To buy or not to buy…

We are constantly asked ‘is now a good time to buy’ and the answer as always is ‘that depends’. It depends on what you are hoping for, if you want to invest in an asset that will never lose value then no, it’s a terrible time to buy a house. If you want to buy a home because you are at a point in your life where that is what you want to do then it’s a decent time.

We were telling people from 07′ until this year to stay away from property, and now we believe that the time has come where you can make decisions rationally. It doesn’t sway it either way but you can at least get a good idea of some of the pros and cons involved.

Firstly, there is the property price register, there are issues with it – we have pointed this out before. While knowing what something sold for in the past gives no indication of the future selling price (and property is particularly heterogeneous) it gives some grounding when matched with asking prices in an area and tools that track price rises and falls.

The answer financially is that the interest rate environment is uncertain, while we expect rates to remain low the banks will not peg any pricing to those rates, the tendency has been to actually increase rates while base rates drop.

This normally screams out ‘fixed rate’ but the premium built into fixed rates is so high that you pay an incredible cost to do so with the majority of lenders.

What you can do is look at the cost of renting versus buying, we still have our calculator over on MyHome.ie which allows you to put in price increases and price drops as you choose to predict them over the next ten years (and the same for rents), then, using an assumed 6% mortgage rate we make comparisons.

The one thing that some buyers realise and others don’t is that TRS is a valuable tax break, and much like that ad on the radio ‘when it’s gone it’s gone’, the plan is to kill it off from 2013 and not revive it.

This moment in time (if you are in the camp who believe city prices are realistic) is one where you can take out a mortgage and with every payment you make your personal balance sheet improves (assuming prices don’t fall rapidly), not only that but you get a tax break for doing so, and the final plus is that you obtain the utility value of the property as well!

I am confident that in the future people will look back on 2012 and say ‘that would have been a good time to buy’, but that clarity will only come with hindsight as do so many good investment decisions. Sadly there are no guarantees in life and that means that the people who take that leap could lose but all factors considered, it is – in our opinion- a good time to consider a home purchase.

Comments

  1. Dave Flanagan

    Karl I think your point that the interest has a relief has a value and that if that value is greater than the amount you expect prices to fall that great.

    But what about the – much maligned – fundamentals?

    Employment – bleak.
    Net income – lots of tax increases on the way.
    Property tax – only way is up.
    Interest rate – might stay where they are for the short term but ultimately the only way is up.
    Demographics – lots of emigration in the house buying cohort.
    Global prospects – uncertain at best.
    Supply – ok this a little lower recently but artificially so.
    Credit – not a whole lot out there and I don’t think that is going to change drastically.

  2. Hi Dave,

    All excellent points, but property cycles tend to bottom when confidence and fundamentals are exactly as you describe, seen in the UK during the early 90’s and also in the early 70’s. The reduction in construction activity matched with the overhang which primarily exists in places people don’t want to live will create an ongoing two tier market – but this simply isn’t true for cities and that is why I’m confident we’ll enter another boom-bust cycle with right now being either the bottom or near to it for cities.

    The credit cycle that you allude to shows this in a roundabout way, how can prices rise or stay flat when credit isn’t available? How can the CSO show a 47% increase in renters and no wonder if they all want to rent for life or eventually own a home? That transition will result in the standard dynamic, rents will rise, then property values start to rise which will compress rents (watching rental yields is a great way to observe the property cycle), credit expands and then it doesn’t which is when the next ‘big bang’ occurs. We’ve done it many times before, rinse and repeat!
    thanks for dropping by

  3. John

    Karl,

    Well reasoned out points here & agree that this year would prove well to buy a home over the longer term. However, there are 2 specific points that you mention that I cannot seem to reason out.

    You mention that the premium loaded to fixed rates is too high to justify this over variable. It is reasonable to expect or assume that interest rates will rise by a further 2% plus over the next 2 years, the 0.5% increments have started and the banks will be hard pressed to turn over profits (the injections from the ECB/IMF will have stopped). When you have a smaller pool of money to work, the only option is to raise rates, that simple. Interest rates could hit 8% by 2020, but who has a crystal ball,

    Your point as to the credit cycle is very interesting, but to think we will have another boom is a challenging thought, considering what the property price bust will have done to the Irish psyche. I think a rational expectation would be in more of the region of a 20%-30% rise and then a level off to move with inflation. I would welcome your comments.

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