Negative Equity in Ireland

I don’t see negative equity in and of itself leading to mortgage defaults like you see in the US or UK, as the bankruptcy process in the country is far lengthier to exit from than in other countries. Bankruptcy here, i believe, can last up to 12 yrs, while in the UK it can be over and done with in 12 months sometimes. In the US there is simply no recourse on defaulting on a mortgage, though credit scores will obviously go through the floor. Here the debt ‘sticks’ to you for a long time. Only in extreme situations (ie LTVs 125%+) would it make sense to default and take your chances in bankruptcy.

Unfortunately, for these reasons i see inflationary policies to ‘inflate the debt away’ as being the easiest way for many future policy makers, which will ultimately only lead to a weaker currency and another bubble at some stage down the line.

@Karl: “These losses have not been incorporated into any of the calculations relating to the loans going into NAMA, so these losses will be over and above any losses associated with NAMA transfers.”

Did I just hear Ivan Yates saying on the wireless that reliable sources had told him that AIB’s bad loans amounted to thirty-one billion?

Ronan,

As you’ll appreciate negative equity does not in itself impact either individual incomes or the national economy directly. Negative equity will likely freeze/constrain the housing market since homeowners will be less reluctant to sell. Negative wealth effects will indirectly reduce aggregate demand, but this is more linked to falling house prices generally than negative equity per se.

The key trends that will mark significant economic problems in the housing/mortgage market are unemployment (as a proxy for distressed mortgages) and mortgage defaults. The former will obviously identify individual hardship and the latter will impact the balance sheet of Ireland’s insolvent banks. Let’s be clear, negative equity is a bank problem and households should not be expected to personally take the hit for poor banking decisions. Negative equity must be seen as a problem to be solved by writing down mortgage values to fair market-value, i.e. negative equity is a banking problem.

I think it is important to stress the fallacy of negative equity, as I believe housing is still beyond reasonable affordability ratios and price-to-earnings ratios. The possibility of destroying capital in the residential sector would be a major correction that would allow construction and the housing market to recover. This is a political question and Irish homeowners and the Irish economy have nothing to lose if banks are compelled to write-down mortgages as is happening in the United States.

anemeconomy blog

Would be worth thinking more about the correlation between “negative equity”, motivation for purchase and employment security. If my wages have been maintained and I bought explicitly to live in the property for a long time, then the effects are obviously less. People overextended on “ladder property” mortgages with uncertain employment prospects are an interesting group in this debate. The size and regional distribution of this group could be estimated to refine Ronan’s figures.

@ Steve. Well said Steve. Negative Equity is indeed a problem for the lenders. A Debt Jubilee may (more likely will) be required to clear the system.

There are some ‘iron rules’ of lending for the purchase of your private residence; you put down 20% cash (that is, real money). You are limited to 2.5 times your gross (P60) salary – and your monthly repayments must be equal or less than 28% of your gross salary. Simple rules.

Most private property values will revert to their 1995 (approx) values. So if you purchased after 2000 – you’re s*****d! Buying and selling of private residences will slowly – very slowly, recover, but building will not. The supply overhang is too large.

@Liam. Your spot-on about the regional distribution. Real serious problem here.

Brian P

I think there could be an assumption that EVERY house was bought with finance, CBRE figures in the past showed that 50% of property has no mortgage on it, and Amarach’s ‘Debt of the Nation’ research suggested the same.

To be in ‘negative equity’ you are talking about the finance portion of the loan, if there is no mortgage than you are not in negative equity, you’ve merely lost value versus the price you paid.

Its absurd to say that house prices will revert to 1995 values. Average house prices in 1995 were approximately 70k (ESRI/TSB). If house prices fell to that level in the next few years, they would barely be 1.0 times average household income. In the countries with the cheapest house prices (e.g. Canada) the ratio is about 3.0. It would also put house prices in Ireland at about one-third the level in most of western Europe, the U. Kingdom and U. States. Those who make such wild forecasts do so for one reason only. Namely, to instill fear among those contemplating buying a house and thereby damage the construction industry.

@John: “Those who make such wild forecasts do so for one reason only. Namely, to instill fear among those contemplating buying a house and thereby damage the construction industry.”

Is there a union or something you have to join to be allowed to damage the construction industry? If so, I’d like to join it.

@Brian.

