Saturday 14 December 2019

Get a house you can afford, not one you can buy ...

Home Truths

The tiger era saw too many people take the maximum they could borrow.
The tiger era saw too many people take the maximum they could borrow.
Mark Keenan

Mark Keenan

A roll of recently published and ongoing repossession cases shows that a serious reality check is required in some quarters regarding ridiculously unsustainable home ownership.

We read continually about bank actions against individuals and couples who have earned little or no money through the last six years, but continue to cling like limpets to bigger houses that they absolutely can't justify owning any more.

In huge negative equity, some of them haven't made a mortgage payment in years. They don't go on holidays, grocery shopping is curtailed, and generally they don't have a life for the sake of a big pile they can't afford.

And usually it's the subject of an ongoing repossession action by the bank, which will take it back eventually anyway.

But why give up essentially everything else - for years on end - for the sake of an extra bedroom or two?

We know that personal fortunes change - that today's high earning stockbroker can be wiped out overnight and end up unemployed for years. He or she might have borrowed large to buy a big home back in the Tiger years. But when it all goes Pete Tong, most realise that you have to regroup, take stock, sell up and downsize - if you can.

Because lots of crash era property casualties desperately want to ditch their oversized mortgage millstones on their trophy homes, but can't because of negative equity. For this reason, the strangest species of all is that which insists on clinging to a great big pile at the expense of all else when they do have the option to move on.

In complete contrast there are sensible people living in quite average houses who are also deep in negative equity. They don't give a fig because they can afford the mortgage payments and because when they bought their homes they spent conservatively. They don't plan on going anywhere soon and they know that inflation will eventually restore equity over time.

In the meantime they will have enough money to go on holidays, eat in restaurants and generally have enough to enjoy their lives. As the market lifts again, homebuyers need to learn the lesson that sensible buyers show by example: get the house that you can afford - not one the one you can buy.

The Tiger saw too many people take the maximum figure they could borrow, add a loan from the credit union, then from the parents and then factor in the future income from a notional part-time extra job. It all ignores the tenet that for most first time buyers, life can only get more expensive going forward. There is still an element of this kind of thinking in how some buyers today decide what sort of house they can afford.

On top of this, the way Irish property is sold will always gives a potential buyer the notion that it is "normal" to stretch financially to acquire the home they want. They are told immediately on viewing a property that "houses on this road are now fetching X more than they are prepared to pay - with the exceptional sale being cited by the agent as the norm." It is easier for estate agents to accentuate this in a fast rising market. It is easier for a selling agent to play on panic to stir a buyer into shelling out more.

The auction system similarly brings potential buyers into a room together in order to induce a panic because lots of buyers want this property and lots of people are prepared to pay more for it.

Another big problem all younger buyers face today is that the fundamental rules by which we have traditionally judged affordability have to change massively.

A generation ago when mortgages were offered for 20 years, the popular perception was that it was wise to spend not more than one third of your net income on your mortgage or your rent.

But 20 years ago few people had a mobile phone, broadband, Sky and Netflix. There was no property tax, bin charges and water charges. Today we have many more utilities and the relative cost of those which remain the same have soared - take gas and health insurance as examples. The notable exception is interest rates.

It means that our real spending power has diminished significantly overall.

In order to have a nice life (a mortgage is for 30-plus years today), today's young buyer should probably alter that "one third" rule to read "one quarter" - and the rest. And in a rising market, a house price is like a flying disc target at a clay pigeon shoot - you always have to shoot ahead in order to be successful in hitting it. Those who lose out are forever chasing the market upwards, shooting at where the price is now rather than where it will end up.

In a rising market those who are both clever and successful through their property-owning lives will first work out a price they can afford to repay in the long run; one which will incur mortgage repayments that are well stress-tested for future cutbacks and eventualities. They will stick with that price rigidly despite the estate agent's crankings. And then they will only go and view homes set well below it. Houses they can afford and which will ensure them an otherwise normal life.

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