Mortgage Activity “Remains Subdued”

For good or ill, the future financial prospects of the Irish sovereign depend in various ways on the future of the Irish property market, both via its purchases of NAMA property and its investment in banks with considerable mortgage books.

The Irish Bankers Federation report on the mortgage market (data here and press release here) paints a picture of a market that has almost completely collapsed. NAMAWineLake provides his customary high quality analysis here. I’d note that the series seem to have a seasonal pattern so comparisons of 2011:Q1 with peak may be a little misleading but even year-over-year comparisons paint a picture of a market in freefall. These figures also tie in pretty well with the figures from the new house price index from the CSO which showed a faster pace of price decline in the three months to March 2011 than had been seen since mid-2009.

47 thoughts on “Mortgage Activity “Remains Subdued””

  1. The market will return to “normal”, meaning a normal level of transactions, only when we can find the clearing price. And for that we need far more transparency.

    Hopefully the recent and future Allsop auctions will provide the market with some degree of price transparency.
    Has there been an update on the government legislation that will make transaction information public?

  2. Mistake speculatively hoarding all those property assets till now to try to fool people the market had bottomed. Expensive mistake.

  3. As the main strategy since the start of the crisis has been kicking as many cans down the road as possible, hoarding property hoping something turns up makes perfect since.

  4. Karl Whelan said:
    For good or ill…

    I can confirm that it’s for ill.

    Either the cost of living goes up or our national debt by proxy does.

    It’s a lose/lose surely?

  5. Steadfastly demanding a lower price – aka – slow, slow, quick, quick, slow.

    A rash of new For Sale signs has appeared. That should be good for a few more points down.

    Brian Snr.

  6. Actually forecasting the size of the mortgage market in future is quite easy if you know how. Like Dreaded Estate says there will be no stabilisation absent reliable and timely price index disclosure. In some parts of Ireland there shall be no stabilisation absent demolition.

    We should be demolishing 1 Ghost Estate in Roscommon/Leitrim/Longford every week by now and we have not even started.

  7. A proper price index is important but it is not a pre-requisite to price stabilisation.

    Prices will stabilise when the banks have money to lend and they decide on firm lending criteria.

  8. @Zhou
    I think we are quite some way from price stabilization yet. However think market stabilization is far more important to the state.

    Can’t see the market stabilizing unless we get far less price stabilization. By most metrics Irish property is significantly overvalued and more falls are needed to clear the market.

  9. Apart from banks having money to lend, people have to believe that the money is a sensible deal. That they’ll have enough (reliable) income to pay the mortgage, to pay their increasing taxes, to pay their increasing pension costs, to pay their health insurance, etc., etc.,etc.

    A thread on the pin (i can’t post there) mentions how self-employed essentially can’t get mortgages at all at the moment. Even if they have money to lend, banks are going to be much fussier in their lending, and borrowers will probably be much more careful in their borrowing. The prospects for house prices, particularly on the right of the distribution, are not going to be positive for a while unless there’s major inflation.

  10. The story with the house price monster is so similar to the mess with the voting machines which were bought at enormous expense and never used . In the end no buyer could be found for them.

    Wasn’t it the antichrist who said the price of houses would fall 70% , all the way back down ?

    The Grand old Duke of York.
    He had 10,000 estates
    He marched them up to the top of the market
    And then he set up NAMA

  11. Interesting counter-trend move in the average amounts of top-up mortgages over the last 3 quarters. Average of €104.544 in 11Q1 seems a lot to spend on the new conservatory at a season when building activity is traditionally low and prices have dropped faster than a 3-bed in Leitrim. Is it possible that folks are raiding the home equity kitty for the cash to invest in Alsop’s opportunities? If so it indicates that money is there for people with high level of equity in homes and that the numbers of cash buyers in the investment market may be slightly inflated.

  12. @Eoin Leahy

    wouldn’t discount the idea the money is going on house extensions. There are reliable anecdotal reports of builders still being reluctant to even turn up to give quotes for house extensions where they suspect the client will be price aware.

    To me this is astonishing, so I double checked. It appears there is little determination to compete for business among many small builders – so there must be people in secure, reasonably highly paid jobs supplying the projects.

  13. @Dreaded Estate

    Point taken re difference re market/price stabilisation.