I don’t know about any union. If you want to inflict maximum damage on the construction industry and those who work in it, my advice would be to ask Morgan Kelly, and I’m sure he’ll tell you how best to achieve that goal.

@karl deeter
I did use DoEHLG figures on loan profile – but I’m not sure whether or not they include 0% (their lowest threshold is 70% or less). Naturally, that would affect the total number of properties, but the Amarach research seems to suggest that a 20% estimate is probably not out by a factor of 2.

@Liam
Good idea – the figures I’ve worked out are based on eight regions (five cities, three provinces), with most of the detail not shown in the blog. It may be possible to break it down by county (certainly quarterly, if not monthly). But I guess it might be even better to start looking at the other dimension – house type, bedroom number, etc. – as well as location.

Will have a think about that. Can’t think off the top of my head why it’s not possible, if we stir and mix carefully the various sources we have (daft.ie, PTSB and DoEHLG) and the varying levels of detail and time periods they cover.

@Brian

I do not agree that we have an oversupply of housing. The arbitrary character of Irish planning fostered new housebuilding totally decoupled from housing demand, which now means that we have areas of the country with unfinished estates in god forsaken villages while in central Dublin and certain areas there still exists housing demand (economic and social). We can not allow toxic debts in the residential mortgage sector to crush any new construction and we need to seriously question the role of development control in the creation of Irelands’ land and property bubble.

It is important to differentiate between artificially contrived excess supply due to the persistence of inflated house prices (caused by asset speculation) and excess supply based on fair value (which we can take as the traditional lending criterion you detailed). Given that public servants and 4/5ths of the private sector will continue to be in work this time next year, then we should be focused on how we can ensure that Irish construction continues to renew our housing stock in those places where potential demand exists.

Let’s get one thing clear. Except for the fact that construction is a backward industry which hasn’t changed much in the past 200 years, the idea that the construction industry should apologise for radically improving housing conditions throughout Ireland is tosh. This kind of miserabilism needs to be contested if Ireland is going to quickly reinvigorate the economy.

I do not agree that we have an oversupply of housing. The arbitrary character of Irish planning fostered new housebuilding totally decoupled from housing demand, which now means that we have areas of the country with unfinished estates in god forsaken villages while in central Dublin and certain areas there still exists housing demand (economic and social). We can not allow toxic debts in the residential mortgage sector to crush any new construction and we need to seriously question the role of development control in the creation of Irelands’ land and property bubble.

It is important to differentiate between artificially contrived excess supply due to the persistence of inflated house prices (caused by asset speculation) and excess supply based on fair value (which we can take as the traditional lending criterion you detailed). Given that public servants and 4/5ths of the private sector will continue to be in work this time next year, then we should be focused on how we can ensure that Irish construction continues to renew our housing stock in those places where potential demand exists.

If you are a sad case like me and will be working over the weekend Ronan am happy to read a draft. Cross-tabbing with regional job layoffs and a few other variables would be worth doing. Given the age-profile of unemployment, it is worth working out the likely number of people who are facing negative equity and unemployment and to say something about their characteristics in terms of number of children and so on. While I have been commenting on labour force entrants, the group of people who purchased since 2000 and who are facing employment uncertainty (largely in private sector) are another group that warrant study and who are not being done any favours by current government policy.

I accept the point made by Owen that foreclosures are far more rare in Ireland than in the UK. What I am not aware of is whether there is any evidence about what is actually happening when people cannot meet their mortgage payments and whether the current arrangements are optimal with respect to the lifetime welfare of the people involved. Putting some figures on the likely size of this group would be an interesting way to start.

Another issue here is the extent to which home ownership in Ireland will harm economic recovery through a channel written about in a famous paper written by Andrew Oswald, namely that home ownership reduces regional mobility. There is a lot of debate in the literature about the magnitude of this effect but there is a very plausible scenario in Ireland whereby people overextended in areas where house prices and job prospects lag behind may be severely constrained in their choices to simply move to areas where economic activity starts to pick up.

@Ronan L link on the DoHLG stats?

@Steve: “… we should be focused on how we can ensure that Irish construction continues to renew our housing stock in those places where potential demand exists.”

That would be Outer Mongolia, would it?

What the construction industry should be apologising for is the rape of the landscape, the corruption of local government, the bankrupting of the financial system, the distortion of the political system, the misallocation of resources within the Irish economy and the hefty contribution to global warming. When the builders have made amends for that lot, we’ll buy them a set of Lego bricks so they can keep on building — but harmlessly.

