the market), the spokesman claimed it wasn’t the single licence broker’s fault if he seemed to be misrepresenting himself to hapless clients – it was all the fault of the lenders for restricting the numbers of licenses they give out.
Mortgage brokers – and the property sector generally – are poorly supervised and regulated in this country. What regulation of mortgage brokers there is, requires that they be awarded a licence by the bank or other lending institution, which one would like to think is based on criteria like professionalism and competency, but instead is clearly done so based on the amount of business the broker can bring in.
A dog and stick salesman working out of his converted garage may not cut the grade and he could end up getting just one or two institutions to award him the licence. But up goes his shingle: Independent Mortgage Advisor.
Buyers go to brokers because they think it is more convenient and they hope the broker will smooth out the buying process. This is often the case. But it comes at a price, which the broker is not required to disclose and most first time buyers at least, don’t know any better to ask.
With the average Dublin home worth nearly €500,000 now, that 1% sales commission to the broker is definitely worth not disclosing. It certainly isn’t something they want to have to refund in part or whole to the customer – which is what the best fee-based brokers do. ouy
Before they were properly regulated, insurance brokers and their masters in the life companies made their fortunes by concealing the high purchase costs of insurance, investments and pensions.
That mantle of distinction has been passed onto the worst of the mortgage brokers. Beware.
* * *
EMIGRANTS DON’T NEED SUB-PRIME LOANS
I certainly hope that the hard-working immigrants who the sub-prime mortgage brokers say are coming to them for home loans because they have no credit record, realize that if they establish a regular savings record with their bank, pay their bills on time and get a down-payment together, they should be able to borrow at the same rates as the rest of the population.
The banks are finally recognizing what an important new source of business the tens of thousands of immigrants are, and are translating more and more of their sales and account materiel into other languages, especially Polish. AIB have even announced a recruitment drive for Polish staff. Even the Pensions Board has translated new booklets on equal pension treatment, discrimination and victimization into French, Spanish, Polish, Russian, Arabic and Chinese.
What immigrants really need – like the rest of us - is a chance to buy a decent collection of savings and investment products, adequate life insurance and a pension plan. Presented in the right way, there should be plenty of profit and gain for both sides.
ST MoneyComment - June25/06
WE ARE WELL AND TRULY CAUGHT IN A BUBBLE
The news that property prices have gone up an average 14.9% a year since 1996, according to the Permanent TSB/ESRI 10 year review, will either delight or sadden you, depending on how high up the property ladder you happen to be. But since most people believe what they want to believe, and Irish people believe that property values always defy the laws of gravity, I expect many homeowners have a warm feeling right now about the ‘wealth’ they are accumulating in their homes.
The Permanent TSB predict that this year prices will rise by 10% and from next year gently fall (the ‘soft landing’) as the effect of higher interest rates is felt. Prices, says the bank, will settle at increases of 5% per annum for the next 10 years. By 2014, your €280,000 three bed semi-d out in the corridor counties, which cost you €75,000 in 1996, should be worth just over €500,000.
Well, thank goodness someone has that crystal ball.
I’ve been getting increasingly anxious that mad house price rises meant we were getting caught up in a horrible asset bubble, just like the 1999-2000 tech stock bubble, only worse, since so many more of us own houses than shares in this country.
I was also worried that people on pretty ordinary salaries were becoming reckless about their borrowings because of the easy access to so much cheap credit; after all, what’s the point of your house rising in value by 14.9% if you can’t dip into the ATM machine just under the dining room window?
I also had this especially crazy notion that anyone who needed an interest-only, 35 year, 100% value mortgage – and access to a second income - before they could afford to make the monthly repayment probably couldn’t really afford to buy right now. Maybe they needed to wait until they earned more, or prices fell.
Wrong again. According to the Permanent TSB, affordability is not as big an issue as people like me say. Everyone can afford a house in Ireland. Not only that, but most first time buyers do come to the market with savings – about €22,000 on average says the bank. But they prefer to spend this money on furnishing and fixing up their new homes, and so the bank gives them the 100% mortgage.
