How far overpriced is property when you comapre to other options?

[Kevin Doyle]

Aahh. A clear extrapolation of the "rent is dead money" theory.

This country still has a lot to learn about finance and economics.

From the likes of you??

Ha ha ha ha ha ha.....

You do realise that seabhcans post was the exact opposite of what you claimed it was?

[Dillinger]

...and emigrate for 6-12 years, because unlike the US, the debts stays with you not the house.
And anyone who bought in the last 10 years is in that position.

That would be about the best option.

[Dillinger]

The market will become a renters paradise. Also, what will happen, is that people will occupy abandoned properties, then eventually apply for the lease. This happened in the UK after their last crash. We have similar laws, so this may happen here.

[Geckko]

We did a report in conjunction with Propertyweek.ie to see what price a property would have to be in order to match a deposit. The idea being that if you are going to consider taking any risk it should at least match or beat something that is considered 'riskless'. Link is below [i don't know how to put wording into the link, it says Irish Mortgage Brokers | , but that's the link to the blog where it's at]


Irish Mortgage Brokers | Mortgage Brokers Dublin


The report focuses on 'target prices', to justify today's price what kind of rent would you need to be getting? Based on the actual rent today what would the property have to sell at in order to match deposits? and lastly, if rental prices dropped, using the same methodology what prices would property have to sell at.

Covers Dublin, Cork, and Galway.

MB. You can only do this properly by leaving out the gearing, or gearing each side to the same extent. Failing to do so means you are comparing one risk free financial position with a much riskier one.

This is a central result of modern finance theory (Modigliani). You don't increase the economic return through gearing, you just increase the risk. In essence you are comparing investing €350k, against investing €88k.

You need to do it witohut the gearing, find the best investment and then choose the amount of gearing you need, if any, to scale the risk (and hence return) to the desired/acceptable level.

So you should ask, if someone gave you €1m, would you be better off buying a house for €1m, or buying €1m in 50 year inflation linked government bonds and renting. Then you get:

Buying:
+ rental yield

Renting:
+ investment return - rental yield

The difference comes down to the real return on bonds vs. the real rental yield.

At the moment long-term real bond yields are fairly low, but still positive around 1.5%. Real rental yields are about zero really.

so you would be better off paying the real rental yield and taking the real bond yield = 1.5-0 = 1.5% per annum real return, or €15,000 per annum better off renting.

Of course you need to consider the different types of risks you are running. Being the renter leaves you exposed to real rental yield risk (you are protected against general inflation, but if there is a housing shortage in the future that pushes rents way ahead of inflation it will cost you.

If you are an owner occupier and you aren't "long" housing - i.e. the house is not more than your needs, then you are nicely hedged.

If this is an investment property, or your a "long" housing (for example, you bought a bigger house than you really needed), then you are exposed to real interest rate risk. If real rate rise then you become worse off as the cost of the capital you have invested become higher and higher relative to the rental yiled (actual or imputed) that you are getting.

[Geckko]

From the likes of you??

Ha ha ha ha ha ha.....

You do realise that seabhcans post was the exact opposite of what you claimed it was?

You're first in line for the remedial classes. Go read the post again.

[Kevin Doyle]

You're first in line for the remedial classes. Go read the post again.

Yawn, he said renting is the better option for him, he wasn't advocating the rent-is-dead-money theory.

Either you misread him or don't know what extrapolation means.

Stop digging, except your gaff and move on.

[MortgageBroker]

MB. You can only do this properly by leaving out the gearing, or gearing each side to the same extent. Failing to do so means you are comparing one risk free financial position with a much riskier one.

This is a central result of modern finance theory (Modigliani). You don't increase the economic return through gearing, you just increase the risk. In essence you are comparing investing €350k, against investing €88k.

You need to do it witohut the gearing, find the best investment and then choose the amount of gearing you need, if any, to scale the risk (and hence return) to the desired/acceptable level.

So you should ask, if someone gave you €1m, would you be better off buying a house for €1m, or buying €1m in 50 year inflation linked government bonds and renting. Then you get:

Buying:
+ rental yield

Renting:
+ investment return - rental yield

The difference comes down to the real return on bonds vs. the real rental yield.