Average house price in Feb 2009 was €256k (ESRI/Irish Permanent), average industrial wage €38k. That’s 6.7 times.

Anyone care to suggest what an appropriate ratio should be?

@Stuart: Average P/E ratio for Irish homes over last 20 years is 4x

@Steve: With regard to the General Oversupply (certainly not regional – a myth perpetuated by the estate agents) we have built 118,000 new homes as measured by DoEHLG using ESB connections between Mar’07 to Feb’09 (period of falling house prices + New Homes Supply data).

I’m a big believer in the follow-the-money approach as well as “the proof of the pudding is in the eating” one too!

Firstly, as reported in Sunday Business Post 2 weeks ago – I did at the behest of Davy Stockbrokers meet with 2 U.S. Hedge Funds (Ziff Bros. + Centaurus) in July ’07 accompanied by Ronal Hurley of Davy and I supplied them with Excel spreadsheet print-outs of 38,200 unsold new homes solely in Dublin (2 yrs ago). They wanted proof to ‘short’ the Irish property market by selling the Banks. They did. They made millions – hence the power of money argument.

With regard to the other aspect – the proof of the pudding is in the eating – last week Lisney cut another 10% of it’s workforce and the week before Savills cut headcount in Eire to 155 (was 250 a year ago) as well as slashing senior management pay by up to 22%.

Now if there is not an oversupply problem + prices still too high + banks lending 4x salaries with average prices at 7x (see Stuart) i.e. a funding gap, why on earth would Estate Agents still be culling staff. If you’re reply is that sales are non-existant then by definition there IS oversupply as Demand < Supply.

@Liam Delaney : A good point about regional mobility as this is what is occuring in the United States right now, a reduction due to negative equity. Neither should it be lost on us in an Irish context.

However, I would like to respond to your argument using the most recent PRTB data (June 2008 unfortunately) which shows that 410,000 homes are now rented by almost a quarter of a million landlords. Each of these homes contains at least 1 person, possibly 4 or 5. Home ownership has fallen to 73% and could easily fall further as more young Irish decide to opt for labour mobility through long-term renting. Possibly a good thing from the labour market perspective (also too from an emigration one too).

@Karl Whelan: Read the DAFT economists report – totally spurious. There is only one way to calculate negative equity accurately and that is to use IBF Quarterly Mortgage Data on FTBs (numbers + value) coupled with FTB home price index as supplied by PTSB-ESRI (only HPI based on actual values that we have that is mix-weighted). His top-down approach is ‘assume’ a percentage of what’s been built. It’s totally wrong e.g. negative equity is higly dependant on LTVs e.g. in March 2007 average FTB LTVs fell to 75% as housing market correction commenced. But 1-year later (Q2 2008) they rose to 100% as new FTBs were sucked in by the lure of serious price discounts.

Another problem with IBF data is limited history i.e. start date is Q1 2005. So you have to use CB data and extrapolate using an assumption for FTB proportion of total residential mortgage lending (I used 33% in my book as this was the historic average).

You have to distinguish between FTB negative equity and Existing-Home negative equity. The latter is more difficult to estimate due to Top-Up mortgages & remortgages.

Finally, the obvious point regarding how much property values have already f

Finally the obvious point regarding how much property values have already fallen is a moot one. His report suggests that national average home prices are back to July 2004. Not true. Average Mar’09 price of EUR 253,546 is back to between October to November 2004, so if he cannot get the time frame correct?

I do think however that 2002-2007 was Bubble period, therefore prices will eventually roll-back to pre-Bubble levels, possibly back to 180,000 to 200,000 level. This would put 200,000 FTBs into negative equity but its very difficult to estimate STB negative equity as LTVs are much lower <70% from 1994 to 2003. So you need a major crash (assuming that falls greater than -20% is a Bear market and -40% or more = crash), say 50%. This would affect 250,000 second-hand homes purchased since 2004.

The figures are stark and truly frightening.

@Derek,

Economists are liable to invoke the model of demand and supply without understanding its basic assumptions. In terms of economic potential and social need, the notion of demand and supply is not helpful. Housing demand and supply is an assumption, as the model of demand/supply is based on the notion that the quantity and price of housing will be determined by the relationship between ex-ante preferences of suppliers and buyers, i.e. the supply and demand curve.