Now that’s a novel approach: the lender allows a young couple to bypass the opportunity to avoid 35 or 40 years worth of compound interest in order that they can buy €22,000 worth of sofas, carpets, widescreen TVs, etc – all stuff that depreciates and disintegrates and should be bought with income or savings.
Clearly, I am nitpicking. What’s €22,000 these days?
Anyone with a typical €500,000 Dublin house will be another €50,000 ‘richer’ by the end of 2006, says the Permanent TSB. And to think that all that new wealth will have been generated by bricks and mortar! Not an additional hour of overtime will have had to be worked; no one will need to take on a second job to earn the equivalent of a second income! Not a penny will have been risked on the stock market!
It really is magic, this home ownership lark.
ST Moneycomment – July 16/06
ARE WE REALLY AS RICH AS THE JAPANESE? REALLY?
Too bad a million euro just doesn’t buy what it used to. Like a really flash house. Or early retirement.
Bank of Ireland says there are now 30,000 millionaires in Ireland but that when the value of our property is taken into account – that typical four bed semi-d in Stillorgan - there are 100,000 millionaires in Ireland.
Only 100,000? Surely someone is underestimating price growth, especially in Dublin. Estate agents who keep shoving their flyers in my door insist that practically every house on my street – and it’s a long street - is now worth a million euro. And what about fashionable Dublin 4 and 6? And Killiney and Dalkey and Malahide and Howth?
We now rank in the global wealth stakes – per head of population - ahead of every Brit, American, German, Frenchman and Canadian, says Bank of Ireland in its recent review of the nation’s wealth. Only the Japanese are wealthier, according to the bank’s ‘extensive research’. Every man, woman and child in Ireland, once you divide all our wealth up equally, is worth €150,000, which will be very good news indeed to that half of the working population who can’t pay off their credit card bill this month or who has exactly zero euro stashed away in a private pension.
Of course the bulk of our wealth is tied up in property and has only been accumulated in the past 10 years, says the bank. A period that coincides with great economic growth here and historically low interest rates.
It’s hard to top a claim that we are amongst the wealthiest people in the world, but this report also states that our propensity to use the asset value of our property to take on more debt and invest it “to secure further growth” means that when it comes to investing, we Irish are “entrepreneurial and more risk orientated” than many other developed countries which rely more on inheritances for investment purposes. The fears about rising debt levels “are overstated”.
It takes some leap of imagination to describe a seriously indebted mortgage-holder as an entrepreneur, but I guess for Bank of Ireland, at least, anything is possible in a country with 100,000 millionaires.
Meanwhile, it is worth reminding all those property-based risk takers out there that the interest rate cycle has only just turned, and it will be some time before the real pain begins and people start to come to their senses about the true nature of their wealth and debt: that they are not the same thing, whatever Bank of Ireland tells you.
STMoneyComment – July 30/06
GAPING HOLES IN REGULATION – ESPECIALLY FOREIGN PROPERTY SALES
Have we too much consumer protection regulation, or too little? Should the authorities be making it easier for you to open a bank account, buy a pension or insure your house, or should they be making it harder?
It depends on who you speak to – providers think they are already overwhelmed with expensive, useless paperwork – while consumer advocates (but not that many actual consumers) seem to think the public are the helpless victims of a concerted campaign by banks, insurers and other service provider to overcharge, hoodwink and generally rip customers off.
The latest layer of regulation, the new Consumer Protection Code, has been under discussion for a couple of years and is aiming to stop institutions from offering unsolicited, pre-approved loans and higher credit card balances, ensure that all charges and fees are up front and transparent and to make sure that there is a standard definition of terms and conditions and sales practices amongst all service providers; it also deals with the level of competency that people selling to the public much achieve, even top managerial levels.
Most consumers probably won’t notice any of this – which isn’t a bad thing: who cares what hoops the salesman or manager have to jump through to deliver a product, so long as it happens and you’re happy that what you’ve bought is what you asked for, or what is suitable for your circumstances. Suitability is an issue that the companies will have to take into account, and will hopefully end the sharp practice of selling expensive, life assurance-based investment policies to 80 year olds.
