Economic and Social Review: Spring 2010

The latest edition of the Economic and Social Review has been published. The edition contains two policy papers by staff from the ESRI, one by Tim Callan, Claire Keane and John Walsh on property taxes and the other by David Duffy on negative equity. The Irish Independent have “seen Duffy’s report” presumably because they have access to the Internet. Now you can read it too.

22 replies on “Economic and Social Review: Spring 2010”

On a point of grammar:

“This paper estimates that 116,000 borrowers
were in negative equity at the end of 2009, rising to 196,000 borrowers by end-2010.”

The gerund clause implies the same (past) tense as the main clause. From the point of view of the March 2010 reader , this is just sloppy grammar. But once people start downloading this paper from an archive in, say, 2013, the reader will not readily be able to tell whether the 196k was estimated ex ante or ex post. Yet, it is quite a different thing to say, ‘I estimated something happened’ versus, ‘I estimated something will happen’.

Mr. Duffy’s report proper begins:
“In many cases negative equity will not be an issue. Many of those in
negative equity will be unaffected and will continue to pay their mortgage
without difficulty. Negative equity will only become an issue for a household if
they need to sell their house and cannot wait for the housing market to

This is a common line. It is also mistaken, in my view. In the first place, it considers only the economic consequences (they might as well rename the ESRI the ERI…). In the second, even considering only the economic consequences, negative equity is an indication of market failure in pricing with the result that malinvestment has to be paid for over a number of years. Money spent on interest on negative equity portions and on reducing the capital to a return to equity is waste. It is, quite literally, dead money in a way that rent can never be.

According to Mr. Duffy’s figures, 148 bn of mortgages including securitisations, 1.5 million dwellings, 600,000 mortgages, average mortgage €246,000…

According to the PTSB, the average price of a house was €213,000 in December 2009.

On average, if you have a mortgage, you are in negative equity to the tune of €33,000 if you believe the figures…

Leaving aside Mr Duffy’s gerund (painful), what he said makes sense. I am not aware that there is an obligation on every ESRI author to consider the social and economic aspects of every issue they discuss. Indeed it probably makes sense for the economists to stick to economics etc.
The existence of negative equity does not imply market failure: you bet on an asset and you got it wrong: s**t happens. With perfectly functioning markets this can still occur.
I think the media & other mischief-makers like to stoke up this issue for much the same reasons that the Daily Mail would have us believe that everything either causes or cures cancer. The general concern about negative equity arises from countries like the UK and US with large centers of population with differing unemployment rates that are far apart. Hence it might be a barrier to labour mobility. But Ireland is not remotely like that so there is no reason to think that it is a big deal. The obligation is on the alarmists to prove otherwise.

Kevin Denny said: The general concern about negative equity arises from countries like the UK and US with large centers of population with differing unemployment rates that are far apart.

Kevin, in large measure, many of the best people I worked with in the construction industry in Ireland were from Eastern Europe. It was interesting to work with folk, who were in Ireland but doing so to pay for mortgages and purchase sites back in their homeland. We have to consider that dimension in economics nowadays, with regards to this island. Likewise, the Hangar 6 and Dell, Limerick recent stories in the media highlight the fact how mobile jobs are within the wider EU region now. I read in the Irish Times today, the Tanaiste asked for the EC to consider plans for employment creation in Europe. Instead of getting caught up in academic arguments about the EMF etc. I suppose, your point on the United States is a good one. But in future, in the European region we need to think of a region-wide strategy for employment creation. That in turn, would impact on factors like housing, as you mention. BOH.

@Kevin Denny
So it’s EorSRI? One or t’other? I would have thought the social consequences of negative equity to rank pari-passu with the economic ones.

How would you define market failure? I would define it as where a market for long-term (durable) goods is unable to find an appropriate price for those goods. I don’t believe that houses are assets in a tradable sense except to a speculative minority.

Try commuting long-term from more than an hour away from your place of work and you’ll see barriers to mobility. From memory, an hour just about gets you across Dublin… The differing unemployment rates across the state make grim reading.

