The big movement since the previous post on my future house build is that the AIB came back with a mortgage offer – apparently they’d issued it prior to the last post here, but it had gotten lost, only when I went asking about progress did they find it. Their Approval in Principle was for 3.25x income i.e. LTI ratio of 3.25x, where the legal cap is 4.0x for first time buyers like me. That would normally be a problem for most people (effectively it’s a ‘soft no’), however in my unusual case due to the remote rural location the valuation was always going to be the limiting factor, and we had never had any illusion about that from the very beginning. To remind people of the post from February, mortgage lending maximums are:
No more than four times your average income in the past three years (this is the Loan to Income limit set by the Irish government).
No more than the cost of construction (€700k).
No more than 90% of the final valuation of the completed property.
So everything was always going to hang around the valuation. The AIB ended up appointing Liam Mullins & Co estate agents as the valuators, they are the most successful of the local regional estate agents. In fairness to them, they did take their time to understand the build detail, the design detail which surprised me. They then surprised me even further with a €490k valuation, which seems rather high for the area!
Let’s compare that to other recent sales in the same estate. Price data is from https://www.propertypriceregister.ie/, the rest I culled from estate agent listings, the plans on the public planning applications website, and the CSO data for house price inflation in the P51 eircode district.
2023-02-14: 24 Ard Na Si, €390k.
- Four bedrooms, four bathrooms, BER B2, 316 m2, built 2009. €1,234 per sqm.
2022-05-08: 36 Ard Na Si, €265k.
- Three bedrooms, BER C2, 151 m2, built 2009. €1,755 per sqm (normalised to 2023 prices: €1,562).
2021-12-06: 32 Ard Na Si, €300k.
- Five bedrooms, 260 m2, built 2007. €1,153 per sqm (normalised to 2023 prices: €1,191).
2020-10-30: 2 Ard Na Si, €218k.
- Four bedrooms, built 2012. Not more than 160 m2, if so around €1,363 per sqm (normalised to 2023 prices: €1,644).
You’ll note the unusual price per sqm distribution peculiar to British and Irish house prices – we are unusual in the world by not following a universal price per sqm for a region which most of elsewhere does. Instead we price the first 120 m2 of any quality (no matter how bad) at an eye watering price barely affected by quality nor condition, then remaining m2 especially cheaply but with more account of quality and condition. This is due to the bimodal nature of house buyers in Ireland and the UK – there are lots of people who will take any house at all, and they tend to overly bid up the bottom end of the market which rather does a disservice to the non-wealthy (in any other country, they would live in high density apartments and would never consider owning a house, but that isn’t the culture in Ireland and Britain). Meanwhile, those who can afford to pay a little bit more get far less competition during bidding, and so can be more picky. It also means they (relatively speaking) get bargain housing in terms of additional space and quality/condition per euro spent.
You can see this in the above where there are two categories of house on the estate: let’s call them ‘premium’ and ‘non-premium’ (the plot sizes are all identical, so only the house affects the sale price). In 2023 adjusted prices, premium houses sell for ~€1,200 per m2 and non-premium sell for ~€1,600 per m2, a 25% discount per m2, but premium houses have at least 75% more floor space and so therefore cost more overall. Or, put another way, ‘non-premium’ housing is around one third more expensive per unit of living space than ‘premium’.
Having explained all that context, doesn’t the €1,570 per m2 valuation for my house (which is ‘premium’) look excessive? The CSO stats reveal something interesting: between 2012 and 2018 new house sale prices had a ~15% premium over those of used house sales, which would be a percentage consistently repeated anywhere in the western world historically speaking, as people do like brand new over used; however from 2019 onwards the new house price premium rose to a fairly astonishing ~75%, at least for the P51 eircode region.
Changing the eircode region reveals that the same phenomenon appears countrywide, but with different start dates. Cork southside is like the Mallow region, the new build premium jumps around 2019. Cork northside saw it jump from 2016; Naas saw it jump from 2015; Dublin 24 (south west) appears to have gained the premium as early as 2011, albeit consistently lower over time at ‘merely’ ~48%.
As to likely causes, I must admit to being a bit stumped. Significant first time buyer subsidies only came in from 2017 onwards, and they cannot explain more than 5-10% of the premium in any case. Britain has similar weird patterns in new build price premiums with a clear pattern of the highest premiums being in the historically least developed areas, same as what we’ve observed in Ireland above. The evidence is clear that the new build premium vanishes after about three years, so that’s effectively negative equity of 50-70% in year three unless house prices are generally rising, which is motor car type value depreciation. I’m going to have to put it down to the same phenomenon as with motor cars: humans are irrational about ‘new’, and the irrationality is particularly pronounced with what is deemed a premium brand or thing which isn’t really all that much better than the non-premium brand or thing, but people simply go nuts on them. A five year old motor car rationally speaking ought to be worth most of a brand new motor car – it’ll be barely more efficient, and wear and tear replacement parts won’t cost much for years yet to come. Yet motor cars consistently lose half their brand new purchase price after three years, and that’s been the case since the 1960s at least. Similarly, a five year old house ought to cost most of what a brand new house costs, very little would need replacing or maintaining. Yet, apparently irrationality says otherwise, as clearly Akerlof’s Lemons effect couldn’t rationally generate such large price premiums.
I assume that the estate agent’s valuation is meant to be for after three years not new, so on that basis they were rather generous to me in the valuation – they used the non-premium per m2 value rather than the premium value. Equally, if the bank seized the house when it were still new, it would be worth far more due to that new build premium. On that basis, the valuation was generous to me but fair to the bank. It’s not an unrealistic valuation.
Anyway, bringing all this back to my actual build, 90% of €490k = €441k, which will cost me €2,700 per month in mortgage payments to repay incidentally . €700k - €441k = €259k as being the unborrowed cash sum that we need to raise before September when the mortgage offer expires. I don’t know if we can achieve that by then. Maybe. If not, we’ll do all this again this time next year. As mentioned before, one is in a terrible bind here – if I spend money on progressing the build, I reduce the cash balance needed to get the mortgage, but if I don’t spend money on progressing the build, I delay the build. And certain things can only happen in the summer, when the ground is dry .
This weekend is a long weekend, I have rented a six tonne digger with which to move a bunch of soil and relocate those lego concrete blocks away from the front where they are in the way. I am just praying that the rain holds off unlike the last time I drove a digger on that site, it quickly turned into a mud bowl.
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