7 ways to negotiate the current property market

Prices for first-time buyers are on the up so is it still a good time to buy? What should a downsizer do? And is investing in a buyto-let a good idea? Here Ronan Lyons offers an overview of the current state of the market, while inside, Fran Power asks t

IRELAND’S housing market in 2017 is one of many conflicting signals. Depending on who you talk to, there are parallels with all sorts of past experiences. To some, we are still living in the crash, with masses of empty properties dotted around the country the elephant in the room. To others, the dramatic increase in housing prices tells them that we are in a bubble. To them, the market is like Groundhog Day — and we are Bill Murray, doomed to repeat the same cycle we just exited. I am not convinced by either narrative, however. True, there are some small pockets of the country where an excess of bubble-era building still swamps demand. But by far the more important trend over the last six years has been an acute and growing shortage of supply. It’s worth remembering that, in the bubble years of 2001-2008, Ireland’s cities did not build to excess. The over-hang, once the bubble popped, was to do with the increase in unemployment and emigration. Once this levelled off in 2010, so too did rental, and later sale, markets.

But if we are not back in 2011, neither are we back in 2001. The market then was characterised by increasingly reckless borrowing and lending. Central Bank of Ireland figures indicate that the typical first-time buyer went from having a 33pc deposit in 2000 to less than a 10pc deposit in 2006. More than 25pc of first-time buyers that year had no deposit at all.

Back in 2014, when Dublin house prices were rising at a rate of 25pc per year, I did worry that we were entering another expectations-driven bubble, fuelled by loose credit. And, true, the Central Bank has recently relaxed its mortgage rules, while the Government has decided to ‘help’ first-time buyers.

But the key point is that the rules are there. It is not up to individual banks to decide how risky they should get when issuing mortgages: the Central Bank has given them a maximum level of risk.

So what we have is a market where demand easily outstrips supply, in both sale and rental segments, but where credit is limited, reducing dramatically the risk of a bubble.

Strong demand — and weak supply — mean that some of the guessing is taken out of the market. Despite quarterly and perhaps annual blips, it is likely that prices will continue to rise in the coming years, although far less dramatically than in recent years.

What does this mean for those thinking about buying or selling? For sellers, the key change is to move away from valuing your house based on what it was worth in the bubble or what your neighbour sold theirs for two or three years ago.

Sellers need to figure out the kind of buyer for their home: Who are they and what do they work as? Knowing whether your home is likely to appeal to a teacher or two law partners or someone downsizing is central. What is their household income? What sort of deposit might they have? This will determine their mortgage and thus the maximum they are willing to pay.

For example, suppose you think your home will be bought by an accountant and a teacher. Together, they earn €80,000 per year, before taxes. They are first-time buyers and, leaving aside money for solicitors’ fees and stamp duty, they have saved up €30,000.

Under Central Bank rules, they would be allowed to borrow €280,000 — unless they can secure an exemption from the loan-to-income restriction, in which case they could borrow €300,000. Either way, the most this couple would be able to spend on a house is €330,000.

What about buyers? It is tempting for buyers to just employ the same logic in reverse: “Whatever the bank will lend us is our stash and let’s go find something we like.”

But the key question for buyers is to know how much an individual property is truly worth — and then tailor the search for a home based on that calculation. This is done by applying an investor’s logic. As a homeowner, you are both an investor and a consumer. And a good investor will want to know what return they are going to get on their asset.

The rule of thumb is that bidders should not offer more than 20-25 times the annual rent for a property, without a very good reason why. A property that rents for €1,200 per month has an annual rental bill of almost €15,000. This translates into a value of between €300,000 and €375,000.

The smaller the multiple of the annual rent, the better a deal you are getting for yourself as an investor. Many investors currently are only paying 10 times the annual rent for one- and two-bedroom properties.

But going beyond 25 times the annual rent means that you are taking on risk. Remember, as the successful buyer of a property, you have just valued it more than anyone else on the planet. You should be able to explain why!