    The core reason our residential property market is not functioning is that the banks have no money. I suggest there are plenty of people who are willing to take a chance notwithstanding the uncertainty as to prices but there are no banks to lend to such people.

  14. Scary comment from Ivan Yeats article a couple of weeks ago. It would take an auction of the size off the allsop action every working day for 8 years to clear the nama property.

    For the 87% of Irish people without mortgages this hold and hope for a fake floor stratagy nama have adopted is a disaster and exacerbates our slow motion downward trend.
    We need To get rid of as much of the property as quick as possible. We need Americans and Europeans to see value in a holiday home in Ireland. This will bring on the collapse quicker and let us start again.
    For the 13% of people with Mortgages we need Bankruptcy legislation.

  15. @zhou_enlai
    I disagree, I think people with a good credit history, history of savings, a clean current account and looking to borrow a reason multiple of incomes can and are getting mortgages.

    The banks lending criteria has been massively tightened and someone people may feel that this is temporary phenomenon. However, I think the current lending criteria are sensible for a bank long-term. If people aren’t able to meet the criteria I don’t see why a bank should lend to them now or even in the future when their balance sheets are fixed.

    The problem is there isn’t the same number of houses at appropriate prices to match this demand.

  16. @ DE

    the boom at its most boomiest had banks throwing out money on 6*salary, 40 year terms, LTVs > 100% . Each of these individual lunacies was a ratcheting up of risk and price level so if things settle back to more normal lending patterns of say 3* salary , 25 years term and 85% LTV the pool of eligible buyers and their budgets will shrink significantly. So prices would seem to have to fall. They should never have risen by so much in the first place.

  17. its depressing to see the re mortgage and investment property numbers

    I wonder how many people re mortgaged their homes to buy an investment property where that re mortgage was in reality being funded by foreign lenders to the banks who it turns out will be bailed out by the Irish taxpayer.

    Madness

    Why o why did people borrow against the value of an Irish property to fund an investment in further Irish property. Its seems o so moronic.

  18. Tying your money supply to the housing market guarantees a epic misallocation of resourses.
    It would be best to continue with high fiscal debts rather then a restoration to “normality” which would merely suck more resourses into non productive assets whose value is merely a artifact of the IMFpetro$ system.

  19. @DE

    Perhaps you are right. It is hard to know. I have not heard of anybody gettign approval in principle for a certain amount and told to go out and find a house. However, it could be that people are not considering the correct prices for them. My suspicion though is that the banks are deleveraging their little buts off and new business is not wanted or welcomed.

  20. @zhou

    You do know staff at the nationalised banks are now specifically incentivised to reduce the lending books? Why they need to be “incentivised” given they really should be quite surprised to be employed full stop, is a mystery.

    Since there is so little lending by the state’s banks, the state is going to employ and “incentivise” bankers (Labour Party policy) to try to get lending into the economy.

    As long as they throw money at a problem, no one can accuse them of inaction.

  21. In the context of this discussion, an article from today’s FT may be relevant.

    http://goo.gl/GNrmo

    “Banks offer pre-crisis loan terms in Spain”. Article is about how spanish banks and cajas are again offering 100% mortgages with 40yr terms.

  22. @ Christy

    Fintan O’Toole goes into the hunger for property and only property in his book Ship of Fools. There were tricolours flying over prime hotels in London that were bought by Irish builders. It was very magical thinking that took over.

    Maybe if the capital generated had been invested in a more diversified fashion the crash mightn’t have been so nightmarish. Ireland ran a monoculture along the lines of the potato experiment of the early 1800s and the results were along the same lines. In Achill you can still see abandoned lazy beds. One of the ghost estates should be preserved for future generations to wonder on.

  23. All

    Until the residential property market moves to an average net rental yield of 7% house prices (not necessarily rents) will continue on a lower trend. At a 7% yield point property prices will be – based on historical long term trends – fair value.

    Sadly we all know that risky asset markets have an annoying habit of trading above and below ‘fair value’ for some considerable time. In the case of the Irish residential property market this is a likely scenario given that the boom was so boomy and the bust will be ahem.. so busty – but rest assured residential net rental yields will go to 7% at the market average, at a minimum, before we reach the bottom.

