How much could your house value fall by ?

Hard landing, soft landing, 10% fall or 50% fall, you are probably sick of all this economic gobbledygook. There are three parameters that determine house prices, rental value, interest rate and sentiment. To calculate the minimum value of your house, first find out how much you would get for renting it out for a year ( say €2,000 per month or €24,000 p.a.). Now find out how much you could borrow where the yearly interest would equate to the rental value. In this case €24,000 would pay the interest on €480,000 at 5%.

The difference between the calculated value and the market value is determined by sentiment. Sentiment for investors is mainly driven by the expected rise in value over time. Investors were prepared to pay stamp duty and other buying costs on the basis that that this money would be recouped over time, and also that that buying and selling costs are deductible against capital gains tax. Any long term appreciation is only subject to a maximum capital gains tax of 20%.

Sentiment for home owners is mainly driven by status in society, stability in family life not being at the beck and call of the evil landlord. There are other sentimental reasons for paying over the odds for a home.

So what are the rules of falling house prices. Rule one house price reduction is slow and sticky, no one wants to believe that they are losing thousands of euro per week. Rule two the bigger they are the harder they fall, who is going to pay €8,000 per month rent for a €2,000,000 house? More expensive houses lose a bigger proportion of their value.

Who wins ? People moving up the value chain, more specifically those who have sold and are prepared rent for a year as house prices drop.

Who loses ? Those who have bought houses in the past two years. Those who are renting. And last but not least the parasitic auctioneers.

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