Have we learnt nothing from the last property collapse?

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tallpaul

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I'm going to rant/generalise.

It seems that the next generation coming along still seem to have the same fixation as previous ones that any surplus cash should be chucked into second and third houses on the blind assumption that they will appreciate in value/earn easy high rents even if the purchaser has high levels of exiting debt!! 'Sure how hard can it be? 2K a month for doing nothing, It'll pay for itself in a few years' It is original posts like this that makes my blood boil.

When will people learn to live within their means (as someone once said...) and get about the business of reducing their existing debt without getting into more hock and putting all their eggs into one Irish property basket?? Not forgetting the unremitting hell that being a landlord in Ireland seems to be at present. Has the OP even CONSIDERED the direction of interest rates/inflation over the next five years?

I'm convinced, now more than ever, that budgeting/debt management should be drummed into children in school
 
tallpaul said:
When will people learn to live within their means (as someone once said...) and get about the business of reducing their existing debt without getting into more hock and putting all their eggs into one Irish property basket??
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Records began fifty years ago and since then inflation adjusted property prices have increased by 250%. This is a real gross annual return of 3.5%. That's before depreciation of course but ignores rents.

Yes, it was a rollercoaster but three periods of big gains and only two periods of losses.

Irish property is not riskless but if you have the stomach to stay in it for at least two decades you will get a return.

fredgraph.png
 
Paul F said:
Only two periods of losses so far ;)
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Half a century is a lifetime investment horizon for most people.

I don't know of any housing market in a developed economy where anyone has made a capital loss on residential property over the span of two decades.

Ireland is more volatile than most places, but returns are there if you have the patience.
 
Maybe an excessive bias towards property investment by individuals is rational?

As long as you can manage negative cashflows, leverage/BTLs seems to allow people to do well buying second and third houses.

The high and complicated taxes on owning shares / funds / EFTs don't help.

What really encourages people is the idea that they just need a 20% deposit, and then "somebody else will pay the mortgage".

Put 20% down, and as long as you are the type of person who can be a landlord, and as long as you can deal with negative cashflows to repay the capital, then the tenant pays most of the mortgage, and you have an asset after 25 years.
 
Thanks to the mods for moving this.

I'm not doubting for a second that holding onto a house for 25 years will not make a return on an investment. Far from it.

However my point is that someone with 29 years left on their mortgage and a debt of €275K and who has a lump sum available seems to instinctively think that another property and more debt is a better idea than running down the balance of what they currently owe. It also completely ignores life's normal risks of unemployment/ill health etc. I don't believe it is a wise or prudent course of action.

Actually on a re-read it is even worse. The lump sum is only €20K!! To use as a deposit to get into further debt of €250K to owe over half a million...

Perhaps I'm just old fashioned...
 
tallpaul said:
Thanks to the mods for moving this.

I'm not doubting for a second that holding onto a house for 25 years will not make a return on an investment. Far from it.

However my point is that someone with 29 years left on their mortgage and a debt of €275K and who has a lump sum available seems to instinctively think that another property and more debt is a better idea than running down the balance of what they currently owe. It also completely ignores life's normal risks of unemployment/ill health etc. I don't believe it is a wise or prudent course of action.

Actually on a re-read it is even worse. The lump sum is only €20K!! To use as a deposit to get into further debt of €250K to owe over half a million...

Perhaps I'm just old fashioned...
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I certainly would be of a similar mind to you. I did not invest in Ireland in the 00s boom but then again, I suppose I missed out.... who knows. At least now my mortgage is fully paid off and just one daughter with two more years in Uni. I would like to think I am off the hook at that stage.
 
NoRegretsCoyote said:
Records began fifty years ago and since then inflation adjusted property prices have increased by 250%.
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I'd guess most assets linked to the Irish economy have grown significantly in the last 50 years. We were a basket case back. I think the growth rate in the last 20 years is more informative.
 
tallpaul said:
Thanks to the mods for moving this.

I'm not doubting for a second that holding onto a house for 25 years will not make a return on an investment. Far from it.

However my point is that someone with 29 years left on their mortgage and a debt of €275K and who has a lump sum available seems to instinctively think that another property and more debt is a better idea than running down the balance of what they currently owe. It also completely ignores life's normal risks of unemployment/ill health etc. I don't believe it is a wise or prudent course of action.

Actually on a re-read it is even worse. The lump sum is only €20K!! To use as a deposit to get into further debt of €250K to owe over half a million...