    Mean reversion tells me so i.e. reading history not crystal balls.

    I suggested here before that the CBI estimates of house price falls (PTT) in their bank recap document, was nothing short of a very expensive joke (at a cost of €30m to produce) for a few very basic reasons:

    1. There is no mention in the entire document of mean reversion as a risky asset market concept despite its known influence, for the best part of 200 years, on risky asset markets. This is astonishing to say the very least and makes me worried that the numbers simply cannot be reasonable estimates of likely house price falls.

    Property markets, particularly residential property markets, are tailor made for such analysis given that the average mortgage durations required to purchase same are in the range of 20+ years – suggesting that longer term views on pricing are more critical here than in virtually any other known risky asset market. But not one mention in the document.

    2. In addition, unbelievably, the term ‘rental yield’ doesn’t get a mention either. Not once. This seems incredible – but sadly true.

    Rental yields represent the DNA in property valuation of any description. ALL other metrics in valuing the asset class are inferior. Banks lending money into the residential market are beginning to realize, after a decade of madness, that metrics such as times salary and the like i.e. affordability metrics, are a complete and utter nonsense.

    In terms of mean reversion this market is in the process of mean reverting to the long run trend adjusted for inflation – not necessarily on prices but on rental yields. This is the critical issue. Can we please stop doing cartwheels over the fact that we don’t have a proper house price register.

    What we actually require is a register of equivalent rental yields street by street, townland by townland.

    Had lending into the residential property market over the past decade been based on long run yields the madness in pricing would have been avoided. Fact.

    Banks ended up – at the extremes of the market – lending into residential property deals where the net yield was less than 1% when a risk free alternative was paying you c4%. In any mans language this was a banking error plain and simple.

    Had the banks done their job, which they were Regulated to do, as yields fell towards 5.5% the warning lights should have been flashing in a big way – but this didn’t happen for all the reasons we now know.

    The primary reason being is that greed and stupidity got in the way of basic market analysis against long run trends as mortgage affordability made ‘sense’ at the time against borrowers inflated earnings but had the analysis been done it would have quickly revealed it made no sense against the earnings capacity of the property in question i.e. the rental on equivalent properties.

    The most important issue therefore was the flawed lending models used by the and incredibly still being used by them.

    The problem with the mortgage lending model is that the valuation issue and the financing of the deal have been merged into one by using times salary and the like as a basis in providing consumers buying power by way of ‘mortgage approval’ for a fixed amount of money.

    This was and is a complete nonsensical way to ‘value’ property because it ultimately takes zero cognizance of the earnings potential of the house/apartment, regardless of the initial use of the property.

    The value of a house and the method of financing its purchase are distinct and separate issues.

    A rental yield register would provide an extremely sound basis for valuation and thereafter the financing decision/method/model is completely dependant on all the other normal lending risks banks consider before they advance money. They two are not intertwined or in any way linked so can we please stop suggesting they are – mixing these two issues up has got us where we are today.

    I would therefore request that contributors please think before they suggest that ‘safe’ lending models such as 2.5 times the first earner and 1 times the second earner yady yady are the way to go. Utter nonsense.

    In using these models today against the 2010 average industrial wage (36k) would potentially have a couple buying a house today with a ‘cost’ of €140k and a monthly mortgage of €820 (Initially interest €512 pm + €308 pm principal) on a 90% LTV over 20 years at tsb’s initial first time buyers rate.

    Versus a rental gross cost of €466 pm (€140K *4%/12) based on Daft.ie latest average market rental yield of 4% i.e. a real market ‘value’ of €73k using long run metrics yields of 7% and net rentals(92% of Gross).

    Model has the house costing €140k

    Rental Yields has the house valued at €73k ((€466*12*92%)/.07)

    What would you do?

  24. @All, but especially @2Pack.

    We should be demolishing 1 Ghost Estate in Roscommon/Leitrim/Longford every week by now and we have not even started.

    Don’t let a good idea like demolishing houses get in the way of economics.
    It used to be an axiom that sunk costs are irrelevant to future economic decisions. Maybe that axiom has been demolished too.

    There is a real opportunity to create a good tourist business from ghost or semi-finishes estates.

