These are a selection of 'Money Comment' columns I wrote about residential property in 2004
ST MoneyComment - March 28, 2004
HUGE GAP EMERGES IN PROPERTY REGULATION
The tax implications of property investments seem to be the last thing on people’s minds when they hand over their down-payments on holiday homes and buy-to-lets. It is bad enough that investors are unaware of capital gains tax liabilities on Irish property, but worse still when they buy property abroad without knowing the tax implications in those countries.
Different jurisdictions have different ways of dealing with profits realised from property sales: for example, the UK does not tax profits earned by non-residents, while Spain – I am told - does charge CGT on profits realised within the first 10 years of the purchase. How South Africa, Canada, Hungary, Bulgaria and Estonia – all well publicised investment destinations - tax profits repatriated by property investors and non-residents should be a pressing issue, but doesn’t seem to fill too much space in the glossy sales brochures being handed out at weekend property fairs.
Property investing has overtaken just about every other asset class in recent years yet there remains a gaping hole when it comes to the way in which it is being policed.
IFSRA regularly investigates unlicensed, off-shore investment firms that cold-call and target Irish investors to buy shares and then publishes warning statements about them in the national newspapers. They even keep a register of such companies – and the licensed ones – for punters to check before they hand over any money or their bank account details. Yet anyone can come here and flog apartments from Sophia to Singapore without so much as a handshake from IFSRA. Home-bred property promoters get just as easy a ride.
You can never legislate for people’s stupidity or greed, but at the very least, shouldn’t promoters be required at the point of sale to provide prospective investors with a standard disclosure document of their own costs, charges, commissions plus investment projections, tax implications, etc regarding the property? And what about the requirement for ‘best advice’ that licensed Irish financial advisors have to give their clients?
The property investing sector is playing by all its own rules at the moment, and for many unwary and foolish investors it could all end in tears.
ends
ST MoneyComment – March 28/04
IT’S ALL ABOUT BUILDING CAPITAL GAIN, NOT A PROPERTY NEST
I’ve been listening to prospective, first-time buyers moan so long about how it is impossible to get on the property ladder - without mummy and daddy’s help - that I suppose I was nearly believing it myself.
A report last week about how newly built, low cost authority houses have been reduced by €40,000 because there are so few buyers confirms what I have suspected all along: not only are 20 and 30-something’s unbelievably fussy about property, but are only interested in playing the property game if they can take full advantage of the speculative fever that has gripped this country for the last few years.
The houses concerned are brand new, pleasant three bedroom homes on the edge of Fermoy (one of Cork’s loveliest bigger towns) which the county council are selling as part of a low cost, shared ownership scheme for first time buyers on relatively modest incomes. The 76 houses are selling for just €122,000, €40,000 less than the original asking price, but of the original 125 or so applications, only 35 have so far been taken up. Apparently the same problem has occurred with similar schemes in Youghal and Kanturk.
There is either something very wrong with the houses – though they certainly looked very spacious and attractive to me; with the location (well, I like Fermoy) or with the rules of the scheme. Perhaps there is a glut of low cost private houses in the area, but I don’t think so. I expect the problem is that despite the low asking price and the reasonable purchase terms (the buyer takes out a mortgage on up to three quarter of the value for house and pays a modest rent for the balance until (s)he can afford to buy out the balance) buy you must hand back any profit if you sell the property within the first 10 years of ownership.
Perhaps some young singles or couples believe these houses will simply be too small for their future family, but I expect it is more the loss of a juicy capital gain after a few years which prevents them from signing the contract.
Cork parents who have been the victims of the widespread and not-so-subtle pressure from their children to release equity from their own homes to help pay down payments may want to take note of this development in Fermoy.
End
STMoneyComment – April 4/04
SOARING MORTGAGES THREATEN NEW BUYERS
Lower interest rates seem to mean just one thing in this country – an opportunity to get even deeper into debt. Mortgage values are growing by one billion euro a month, says the ESRI, which has warned that if something doesn’t give, we could end up in the same scenario that happened in the UK in the early 90’s when a property crash left thousands of people with mortgages that were worth more than their properties.