Pity Mr Duffy and Yoganmahew would not read the Financial Regulator’s website and in particular their press release of the 3rd March 2010 where they state that there are 793,000 mortgages outstanding at 31st December 2009 valued at €118.3 Billion averaging €149,500 per household. There are lies damned lies and statistics. The lack of accurate information on the Irish Housing/Mortgage market never ceases to amaze me but everybody has a figure cobbled from some mysterious information source which nobody understands where it came from. The supposed number of empty houses at 300,000 is another one of these stupid figures that is not backed up by any credible data.

@ Yoga,

How would you define market failure? I would define it as where a market for long-term (durable) goods is unable to find an appropriate price for those goods. I don’t believe that houses are assets in a tradable sense except to a speculative minority.

There is a lot in that statement.

I always consider the large Dublin based developers, who between are holding back stocks of thousands and thousands of residential units, on good public transport lines, such as LUAS etc, in expectation that the ‘market’ for them might recover at some stage. I guess, I would refer people to that movie starring Leonardo De Caprio, Blood Diamonds. In terms of holding stock off the market etc. Contrary to what most people think, of too much stock appearing. The stock that the large developers in Dubln can afford to hold back, due to the considerable forbearance of Irish banks recently, is all residential stock in the right place – as opposed to being sited in a bog in Co. Offaly.

In fairness to the Dublin based developers though, their strategy was quite simple. To affect market behaviour. In the instance of Liam Carroll at North Wall Quay for instance, we decided to cease building of more residential units, until we could provide jobs in office buildings in that region of the docklands. So that people who did commute long distances, would see the quality of residential accomodation available closer to work, and choose to live in the docklands as opposed to in Athlone. But we got into trouble with Dublin city planners, for not building enough residential to go with the commercial as per the Docklands masterplan. BOH.

@Yogi: I think if you check its “and”. Its normal in academia for the author to decide to remit of his/her study & not some blogger. I suggest you actually read some publications from the ESRI. I have commuted for long distances/times, as do many people, as it happens. As for market failure, look it up in text book. Houses are definitely tradeable since people (a) buy them and (b) sell them. In fact that’s probably how most people acquire them.
The key question is, in my view: How many jobs are not filled because of negative equity? No one knows but it seems unlikely to be many.

@trp The FR figures appear to relate to PDH mortgages which stood at €78.5bn in Dec ’09 – the difference is probable securitised mortgages which were 37.6bn in Jan = 116.1bn which is getting close to the FR figure of €118n. Dec ’09 also includes €30bn in buy to let and €1.3bn in holiday homes. Seems the FR should explain where it got its figures from in particular the number of mortages. Average mortgages are a nonsense -what’s required is detailed data showing mortgage/ltv’s/arrears on an aged book basis which should provide a more accurate profile of negative equity and loan arrears etc.

@bill and others
Yes, proper statistics would be good. Any statistics would be good!

I am going from the figures Mr. Duffy gave in his paper… the Financial Regulator has an excellent track record in sums, so you may be happier with that office. Your swipe at the 300,000 figure betrays you, do you think the CIF figure more accurate?

The ESRI is an academic institution now is it? And there was I thinking it was an economic and social think tank that would provide insight for political governance. Jeepers, I’ll bet that’s even the remit the government funds it under. I am not specifically getting at Mr. Duffy for not covering the subject, I am getting at the ESRI for not covering the subject in its quarterly reports. The social consequences of negative equity are at least as severe as the economic.

You may stay in your text books, I’ll stay in the traded economy. Lots of things are bought and sold. Few manage to be as mispriced as housing often becomes. Why is that? Could it be that far from being perfectly functioning the housing market is as dysfunctional as it is possible to be? That the information and power asymmetries, the bias of participants, the two-faced nature of credit providers, government, existing owners etc. combine to make it so?

Its the social consequence of negative equity that should worry minds. There is a whole generation of single young men and women in their twenties who own property that they will not be able to sell for close to what was paid for it for ten years or more. They will be unable to marry and buy bigger homes for themselves and their offspring because of this debt that will hang around their necks and thus not be able to form the next familes and our young population won’t be so young any more. We will become like continental europe, increasing elderly population, decreasing workers to support them.

