Is now a good time to buy?

 

It’s the question no one can answer with cast-iron certainty but with serious mortgage relief on offer and falling prices, it might just be a good time to buy, writes CONOR POPE

WHILE THE three auctions of distressed properties held by Space Allsop in the Shelbourne Hotel last year featured dozens of lots and attracted huge crowds, protesters, international television crews and crowd-controlling gardaí, the Merlin property auction in the Burlington Hotel at the end of November was a considerably more low-key affair.

There were just 60 chairs in the ballroom and many of those remained vacant throughout the short auction. Just two of 10 properties reached their reserve price and sold under the hammer, a further two properties were sold after the auction and negotiations got underway for three others.

Unlike the Space Allsop affairs which were organised by banks anxious to get repossessed or surrendered properties off their hands, the Merlin sale saw owners putting their houses on the market and the anxiety on the faces of many of those would-be sellers was evident.

While the auctions were different, they were both a stark reminder of just how far the Irish property market has fallen.

In the Burlington, one house in Dublin’s East Wall that once might have been expected to sell for close to €400,000, had a reserve of €65,000 which it eventually reached after a painstaking process. A three-bedroom house in Clifden, Co Galway had a reserve of €69,000 but bidding peaked at €58,000. Its value just two years ago was put at €205,000. A two-bedroom apartment in Youghal, Co Cork attracted a bid of €65,000 before selling, post-auction, for €66,500. Its peak value was around €250,000.

Recent figures from the Central Statistics Office (CSO), MyHome.ie and Daft.ie all bear out the precipitous decline. According to the CSO, the cost of an average home in the Republic fell by almost 16 per cent in the year to the end of November. For its part, MyHome.ie reported an annual rate of decline of 13 per cent in 2011, while Daft said house prices had fallen by 18 per cent year-on-year.

Then there are the more than 100,000 homeowners who are struggling and often failing to pay their mortgages each month. In such a climate of fear and uncertainty asking whether 2012 might be the year to buy may sound ridiculous but it might be a good idea for many.

In an effort to kick-start the moribund property market, in last month’s Budget the Minister for Finance Michael Noonan dangled a carrot in front of would-be buyers who are considering making a move.

First-time buyers who buy this year will get mortgage interest relief of 25 per cent in 2012. The rate will stay the same in 2013 before falling to 22.5 per cent for 2014-2016. In 2017 it will drop further to 20 per cent, meaning for that year they would get a maximum relief of €2,000 annually for singles and €4,000 for buyers who are married or in a civil partnership.

People who buy their second or subsequent home next year will benefit from a 15 per cent rate of mortgage interest. People who wait until 2013 will get no relief.

If a person buys for €300,000 today and puts down a 10 per cent deposit they will have a mortgage of €270,000. Spread out over 30 years at 4.5 per cent that will cost around €1,289 a month. This year a couple would get €225 off that in mortgage interest relief which would take the net payment to €1,064 a month.

If they were to wait until 2013 and house prices were to fall by 10 per cent over the next 12 months then the same house would only be worth €270,000 next year.

With the same 10 per cent deposit, that would leave them with a mortgage of €243,000 in 2013 but no tax relief on the payments. So a 30-year mortgage at the same rate of 4.5 per cent would mean a monthly cost of €1,160, a fraction less than if they bought now despite the smaller mortgage. But they will also be paying their mortgage for one year after the first couple have paid theirs off and will have paid rent for an extra year.

Cathal Gahan from Dublin is collecting the keys of his first house later this month. He is 29 and has just bought a three-bed, mid-terrace house in Raheny for €200,000, more than €200,000 less than what it would have cost him at the height of the boom.

“I have been saving for the last few years and finally I got into a position where I could afford it. I am buying as a home for the long term,” he says. “My thinking was that I can afford it, it is where I want to live and I have got the financing in place so why wouldn’t I? Of course it might fall in value over the next two or three years but I don’t really mind.”

He used a broker to arrange his financing and says that because he had the 10 per cent deposit and a full-time job, the loan was not a problem. “A lot of my friends are talking about it and asking about the mechanics of the process. The reality is that none of us could have afforded to live here, where we grew up, five years ago.”

And what is the bottom line? His three-bedroom house, once interest relief is factored in, will cost less than €600 a month, a price which compares favourably to similar-sized houses in the area which are renting for €1,000.

According to Daft.ie economist Ronan Lyons, a key point is that recovery will not mean an increase in prices. In the property website’s “State of the Housing Nation” report published last week he said recovery “means an increase in activity” and not a big shift in prices – those days are gone, possibly for ever.

There can, however, be no recovery until banks start lending. Last year Irish banks issued about 13,000 mortgages compared with over 200,000 in 2006, a decline of almost 95 per cent. The financial institutions blame the dramatic decline on a lack of demand because those who would trade-up are mired in negative equity or are clinging to precious trackers and first-time buyers are either unemployed or worried about their jobs.

But experts say that while demand is certainly down, it is not down by 95 per cent. Lyons points out that while 50,000 25-34 year-olds have emigrated and another 50,000 are newly unemployed “there are still over half a million 25-34 year-olds – the household-forming age – at work. These are the people who would, in other circumstances, be kick-starting activity in Ireland’s property market.”

Bank of Ireland has committed to lending €1.5 billion this year. That increase in lending, if it actually happens, would amount to around 65 per cent of all lending last year and would be sufficient to see a significant increase in activity.

Mortgage broker and financial commentator Karl Deeter is surprisingly upbeat about the state of affairs.

“I haven’t been positive about property for half a decade but this year I am,” he says. “My feeling is that most of the heavy lifting is done and while I don’t think we have reached the bottom of the market, I would expect declines to be in the low double digits if that unless we buck all international trends and the correction is in excess of 70 per cent.”

He told Pricewatch last week that he was “happy enough to say that when we look back on today in a decade’s time people will say that this year was a good time to buy a house”. He stresses that good quality houses in established areas are attractive rather than apartments which will struggle to retain or increase their value.

Deeter also believes people should look towards long-term options rather than simply getting on the property ladder as they may have wanted to do a decade ago. “If someone came to me and said they wanted to get on the ladder and did not mind where they bought, I’d ask them to show me their time machine to see if they had come from 2006.”

Financial advisor and director of moneycoach.ie, Frank Conway says that if people come to him in connection with a mortgage the first question he asks is why are they buying.

“If someone is looking to make an investment or because they think the bottom of the market has been reached then I strongly caution against it. There is no way anyone can know when the bottom has been reached. But someone who is buying a home for the long term who has the troika of job security, financing and a property at an affordable price, then it is certainly not a bad time.”

Conway does not, however, believe the market is close to settling. The big problem, he says, is the banks are not lending.

“We need to see cash flow in the mortgage market and I do not see that happening. The conditions have created conditions which mean many people will not qualify for a mortgage.” Things like the occasional credit blip, recent employment after a period without a job or contract-only positions in line with public service recruitment bans are all working against people.”