Ten years on, Catherine McAuliffe reflects on the property crash of 2007, and on its roots in the 1990s.
Being known as a New Homes ‘Dinosaur’ allowed me to talk about the ‘good old days’, pre the property crash, but the analogy was appropriate — not because of the year I was born — but because this sector of the business became extinct.
In 1996 I bought my first home in Cork for IR£45,000. A new three-bed semi in Carrigaline, I thought I would never own anything of such value, ever again. Two years later, I sold it for IR£84,000.
Twenty one years later, the same house would be valued in the region of €230,000. In two years the price doubled. In 21 years, it quadrupled in price if you take into account the difference in currency.
Of course it went up before it came down, but what is clear is that the property crisis in fact commenced in 1996 and continued to develop momentum until its downfall in 2007 — 11 years later.
While I prefer to look forward these days, I find myself reflecting upon the differences between today’ new homes market and the one that was then.
It is no secret that new house prices soared well in excess of what was realistic, but this was driven by a number of different factors.
Firstly, the availability of funding, with loose or no restrictions on borrowing, allowed the amateur investor to buy one or many new homes without consideration for what was to come next.
I remember buyers who were borrowing for their next purchase, on the basis of the uplift in value of the one they had just bought previously.
This, together with no real tenancy regulation, no second property/investment property tax, interest-only loans, tracker mortgages and the like, allowed everyone to be an investor.
The investor drove the demand levels in the market which in turn drove the price.
First-time buyers and private home buyers were constantly competing with the investor.
Today we find ourselves in a much different market. First, the one-off/amateur investor is much less likely to buy a new home or indeed a residential investment.
The cost of finance for an investment property is higher and far more restrictive; registration and tax implications are prohibitive, together with the current rental restrictions of 4% per annum in urban areas.
This in itself has resulted in a decimated rental market with a huge shortage of rental properties driving rents skywards.
While it is very clear not enough houses are being built to satisfy the market, and we are most aware of the housing crisis in this country, it must be recognised that much of the unsatisfied demand comes from the social housing sector.
The Government’s delivery policy — while not currently satisfying demand — is in place since 2014, promising 35,000 new homes to meet social housing needs by 2020.
On the private housing side, all of the players are in place; land is being sold to developers; planning applications are being granted, and houses are being constructed.
On the buy side, we have a normal market, not driven by investors, and the buyers are either first-time buyers, traders-up or traders-down.
Many of the schemes released this year are of detached family homes with more recent additions to the offering being in excellent areas such as Blackrock and Model Farm Road, with large price tags.
But there is clearly a shortage of three-bed semi-detached, townhouses and starter homes.
Why do I prefer today’s market? Lending is rightly being policed and controlled by Central Bank rules and general banking criteria.
The quality of the houses being built is excellent, as building regulations now require an A energy-rated house, fully insulated and much, much cheaper to run.
New designs, elevations and building systems are being utilised to produce an attractive, well-thought out home for the future.
We must, however, listen to market demands and to those buyers’ purchasing ability.
A large number of loan approvals in Cork granted this year are below €300,000.
For example, one of the pillar banks confirmed 82% of loan approvals for 2017 were between €200,000 and €300,000.
First-time buyers will be forced out of the market if we do not recognise the signs. Pricing will be key to sustain this market.
Why are larger houses being built? Simple! There is a better return.
A pent-up trade up-market has emerged to satisfy the schemes of 20-50 larger detached houses but the number of purchasers with buying ability of between €500,000 and €1,000,000 is diminishing.
It is time to look at the viability of building the right product to satisfy market demand.
According to the SCSI, the cost to complete a three bedroom semi before purchasing a site to put it on in the greater Cork region is €170,787.
The average site with planning permission will currently be marketed at €50,000 to €100,000 per ‘stand’ and rising, depending on location. VAT is currently at 13.5%. It is clear that the margins are tight on new homes.
How can we encourage more developers to build suitable housing for current market demands? Reduce VAT?
Maybe, or does that just go back on the bottom line? Perhaps a tax rebate paid incrementally once a certain number of units are completed would be more appropriate.
This would encourage faster building and healthy competition for a more sustainable market.
Catherine McAuliffe is a director of Savills, Cork.
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