1 IF YOU’RE A BUYER...

Like anyone in the situation of buying a property in the current market, supply is your major constraint. Michael Dowling, a financial adviser and chair of the mortgage committee of the Irish Brokers’ Association, summarised it as follows: “We are not building enough properties for first-time buyers and the stock available in the second-hand market is falling. Prices are rising and there is a degree of panic among buyers.”

As property consultant and market commentator Philip Farrell pointed out: “Only 1.2pc of the national stock is currently on the market, which is an all-time low. Total stock is two million houses.”

This translates, in a properly functioning market, into 4-5pc of the total stock available at any time.

“It’s a rising market,” said John McCartney, director of research at Savills, “so move as quickly as you possibly can — obviously, get all the paperwork done in advance so you are a credible candidate and do everything you can to show that you’re ready to go, that you can act quickly, because it can help you in a competitive situation. If you’re trading up, the advice is always to sell your property before you buy another one. Partly because it’s less risky but it also gives you more clout.”

Healy Hynes, of REA Hynes, in Athlone, Co Westmeath, added: “Sometimes common mistakes can result in a delayed closing or even the entire deal falling through.”

When it comes to dealing with the bank, Hynes recommended: “First, don’t damage your credit by making a major purchase before closing. If you decide you can’t live without that new BMW, you might have to wait on owning a home.

“Even with approval in principal, the bank could easily determine that your new car payment would hinder your ability to pay your mortgage. Wait until after you get the house to do some spending.

“Secondly, don’t change jobs if you don’t have to. Banks like to see consistency instead of constant job hopping. If you are just miserable in your job, see if you can switch within the same company. Or just tough it out until you have the house.

“If the [bank’s] valuation comes in too low, don’t freak out, there are solutions. The seller might be willing to come down on the price or you can put more money down if you really are committed to that home.

“Just don’t let emotion get the better of you. After all, the valuer is there to ensure you’re not paying too much.

“Lastly, you must be on the same page as the bank throughout the process. Provide them with the paperwork they need and answer their questions in a timely manner. Failure to do so will keep you from your goal of a new home.”

2 IF YOU’RE A FIRST-TIME BUYER... Since the introduction of the helpto-buy (H2B) scheme and the relaxation of the Central Bank’s lending rules, there have been signs of increased heat in the first-time buyers’ (FTBs) market. It is also fuelled by the ongoing lack of supply.

It means that competition is fierce for any available properties. Added to that, Philip Farrell pointed out: “First-time buyers are competing with cash buyers who form 45pc of the total of transactions.” BUY OR WAIT?

Is it still a good time to buy then? According to McCartney: “If you’re in a position to avail of the full H2B tax rebate — in other words, if you’ve paid enough tax over the last four years to get the full €20,000 and you’re buying a property that would qualify — then I think you should move quickly because I think that the value of the H2B grant is likely to be priced into new homes pretty rapidly.”

DO YOUR PAPERWORK

“Arm yourself with all you can,” said Farrell. That includes, he said, “having written loan approval in place and showing the estate agent proof if available”.

He added: “Make the agent aware that you will close the sale quickly within, say, four to six weeks, if successful. Do not offer subject to another inspection. Look first, then bid and, if you’re successful with your offer, place the deposit quickly.”

John O’Connor, chief executive of the Housing Agency, said: “As a first-time buyer, you must prove your ability to borrow and repay a mortgage. You should put your finances in order before you attempt to borrow.

“Your credit rating matters. You should ideally repay outstanding loans and clear your debt before approaching a lender.”

Not only should you be in the black with your bank but a consistent savings record, built up over time, will show your ability to repay a mortgage, he added. A consistent rent record will also be viewed in this way.

“Have your solicitor’s details already available,” said Farrell, “and sign the contracts quickly once your solicitor is satisfied. Check and see if contracts are available before you buy and examine them in advance. Maybe the property had been for sale previously for auction — if so, the contracts would be available.”

When it comes to choosing your mortgage, Michael Dowling said: “I would advise all first-time buyers to consider fixed-rate options. I expect interest rates to rise over the next 18 months.