    1. Give them away on condition that they be finished to tourist accomodation standard within two years, with money deposited up front for the projects.
    2. A revamped Bord Failte could be used to market these for fly-drive or other tourist ideas.
    3. I would even go so far as to reduce the tourist rental to a nominal fee.
    4. By arranging the packages properly one could not only avoid taking tourist business from other local businesses, one could probably increase their business.

    But as I said, don’t let a good idea like demolishing houses get in the way of positive ideas.

  25. Fxxk off anyone who wants to demolish Ghost estates in Letrim Roscommon. I am a professional and I have 10,000 savings and I pay rent down there week to week and want to buy a house at it’s true value. When they hit 50,000 I’ll buy.

  26. @YOB
    Re your model.
    Its late after a long day. I understand your general point and agree with it. Could you try to explain the €466 a little better.?
    Is it not better to start with a monetary average rent figure and work it back to get the house value Its late, my brain is fried.

  27. @ a punter

    A Professional? Means someone else is paying your salary.

    You sound like a cheap skate ‘investor’ spending too much of your salary on depreciating assets or consumables.

    You caught at one of those moments.

    🙂

  28. @Eamonn Moran – “For the 13% of people with Mortgages we need Bankruptcy legislation.”

    Agreed – but won’t this also end up adding even more supply, further pushing down prices? I think we would see two waves of bankruptcy applications: the ‘early adopters’ who just want to get rid of the problem/nightmare then the ‘wait and see if my personal situation improves’ who jump after they see everyone else doing it (and their personal situation doesn’t improve). I can see it running into 5 figures. Whether it pushes 6 figures remains to be seen.

    The Irish property market is ‘untouchable’ at the moment and I would suggest it is only fools with a bit of spare cash rushing in to the Allsop auctions, thinking they are getting a bargain when in time it may well turn out that they didn’t…. and a fairly short time at that.

  29. @Grumpy – “Why they need to be “incentivised” given they really should be quite surprised to be employed full stop, is a mystery.”

    Having worked in the financial services industry it is a major surprise to me that thousands have not been given the opportunity to continue their career elsewhere.

    There must be some directive coming down from government/bail-outers that they must keep people on and only slowly trickle staff onto the dole queue. It is the only explanation.

  30. @ JR: Demolishing is daft. The crux is to be able to legally ‘seize’ those properties for zilch – the developer carries the ‘sunk cost’, and offer the properties, as seen, to people who will put them in order. Have to have a clawback somewhere.

    The key attribute would be to do a careful analysis to see if all the properties were in use, whether the area would be viable in terms of services, access to an allotment, school and basic shopping. If the development cannot pass this test, then demolish and return to agri use.

    @YoB: What would I do? Have to ask you for another favour. 🙂

    Essentially you are asking me to junk my slightly tethered paradigm of res property pricing (20:28:32 Model) and adopt an alternative. At moment I have both moored side-by-side. One has to be cast adrift and … well, the parting of ways, etc.

    1. That 7% – this is a historic value? It must have some basis. Is it a virtual value lodged within a range? ie. there may be some min and max tolerance?

    2. How would the valuations be made? As an owner of a very very important piece of property, mightI be a tad miffed at the value? I recently had a valuation placed on the house I live in and I was at a loss to understand how they came up with it. I’ll have to look back over the paperwork.

    3. That RY calc at the end of your piece; the 92%? Is that of the ‘value’? I would not allow anything over 80% – ie. you use a 20% cash (from savings) on-the-table deposit.

    4. The ‘times salary’ metric is open to all sorts of abuse. But it does have a long history of use (with a 30 yr loan, and 20% down, and lender conducts a due diligence on all other outstanding debt!). But, and herein lies a serious problem – the expectation, with a P of 1.01, that salaries would slowly increase over time. I have a bad feeling that this paradigm is in the skip.

    Could I ask you to provide me with a few other examples of valuation calc (I’m a bit slow on the uptake here!). Thanks again.

    Brian Snr.

  31. @Joseph

    The equivalent rental cost on a house costing €140,000 based on latest yields of 4% per Daft is €140k * 4% = €5,600/12 = €466 pm Gross.

    The market however should be valuing (and will in time) a house generating a rent of €466 pm at €73k – based on long run trends and net yields.

