Boom or bubble and will it bust or burst?

This is a piece that Karl wrote for the Irish Sun, it relates to a piece that was the lead story for the paper last week.

(Begins)

There is a lot of talk that we have a ‘property bubble forming’, with virtually no supply, a growing population and a trend towards smaller households as things like separation and divorce become more common, it simply lacks ‘bubble’ qualifications.

But it does have ‘boom’ written all over it, we have had many such booms and busts in Irish history, I have spent much of the last two years researching just this very thing with Frank Quinn from Blackrock College of Further Education.

We have had many price rises and falls in the last 300 years, often we saw that after a crash the next boom would result in overcrowding because back then, as now, supply became ‘short’ in the areas that it was needed.

A boom is about rapid price appreciation, it doesn’t mean you have a bubble. You could have the price of anything boom and there wouldn’t be a bubble, …

Read More

Tracker mortgages: make sure you don’t miss out!

Yesterday the Examiner broke a story about tracker mortgage holders potentially missing out because they are not reading their terms and conditions. This is an issue we have seen first hand in our company, but it wasn’t due to not reading the terms and conditions, it was down to a bank error.

Recently Bank of Ireland had to put 2,000 accounts back on trackers after they mistakenly took them off and onto variable rates. AIB made the same mistake 214 times and PTsb did it 53 times.

In our own brokerages case we saw something similar recently with PTsb, they insisted to a client that no tracker was available. Then, only after the client remortgaged did they admit their error and offer it back. We represented the client in this case and insisted that all costs were also covered in reinstating the mortgage. This means paying solicitor fees, losses on clawbacks, breakage fees for the fixed rate undertaken etc.

Where this happens has tended to be where …

Read More

News of the World: Money expert on Debt

IRELAND is in payback mode at the moment. As a country we’re experiencing “deleveraging”, which means that many people are using most of their money to pay back excessive borrowing. However, that practice only puts cash into the banking system and not the real economy.

This is because banks aren’t lending — they’re too busy using the cash to put out fires within their own institutions. There are 786,000 Irish households with a mortgage, and six per cent of them are in trouble. The vast majority of that six per cent haven’t paid the bank a single cent in more than six months.

SOLUTION

Our Government-led solution is to encourage that to continue. They’ve made it almost impossible for banks to repossess homes — Labour’s solution of a two-year moratorium on repossessions reeks of “delay and pray”. A further 24,000 mortgages have been restructured and are still not performing, while 35,000 are only staying afloat due to a change in their conditions — mainly by not paying back the loan, only servicing the …

Read More

Irish Mortgage Brokers and MyHome.ie on TV3’s ‘The Morning Show’, 2nd March 2011

We were delighted to feature again on TV’s ‘The Morning Show with Sybil and Martin’ (although Brian was sitting in for Martin) on their monthly property slot.

This week we spoke about the necessity of price drops to get a property sold, it is likely the single most important factor, it is also overlooked that there is often a carry cost or opportunity cost loss if sellers don’t drop prices.

Next month we are likely to cover ’empties’, that will be a fascinating show worth tuning in for!

Read More

The first time buyer conundrum, to buy or not to buy?

At the moment in Ireland there is a conundrum for first time buyers: should you buy now and potentially over-pay on purpose?

It’s an unusual one and it partly related to property prices, it is a combination of taxation changes that will occur from the start of 2012 and expectations of interest rate changes from both banks and the ECB.

The argument of ‘rent or buy‘ is well established, we produced report on it with Peter Stafford (now of the IAVI/SCS) and Frank Quinn of Senior College Dun Laoghaire, but this is different – buy now or buy later isn’t taking the default of renting as an assumed continuous option, rather it is a case of delaying for the sake of market timing.

The changes in tax are on the tax expenditure side, namely TRS (tax relief at source).

Currently it is applicable to a maximum of €10,000 p.a. and the rates applicable are …

Read More

Bank cost of funds versus mortgage prices

Eurodollar or LIBOR cost of funds is a common phrase in banking, what does it mean or do though?

Banks borrow short term and lend out long term, they call it ‘maturity transformation’ and in doing so they aim to make a mark up on the money, it’s the same concept that a shop uses in selling cartons of milk, fundamentally the idea is the same.

The LIBOR rate is ‘London interbank offer rate’ and represents the cost of funds for a high quality non-governmental institutional borrower.

To get an idea of the cost of funds (and this is currently speculative because Irish banks don’t get offered funds at Euribor [euro equivalent of Libor]) all you have to do is a simple calculation.

We know that banks tend to use three month money and that means that any calculation will always have the interest rate reduced by multiplying it by 90/360 (3 months = 90 days, and 360 = 1 year [I know that in real life 1 year is 365 days but that small change of 5 days gives …

Read More

Property prices and property costs, they are not the same, so do you rent or buy?

We have seen a growing trend in our brokerage of people getting mortgage approvals (mainly first time buyers) and not drawing down, this might indicate some pent up demand in housing – which if it comes will be regular houses as opposed to apartments – or it indicates fear of buying in general.

The thing that is pervasive is the ‘price’ of housing, and the idea is to wait until we reach the bottom. That is a perfectly rational concept, and when you are not purchasing over a long term then the price now (we’ll take from financial market vernacular and call it the ‘spot price’ of housing) is the main thing to focus on.

However, that is only one part of the ‘price’ because the majority of new buyers are not buying for cash. The other price is the price of money, the financing costs. We indicated in our annual outlook that banks would, in 2011 alone, increase rates by a further 100bps or 1%, that any bank which isn’t government owned will have variable rates in the region …

Read More

Competitive Currency Devaluations

I have been talking for some time about a ‘rip off’ that the US will attempt to make against China, that it could take a belligerent form (default) or a traditional and less likely to cause a war option (devaluation of the dollar). It seems to be playing out and going for option two.

Competitive currency devaluations are alive and well in the world, why? Well, in early 09′ I wrote about it on the Paddy Power Trader blog:

“One way of paying bond holders back (but not ‘rewarding’ them) is via a devalued currency with an inflationary environment thrown in, in fact the big robbery of this century is going to be (as it was in the past as per the 1870s first, and then via Presidential Executive Order 6102 in the 1930’s) a dollar based one, the only way the US can pay its debts is to essentially rip off the debt holders, domestically that won’t be so bad, but internationally it …

Read More

Interbank Yield Curve: 28th September 2010

It has been a while since I posted on the yield curve, the main reason was that I lost my daily treasury letter from Bank of Scotland when all of their reporting went back to the UK and the daily replacement by Lloyds didn’t offer sufficient time-line to give a full curve.

The interesting thing that has happened in the interim is that the rules regarding forward rate prices between mortgage rates and Euribor rates has disconnected, in the same way that the ECB and Euribor disconnected in 2007, by this I mean that it is fascinating to see the established relationship end but the implications are horrifying for borrowers because it has meant that their monthly payments have gone up at a time the ECB is keeping rates low for the purpose of loosening up the financial cogs.

Take a look at the difference between February of this year and today, we can see that the long term rates are coming down and that flattening of the curve means two things: the ‘new normal’ is predicted to be one …

Read More