“As most first-time buyers borrow between 80-90pc of the purchase price, variable rates range from 3.5-4.5pc, but a three-year fixed rate of 3.45pc is available and 3.55pc five-year fixed rate is available, also.”

WHAT DOES THE FUTURE HOLD?

There has been a big increase in the number of monthly mortgage approvals and the number of transactions in January since the announcement of the H2B scheme and relaxation of Central Bank rules.

“The question is,” said McCartney, “is it going to be sustained or not?

“It could well be that, after an initial surge because of an unwinding effect [of vendors anticipating the launch of the scheme], you then get a period where transactions default to a more moderate pace.

“But the big question ultimately is whether the price increases that we’re definitely getting — I think we were always going to get — whether they will draw out supply and that will enable more transactions to happen because we won’t be constrained by two people bidding for only one property.

“You’ll have two people bidding for two properties.”

3 IF YOU’RE SELLING…

Congratulations, it’s your market. Philip Farrell says: “If you’re selling and don’t need to buy, I would hold off for a while — prices are only going to get stronger over the next 15 months. However, if like most people you’re also buying, that position is negated.”

Most, if they aren’t downsizing, are trading up. Traditionally, they sold on to first-time buyers but H2B has shaken up the market. “Now,” says John McCartney, “they face a bit of a conundrum because FTBs — presumably because of the H2B — will be particularly attracted to New Homes rather than second hand so that is an inherent challenge for those trading up.

“The obvious thing is they are going to have to perhaps discount slightly relative to New Homes which are already more expensive on average than second-hand properties. But I think we could see that gap widen.

Added to this, the average price of New Homes will be driven up by the H2B, while that of a second hand property won’t be, says McCartney. Traders-up may have to target first-time buyers who are either not eligible for the H2B, or may not be able to realise the full refund because they are newly arrived in Ireland. Or they may need to target downsizers.

4 IF YOU’RE A DOWNSIZER…

It’s no surprise that once again the market constraints for this category come down to supply. According to Dowling, “the major concern for those downsizing is the availability of alternative accommodation and particularly in the area in which they currently live”.

The problem is exacerbated by the fact, said McCartney, that there has been a 29.3pc increase in the number of people aged 65 and over since 2008. Rather than the numbers of downsizers increasing, however, it has been falling steadily. In 2014, according to McCartney, it accounted for around 13.4pc of Savills’s sales. That has now dropped to approximately 5.3pc.

What is causing the drop? McCartney said: “It could be a number of things — these people, assumed to be empty nesters, are not empty nesters because their adult kids, due to high rents and house prices, can’t leave. It’s a huge factor.”

Most downsizers have paid off their mortgages and may be sitting on a sizeable asset and this could be part of the reason for the drop. McCartney added: “If prices rise by 10pc a year, if your house is worth €800,000 and you sit on it for a year, and there’s 10pc house price inflation, you’re getting a capital gain of €80,000. If you were to downsize and buy a property of €400,000 and house prices go up by 10pc, you’re only getting a capital gain of €40,000.”

DON’T OVERSHARE

For those who do decide to downsize, Farrell advises playing your hand close to your chest and not giving away too much detail on your current home. He said: “If it is sold, let the agent know, as it will give them comfort. However, do not give details of the price as it may convey that money is no object.

“If your sale is closed, make the agent aware that your interest is not subject to your own house selling.” However, he added: “If your own house is not sold then keep this fact to yourself, if possible.”

He finds that few people in Ireland take separate advice on the value of the property they intend to buy.

“It is something which can save you thousands and won’t cost an arm and a leg,” he said. “Engage someone who is dealing in the market every day of the week such as a buyer’s agent. This is especially important when bidding in an auction scenario.”

5 IF YOU’RE IN NEGATIVE EQUITY…

For this section of the market, there is at last some good news. Dowling said: “There is hope for those in negative equity with rising house prices, ironically.” Rising house values, he added, will allow more people to sell and move on.