However, you wouldn’t think there was much a problem judging from the average percentages that the ESRI say we spend on mortgage payments – just 8% of disposable income. (Which they predict could rise to 10% by next year.) The mortgage in question has an ‘average’ term of just 10 years left to run.
I don’t know about you, but 8% of disposable income set aside for the mortgage, (or even 10%) sounds pretty manageable and might even represent the mortgage payments that anyone who bought their house in the ‘80s is currently paying. But long-standing homeowners with 10 or fewer years left on their loans are in no danger from any price collapse.
The threat of soaring mortgage loans is greatest to anyone who bought their three-bed semi - in some distant suburb – in the last few years. The average industrial wage is €30,000. The average house price in Dublin is over €309,000 and over €237,000 around the country. If you are lucky, you get to keep about €22,000 of your gross income or €1,800 a month after tax. Yet you couldn’t buy a closet in Dublin for 8% or 10% of that figure.
The only way a billion euro a month is being borrowed for mortgages is because two people are paying off a ‘typical’ €200,000 mortgage every month with about a third of their combined incomes. That’s before they pay for food, utilities, car loans, insurance, crèche fees, etc.
The ‘average’ figures are deceptive, but is it any wonder the ESRI is finally beginning to get worried about the impact of lower interest rates?
Meanwhile, it isn’t just the ESRI that sees the writing on the wall for the property market. At the Irish Association of Pension Funds annual investment conference last week, Colin Hunt, the head of research at Goodbody Stockbrokers warned that “Unless house prices moderate to 5-7% over the next year then we could see a property crash which would have major implications for the Irish economy.”
The next day the latest PTSB/ESRI house price index showed that house prices in Dublin are up 11.8% in the year to the end of February and 13.5% outside Dublin.
STMoneyComment – May 16/04
BUBBLE FED BY PRICE FRENZY
A house up the road from me which was bought 14 years ago for €38,000 is on sale for €650,000, an increase of 1,700%. I know this should be a source of great joy for the rest of us, but after last week’s headline about how second hand homes in Dublin increased by 19.5% in 2003 this news leaves me wondering not when a property collapse is going to happen, but the size of that collapse.
My gloomy view is not shared - surprise, surprise - by estate agents, mortgage lenders or bank economists who all have a vested interest in talking up prices. They argue that on-going, low interest rates in the EU means that buyers can afford higher mortgage loans and that strong employment figures have alleviated fears about job losses, the second ingredient in a classic property bubble burst.
But what about supply and demand? The Department of the Environment are of the view that there is sufficient housing – nearly 69,000 new houses were built last year – to meet demand and rents are softening.
So why are prices still rising this year by 13% nationally?
Price bubbles like this – at a time when other assets are rising by low single figures and inflation is under 2% - happen because of a combination of fear and greed. The fear is, unfortunately, well founded, since prices do keep going up every month and the longer the delay, the more the buyer will pay. But the price frenzy is fed by greed as buyers hope they will get to share in the phenomena of 1,700% profits since 1990.
People need a place to live and I fully endorse the idea of home ownership. But before you commit yourself to a mortgage that is ten times your combined salaries (house buying now being out of reach of single buyers on the typical industrial wage) keep in mind that €1.3 billion was wiped off the value of the Irish stock market overnight recently because of the merest hint that the US Federal Reserve may raise interest rates next month.
Just imagine what will happen when the EU does eventually raise interest rates here.
ST MoneyComment – July 25/04
GO WEST TO SEE UGLY FACE OF THE BOOM
If you want to see the really ugly face of property speculating go visit the west of Ireland this summer.
Eighty thousand new homes will be built in 2004 – a record number – but how many of them will lay empty for half the year or longer?
A week spent in County Clare has confirmed what many aspiring young home owners in scenic areas have complained about for the past decade: that speculators are continuing to build and buy houses all around the country which are not only unaffordable to local buyers, but can’t even be rented because leases only extend to April when the holiday season begins.