The code looks very comprehensive, but the Irish Brokers Association are unhappy that it lets bank deposits and lending products of less than a year’s duration, off the code’s hook: the Regulator says there is no investment risk with short term deposits/loans, but the IBA say there is such a wide variation in interest rate returns that the banks should be obliged to apply the same careful selling standards and suitability criteria as they would if someone was choosing to invest their life savings into a 10 year investment bond.
Whatever about trying to safeguard the short term deposit account choices we make, it seems a shame that while mortgage lenders and their broker distributors now have clear cut codes under which they must work, which include their sales practices, why hasn’t any kind of code of practise been extended to overseas property promoters here?
The Regulator’s press office keeps reminding me that property sales are not part of the Regulator’s remiss and that it is very mean of me to keep harping on about how they can allow the kind of …well, sharp doesn’t adequately describe… the same methods under which some of these hucksters operate.
How can we have strict regulations – and now industry codes of practices – that go to great lengths to stop unregistered, unregulated boiler house operators selling shares and other investments from outside the state (or even from an office here) nut not bother to make sure that guys who are flogging Bulgarian (or Bundoran) holiday homes every weekend (and walking off with deposits), have at least checked in with the Regulator?
At the very least you’d think someone who is supposed to be watching out for consumer’s interests – like the Financial Regulator – would expect them to at least remind their potential customers ‘that the value of property can fall as well as rise?’
* * *
YOU CAN’T REGULATE AGAINST STUPIDITY
Whatever about preventing the financial services industry from indulging in bad practices, there is clearly no way to introduce any code that legislates against the consumer’s own stupidity.
Last week I happened to meet a accountant of my acquaintance who said that she took on a couple after they had read a recent piece I wrote recommending a wealth check, at least once in their life. They were also keen to get their tax affairs in order and to start claiming a number of reliefs and allowances they were due.
During the course of the wider consultation, where they had to go away and return with a file full of bank statements, mortgage contracts, pension and insurance policies, the advisor discovered that not only were their taxes in a bit of a mess, but that they had borrowings of €40,000 they didn’t know about.
This couple, both professionals with relatively high earnings were juggling so many credit card balances, personal loans and mortgages that they had lost track of €40,000 worth of debt. Just like that.
They were paying so many direct debits – and occasionally doing some short term borrowing from Peter to pay Paul – that they had simply forgotten the who, why’s and wherefore of €40,000 that various lenders had extended to them.
Is it any wonder the banks stand accused of overcharging customers €118 million since 2004? I’m surprised it isn’t higher: if €40,000 worth of borrowings can be overlooked, what’s an extra few euros in transaction charges, or foreign currency calculations?
ST MONEYCOMMENT – Aug 2006
BIG BUBBLES BEGET BIG BUSTS…LIKE FLORIDA
With the US property bubble now deflating in a steady whoosh, I was amused to return from holiday last week to find a flood of unwanted e-mails from mainly Florida property developers offering cut-rate deals for condo’s and villas all over the sunshine state.
One that especially caught my eye was a buy-back guarantee for a new development in Port Charlotte on the Gulf Coast that promised a 150% return from the developer on the deposit when you sign the final papers. This represents, says the desperate promoter, ‘Hot Properties Worldwide’, a 10% discount on the selling price. Oh, and the developer will throw in all the closing costs as well.
What, just 10%? What about throwing in a top of the range air-conditioning, professional landscaping and even a year’s worth of taxes and insurance?
There are finished and unfinished Florida properties that are selling for 20% less than they were last month, if they are selling at all, plus sweeteners like those above. As one of the ‘hottest’ real estate markets in the US for the past decade, it shouldn’t come as any surprise that along with California and Nevada and the East Coast, it is now suffering the biggest chill-down.
Big bubbles beget big busts and there are now homeowners (including a few Irish investors I know) who have had their houses up for sale in the Orlando area since last Christmas, but haven’t seen a single prospective buyer walk through the door since Easter.
STMoneyComment – Sept 23/06
LOWER STAMP DUTY AND INCREASE DEVELOPER’S PROFITS
In the social circles that the new Tanaiste, Michael McDowell probably moves in, stamp duty must be a heady topic of conversation. His neighbours and friends, sitting around their polished dinner tables in leafy Dublin 4 and 6 would certainly not see much change out of €100,000 from a stamp duty bill, even if all they could afford was a €1,000,000 property in the lower end of the market.
