Sales of investment properties have collapsed and it looks like we are in for a long, hard winter

T HE UPCOMING budget and the prospects of a new property tax are making life ever more difficult for developers and estate agents desperate to tempt residential investors back into the market. While a fair number of purchasers continue to trade up and first time buyers have been busy picking up what often look like bargains, the investment sector remains largely dormant.

The extent of the collapse in investment sales is quite unprecedented. At the height of the property market in Q2 of 2006, the spend was running at almost €2 billion. In the same quarter of this year the figure had fallen to €50 million – a drop of 97 per cent – “A market wipe out in every sense of the word,” according to Frank Conway of Irish Mortgage Corporation.

Put another way, investment sales accounted for 18 to 20 per cent of the overall residential market during the boom. Today it is no more than 4 per cent.

One of the guiding principles of property investment is that it is often advantageous to buy when others are not buying. Hence the number of bargains available at the moment as prices drop by 50 per cent and more. And still there are few takers.

Those active in the market are primarily cash buyers who don’t have to submit to the strict new risk assessment belatedly introduced by the banks. Less experienced investors are obviously scared by falling prices and tighter lending criteria. They are equally put off by the constant flow of bad news about the Government and the economy. In all this turmoil there is scant evidence that the property market is close to bottoming out. The knock on effect is well understood: buying an investment property at this stage could mean that you end up in negative equity like so many others.

The cornerstone of successful property investment in the past has been the short-term gain in values. That no longer applies and with rents down in all areas of Dublin, none more so than in the suburbs, investment opportunities have lost much of their appeal. To add to the gloom, interest rates are now quite a bit higher for investors than they used to be.

During the boom years, the banks were happy to give investors mortgages at virtually the same rate as first time buyers. For much of the time, the differential was merely one-third of a percentage point above the average cost to a first time buyer. Today, investors can expect to pay a premium of 2 per cent. And the lenders’ attitude is take it or leave it.

The departure of Bank of Scotland Ireland has also had a seismic affect on the mortgage market. The bank championed interest-only loans for the full term of investment mortgages – sowing the seeds for the disaster that now besets the property market. To no one’s surprise that option is no longer available. It was clearly off the wall to have offered “quick gain and little pain”.

Many of the initial investors used the lower interest-only mortgage repayments for a year or two before flipping on overpriced properties. Others relied on the capital appreciation to add to their property portfolio. Either way the marketing ploy could only end in disaster.

Nothing will change until there has been a recovery in confidence. Frank Conway rightly contends that lending criteria alone does not explain the fall in activity. There are any number of other issues to be dealt with before the market can bounce back. Unfortunately we seem to be in for a long, hard winter.