The dissolution of the 30th Dail was undoubtedly a welcome political development for the nation but it comes at an additional cost to would-be home buyers. The fire-fighting by both leaders and opposition, particularly since November 2010, led to the Minister for Justice and Law Reform failing to introduce an amendment to the Property Services Bill to establish a National House Price Register. This failure flies in the face of assurances given to lobbying bodies across all sectors of property industry and frustrates the already cautious market, arguably setting it back further.
In an eleventh hour attempt to stimulate the property market the stamp duty regime was reformed in The Finance Bill 2011, widening the net so that all buyers are now liable, but reducing the rates so that moving is no longer cost prohibitive. While this is a welcome development for those trading up or with cash to invest, it could be argued that this reform might well have been more effective as a stimulus initiative in 2012 or 2013. This is supported by exchequer returns this week showing an increase in stamp duty of 38 per cent in 2010 over the previous year. The market would have been better served by creating the National Property Price Register as a priority and announcing a lead in time for the stamp duty changes. This would have had a more pronounced effect on the market as it would have motivated first-time buyers who were sitting on the fence to make a decision, and it would have allowed that decision to be an informed one. It would also have made sense in terms of access to available credit and dealing with current stock levels around the country as first-time buyers are still the borrowers of choice and buy the so-called ‘starter home’ of the past, freeing up the next wave of buyers, those trading up, in time for 2012 when stamp duty reform would have been effective.
Instead, we are left with a system of property valuation that is laughingly referred to as an art form rather than a science by even the most experienced valuation professionals. This is simply not good enough for buyers.
Uncertainly in the market is preying on the minds of would-be buyers, they are terrified of the financial risk, in particular, the fear paying more than the property is worth and finding themselves in negative equity. To return to the market, they must feel a real sense of confidence in the value to be achieved and while this is best done by providing reliable market data, there are some methods that buyers can apply when assessing value.
There are several acceptable methods of valuation of residential property in Ireland, none are infallible. The valuation methodology tends to change depending on whether you are building, buying or selling a property for personal use or as an investment. Confusion arises when different methods of valuation result in very different values being placed on the property. The most applicable for residential buyers are the comparative, repayment and investment methods.
The comparative method is exactly how is sounds, using the past sales price of a similar property to value another. Worrying, this is the method that most influences values in Ireland, despite the lack of accurate achieved sales price data in this country. So the valuer looks at available data, usually, sales by their own office, anecdotal industry discussion and reports from property sales websites. As a result the so-called value is distorted by the levels of sales within a particular estate agency office, the efforts of sales personnel within the office and the, sometimes aspirational and sometimes strategic, sales prices of competing firms.
Another method of valuation is the repayment option, which aims to repay or recoup the price of a property within a defined period, usually the mortgage term. It is based upon the likely income that could be derived from the property, if for whatever reason the buyer could not remain there and had to rent to tenants. This method of valuation is more effective for commercial property as it does not take into consideration the desirability of the area and other priorities for home owners.
An investment valuation is calculated using the likely yield from the property. The standard test has always been to aim for a percentage yield no less than the cost of borrowing, in the past that figure was upwards of 3 percent, in the current market, 5 per cent is the minimum expected. The likely annual rents achievable are expressed as a percentage of the asking price. A higher yield means a greater level of return.
For home buyers, covering the cost of borrows is a solid test, particularly in an uncertain market where the future is less than secure. Investors would be looking for an element of profit over and above the cost of borrowings.
In general, residential property in Ireland is generally not valued on foot of any single methodology but rather the valuers professional opinion of what price is likely to be achieved on the open market within a reasonable period
of time, in reasonable market conditions.
The most effective method of valuation will differ depending upon the property type; however, for most buyers, a multi-faceted approach to valuation will provide the most solid results. Factors to be considered when assess the likely value of a new home are:
1. The percentage fall in prices from the peak, remember that 50 per cent is a national average, the real drops range from 30 per cent to 75 and even 80 per cent – buyers must do their research.
2. The total stock sitting on the immediate/local market, if an apartment is not desirable, do not include it in your calculations.
3. The likely yield on property, circumstances may change over the short term and buyers must be able to manage the mortgage shortfall.
4. The revised price per square meter when compared with completing properties in the area, buyers should not be tempted to pay for a level of finish that is easily replicated.
Carol Tallon, Managing Director of Buyers Broker Ltd, www.buyersbroker.ie and author of The Irish Property Buyers Handbook 2011.