Stamp duty has never been popular tax, but house price inflation has turned it into one of the most insidious, since it takes no account of the rampant price inflation of the past several years.
With exemption limits of just €317,500 for first time buyers and a meagre €127,000 for young families or pensioners who may want to trade up or down from smaller or bigger second hand properties, this has become an indiscriminate tax. Even someone buying a €2 million house in Mr McDowell’s constituency would have to feel the pinch when relieved of €180,000.
Should it be abolished entirely? Not if it remains the only property based tax that all buyers – home owners, investors and speculators have to pay, other than CGT on property other than your principal private residence. But it should certainly be amended to take into account rampant house inflation and how it distorts the market.
The problem at this late date in the property super-cycle that is the Irish property whirlwind is that any politically inspired tinkering is likely to end up making things worse for hard-pressed buyers. Lower the stamp duty rates and you only encourage profiteering, especially by developers who will most likely hike their prices.
And if you don’t believe that would happen, you only have to look back a couple of years when the €317,500 stamp duty exemption was extended to first time buyers of second hand and not just brand new houses. All that happened – and estate agents were the first to warn about it - was that older houses within sight of this price range suddenly became a few thousand euro more expensive.
* * *
COMING SOON…ANOTHER WAY TO EXTEND A LIFETIME OF DEBT
Meanwhile, coming soon, to a mortgage broker near you: yet another opportunity to put yourself into a lifetime’s debt with a 40 year, interest only loan. Age no limit.
The Leeds Building Society, one of the biggest in the UK, is joining forces with the Irish Mortgage Advisor’s Federation (IMAF) and the IFG broker group to sell their mortgages here via these intermediary networks.
As the 13th lender-to-be, Leeds is targeting the ‘prime’ Irish market, says IMAF – that means only people with top credit records, and will only give maximum loans worth up to 80% of the property value, and not the increasingly common 100%, no-money down loans. But Leeds also intends to offer up to 40 year loans, full term, interest-only repayment schedules and an income-to-loan ratio of up to 4.9 times – the highest on the market.
With terms like these, it seems to me that the line between ‘prime’ and ‘sub-prime’ lending is getting finer every day, especially when, in this case, it is commission-earning mortgage brokers, who pocket 1% of the mortgage value, who are flogging the loans.
To stand out even further from the crowd Leeds intend to also sell mortgages to people up to age 75 and to offer a standard ECB (plus 1.1%) tracker rate to all comers.
Most elderly people, except for a tiny few who buy holiday homes (and usually then with cash), take out equity release loans to boost their pensions or to make cash gifts to close relations. These defer the monthly repayments (at a fixed rate of c6%) and the debt is cleared after their death by their estate. This cheaper. Leeds offer could be very tempting, not just to the elderly person, but to any younger relations, and will no doubt be emphasized by the broker.
But now that just about everyone can buy a pricey mortgage, regardless of savings, income, or age, perhaps the pre-teens will be targeted next.
Between the standard early inheritance, a 70 year lending term, an interest-only repayment schedule, his weekly allowance and his father and I going guarantor, my 12 year old is as likely a buyer as any these days.
ST MoneyComment – Sept 30/06
PROPERTY BOOM TAX BUST
The tax problems faced by thousands of Irish owners of Spanish property was first revealed a couple of months ago when the Spanish revenue authorities announced they were going after the millions in unpaid back property tax and rates that they say is owed by overseas investors.
It’s reckoned that as many as 75,000 Irish owners are non-compliant – many of them inadvertently, having not bothered to register with local authorities, been unable to read tax demands because they don’t speak the language or simply because they are absentee landlords and didn’t bother providing their tenants with forwarding addresses. There are undoubtedly some who, like here, just figured they wouldn’t pay the bill until they were on the court steps.
You really know you’re in the midst of a hot, hot market when specialist tax and legal firms start springing up to help unravel the stupid binds that such people get themselves into when they race pell-mell into a foreign investment market without proper due diligence.