At the moment long-term real bond yields are fairly low, but still positive around 1.5%. Real rental yields are about zero really.

so you would be better off paying the real rental yield and taking the real bond yield = 1.5-0 = 1.5% per annum real return, or €15,000 per annum better off renting.

Of course you need to consider the different types of risks you are running. Being the renter leaves you exposed to real rental yield risk (you are protected against general inflation, but if there is a housing shortage in the future that pushes rents way ahead of inflation it will cost you.

If you are an owner occupier and you aren't "long" housing - i.e. the house is not more than your needs, then you are nicely hedged.

If this is an investment property, or your a "long" housing (for example, you bought a bigger house than you really needed), then you are exposed to real interest rate risk. If real rate rise then you become worse off as the cost of the capital you have invested become higher and higher relative to the rental yiled (actual or imputed) that you are getting.

Hi Geckko,

the idea I used was to look at using a certain amount of money, (which is determined by the opportunity cost) and to compare the risk-free return vs that of the risk based return, granted gearing comes into play, but if you do the figures from a cash v.s. cash position the (buy a house for cash or invest that money on deposit) capital position is equally negative over the 5yr period we used as a short term test to decide what the current winner was.

The figures are there to indicate direction and where prices would need to be in order for medium term risk-premium to balance (mind, property should really be beating deposit in the first place given the risks involved).

a mortgage over 25yrs vs at treasury over the same period, i don't think a 50yr TIPS would be a like for like.

I think the 5yr window we used when matched against current supply gave a fair interpretation, but maybe we should design a long model too?

might need some help on that, fancy volunteering! ;-)

[Geckko]

Hi Geckko,

the idea I used was to look at using a certain amount of money, (which is determined by the opportunity cost) and to compare the risk-free return vs that of the risk based return, granted gearing comes into play, but if you do the figures from a cash v.s. cash position the (buy a house for cash or invest that money on deposit) capital position is equally negative over the 5yr period we used as a short term test to decide what the current winner was.

The figures are there to indicate direction and where prices would need to be in order for medium term risk-premium to balance (mind, property should really be beating deposit in the first place given the risks involved).

a mortgage over 25yrs vs at treasury over the same period, i don't think a 50yr TIPS would be a like for like.

I think the 5yr window we used when matched against current supply gave a fair interpretation, but maybe we should design a long model too?

might need some help on that, fancy volunteering! ;-)

You still can.t do it that way.

It is like saying what offers the best expected return:

€1,000 of FTSE index, or
€1,000 of FTSE spreads?

The latter of course, in absolute terms, but with much higher volatility. Same with your analysis.

Take the gearing out and compare the expected physical returns.

Also re. the index linked bonds points. This is to compare against the altenative asset purchase, which for someone 30 years old is about 50 years of imputed rental yields. Of course, you could buy other pretty secure inflaton protected fixed income securities with an even higher return, but with higher than sovereign risk.

The mortgage doesn't enter into it. As I mentioned, the gearing should in fact be taken out.

[carlovian]

Interesting report and its true that property is way overvalued at the moment.

Have to agree with Gecko about the borrowing factor. To compare property v deposits we should treat both alternatives similarly.

Also im not sure about the annual loss in one year simply being multiplied by 5 to get the total. Are we ignoring the time value of money here ?

Alternatively would a DCF approach be possible ?

[MortgageBroker]

You still can.t do it that way.

It is like saying what offers the best expected return:

€1,000 of FTSE index, or
€1,000 of FTSE spreads?

The latter of course, in absolute terms, but with much higher volatility. Same with your analysis.

Take the gearing out and compare the expected physical returns.

Also re. the index linked bonds points. This is to compare against the altenative asset purchase, which for someone 30 years old is about 50 years of imputed rental yields. Of course, you could buy other pretty secure inflaton protected fixed income securities with an even higher return, but with higher than sovereign risk.

The mortgage doesn't enter into it. As I mentioned, the gearing should in fact be taken out.

I have to agree on one hand, but until you can find a house for €80k then it is not a real world scenario on a personal risk situation, if you have to gear to buy then you need to factor in the actual situation that is expected, if you have more cash than 20% then compare the greater % against the benchmark on deposits to help make a decision.

Gearing does distort the figures but this is not about relative returns on the opportunity cost only, but on the total cost so how do you take gearing out of that and not lose sight of the scenario for the individual investor?