Everywhere you drive in west Clare, along the coast and throughout the Burren, there are empty new houses built in recent years to avail of Section 23 holiday home tax breaks. The rental incomes earned by the absentee landlords average only about 16 weeks of the year, say unhappy locals from Kinvara to Lahinch. The owners leave them empty because up to now they have made up for lost revenue with capital growth.
This year however, summer occupancy levels are even worse than last year, with local tourism operators citing the poor weather, the strong euro, travel fears by Americans, and perhaps most significantly, overpricing.
“I think maybe there is a realisation that we are pricing ourselves out of the market,” said one trader in Ballyvaughan, in the Burren. “Visitors complain about the price of petrol (€101.9 at the local service station), the cost of food and accommodation,” she said. “We’re paying for it this year worse than last, and 2003 wasn’t a good year either.”
Outside the village, huge new houses on half acre sites, designated as B&B’s sit empty, while the established places all have vacancy signs in their windows. Meanwhile, Lahinch, an intensely ugly place but with one of the most beautiful beaches in the world, has turned its outskirts into Tallaght-by-the-Sea in recent years with endless rows of tacky semi-detached ‘cottages’, each one exactly the same, all seemingly lying idle.
Young working class people are being priced out of their own towns and villages, but I rather doubt if this worries the rich golfers from Dublin or the speculators who come down for a week to inspect their investment.
ST MoneyComment – Sept 26/04
GERMAN INTEREST RATES UNSUITABLE FOR BOOMING IRELAND
The idea of paying an extra €300 a month on a typical €250,000 mortgage doesn’t sound very promising, yet this is what has been suggested in last week’s Central Bank’s Financial Stability Report in its outlook on the short term future of the property market here.
The Bank has said for at least three years that mortgage interest rates have not reflected the true position of our market and that we’ve been funding the mother of all property binges on the back of rates that are more suitable to Germany’s relentless economic doldrums, and not out own brisk little sou’ westerly.
You only need to look across to the UK and its similarly buoyant economy, where home buyers are now paying in the region of 7% for their new mortgages, to get an idea of the kind of rates that we should be paying. Fearful of another property crash after the last one just a decade ago, the Bank of England has been steadily increasing British interest rates to cool down the market. Property price increases have now reversed.
The problem here is that all the carrots have been eaten (especially the SSIA one which was supposed to take excess spending out of the economy) and all the sticks are held in Frankfurt. Our own worried central bankers can only wring their hands and wail about how the sky will fall if we (mortgage buyers and providers) don’t start borrowing/lending more prudently. The problem is that like the little boy who cried wolf too often, practically no one believes they’re about to be eaten, and why should they?
The only reason the ECB will raise rates high enough to add another €300 a month to a typical new mortgage repayment is if the German economy makes a miraculous economic recovery. Despite attempts by the government there to cut social security, the legislation is too little and will take at least a year or two before it has any significant impact on unemployment, and none on their massive pension deficit.
No, there’s plenty more expansion room in our property bubble before rate hikes start to pinch. Judging from the recent mortgage lending figures – up 27.7% on the same rates to last July – we’re determined to fill every cubic inch before someone in Frankfurt finally bothers to take out that sharp pin and gives it a great big stab.
I can think of a few ways to take some of the heat of the market – abolishing all mortgage interest tax relief in the December budget would be the best way – but with government backbenchers already fretting about their unpopularity and an election looming, it will never happen.
STMoneyCommentOct 24/04
OVERSEAS PROPERTY APPETITE “INSATIABLE”
The desire for overseas investment properties is insatiable, especially this month when it coincides with the October 31 pension tax relief deadline and every property broker-cum-tax advisor has a favourite scheme to flog.
One location which this year is attracting investment interest – to my utter amazement – is Montreal, a city I know very well having lived there for 24 years. Not that it isn’t an exciting, attractive place, and one in which property prices are on the rise. It’s just that the property taxes are so horrendous compared to Ireland that it makes you wonder how promoters could possibly be making a single sale here.