The reality is that housing demand and supply curve were transformed by the emergence of an asset bubble, i.e. supply and demand was based on speculative not housing preferences. This resulted in inflated prices well above affordability. As you have written, house prices are still way above the secular trend observed in developed economies during the 20th century. This suggests that the real problem in Irish housing is artificially high prices, since housing demand is traditionally determined locally by demographic trends, household preferences and employment.

Therefore, the important question is how can we foster a price correction in housing to respond to the shift in housing demand from arbitrage asset to normal good. That is why it is preferable to describe the problem as high prices not excess supply.

For instance, one of the key problems in the new housing stock built during the boom has been the dearth of desirable detached family homes at affordable prices and located in desirable economic/social areas. Planners have penned young couples into apartments and timber-frame crates unsuitable for families. This means that we have a real demand for housing but market prices and development control are barriers to satisfy such demand.

BTW I am not a fanboy of developers, estate agents or builders. I am an advocate of improving housing conditions and I am depressed by the hackneyed miserabilism of experts who think that we have done nearly enough to supply bettter, bigger housing in Ireland. Instead, the excess supply of cramped dwellings in urban centres or ghost estates in remote towns is used as an excuse to reject real housing needs and desires in Ireland.

@Karl
The stats are up at http://short.ie/house-stats – version I worked off was published in late March I think, not sure if they’ve updated since.

@Derek
I’m not sure you’ve fully entered the collaborative spirit in which I made the estimates and sought suggestions for improvements or add-ons. 🙂
Nonetheless, I think I’ve got your main point: There is at least one further very important dimension to explicitly calculate, FTBs vs. non-FTBs, which should not be conflated with new and second-hand homes, and that IBF and Central Bank statistics can give a good pointer for the scale of this (about 20-22% of total mortgages since 2005, per IBF spreadsheet).

@Liam, if you don’t mind, I might work this in and see what implications it has, and then – if needs be – talk to Ali in IBF, to see if we can get any more of a regional breakdown, before we try our neg-equity/unemployment mash-up.

@Derek, a couple of quick follow-up comments and questions. You wrote:
“His top-down approach is ‘assume’ a percentage of what’s been built. It’s totally wrong e.g. negative equity is higly dependant on LTVs e.g. in March 2007 average FTB LTVs fell to 75% as housing market correction commenced. But 1-year later (Q2 2008) they rose to 100% as new FTBs were sucked in by the lure of serious price discounts.”
From what I can see, I did not just assume a percentage of what’s been built. I used the LTV profile in the DOEHLG statistics, which is based on lender/IBF data. I noted in the blog post that this presents challenges as they only give statistics by five LTV ranges (and by new/second-hand), the lowest which is “below 70%”. Nonetheless, I felt that while the stats aren’t perfect, they’re many times better than if it had been left for me just to ‘assume’ things. Or have I misunderstood you?

You wrote: “Finally the obvious point regarding how much property values have already fallen is a moot one. His report suggests that national average home prices are back to July 2004. Not true. Average Mar’09 price of EUR 253,546 is back to between October to November 2004, so if he cannot get the time frame correct?”
I’m not sure if you’ve read the original post linked above. I have my doubts about the PTSB-ESRI index at the moment, for sample size reasons, so to get a more accurate picture, I used up-to-date asking prices based on the daft.ie series I calculate. I did this for three reasons: (1) it’s based on 10,000+ observations a month, (2) it’s the most detailed hedonic house price index in Ireland (that I know of) and (3) it does seem to be capturing rapid house prices falls at the moment.

As I explained in the post, I have discounted current asking prices by 10%, based on anecdotal evidence on the current gap between ask and close. Not exactly precision science, I know, but it’s meant to be a starting point. If you think another percentage would be better, we can try that also.

We have been through this before. There is no need to guesstimate except to startle the horses and to enable personal planning. If you want to realize what equity still exists, sometime in the next 10 years, it is best done now. If you have family needs, including offspring who will need that very property, after 10 years and they will be able to take on much of the debt, then maybe it is best to stay. Buying anew would be brave now, unless you get 100% financing. Mortgage fraud is common in bubble times. Banks etc get stiffed by persons excluded from the ladder by high values. They stay for as long as they wish to pay the mortgage which has crashed to low levels recently.
What is coming, guys, is higher interest rates! Knud or Canute, showed his court that he did not command the waves. Likewise not even the ECB can keep rates below market level. BOJ has had a nil interest rate for some time. Whenever it rises, pundits scream “recovery!”. What happens to negative equity, academic discussions apart, when interest rates pick up, once all these international stimuli come home to roost? Once we have fixed the EU economy: the Irish and Spanish property markets collapse? What is bad now becomes much much worse.

