Mortgage rates hike means funding difficulties
While pent up demand still exists for housing of all sorts it may well be that the hike in rates coming down the line from the ECB could be the factor that pushes house prices into a slump.
The old saying, ‘as safe as houses’ has been around for a long time.
It has its genesis in the great property crashes that rocked Chicago and California in the 19th century when the US was starting to grow rapidly and people thought that property could only go one way and that was up.
Like every other bubble that had gone before, it offered the lure of easy riches, but after the bubble burst in 1926 property prices fell by more than 90% from their peak values.
Several factors drove the Florida market and a few unfortunate hurricanes didn’t help.
But the point so painfully driven home to those who lost everything was that property prices were capable of imploding not just once or even twice but three times in the case of about 50 years in the US.
Property crashes are not the preserve of the US. As far back as 1773 prices tumbled in Britain followed by crashes in France and Germany the following century.
And in the 1890s prices in Britain were hit again.
In 1899 the average price of residential land was £900 an acre and it had fallen to £130 or 85% in the five years to 1904.
In his book on market crashes, Bob Beckman warns that anyone who wants to avoid getting hurt in a bubble has to realise that any area of commercial activity can fall victim to a crash.
In his analysis he points out too that bubbles happen when most people, at a given time, are willing to believe that what they are investing in can never fall in value.
In total the world has been subjected to about 12 major crashes.
Property investors and house buyers would do well to remember that back in Thatcher’s Britain in the late 1970s, negative equity caused havoc in the South East.
Banks were lending money as if it was going out of style and the people who were doing well borrowed massively, paid inflated prices for apartments and houses, driven by the shared belief that the good times triggered by Thatcher’s policies would never end. They paid the price in the end.
With that backdrop the question being increasingly asked is how safe the Irish housing market is.
The argument in previous bubbles was that ‘pent up demand’ drove the markets forward.
At the end of the day our cherished properties are still only worth what the other person is prepared to pay for it.
With amounts being borrowed rising incessantly we are fast getting to the point where the average mortgage will be close to the €300,000 mark while over 500 mortgages will be taken out this year for well over €1 million each.
This is happening at a time when ECB rates are set to rise by at least 0.5% before the year end with a further 0.25% a distinct possibility in the first three months of next year.
Every 0.25% adds about €15 to the repayments on every €100,000 borrowed.
But perhaps the real danger to the Irish property market lies elsewhere.
Developer Sean Dunne lashed out €380m for less than seven acres of land previously owned by Jurys Doyle in Ballsbridge.
Since then he has invested a further €200m in the AIB head office.
This week Liam Carroll splurged €171m buying 22% of Greencore driven mainly by its huge land bank.
Land grab mania seems to be the order of the day and even those of us who have been positive about the market and what can be sustained are getting decidedly edgy at this stage.
Crashes by Robert Beckman should be recommended reading for anyone even remotely interested in what’s happening in this country right now.