“The depth of our negative equity is receding all the time because of house price inflation,” agreed McCartney. “But if you sell up you crystallise your assets, you buy into a new place and you’re never going to recoup that loss — presumably you’re buying a cheaper place or you wouldn’t be relieving yourself of the negative equity but you’re also getting rid of any capital appreciation you would earn if you stayed put.”

As long as you can service your mortgage in a rising market, McCartney’s advice would be to stay put.

ON THE MOVE

But if you have to move, how can you minimise your loss? O’Connor said: “Negative equity is an immediate problem if you want to sell your home now and move.

“Unless you have savings that you can use to repay the difference between the value of your home and the mortgage, you might find it difficult to move. It can also be difficult if you want to re-mortgage.

“If possible, it’s a good idea to try and reduce your negative equity by overpaying your mortgage. Another option might be to rent out your home if your lender will agree to this. This would mean you keep the existing mortgage, although you will probably have to pay a higher interest rate. You would also have to tell your insurer.”

While many lenders are now offering products which allow you to carry negative equity to your next purchase, these are restricted in terms of availability, said Dowling.

If you’re in negative equity and have difficulty paying your mortgage or have run into arrears, said O’Connor, “it’s important that you engage with your lender and seek financial advice. Don’t ignore the problem”.

Michael Culloty, spokesman for the Money Advice & Budgeting Service (mabs.ie), agreed. “The most important thing, if you’ve fallen into arrears or you think you’re in danger of falling into arrears, is to get in touch with your mortgage supplier and explain your problem,” he said.

“Then they know you are upfront about the situation and they may be more accommodating. They may give you a payment holiday, there may be choices there. But if you’re not going to do that, you could find yourself on a slippery slope into a more and more difficult situation. So it’s crucially important that you react early.” MABS also runs a programme called Abhaile for those who are in danger of losing their homes to repossession.

6 IF YOU’RE RENTING…

Those in the rental market have borne the brunt of the impact of a lack of supply and its effect on rents over the last few years. Dowling said: “This is a very stressful time for those who wish to rent a property, with a complete lack of supply in the market. Rents have increased at far greater levels in percentage terms than house prices and are at levels greater than those achieved at the height of the market in 2006.”

It’s too early to measure exactly how the introduction of Rent Pressure Zones (RPZ) will affect the market. Dowling believes, however, that they will “help those in existing arrangements”.

Even so, there are those who fear it will serve to drive more landlords out of the market and so reduce supply further.

LONDON ON THE LIFFEY?

Are we moving, as some say, to a new way of living, more like European cities where we are lifelong tenants, happy not to be tied to a property? Not according to McCartney who sees the recent introduction of the Help-to-Buy scheme as “a recognition of how cherished that idea of home ownership actually is”.

He added: “I would say that leaving culture and preferences and all that aside, the truth of the matter is that financially over your lifetime you’re better off, at least the way things are set up now, buying if you can.”

Most homeowners have paid off their mortgages by the time they retire, which means, said McCartney, “you live rent-free for the rest of your life and because you’re living rent-free, you can afford to retire on a relatively modest pension. Your day-to-day costs are pretty modest. And that is the pension that most of us are going to end up with — pretty modest pensions”.

Think long term is McCartney’s advice. He warned that “if people are going to want to rent in the Continental style or American style all their lives, they have to start thinking about what they’re going to have to do in terms of retirement”. That means putting more money into their pension pot and saving more.

WHAT RENTERS NEED TO KNOW

If you’re one of the many viewing rental properties now, O’Connor recommends working through the following questions: When and for how long is the property available? Is it fully furnished? How many people are allowed to live in the property? How secure is it? Who is responsible for upkeep? Is there a garage or onstreet parking? Are pets allowed?

Once you have found a rental, keep all the paperwork concerning your tenancy, including receipts for deposits, inventories, payment of rent, bank transfers, etc. O’Connor said: “Your record as a tenant will be important in the future. Many landlords are happy to retain good tenants, even at a lower-than-market rent.”

And there is an added incentive if you wish to buy later. “As a borrower, your rent record may be used to establish your ability to repay a mortgage,” he added.