I have been reading about what will happen for five years standing on the shoulders of giants who predicted what was going to occur. And what was going to happen after. They were ignored because everyone was enjoying the party too much. That is the fault of the executive.
The reason Lenihan et al are relieved that there is no rioting in the streets is down to his knowledge of what is coming and the ignorance of those who used to be middle class……. No pensions, no equity, no job.
Kinda makes sense of my more histrionic postings?
We need to destroy the debt, now. Liquidate. Don’t stop doing so because once they realize how bad it is, suicides will zoom. Look to Iceland.

@Stuart

I had to calculate the average new house price (avnhp) against the average industrial wage (avindw) from 1973 to 2006 for a project last year. These were the figures I obtained. As the data sources were not the best, I’ll be happy to correct my figures if anyone suggests they are wrong and supplies a different data source that I can use instead. I had to use the Dept of Environment figures for house prices as the ESRI/TSB figures only go back to 1996. In addition, the figures for 1986 to 1990 are a bit out, as I couldn’t get average industrial wage figures for those years and had to use 1985 and 1991 figures instead. So, ignore the 1986 to 1990 figures.

1973 avnhp: €9,009.00 , avindw: €1,599.9 , ratio: 5.631
1974 avnhp: €10,836.00 , avindw: €1,950.4 , ratio: 5.556
1975 avnhp: €13,254.00 , avindw: €2,520.7 , ratio: 5.258
1976 avnhp: €15,564.00 , avindw: €2,921.5 , ratio: 5.327
1977 avnhp: €18,754.00 , avindw: €3,385.0 , ratio: 5.540
1978 avnhp: €24,082.00 , avindw: €3,937.2 , ratio: 6.117
1979 avnhp: €29,387.00 , avindw: €4,624.2 , ratio: 6.355
1980 avnhp: €34,967.00 , avindw: €5,506.3 , ratio: 6.350
1981 avnhp: €40,167.00 , avindw: €6,387.7 , ratio: 6.288
1982 avnhp: €44,060.00 , avindw: €7,326.9 , ratio: 6.013
1983 avnhp: €44,448.00 , avindw: €8,286.2 , ratio: 5.364
1984 avnhp: €45,419.00 , avindw: €9,261.5 , ratio: 4.904
1985 avnhp: €46,542.00 , avindw: €10,048.1 , ratio: 4.632
1986 avnhp: €48,256.00 , avindw: €10,048.1 , ratio: 4.803 **
1987 avnhp: €48,151.00 , avindw: €10,048.1 , ratio: 4.792 **
1988 avnhp: €52,450.00 , avindw: €13,707.5 , ratio: 3.826 **
1989 avnhp: €58,178.00 , avindw: €17,293.7 , ratio: 3.364 **
1990 avnhp: €65,541.00 , avindw: €17,293.7 , ratio: 3.790 **
1991 avnhp: €66,914.00 , avindw: €17,293.7 , ratio: 3.869
1992 avnhp: €69,264.00 , avindw: €18,183.7 , ratio: 3.809
1993 avnhp: €69,883.00 , avindw: €18,841.7 , ratio: 3.709
1994 avnhp: €72,732.00 , avindw: €19,481.6 , ratio: 3.733
1995 avnhp: €77,994.00 , avindw: €19,879.2 , ratio: 3.923
1996 avnhp: €87,202.00 , avindw: €20,692.2 , ratio: 4.214
1997 avnhp: €102,222.00 , avindw: €21,377.6 , ratio: 4.782
1998 avnhp: €125,302.00 , avindw: €22,868.6 , ratio: 5.479
1999 avnhp: €148,521.00 , avindw: €24,165.5 , ratio: 6.146
2000 avnhp: €169,191.00 , avindw: €25,786.0 , ratio: 6.561
2001 avnhp: €182,863.00 , avindw: €27,919.0 , ratio: 6.550
2002 avnhp: €198,087.00 , avindw: €29,872.1 , ratio: 6.631
2003 avnhp: €224,567.00 , avindw: €31,513.5 , ratio: 7.126
2004 avnhp: €249,191.00 , avindw: €33,338.3 , ratio: 7.475
2005 avnhp: €276,221.00 , avindw: €35,277.5 , ratio: 7.830
2006 avnhp: €305,637.00 , avindw: €37,477.1 , ratio: 8.155

