Boom-bust property cycle is a certainty
As an investment advisor, one of the most frequently asked questions I get from clients is about buying property.
If I got a euro every time someone asked me whether now is a good time to buy, either for residential use or from those looking for an investment, I would be worth more than Bill Gates.
You might think these are two separate markets with different considerations,and in a way they are. A residential house is for living in, so value is not as important, and if you are trading up or down, then selling and buying in every market nets out the same. You pay more in a high market but sell for higher and vice versa.
The reason these two markets are so interrelated is that there are overlaps as there is only a finite source of properties and both sets of buyers are fishing in the same pool.
Investment properties are all about yields and not so much about comfort and personal interest.
However, talking to many investors, it is difficult to buy for pure returns as people generally get personally involved. As well as this, the same criteria, such as close proximity to trains or buses and good schools, are relevant for both sets of purchasers. It is more difficult to rent a property far from amenities and good schools.
Statistics show Ireland is undergoing a historic shift in its traditional pattern of home ownership. In many ways, the Irish experience of independence has been one of gradual, but significant, improvement in living standards. Much of this has been driven by the accumulation of property, primarily owning one’s own home.
Due to high house prices and the influx of young Europeans working in multinationals, renting is a reality for more people living in Ireland than ever before.
Compared with other markets, Irish renters face uncertainty on rent costs, how long their leases are, and what the future holds. There have been reforms in recent years, most notably rent pressure zones, extensions to notice-to-quit periods and penalties for landlords who break the rules on termination provisions.
For those paying rent, but who are in a position to buy, I feel they should explore the option of buying. While prices have risen considerably, interest rates are historically low and banks are as competitive as they have ever been.
This has led to ‘cheap’ money with typically fixed rates of around 2.5% per annum available. In many cases, people will pay less in mortgage repayments than rents. Even those non-financially astute can see how this makes sense.
In terms of investment, I would tread more carefully. With negligible deposit rates, people naturally look for better returns and property is an asset class Irish people like. Property is, however,a high-risk investment and people often forget this. Also, it requires a large amount of capital.
The surge in renters and rents has made for good business for a lot of investors; particularly those overseas, but these investors can afford the risks, which Joe Public cannot.
Prices are rising due to what property insiders describe as a ‘wall of cash’ trying to get into the Irish rental sector.
Estate agent CBRE has estimated that there is €7bn of so-called institutional capital (large swathes of cash, controlled by professional money managers) chasing apartment stock in Ireland. These investors can afford to outbid individual buyers as well.
However, while rents are high and thus make yields attractive, there are headwinds. The rent caps have limited returns and the market will not always be as strong as it is. Property,as well as being proportionately too large for most investors, is also very illiquid. Despite this, people are enerally optimistic in their outlook forgetting what happened in 2008/2009.
People often forget decisions regarding property must be made over the medium to long term and not just due to the market now.
The other consideration is tax. For those able to buy property in tax havens such as pensions, this is more palatable than those who are paying over 50% tax on the rental income they receive.
Each of us, on average, is worth about €150,000, and about half of this is in housing. We have to rely on the value of those assets to see us through the ups and downs of life and property tends to go through boom and bust cycles, so prepare for the next wave. It will come.