With over 200,000 Irish property owners thought to be actually living in Spain, France, Portugal and the UK, at least one new tax firm is offering to do their annual tax returns for €250, which looks like a pretty good bargain, though I suspect that modest fee might rise if your tax affairs are in a really terrible mess. (If your property is in Bulgaria or Turkey you might want a good lawyer by your side as well.)
No doubt these specialist firms will do a roaring trade closer to home, especially now that the Revenue’s offshore assets division is targeting overseas property owners to see if they’ve been forthcoming in declaring any income they’ve earned on their apartments and villas.
STMoneycomment Oct 8/06
‘SOFT LANDING’ IS NO SURE THING
You know that an asset bubble is just about stretched to its limit when the people who have made the most money by inflating it insist that a ‘soft landing’ is a sure thing.
Thus it was last week when the estate agents Sherry Fitzgerald announced to the nation that the sharp third quarter fall in house price inflation represented “some moderation in the pace of capital appreciation. A soft landing like this in the context of a very vibrant economy is the best result for all participants in the market.”
How can a mere1.5% price hike in Dublin property during the entire third quarter of this year be a ‘best result’ when the previous two quarters reported cumulative price rises of 21.5%? Sounds more like a ‘thud’ than a soft landing to me.
This slowdown in price growth would be good news for first time buyers if they hadn’t already been priced out of the Dublin market, but it certainly isn’t for buy to let investors who have been subsidising their tenants on the expectation that high prices would last forever. Nor is it good news for recent buyers with 100%, interest-only loans or for existing owners who have been heavily remortgaging their homes to finance new cars, extensions, holidays and foreign property.
What these figures are really telling us is that a year after interest rates started going up, higher mortgage repayments are finally beginning to pinch: the poor sod with the €300,000 mortgage is now paying an extra €170 a month interest since last November. If rates go up by another 1% in the next year, their interest bill will have risen by €4,080 in less than 24 months.
Meanwhile, at the high end of the market, auction results this season have been very poor, and vendors are being told to lower their expectations. The suggestion is that houses are taking a little longer to shift. Between interest rate hikes and the idea that horrendous Stamp Duty rates may be lowered or the value thresholds widened, the oxygen that feeds the bubble – a strong stream of new buyers and investors willing to pay anything to get onto the property ladder – seems to be getting a bit thinner.
Prices couldn’t continue to outpace incomes by a factor of six or seven times forever and especially not when the cost of money is accelerating. The economic news may appear very bright, especially on the employment and tax front, but the cost of living keeps rising, especially for non-discretionary expenditure like rent and mortgage repayments, heat, light, healthcare, childcare and travel.
We have been doing our best these past few years to emulate the worst excesses of the US (and UK) property bubbles: the crazy, lax, lending criteria, the media frenzy, the profligate risk-taking by buyers. The maddest notion of all is that the ordinary homes we live in are profit-generating machines that can spew out great wads of cash at will, money that somehow doesn’t really count as ‘debt’ because it is anchored to bricks and mortar.
We are on course to a similar property meltdown to the one that is happening in the US, but, unlike the Americans, we still have some time on our side, strong savings thanks to the SSIA scheme, and, for now at least, relatively decent income growth.
A property bubble needs two ingredients to crash – rising interest rates and job losses. If the debt-laden US economy does go into recession because their homeowners cannot service their huge mortgages and keep buying goods we, and the rest of the world export to them, the ESRI predicts that 90,000 Irish jobs could be lost.
The only soft-landing that heavily indebted Irish property owners are going to enjoy, if this awful scenario is realised, is the one they start making for themselves now.
Stop buying stuff you don’t need with money you don’t have. Start paying off your debts as quickly as you can. Earn more money. Then save it.
STMoneyComment – October 22/06
BEWARE NEW ‘DISCOUNT’ LENDING OFFERS
National Irish Bank last week announced that they are dropping their profit margin on mortgages aimed at existing homeowners with lots of equity in their properties. They seemed to think this was a revolutionary step that will transform the Irish lending market, but I think it looks more like the natural consequence of a tightening market where first time buyers are so squeezed by inflated house prices and rising interest rates that they are an endangered species: the only players with any real borrowing capacity left are existing homeowners.