As the ESRI/TSB house price figures are the most frequently used, and
as these only go back to 1996, there is a tendency to use the 1996 house price/industrial wage ratio as the standard, However, if you go back to the 1970s with the Dept of the Environment figures, it can be seen that the mid 90s was the bottom of the cycle. The ratio was about 6.0 in the 1970s, which is probably what it is close to in 2009 after the recent house price falls. It is not difficult to work out why. In the 1970s there was strong population growth. Between 1981 and 1996 the population hardly grew at all. Since 1996 the population has soared. The future trend for house prices will depend largely on the future trend in population growth. If there is renewed mass emigration and negligible population growth, its similar to the 1981 to 1996 situation. If strong population growth continues, its similar to the 1970s and 1996 to 2006 situation. In this scenario (of strong population growth) a ratio of around 6.0 seems reasonable, i.e. what it was in the 1970s and late 1990s, before it went way above this after 2000.

Dermot O’Leary some years ago pointed out that most of the increase in house prices was down to financial innovation, that is moving loans from a 20 year lifespan to 40 and increasing multiples beyond the traditional 2.5 + 1 model.

If we assume a couple on two incomes of say €40,000 each. Then under the more traditional model, they could borrow €140,000. Assuming a 20% deposit, then we are in the region of €175,000.

As we will all be paying far more tax in the future than was paid in the past 10 years, then the multiple will have to decline as there will be less disposable earnings to pay mortgages.

This suggests that there are far greater falls awaiting us. I remember that in 1984 as a young EO in the Civil Service I was able to buy my house (on my own) on a 10 year loan. Despite earning a lot more now, I would perhaps struggle to buy the same house, in which I still live incidentally.

There are two factors in the PE. The E in the property markets case is usually very, very sticky…. usually. If I could envisage an average wage of € 30 k and the average price of a house being € 150 k, in Ireland tomorrow, I think the economy could consider recovering. Does anyone have any thoughts on what the average wage in the country should fall to, in order for Ireland to become competitive again?

Derek – thanks for this information. The economic behaviour of renters is certainly interesting in terms of how adjustment takes place. For renting ever to be a fully meaningful way of fostering labour market mobility among families in Ireland, the rental market would need to be a lot different than at present. Much of the economics literature tends to be sceptical about the welfare benefits of home ownership. Yet, there is a literature on the economics of “social capital” which argues that higher home ownership rates improve things like volunteerism, community spirit and so on due to the fact that homeowners have a much stronger incentive to invest in the communities they live in. Renters, who expect only to live in a place for a few years and also not to be affected by fluctuations in value, have less of a motivation to get involved in the communities they live in. I would need to post a lot lengthier comment to do this literature justice, but it does force us to think about the social gaps that would be created by a wide move to renting as opposed to buying in Ireland.

Pat – “Suicides will zoom”. Suicides, particularly among men (but also among women), increased at unprecedented levels during the boom. Anyone who claims to know a direct link between gdp falls and suicide is talking non-sense. The evidence is very conflicted and the Irish experience in the 1990s is a clear case in point that the two are not necessarily linked in the direction one would expect. Having said that, thinking further about the role of psychological services for people with severe financial strain is a discussion worth having, preferably using rational discourse.

@Mark: Many commentators believe that an internal devaluation (as external not possible due to monetary union and no free-floating currency to devalue) of approximately 30% will be required to restore Ireland’s competitiveness. The ESRI are already forecasting half of that between 2008-2010.

@Liam: Your insights into the social ramifications of lower ownership rates have been duly noted. Agree too that rent controls and new legislation would be required to foster long-term or permanent renting. My take on the higher rental occupancy rates were more focused on the price impact of reduced natural demand longer term (i.e. one-sided).

