Fortunes – or woes – in today's property market hinge on the year you were born
What is the true state of the housing market in Ireland and what does it mean for you? There's a huge amount of hype, speculation and sales talk doing the rounds and in this cacophony and noise, it is hard to get a true picture. One way to look at the property market is through the eyes of two very different generations of Irish people.
The first generation is the people who bought at or close to the top of the market. For these people, price increases of late are only meaningful if prices keep rising so that they can get out of negative equity.
The second group is the investors – or, as they have been referred to lately, the 'cash buyers'. For them, the pivotal issue is the yield on the property.
This week there was loads of data published about the property market and it gives us the opportunity to deliver a snapshot about where it is right now. In order to make some sense of the numbers for both groups, I have taken the rental data published yesterday by daft.ie and the house price data published, also yesterday, by myhome.ie. In table 1, I have calculated how long it will take for my first generation to get out of negative equity.
If property prices rise – as they have in Dublin over the past year, by 10pc – it will take four more years for them to get out of negative equity. However, if prices were to rise by a more modest 5pc per year, it would take another eight years. In the more likely scenario of a 5pc price rise across the board, people in Meath will not be out of negative equity until 2023. This is shocking.
These are the young families I wrote about here many years back, in 2006 to be precise. They were the 'juggling generation', juggling childcare, community and massive mortgages – they are going to be juggling for some time to come.
At the other end of the scale is the 'cash buyer' or the investor. These are mainly older people and these investors are playing a huge part, yet again, in the Irish property market.
Why is this?
It is because when you hear the favoured description these days of the 'cash buyer', this person is almost always an investor. By investor I mean that this is a person who already has a house and is buying a second place to rent.
The strange aspect about the 'cash buyer' is that they are elbowing out the first-time buyer or the second-time buyer. Talk to anyone in an urban part of Ireland who is in their thirties and wants to move to a slightly bigger house, they will tell you that they are being outbid by older buyers, typically in their fifties or sixties. So what is happening? What is the dynamic?
Years ago I referred in this column that there was a generation of 'accidental millionaires' – people who bought their houses in the 1980s and early 1990s – whose house values had risen so much that they were sitting on a goldmine without the mortgage. Fast forward seven years and they are today's cash buyers. They may have traded down in the boom, made a few quid and have no debt.
BECAUSE they don't have to borrow, they are already at a 5pc advantage over the young family that has to borrow from the banks at 5pc interest.
Therefore, what counts for them is the prospect of further rises in prices and the yield that the rent of the house gives them. Remember, they are getting close to 0pc on their deposits so whatever the house is yielding is greater than the amount they are getting in the bank.
So let's look at the yield the cash buyer is now getting. I figure this out by taking the average price of a house in Ireland. I then calculate how much rent the house gets a month and multiply this by 11 months.
The reason we don't take 12 months is because there is always a risk that the property won't be rented all the time. Then I calculate what that annual rent is as a percentage of the original price of this house. This gives us the dividend, or the annual return, to the investment.
Taking the Daft.ie data published yesterday, we see some very interesting trends. Now these figures are crucial to the cash buyers, or the part-time investor, who has always been a presence in the Irish housing market. Look at table 2 to see all these figures.
We see some strange anomalies. Although houses in south Dublin are far more expensive – €90,000 on average – than houses in Cork, they are better value.
This is because rents are much higher and much firmer in south Dublin than in Cork. In fact, Cork is the most expensive place for the cash buyer in Ireland. In contrast, north inner city Dublin is the best value of all the urban centres because whereas prices have fallen there, rents have remained strong.
This is because Dublin city is still a place that is growing and living in the city, whether it is northside or southside, is still living in the centre of a thriving city.
The story of the Irish property market as it unfolds is the story of two very different generations – one very lucky; one very unlucky.
Who would have thought that your financial prospects in a country could have been dictated by such an arbitrary factor as the year you were born?