That isn’t to say that this isn’t a pretty good deal: NIB are offering a discounted rate that reflects how much house you own up to a maximum mortgage of 80% of the value of the property and should save you money, if you fall into such a privileged category.
The new loans works on the basis that if you have a property with existing equity built up, then you can re-mortgage with NIB – assuming of course that you have the income to make the repayments – at a lower interest margin. In the case of someone with 50% equity, the loan is set at the ECB rate of 3.25% plus 0.50%. The 3.75% rate is half to one percent lower than typical market rates.
If you are looking for the maximum 80% loan, they will charge you the 0.5% margin on the first 50% of the value, a margin of 0.6% on the next portion up to 60% of the loan and then a margin of 0.8% on the remaining portion up to the 80% loan to value. The offer is for both variable and fixed rate loans.
Mortgage brokers are usually just as keen as the banks to find more attractive and innovative ways to allow people to get themselves further into property-related debt, but even some of them are giving the NIB a cool welcome.
Peter Bastable, head of one of the biggest mortgage brokers, Simply Mortgages, said that while it will offer savings to some, it has having only a limited attraction to existing owners, of limited use to those on interest-only mortgages and of no use at all to first time buyers or investors.
Instead of turning off the easy credit tap to help slow down price inflation and restore some sanity to this market, lenders are still tying to find other ‘creative’ ways to compensate for rising interest rates and the affordability trap.
This loan might offer significant savings for people trading up, but it will also be used for equity release to refinance other debt, overseas property and more stuff that they could otherwise not afford based on their income or savings.
I can think of only one good use for a lower-interest loan like this until the property bubble has well and truly deflated – to help to accelerate your debt repayment.
STMoneycomment – Dec 3/06
INSOLVENCY LIKELY AT END OF PROPERTY BOOM
Christmas shopping begins in earnest this week, but for one new company, Debtfree.ie it might just be that all their Christmas’s will be coming at once as spendthrift punters find they can’t pay their bills in January.
Just launched by solicitor Barry Lyons, whose firm already has one of the biggest corporate insolvency practices in the country, this new service is aimed at individuals who are facing a bleak financial future that could at worst end up in bankruptcy, and at best, end up as one long and perhaps futile round of credit defaulting as they try desperately to stay out of court.
According to Lyons, there are 86,000 people in Ireland whose credit rating is already compromised by having judgements obtained against them. Many thousands of others are ‘borrowing from Peter to pay Paul’ to stay one step ahead of a court judgement. The culprit, he says is mainly the growth of unsecured credit – now standing at about €5 billion that has been made available, a figure that is growing by 30% per annum.
Actual bankruptcies in Ireland are still tiny – just 20 last year, says Lyons, but this is because bankruptcy is such a draconian option here that destroys your credit rating, can take up to 12 years to discharge and is a very poor deal for creditors. Instead, his company helps clients put together a ‘Schemes of Arrangement’ a sworn statement of the individual’s affairs is put to his creditors and they try and work out a satisfactory repayment schedule.
The legislation for this kind of deal has been on the books since 1988 but there simply hasn’t been easy access to it for sole traders and individuals who instead try to find ways to pay off their debts – perhaps even by selling their family homes and other assets – rather than become a bankrupt.
Private insolvency-type companies like Debtfree.ie – who get paid out of the payments made to the creditors – are doing a roaring business in the US and UK where insolvencies and bankruptcies are soaring.
In the UK, personal insolvencies – the next step down from actual bankruptcies - hit another record in the last quarter, up by 55% year on year; Individual Voluntary Arrangements m(IVAs) rose by 120% year on year and mortgage repossession orders are back to the levels not seen since the last property crash there in the early 1990s. Meanwhile Barclaycard expects to write off €1.5 billion in bad credit card debt this year.
As usual we are just a little further behind in the lending debt cycle, propped up by an economy propped up by an extraordinary property boom.
Debtfree.ie is in the pole position to pick up lots of new business as the boom turns into a bust. With demand expected to grow for their services from small business people and over-extended PAYE earners, I doubt if they’ll be alone in this market for too long.