@RonanL : I’m aware of the flaws/drawbacks with PTSB-ESRI especially to do with time lags, but it is based on actual drawdowns and sale prices. I guess that I’m naturally wary of ‘Asking’ or what I prefer to call ‘Aspirational’ property prices as often they bear little semblance to reality. Why don’t you adopt a matched-pairs sales approach as utilised by the S&P Case/Shiller HPI, providing of course you can corroborate your data, eliminate duplicates as well as multiple prices for same property on the same time/date etc. I think we need a national Land Registry office that collates all prices paid on all properties as they do in UK & USA as well as some continental European countries e.g. in Spain you pay 10 euros to a solicitor and they login to a national database and print out the entire sales history of a particular address – prices paid, dates etc.

@Niall: Dermot O’Leary’s point is indeed a very good one as mortgage lenders typically focus on one-variable – the percentage of disposable income or take home pay that a mortgagee has to pay. Therefore by extending loan tenure, assuming dual-income couples as the norm, as well as lending on an interest-only basis for an initial period, are all forms of financial wizardy, wild-cards that may only be played once! My sister used to run the ICS/Mortgage Store in Grafton St. back in 1990 to mid-90s and despite 11.95% standard mortgage rates back then, they never lent 2.5x Higher Income + 1x Lower, instead they lent up to 5x and ignored central bank warning letters (threw them in the bin). In 1992 with devaluations and higher rates, many mortgagees could not afford the new monthly repayments so ICS (later Bank of Ireland) would simply extend the loan tenure and use deferred capital interest repayments. Jiggery-Pokery in loan finance has been around a long-time and will inevitably resurface again at some point in the future.

Right now the Irish banks appear to be lending a maximum of 4x Salary. It seems to be the new heuristic maxim for loan officers.

@derek brawn there is an estate agent system and people were putting in the selling prices but the data protection commissioner gave an opinion that it should stop, because ‘private treaty’ wasn’t being respected. so the lack of figures isn’t down to anybody now wanting them, its down to direction from above

@Steve: I agree and disagree. Firstly, yes of course it is a problem of higher prices and we do need a serious price correction and yes exogenous shocks like extending Sec.23 in Fin Act Dec 2001 did seriously undermine the traditional housing demand model – introducing a speculative component as you put it.

However, I disagree that you phrase it that way, because supply is an important variable in determining demand for housing (Bacon, McCabe & Murphy 1998) and as David Duffy of ESRI wrote in QEC July 2002 in a descriptive analysis of the ESRI Hermes model for Irish house prices that the 2 biggest factors were demographics (pop aged 25-34) and stock of houses (Supply) divided by population.

Supply features very prominently in all of the empirical evidence and it shows that new supply is highly responsive to price changes in the short-term.

Keeping this in mind, my approach in dealing with the Price vs Supply issue with Joe Public is very simple, it is one of psychology. Telling people that their homes are going to be worth less next year and they will suffer wealth destruction is unambiguously Negative. On the other hand, telling them that Supply is falling and will bottom out in 2010 at 15,000 dwellings (or back to 1970 levels) is actually a Positive message as it will enable the market equilibrium level to be reached sooner rather than later.

I’m afraid that it is a case of Perception Is Reality. Human nature dictates that Irish people will always assume peak 2006/07 prices as their frame of reference (psychology), so telling them that home values will fall by 50% or even 70% you lose them – they simply don’t believe you as it does not tally with their own frame of reference. On the other hand, tell them that we have 2 million dwellings enough for 5.6 million people and they can work that one out for themselves as everybody knows the population is only around 4.4 million. By inference Supply > Demand so Prices have to fall.

Finally, your point about the composition of the housing stock is well made and I do whole heartedly agree with you and I’ve been very vocal in the media regarding too many 1&2-bed flats being built as a result of poor planning and profit maximisation by greedy developers. But it is also as a result of An Bord Pleanala over-turning planning permissions for family style houses e.g. in Cross Avenue (btw Mt Merrion & Booterstown) in favour of apartment blocks instead! This actually occurred recently.

During 2008 – a year of falling home values – Planning Permissions for Flats in Dun Laoghaire-Rathdown were 2,150 in Q2 2008 (just one quarter). That is more than the entire year’s worth of completions of ALL types of property in that local authority area for the same year (2,087 homes built in DL-R during 2008).

Clearly then there is a serious dislocation between what is being built and will be built soon and what is actually demanded by consumers.

