Beginning of the end of the 'pent-up' buyer explosion
THE explosive release of pent up demand has played an absolutely pivotal role in driving up house prices in Dublin these last two years – particularly at the top end of the market.
Going forward, sudden releases of pent up demand will also play an equally crucial role in recovering markets in each and every county nationwide.
Because no matter how flat a market is, there are always buyers waiting in the wings – their purchase postponed and waiting for the best time to dive in. They are there in every county sitting on that 'pent-up fence', cash in hand, and waiting for that bell to ring on the bottom.
The release caused when the bell rings and pent up cash buyers go crazy washes over a property market like an inflationary tsunami and then leaves a cooling effect in its wake as it dissipates.
Right now we are witnessing the beginning of that dissipation of the pent-up release wave at the top end of the Dublin market where price competition has been most ferocious in the last two years and values have risen by a third as a result. A simple way to understand the pent up splurge phenomenon is to think of the January sales.
Jane waits until the sale to buy her suit and shoes because she knows she'll save half the price of each as a result. She won't have smart clothes for Christmas – unlike most people who pay full in early December. But smart buyers (and vendors) don't do what everybody else does – in fact their success is usually based on doing quite the opposite.
Once the signal is clear that the lowest price is available (in this case when the shop doors are thrown open on sale day), the spending frenzy starts with panic.
This is what happens when pent up demand is released.
Jane and the other savvy buyers rush in, often jostling one another to get to the bargains. Why? Because bargain suits and shoes are in short supply at these prices and they're available only for a limited period. If Jane doesn't elbow her way in and grab a suit and shoes, all her plans will have been for nothing. The only suits left will be the full price versions.
The same is true for the release of pent up demand in the housing market.
Smart buyers know there are no soft landings in the property cycle, but they also know that prices always recover. Timing is everything and usually the smart buyers jump in all at once.
There have been far more postponed smart buyers in Ireland than most people think. Amongst them were legions of former smart vendors.
We have been so focused on the wipeouts of the property crash that we forget for every house that sold during the boom years for €10m, €5m or €1m – for every buyer that would get stung – there was also a vendor who trousered €10m, €5m or €1m.
Smart buyers are therefore often previously smart vendors. They chose the timing of their home sale to maximise profit at the top of the market. The signs of an overheated market are much the same everywhere – record low rental yields, record high levels of mortgage lending and loans which exceed 100pc. Then there's the 'shoe shine boy' stuff – taxi drivers borrowing to the hilt to buy villas in Bulgaria and Cape Verde.
Most of those who cashed in at the top simply stuffed that cash right up their jumper and climbed up on that fence to wait patiently for the overheated market they sold in to implode.
To buy again of course.
The very smartest operators are those who habitually turn their family homes into money making machines over decades by selling and buying over and over again at opportune times in the cycle. The smartest of all do it with top end homes where the earning margins are the most lucrative.
For example acquiring a house for €200,000 in 1991, selling it for €5m in 2005, and then buying back the same house or its equivalent with cash for €800,000 in 2011. That house bought in 2011 is likely worth 33pc more already. Plenty of people have done this.
So when the question is asked "who are the cash buyers?" – well that's exactly who they are.
They dive in to feed on the bottom right after the crash has kicked in, the competition that results with their fellow cash buyers for limited stock soon drives prices up rapidly off the bottom.
In Dublin the top end has seen a two year long feeding frenzy, perhaps because we've had pent up buyers collecting on the fence for a whole decade, right back to 2004.
And then one day they peter off. Because at some point all those former pent up buyers will have spent their money and acquired their target homes. Soon there will be no more of them left to to outbid the borrowed buyer with their wads of cash. And as they go home with front door keys and deeds in their hands to historically cheap homes, the heat dissipates in the market and normal service resumes.
In the shops, suits start to sell more slowly and at normal prices. Until the sales come around again that is.