Perhaps I'm just old fashioned...
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Crashed happen not when risky assets become riskier but when safe assets become risky.
It was property last time, it'll probably be bonds this time but it will be something and Ireland's property market is far more plugged in to the international market now than it was in 2008.
 
NoRegretsCoyote said:
Half a century is a lifetime investment horizon for most people.

I don't know of any housing market in a developed economy where anyone has made a capital loss on residential property over the span of two decades.

Ireland is more volatile than most places, but returns are there if you have the patience.
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Certain parts of France have performed very poorly over 2 decades. While there is always the risk of having paid over odds initially, certainly there are areas that have not provided any return when one factors in Net Present Value of Current Market Value (over a 20 year period, this can easily reduce current values by 60% in real terms, that is why I like an IRR measure so much as it "normalises" today's value of your EURO against the present day notional value of your original investment). Include property taxes at an assumed 0.6% per year that is another 12% erosion over a 20 year period.... the remaining 20% is a 1% increase over a 20 year period. Hardly stellar.

Across a small portfolio of properties in Ireland (based outside Dublin), capital growth over a 15 year period ranges from 3% or 4.75% NET (Risk adjusted present value net of all costs). Has traditionally kept ahead of inflation... but not if inflation continues to run above 5%. I can't see much return by way of capital growth left in BTLs in Ireland and the taxation structure is prohibitive for the BTL revenue model.
 
tallpaul said:
I'm going to rant/generalise.

It seems that the next generation coming along still seem to have the same fixation as previous ones that any surplus cash should be chucked into second and third houses on the blind assumption that they will appreciate in value/earn easy high rents even if the purchaser has high levels of exiting debt!! 'Sure how hard can it be? 2K a month for doing nothing, It'll pay for itself in a few years' It is original posts like this that makes my blood boil.

When will people learn to live within their means (as someone once said...) and get about the business of reducing their existing debt without getting into more hock and putting all their eggs into one Irish property basket?? Not forgetting the unremitting hell that being a landlord in Ireland seems to be at present. Has the OP even CONSIDERED the direction of interest rates/inflation over the next five years?

I'm convinced, now more than ever, that budgeting/debt management should be drummed into children in school
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I'm not sure what is the 'next generation' for you TallPaul but for me the next generation, are unable to get on the property ladder at all. This includes my children & most of their friends. So no I don't think they need to be taught anything like that in school..... They see 1st hand how government housing policy has failed them!
 
tallpaul said:
I'm going to rant/generalise.

It seems that the next generation coming along still seem to have the same fixation as previous ones that any surplus cash should be chucked into second and third houses on the blind assumption that they will appreciate in value/earn easy high rents
Click to expand...
It's not a blind assumption, it is a lesson from history, a bitter lesson if you were on the wrong side of it.
 
NoRegretsCoyote said:
Records began fifty years ago and since then inflation adjusted property prices have increased by 250%. This is a real gross annual return of 3.5%. That's before depreciation of course but ignores rents.
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I've been thinking about historic trends a lot lately, and how the older I get the smaller those sample sizes feel like, especially given the rate at which the world is changing and how long cyclical behaviour can be. I'm not saying you're wrong, but I would question whether 50 or even 100 years of data is enough to be predictive of the future.

Longer time frames like https://en.wikipedia.org/wiki/Strauss–Howe_generational_theory are becoming more interesting to me.
 
tallpaul said:
Thanks to the mods for moving this.

I'm not doubting for a second that holding onto a house for 25 years will not make a return on an investment. Far from it.

However my point is that someone with 29 years left on their mortgage and a debt of €275K and who has a lump sum available seems to instinctively think that another property and more debt is a better idea than running down the balance of what they currently owe. It also completely ignores life's normal risks of unemployment/ill health etc. I don't believe it is a wise or prudent course of action.

Actually on a re-read it is even worse. The lump sum is only €20K!! To use as a deposit to get into further debt of €250K to owe over half a million...

Perhaps I'm just old fashioned...
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Maybe you are old fashioned.

Risk assets deliver returns.

What if someone has 29 years left on their fixed rate mortgage, has already maxed out their AVCs and their fixed rate overpayment, and already has an emergency fund?
 
Gordon Gekko said:
What if someone has 29 years left on their fixed rate mortgage, has already maxed out their AVCs and their fixed rate overpayment, and already has an emergency fund?
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That would be a strong financial position by most reckonings – although even then an emergency fund will only see you through a period of hardship for a few months.

Also, "maxing out your fixed rate overpayment" might or might not be a limit that exists: even if your lender only lets you make, say, a 10% overpayment per year without penalty, it is often the case that the penalty for an overpayment beyond the 10% limit is very low or even zero. In the case where there is no penalty, if you have an interest rate of 2.5% on your mortgage, making an overpayment is the same as having a tax-free, risk-free investment that returns 2.5% per annum.