For example, at one newly built downtown apartment complex, the combined federal and provincial sales taxes on a CAN$225,809 (or €155,000) sales price was nearly $34,000 (or 14.5%). A city welcome tax of 1.5% or $3,896 brings the total purchase price for this 608 square foot apartment to $263,633.
If that wasn’t enough, annual municipal tax eats up about 20% of the rental income, which in turn is subject to a non-resident rent retention tax of 25%. Throw in substantial condo fees and rental management charges (which appeared to be set artificially low) and the annual yield might hit 4% if you’re lucky.
An overseas buy-to-let is not a venture to be taken lightly. Too many people are buying too many houses and apartments off the plans without investigating everything from title to taxes carefully enough. Ironically, raising the finance seems to be the least of their troubles.
ST – MoneyComment Nov 14/04
SAVINGS BONANZA FUELS MORTGAGE DEBT
The latest comments by the chairman of the Irish Mortgage Council Joe Larkin, who is also MD of the ICS Building Society confirms what every dog in every spanking new suburban estate is barking about: that there is still more growth in a market “notwithstanding the unparalleled growth that has occurred over the past decade.”
Despite the fact that house prices have risen from €74,000 to €284,000 in the past ten years and that the value of outstanding mortgages has gone up from €3 billion to €12 billion, there is no sign of this trend stalling, let alone reversing, said Larkin.
There is an interesting theory now being touted by a well-known economist that it isn’t just our booming population that is driving on the property market. He believes that the huge pool of savings in the 1.2 million SSIAs (the hugely generous state Special Savings Investment Account) is being used as a sort of safety net that is encouraging many borrowers – especially those topping up existing mortgages. Knowing that they have a guaranteed fund of money to draw down in 2006-7 is giving them the extra incentive, in addition to continuing low interest rates, to extend mortgages which might otherwise squeeze their incomes or budgets which are certainly not keeping up with property inflation.
Certainly bank managers will admit privately that although the rules of the SSIA scheme expressly forbid using the SSIA in order to leverage borrowings, there is a pretty steady stream of customers who casually mention that they are expecting in the region of €20,000 (or €40,000 for married couples) from their fund in 18 months.
“Even if interest rates were to rise one or even two percentage points in the next couple of years, and a typical mortgage goes up by €100 or €200 extra a month, a lot of people who might otherwise have not risked the kind of high mortgage repayments that are commonplace these days, are deciding that their SSIA fund will be a contingency fund.”
Ends
ST MoneyComment - Dec 5/04
RISING DEBT OVERTAKES RISING INCOMES
Indebtedness has become such an everyday feature of our lives now that most Irish people don’t even seem to recognize how much financial trouble they are storing up for themselves.
In its annual Irish Financial Awareness Report, Royal Liver Assurance has created the acronym FEATHERS - Financially Empowered Adults Trying Hard to Evade Responsibility – to describe those group of people who know they should be spending less and saving more, but who prefer to increasingly fund their lifestyles with debt.
According to Royal Liver, the rise in incomes is not reflected by an increased rate of savings, but of the debt rate, with nearly half of all those surveyed now having at least one credit card compared to only 27% two years ago. One in five credit card owners admit they spend too much on their card and 34% say they have more personal debt today than they had five years ago.
Nearly three out of four people surveyed also admitted that because they prefer to spend their money “on holidays and treats” they have no spare money to save. Especially not on pensions, which 68% of those surveyed already believe to be sufficient to produce a comfortable retirement. How this is possible, given that nearly 40% of respondents also believe that an annual contribution of between 1%-10% of their salary will be sufficient to provide that comfort, is anyone’s guess.
The Royal Liver probably could have saved themselves rather a lot of money on this survey by just looking at the latest Central Bank credit report to the end of October. The year on year growth rate for private-sector credit is up over 1.7% from September to 25.2%. The last time demand was this strong was in 2000. The demand for mortgage credit isn’t getting any higher at 27.3% on last year (compared to 27.4% in September), but this is made up for all the higher volume of personal loans and credit card balances that we are building up.
So the party continues, and it is all too apparent this week that there is nobody around – not the Minister for Finance, not the European Central Bank – to call it a night and send everyone home to pay their bills.