Wednesday, December 05, 2007

Silver And Gold

This post is, almost, my annual post explaining why I won't buy a house. In September 2005 I explained, via some maths I could barely understand myself, how if I wanted to buy 'a €250,000 house I would have to find the first €20K of that and borrow the other €230K. That mortgage over 30 years at the current Standard Variable interest rate (3.3%) works out at a repayment of €1,006 per month. For the sake of a simplified argument, assuming that I stay in that house for 30 years, don't change my repayments and the interest rate never rises, then I will pay a total of €362,160 back to the bank and €382,160 in total for the house - a 53% increase on the purchase price.'

At today's interest rates for the same house those figures become 5.2% and a monthly repayment of €1,246. Over 30 years I would pay the bank €448,560 and a total of €468,560 for the house, which is now an 87% increase on the original €250K purchase price!

I also explained that it all 'equates to a bank profit of €367 per month. I pay rent of €425 per month.' Those figures are now a bank profit of €607 per month while my rent is now €450 (although due to go up to €475 in the New Year). See the change? And remember to 'profit' from my house it would have to be worth more than the €468K I really pay for it in 30 years AND that doesn't factor in the decrease in the value of money due to inflation (i.e. the real figure is somewhat more again, probably about €600K at inflation of 2% per year for 30 years).

Last year I said a fall was coming (not clapping myself on the back, btw) and I explained why I justified in 2005 'not buying a house to myself on the basis of actual cost (as opposed to perceived costs) over the period of a mortgage, which would effectively equate to my entire working life.' and how 'since that time the banks have started offering 100% mortgages and repayment periods of up to 40-years, directly fuelling another staggering jump in house prices this year. Well we're now at the point where only those with a vested interest (the banks, the landowners, the developers and the auctioneers and, I suppose, those who have been buying in at the top end since early 2004) in seeing the madness continue genuinely believe it can.

Anyway I bring it up because of the opening lines from David McWilliams' article in last Sunday's Business Post:
'You would be mad to buy a house now. In recent days the Irish housing lobby
- which has hijacked the economic debate in this country and made an absolute
fortune in the process - has started to spin the line that ‘‘now is a good time
to buy’’. First-time buyers, the most hard-pressed financial subgroup in the
country, are being urged by banks and estate agents to take the plunge. Do not
be tempted, because you will only be the lemming-like suckers who bail out
developers in trouble. Hold onto your cash. Guard it zealously, because prices
are headed lower - not just here, but all around the world.'

He's right. And it doesn't matter what Biffo does in the Budget today...
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