You might think that being a first time buyer now would be a risky situation to be in, however in this article I think it will point out some aspects of a slowing property market that are actually to their advantage. We’ll look at some of the aspects for this.
- Firstly there are 100% mortgages, some people say that if your property price goes down and you have a 100% mortgage you owe money that you don’t have the equity for eg: buy for 200k house goes to a value of 190k and you are down by €10,000. However is that really true? For a start look at the situation it would have been if you had had to save that €10,000? If you were earning at the 41% bracket that €10,000 would have meant you had to earn nearly 17,000 to come up with it, so 100% mortgages actually help a first time buyers cash flow, had you gone the other way and saved a deposit you’d be down €17,000 instead of €10,000! The idea is that you are using the banks money, money that doesn’t have to be paid off for a long time so yes you’d have to shoulder the interest but the risk is not really on the buyer ultimately its on the bank who lent the money.
- You can only lose out if you sell. At the moment rents are rising, this is because as rates rise it becomes more affordable to rent than to buy for some people, this increased demand on rental properties – and the correlating increase of houses for sale (up for sale because the owners cannot or don’t want to pay for the increased monthly mortgage) – makes rental prices go up. Its demand pull inflation. The point here is that a mortgage is generally taken for 25 years and more, so a true loss would only be if your house isn’t worth the same price plus annual inflation in 25 years. The way to lose out is selling during the dip and funny enough that’s exactly what a lot of people are doing which is why it’s a great time to buy (I’ll cover more on that in a later point). During the ‘negative equity’ crisis in the U.K. the market had recovered and massive gains made within ten years, so for the people who weather it out there is a strong likelihood that they will come out as winners. Applications for RSI numbers and immigration are still rising so there are people coming here because of the strong economy, this will keep at least some demand for housing and the fact that one in five first time buyers were not born in the country it means that a lot of these people are not going to up roots so a sudden mass vacancy associated with a turn in the economy is not likely.
- Getting property for a discount. We know from what valuers are telling us daily that property prices are not what they used to be. I was bidding on a shell of a house two years ago and it went to twice the asking price, there is probably not a single example of that in the market any more. As a matter of fact you don’t get laughed at by estate agents if you call up and offer less than the asking price, properties are not selling briskly (obviously some areas maintain a strong market but in general this is not the case). Estate agents have a tendency to always say property is never going to go down or experience any problems, quite frankly this isn’t the case. However that doesn’t mean it isn’t a good time to buy hence the old adage ‘when there’s blood on the streets buy land’ that blood can be financial. A property listing for €350,000 might go sale agreed at €320,000, so this means the buyer potentially made €30,000 on the way into the deal, now say the market takes a dip of almost 10%. That house is worth €320,000…. Have they actually lost out on anything? Not really. And even if the market stayed stagnant you are creating equity when you make payments against the capital! You can also create what we refer to as ‘sweat equity’ by doing some minor improvements to the property, this can be as simple as painting it or re-planting a lawn etc.
- Eradication of Stamp Duty. Personally I had to pay stamp duty and it still bothers me. However for the current first time buyers there is none, so on a purchase of eg: €350,000 the stamp used to be 3%, again, this had to be from earned income you couldn’t borrow for it so that was €10,500… after tax! Pre-tax you would have had to have earned about €17,800 (if you pay at the 41% band) to have that money, that meant that until your house went up by about 20 grand you were on a loser. So now that you don’t need that money its fair to look at it like this – until your house goes down by what stamp may have been then your not much less well off.
- Increased mortgage interest relief: this was doubled in the last budget which means that you can get (for two people buying together) and extr €1600 p.a. in relief, this equates to about what the annual interest bill on a €32,000 loan would be at current rates. So again, using other peoples money got cheaper! Granted interest rates rose, but these are not what can be described as ‘bad rates’ talk to somebody who had a mortgage in 1989 to get the answer on what ‘bad rates’ were. These are the rates of a health economy so we need to get used to it and not pine for the old days of artificially low rates!
In a nutshell you have two choices, buy property or don’t. However if you don’t you’ll never have equity, either positive or negative and on a financial planning basis that is a concern, what will you do when you retire? Live in a rented home? Will you always have a landlord? This raises its own questions.
My belief is that there are two great times to buy property, the first one was about 20 years ago. The other is today.