John Leahy, of irishlandlord.com and author of Renting in Ireland, added: “Know not only your rights but also your obligations (see rtb.ie). Communicate with your landlord or agent and seek to resolve any issues before they escalate. Always pay the rent on time.”

When it comes to moving on, Hynes said: “Talk to the landlord or agent at least two months in advance. If you are thinking of moving towards the end of the contract and do not notify them, you may be leaving yourself open to a breach of RTB regulations.”

7 IF YOU’RE A LANDLORD…

While the rental market has recovered and rents have risen sharply, it is still a difficult market, according to Leahy. He said: “The Government’s rental strategy has failed to do anything to encourage landlords to stay in the market. The RPZ rules and rent control measures failed to recognise the many decent landlords who had excellent relationships with their tenants and who were not charging full market rents. These landlords are now tied to artificially low rents, which has resulted, in some cases, in the landlord being unable to meet their mortgage commitments and deciding to exit the market.”

However, McCartney disagrees that landlords are leaving the market in large numbers. He said: “We have always taken the view that the flow of landlords into the market has exceeded the flow out of the market.

“There’s an increase of 22,323 between Census 2011 and 2016. That’s the number of households renting, so landlords are clearly being attracted into the market. And the one thing that I think is abundantly clear is that landlords can make money from renting property as long as they are not too heavily geared.”

Financial adviser Dowling believes it is by and large a good market to invest in. He said: “The yield on investment properties is very good and, with a lack of supply of available properties, an investment property is one which should be part of any investor’s portfolio.

“However, uncertainty with Government intervention with rent cap and 51pc tax on rental income is a major consideration for investors.”

ACCIDENTAL LANDLORDS HIT

Accidental landlords are the ones who have been suffering in the current market. McCartney said: “If you borrowed a lot of money to become a landlord, particularly if you did so at boomtime prices, it becomes difficult because there’s no doubt that the costs associated with running a residential investment property have risen due to regulation over the years — and that’s not a bad thing for the consumer.

“But what it means is that they effectively were subsidising the tenants.

“If you are a landlord today who bought a property with a buy-to-let mortgage, as long as you can service the loan, it’s probably worth hanging in there because you’re getting rent rising, albeit that’s limited now by legislation and RPZ.”

He believes that house prices will continue to rise strongly over the next few years, lifting the value of a landlord’s capital appreciation too.

McCartney added: “Hang in there, that would be my advice to those who have maybe been through a rough time. Things are getting better for them.”

THE CHALLENGE FOR LANDLORDS

According to Leahy, the biggest difficulty for landlords is ensuring that they are compliant with all the new rules and regulations that apply to rental properties. “Different rules and obligations apply inside and outside RPZs, so landlords need to be clear on what their own obligations are,” he said.

“Every landlord should take the time to stay informed of the changing rules and regulations in the rental market including the forms and paperwork required. Landlords should ensure that they are using a lease agreement that is compliant and up to date. If, as a landlord you do not have the time to manage the property and the relationship with your tenants, then perhaps now is the time to consider handing it over to a managing agent. The penalties for non-compliance can be significant.”

HOW TO BE A GOOD LANDLORD

Once the property is yours, how can you make running the tenancy easier?

O’Connor advised: “Getting the right tenant will make your life as a landlord a lot easier and can help protect or increase your investment.”

That means a thorough check of income, employment status, previous rental history and, if possible, references. Did they pay rent on time? Why they are moving? Were they evicted and, if so, why? Did they give proper notice? Did they get their deposit refunded or did they cause some damage?

But O’Connor also pointed out that good tenants are best found and presumably retained by “being a responsible and responsive landlord”. That means registering your property with the RTB, providing a rent book, giving the tenant reliable contact details for you, maintaining and carrying out regular inspections and repairs, and following the standards set out in the Housing (Standards for Renting) Regulations 2017. You can find these standards outlined at housing.gov.ie.

With regard to rent, he added: “A good tenant at a fair rent is better than a poor tenant at maximum rent.”