Ireland’s housing market in 2017 is one of many conflicting signals. Depending on who you talk to, there are parallels with all sorts of past experiences. To some, we are still living in the crash, with masses of empty properties dotted around the country the elephant in the room.
To others, the dramatic increase in housing prices tells them that we are in a bubble. To them, the market is like Groundhog Day – and we are Bill Murray, doomed to repeat the same cycle we just exited.
I am not convinced by either narrative, however. True, there are some small pockets of the country where an excess of bubble-era building still swamps out demand. But by far the more important trend over the last six years has been an acute and growing shortage of supply.
It’s worth remembering that, in the bubble years of 2001-2008, Ireland’s cities did not build to excess. The over-hang, once the bubble popped, was to do with the increase in unemployment and emigration. Once this levelled off in 2010, so too did rental and later sale markets.
But if we are not back in 2011, neither are we back in 2001. The market then was characterised by increasingly reckless borrowing and lending. Central Bank of Ireland figures indicate that the typical first-time buyer went from having a 33% deposit in 2000 to less than a 10% deposit in 2006. More than 25% of first-time buyers that year had no deposit at all.
Back in 2014, when Dublin house prices were rising at a rate of 25% per year, I did worry that we were entering another expectations-driven bubble, fuelled by loose credit. And, true, the Central Bank has recently relaxed its mortgage rules, while the Government has decided to “help” first-time buyers.
But the key point is that the rules are there. It is not up to individual banks to decide how risky they should get when issuing mortgages: the Central Bank has given them a maximum level of risk. So what we have is a market where demand easily outstrips supply, in both sale and rental segments, but where credit is limited, reducing dramatically the risk of a bubble.
Strong demand – and weak supply – mean that some of the guessing is taken out of the market. Despite quarterly and perhaps annual blips, it is likely that prices will continue to rise in the coming years, although far less dramatically than in recent years. What does this mean for those thinking about buying or selling? For sellers, the key change is to move away from valuing your house based on what it was worth in the bubble or what your neighbour sold theirs for two or three years ago.
Sellers need to figure out the kind of buyer for their home: Who are they and what do they work as? Knowing whether your home is likely to appeal to a teacher or two law partners or someone downsizing is central. What is their household income? What sort of deposit might they have? This will determine their mortgage and thus the maximum they are willing to pay.
For example, suppose you think your home will be bought by an accountant and a teacher. Together, they earn €80,000 per year, before taxes. They are first-time buyers and, leaving aside money for solicitors’ fees and stamp duty, they have saved up €30,000. Under Central Bank rules, they would be allowed borrow €280,000 – unless they can secure an exemption from the loan-to-income restriction, in which case they could borrow €300,000. Either way, the most this couple would be able to spend on a house is €330,000.
What about buyers? It is tempting for buyers to just employ the same logic in reverse: “Whatever the bank will lend us is our stash and let’s go find something we like.” But the key question for buyers is to know how much an individual property is truly worth – and then tailor the search for a home based on that. This is done by applying an investor’s logic. As a homeowner, you are both an investor and a consumer. And a good investor will want to know what return they’re getting on their asset.
The rule of thumb is that bidders should not offer more than 20-25 times the annual rent for a property, without a very good reason why. A property that rents for €1,200 per month has an annual rental bill of almost €15,000. This translates into a value of between €300,000 and €375,000. The smaller the multiple of the annual rent, the better a deal you are getting for yourself as an investor. Many investors currently are only paying ten times the annual rent for one- and two-bedroom properties.
But going beyond 25 times the annual rent means that you are taking on risk. Remember, as the successful buyer of a property, you have just valued it more than anyone else on the planet. You should be able to explain why!
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An edited version of this post was originally published in my column in the Sunday Independent.
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