@Derek

I think we agree on much, but I think you’re approach to the discussion mirrors the low horizons of current opinion rather than challenges it.

Firstly on the HERMES pricing model, I think the UK housing market poses an interesting contrast as it is most clearly demonstrates that housing supply is not elastic since development control creates opportunities for rent-seeking rather than normal profits. Arbitrary development control artificially decouples supply and demand there, and here. This is a common feature of Irish and UK housing, however the mechanism and effects have differed. In the UK this has been evidenced by a phantom housing boom characterised by retarded housebuilding rates due to an unbelievably backward brownfield obsession in planning. In Ireland, we have been lucky that Ireland’s housing stock has been radically improved. This real boom in modern housing is the sole plus of the housing bubble, but in public discussions this is rarely if ever celebrated.

I think we agree that much of what was built is unwanted, but that is not because there is no demand. For instance, Ireland’s population is set to continue growing, household preferences still trend to smaller household sizes and the housing boom has a massive deficit in spacious family homes. In addition, as pointed out by others in this conversation, housing mobility will become more important as we are forced to get on our bikes to find work.

Instead, it is regarded as positive comment to suggest that Ireland now has too many dwellings. I do not understand why it is negative to say that we need to build more homes of a type and in a location that satifies current housing demand (based on demographics and employment patterns) and that will require the destruction of capital values of residential property.

Negative equity is a political problem that ought to be managed by banks in whatever way that NAMA proposes to deal with developers’ loans. I understand that some mortgagees may be worried by negative equity, but a devaluation of the housing market generally is the best way to remedy the mess of unwanted dwellings created by planners and developers. If we don’t put a positive case for housing deflation and mortgage modification, then the persistence of unaffordable house prices will destroy economic activity in construction and leave indebted homeowners at risk of mortgage default and a long drawn out process of house repossession. In the wider economy, we need a dynamic housing market and new supply to create mobility in the labour market.

@John
That was the information I was looking for but couldn’t find.

Presumably the level of interest rates is an important factor also. I bought in 1987 but interest rates were 11-12%. In fact they went up to 17/18% around 1993 so perhaps that explains the lower pe.

Interest rates dropped plus they pushed loan repayments out to 30/35 years which made increasing the pe increase sort of logical. But also houses got smaller and then further out and then they became apartments further and further out.

@Steve. I agree with you. The stock overhang is the wrong stock – houses an hour and a half commute from work and friends or tiny apartments. The reality is these might still be there as new housing that people want is built.

@ John and Stuart

interesting figures indeed, though the context of both tax, interest rates and the financial innovation of longer termed mortgages is also hugely important. As is the fact that we now have far more dual-income households. Has anyone got figures of what mortgage payments as a % disposable household income (as opposed to something worked off the average industrial wage) as a ratio of house prices has been over the last 30 years or so? This ‘affordability’ factor is surely a better barometer of the over/under valuation of house prices over the last 30 years and would give a better idea of where the long term equilibrium exists?

@ Owen

Higher interest are incomparable to todays low rates. I have studied the UK market and when you equate the % of disposable income per interest rate, it is obviously much higher now than 20 years ago because of the longer lengths of mortgages, lower interest rates and higher LTVs. I don’t have the figures right now, but if you want I can get them for you.

Also, I don’t believe in putting the words financial innovation and longer termed mortgages together!

Dual income couple bought their first home in 2006 for €350k borrowing 100% over 30 years. Say house price drops by 50% by 2010 and the rise by 5% a year they will clear their negatuve equity of €149k by mid 2018 -and their house will be worth what they paid for it in 2025 – the gaps widen if their house falls by more than 50%. Now what happens if they live in Galway and want to move to Cork next year? Will Ireland’s financially innovative banks allows them to transport the negative equity bit of their mortgage ? Could be the case that negative equity impacts negatively on labour mobility ?

@Bill
What sort of stats are there on labour migration from city to city? If the mobility is from rural town to city they don’t just have the problem of negative equity they also need to top up their loan to afford the higher prices of houses in cities.

On labour mobility, renting is a tax avoidance scheme for those likely to move location, given the presence of stamp duty. Stamp duty exemptions for FTBs miss the point. Replacement of stamp duty with some more orthodox property tax based on ownership rather than transactions addresses the question. In a country with high home ownership, the Oswald effect is magnified by transactions taxes.

41 replies on “Negative Equity in Ireland”