First Time Buyers can't catch a break

first time buyers hit by credit crunchFirst time buyers are being told ‘now is the time to buy’ in the papers. I think it’s time to spell out a few home truths for the prospective buyer just so that they are 100% sure of what they are getting into. Buying a home is fundamentally a good thing, doing so without knowing the facts however is not.

Firstly, property is in a downward market at the moment, that’s not opinion, its a fact. You can dress it up as a ‘re-adjustment’ a ‘balancing out’ or an ‘inter-cusp reductionary period’, heck, call it ‘my granny’ for all I care, it’s still down, plain and simple. So if you put an offer on a property and an Estate Agent tells you ‘you have to sign soon or you’ll lose the place!’, then lose it (unless they accepted an offer so low you have to snap at it!) no guilt, no apologies, and don’t you dare pay full asking price! The current Irish property market favours the buyer not the seller. I would even advise our clients to offer below asking price on new builds. In the past doing that was like getting on Dublin Bus and trying to negotiate the fare! But things change, and how!

Financially thing have changed a lot in the last few years, in 2005 the average house price (according to the PTsb/ESRI report) was €280,000 nationally, three years later it stands at €285,000 which is a mere 1.8% higher, actually it’s slightly less than 1.8% but I like to deal in round numbers.

So what was inflation in the last three years? well, for 2005 it was 2.5%, 2006 it was 4.9% and in 2007 it was 4.7% which is a grand total of 12.1%. compare that to the 1.8% gain on properties bought since 2005 gives grand total of a minus 10.3%. Negative equity is a reality not just a headline. And it doesn’t stop there.

Property developers are reducing prices on new-builds in lumps of €100,000 at a time, and in some cases even more. So what about the people who bought in the first phases of these developments for 100k more than today’s discount price? They are living with the harsh reality of negative equity as well. And its probably not a nice feeling at all, these are just some of the pitfalls for first time buyers, it’s a very real risk. If you are currently renting and you have decided to keep on renting then you are not alone, just look at this website and you will find many people are doing exactly that.

100% mortgages are all but discontinued, and as of writing its fair to say that unless you are in a certain job category you will probably not (if you applied right now) be able to avail of a 100% mortgage in Ireland.

However it’s not total gloom and doom. The government rose the level of TRS (tax relief at source) on mortgages for first time buyers by 100%. That was a fairly big give-away to be fair, but what did it mean? It meant that the increases in mortgage rates were partially absorbed by a tax break, so to my way of thinking the tax-payer is actually the one absorbing the interest rate hikes. Nice work.

negative equity as property plummetsHere’s a fact that you won’t see in the papers, if you bought in the last 3 years (as a first time buyer) you lost out. How? Those figures of inflation and the house price index spell it out fairly true, you would have to buck the trend both in the area you bought in (that it hasn’t seen any price reductions), you would have to increased your income in a way that out does the national average and chosen a fixed rate at precisely the moment when Mars and Jupiter were in alignment.

A mortgage of 280k over 30 years in 2005 would have cost €1,200 per month, at today’s average house price of €285k over 30 years it would cost €1,529 which is €329 per month more. That’s of after tax money, so you would actually have to earn (grossing it up and assuming you are at the 41% band) of almost €560 which is €6,700 per year.

The industrial wage only went up 9% since 2005 while inflation was 12.1%. That means there is negative human effort equity as well of -3.1%. Things are not getting easier and that trend looks set to continue, the live register of unemployed increased by 8,500 last month.

Our own Taoiseach seems to have a total inability to tell the truth, but the truth is that the government is intervening with too little too late, they should have been building houses themselves to ensure that we have an equitable society where everybody has the ability to live with a roof over their head and not be broke as a result of it. If government built houses instead of just taking the contributions (tax wise and at council level where builders made ‘contributions’ rather than having to make actual units for affordable housing) and they were built at an appropriate rate it would have helped reduce demand, given vulnerable sectors of society a home and stripped a portion of the investor market (which got hugely speculative) out as well because it would reduce the pool of renters.

First time buyers have one thing in their favour right now, and that’s the fact the prices are at 2005 prices. I don’t know if the property market will go up or down in the near future, that’s one crystal ball I won’t be rubbing, but if people don’t leave in their droves and the excess supply is used up over the coming years then there is a strong likelihood that property will rebound, certainly it won’t be to the bubble creating percentages we saw from 2001-2006, but that’s a good thing, steady growth is much more sustainable than boom and bust.

If you are undecided then let the figures do the talking for you, find out what mortgage you could afford and then look at prices, if you are paying more in rent or if (for an acceptable premium to you) you could live in an area you really want to at the right price then stop renting and buy. If not then you can sit tight and see what happens. The one downside is that sometimes you can sit tight for so long you get stung anyways, I hate the fact that I am a living example of this but I really felt in 2002 property prices would drop and didn’t buy until almost 2004, my little nugget of wisdom cost me about €60,000. What I’m trying to stress is that it’s o.k. to be a bear, but just don’t do it to your detriment thinking that someday you’ll live in Blackrock for a tenner.

buy smart and at the right price in irish propertyRecessions are often not as bad as the press (and your author) make out, I have been through four recessions and a few currency crisis’s, if you can read then you are at the age where you have too and you’re still alive right? Things are not always easy, recessions are a natural occurrence and each time one comes around people claim it will be worse than the last one, this isn’t Irish Rugby though, this is Economics and for that reason I believe that it will follow a standard path of a few quarters of negative growth followed by a recovery.

Having given a somewhat bleak outlook it’s important to counterbalance this, it may be just the right time to buy, that totally hinges on ‘buying at the right price’. So while I don’t fully agree with what some news stories are saying, which is tantamount to ‘buy anything right here and now!’, they are not totally off the mark. Buying in a sought after area is now possible, its a fact that many first time buyers had to move far from home because of affordability issues, well, now with the adjustments in the Irish property market a first time buyer might actually be able to buy a house in the neighbourhood they grew up in, something that had been taken away from many of us (myself included).

This will be good for the communities and obviously also for enlightened buyers who get into these areas for a good price and who in turn will enjoy a less debt ridden life because of the way and time they bought at. So by making a smart decision you can literally knock thousands off a (potential) mortgage by not taking out a massive one to begin with. Make offers, if the seller doesn’t accept then don’t buy the place, just keep going until you find one that will sell at the price you are willing to pay and you will be able to sip a pint with a wry smile while the folks around you scream ‘the sky if falling!’

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