What this overpayment approach doesn't give you that a buy-to-let does is leverage. If you have a "spare" 90k – and assuming there are no break fees for overpaying – you can overpay your mortgage and earn 2.5% (on €90k) per annum. Or you can get a ~€300k buy-to-let (with a €210k mortgage) and earn 3.5%?? ± ???% over the long term (on €300k). So the BTL approach (which in this case relies on borrowing) lets you invest €300k – instead of €90k if you overpay the mortgage on your home.

The returns on a BTL, as with all investments, are unpredictable. We don't know if a 3.5% return over the long term into the future is a reasonable assumption.

[Edit: The 3.5% figure comes from NoRegretsCoyote's above post and refers only to capital gains. The inflation-adjusted gross annual return on property in Ireland over the last fifty years was 3.5%, with two periods of large price declines in that time. Any capital gain will be taxed at 33% when you sell. The 3.5% figure does not account for rental income, which for many people is taxed at about 30% to 50% after deducting allowable expenses.]

Leverage (otherwise known as "debt") works both ways: if everything goes in your favour, the BTL will make you a lot more than overpaying your mortgage. If the housing market takes a long downturn, or mortgage interest rates stay high for a long time, you will suffer – in proportion to the extent you are leveraged. If the above "± ???%" troubles you, a BTL probably isn't for you.

One thing that is often lost in many of these discussions is pensions. There is a common perception that pensions are the same as any other investment, e.g., buying shares or having a buy-to-let. But pension contributions (in Ireland) get huge tax relief. Even a pension that does "only OK" will far outperform most investments when you factor in the tax relief. See this post for my attempt to put some numbers on it:

When to overpay mortgage?

I'm 6 months in to a 25 year €265k KBC mortgage at 2.4%. I am allowed overpay by 10% of the mortgage value within the 5 year period. As far as I understand it is a KBC policy not a condition of the mortgage so BOI may not allow. So I am able to over pay by €26,500 within the next 4.5 years...
www.askaboutmoney.com

The priorities for most people should usually be:
  • Paying off expensive debt (credit cards, personal loans, car loans, etc.)
  • Building up an emergency fund in a savings/current account (3 to 6 months' living expenses)
  • Saving money for any expenses you will have over the next few years (kids; buying a car; childcare; home renovations; adult children going to college, etc.)
  • Maxing out your pension contributions
  • Overpaying your mortgage (or possibly investing in a BTL or shares)
in approximately that order.
 
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In 2007 a bank would have actively encouraged such a person to buy a property and put themselves into a crazy level of debt.

In 2022 there's no bank that would entertain such a scenario.

And that is good
 
NoRegretsCoyote said:
Records began fifty years ago and since then inflation adjusted property prices have increased by 250%. This is a real gross annual return of 3.5%. That's before depreciation of course but ignores rents.

Yes, it was a rollercoaster but three periods of big gains and only two periods of losses.

Irish property is not riskless but if you have the stomach to stay in it for at least two decades you will get a return.
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And the annualised return of an equity portfolio is around 8%-9% over the same period. So you are investing in a high risk asset class, failing to diversify and probably borrowing to invest and for all of that you are getting a return of about a 3rd of what is on offer. There is a reason why Irish households lost more than the average European household in the last recession and it is right in front of you.
 
tallpaul said:
I'm going to rant/generalise.

It seems that the next generation coming along still seem to have the same fixation as previous ones that any surplus cash should be chucked into second and third houses on the blind assumption that they will appreciate in value/earn easy high rents even if the purchaser has high levels of exiting debt!! 'Sure how hard can it be? 2K a month for doing nothing, It'll pay for itself in a few years' It is original posts like this that makes my blood boil.

When will people learn to live within their means (as someone once said...) and get about the business of reducing their existing debt without getting into more hock and putting all their eggs into one Irish property basket?? Not forgetting the unremitting hell that being a landlord in Ireland seems to be at present. Has the OP even CONSIDERED the direction of interest rates/inflation over the next five years?

I'm convinced, now more than ever, that budgeting/debt management should be drummed into children in school
Click to expand...
In order to learn from mistakes, people would have to admit that they made them, it's much more comfortable to blame the banks, the government, the bond holders and just about anyone else they can think of.

There is some justification for a mortgage on a home, given the asinine housing policy, but if someone goes beyond I have no sympathy for them - if you do stupid thing you should expect to get burned.
 
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