Having looked at FR figures here:
one caveat to them springs to mind:

Note 2:
“Residential Mortgage Loan Account:
Means an account which records loans to individuals for house or apartment purchase, renovation, improvement or own construction of housing fully or completely secured by a mortgage on the residential property which is or will be occupied by the borrower as his/her principal private residence. “Top up” of existing mortgages and re-mortgages should also be recorded in this category. Mortgages secured on properties located in the State only should be included.”

Is any allowance made for multiple mortgages on the same property? Or is that a gross number of mortgages that fit the criteria outstanding?

Mr. Duffy seems reasonably clear in his 1.5 mn dwellings and 40% of these with a mortgage; it’s a figure I’ve seen a number of times, but that doesn’t make it true! (see p.118). So what to choose, it’s like filling in a lotto card…

Anyway, on to another policy document – Property Tax.

There are a couple of typos in the document:
“Given an owner-occupancy rate of
about 77 per cent, this suggests that the total value of the owner-occupied
housing stock was in the region of €3,700 million.”
The commas seem to be in the wrong place in that and the next sentence… I think even Mr. Kelly might struggle to justify that price for 77% of the housing stock.

I see Mr. Stull’s arguments have been persuasive regarding imputed rent… I still don’t see that it is fair. In particular, that it is fair to allow tax relief on debt for both residential and investment mortgage holders, but not for other classes of income – tax relief is an income benefit from the state. This is the opposite of double taxation, it is double untaxation, if you are an owner with no mortgage.

Income exemptions are going to run into the same problems as the government currently has with low-paid. It cannot soak the existing taxpayers more while the current non-tax payers have no incentive to earn more. In a cyclical downturn, the revenue from property tax will fall as incomes drop below the exemption limit. Property tax should provide, at least, a constant stream of revenue regardless of the prevailing point in the cycle. A system based on type and location bands, as opposed to gross property value, will do this and will avoid the need to revalue – a three bed redbrick in Ballsbridge would always be a band G house, for example, without need to track it against price.

Are there flaws with a banded scheme? Undoubtedly. But I was disappointed to see no analysis of other methods and a cost/benefit of them (or even a pro/con). I also see no attempt to estimate the cost of implementing the proposed scheme. Nothing the government does is costless and the process of valuing, administering and means testing. The PRA (Property Registration Authority), for instance, has offices costing 14.5 mn and 230 staff…

Well spotted! But this is an update whatever that means. Publish or perish!

You are correct, but as my new best buddy, DOD would say, you are being unnecessarily negative! Some lucky son of a gun, maybe Peter Brian W, sold that house to a willing buyer. That money is in the economy or like me it left to go on a long holiday to Australia. We are now stuck with the results, but a correct analysis is needed and we need more heads than just mine or yours?

The malinvestment is undeniable and the failure of fiscal authorities has yet to result in punishment. I have been more than hinting that a lot of this market failure was deliberate and with malice aforethought! Pumping in manufactured credit, possibly non-backed, except by naked derivatives, enabled madness. MADNESS! Bulbs or more often housing. OPM was used as a weapon. Not by individual house sellers as they risked being without their super duper asset. WHO ARE THOSE BONDHOLDERS?

You have a good point in that labour mobility will be impacted. But at the risk of the “Wrath of DOD”, there will be no new jobs for a very long time, commensurate with the assumed period of negative equity, for reasons that should be obvious. It is that bleak.
War can be carried on by economic means. Ireland happens to be one of the more obvious casualties but who are the victors?

Brian O’ Hanlon
Good article! Well worth reading!

What assumptions underlie the idea that NE qill be gone in ten years? How valid are they in a Depression? I’d go on but DOD’s blood pressure can only take so much!

I agree with you, and I accepted that point above. But is it silly to expect the ESRI to quantify the social costs of negative equity? And then to put a number on these costs? This is, after all, what we expect you to do for climate change related analysis (look beyond immediate costs to secondary ones), why should property-related analysis get an easier ride? Particularly when its headline statement is “nothing to see here, move along… oh, you can’t you’re stuck where you are and you know it”.

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