    So the bank model has people today potentially buying houses based on times salary costing them €140k but really only worth €73k based on a yield metric.

  32. Yield or Bust.

    Got it. Thanks for that.
    I would have some doubts that a house which would sell for €140,000 (if any houses were selling), could be rented for net rent as low as €466/month.

    At the rate house prices are falling, good houses in reasonable locations able to generate a rent of 750/month, will be bought for close to 140,000 in Mid-West. That’s just a feeling. I could be wrong.
    Thanks again.

  33. @Joseph

    As indicated in time house prices as opposed to rents will adjust to reflect the long run average market yield – the latest Daft rental surveys are suggesting this to be the case.

    @ Brian Woods

    The 7% figure is based on an analysis of Govt housing numbers published since 1976 and available via Dept websites.

    In fact long the long run p/e on most European equity markets mean reverts around 14x which is the reciprocal of a 7% earnings yield so the number has form.

    In addition Credit Suisse publish long run market data stretching back over 100+ years and latest data for Ireland indicates the equity risk premium for Ireland averaging 2.9% pa over Govt long bonds. Given that risk free alternatives are thin on the ground at the moment and using German 10 bunds as a reasonable proxy which are currently yielding 3.1% would suggest required equity returns over the long term at c6% at a minimum.

    Given the country risk here and the additional liquidity risk associated with property as an asset class versus pure listed equities its not hard to see where a 7% number can be achieved coming at the issue from the bottom up using empirical long run evidence.

    (Obviously using current Irish 10 year Govt Bonds would suggest required equity returns of close to 13% and something above that for an additional liquidity risk for property – but that’s assuming the Sovereigns debt issues remain in flux for the foreseeable future – your call here)

    As suggested here before banks ultimately price property so I’d take ‘valuations’ from anyone with a significant pinch of salt. In 98% of residential property transactions in Ireland over the past 20+ years the transaction required a 3rd party lender to complete the deal. So ‘valuations’ in any sense are something of a joke because as we see today without the leverage in the system there is no property market and those with the leverage control the price.

    At the very basic level any risky asset is fundamentally priced based on the cash that it can generate over time using a discount rate to present value future cash earnings today. Property is no different. For a decade banks believed it was. We know that belief was a disaster. Therefore I’d say to you always calculate values based on returns the asset would be able to generate in the open market and not on hope values because hope is not a valuation strategy.

    The 92% number is the net rental yield. It assumes one month’s rent is lost to cover upkeep of the property and the €200 second property cost etc. It’s a long run market average i.e. net yields are 11/12 of Gross = .9166 ~ 92%.

    My own view is that the times salary worked more by accident than design for the years leading up to the introduction of the Euro. Don’t get me wrong the Euro was not the issue but asset allocation for the years after it was.

    With the Euro introduction in 1999 and interest rates going lower the belief was that leverage asset markets and property particularly deserved a structural upgrade (lower net yields / higher p/e s) because the cost of financing was now believed to be on a lower long term trajectory for the foreseeable future.

    But this thesis failed because it assumed the risk in the market fell in line with the fall in interest rates but if fact the opposite was the case – risks in the property marketplace went up because allocations of credit were all sucked into previous long term winners in the banks eyes but we know when all the bets are going the one way the clever thing to do is to take the opposite view – unfortunatley that was the Regulators role, enough said.

  34. @ YoB

    Thanks for that. Clears up a lot. Have to go away and cogitate on the matter – its a ‘kinetic’ model rather than a ‘static’ model. Any reference source you might recommend? Thanks.

    Brian Snr.

  35. @Brian Woods Snr

    As indicated valuation models for property assets should in theory and in practice be no different to any other risky asset class so for reference use a standard dividend valuation model used for equities and adjust the discount rate accordingly.

  36. NAMA may have a cunning plan:

    “Mr Daly said that Nama, conscious that house purchasers could find themselves in “negative equity for a long time to come”, has engaged in preliminary discussions with the both AIB and Bank of Ireland to see if they can provide financial support to purchasers.

    Nama expects to have “a more detailed engagement” with the two banks on this issue over the coming weeks and the product which it hopes to unveil in the autumn will be designed to generate sales of properties controlled by Nama debtors or by receivers, he said.”

    http://www.irishtimes.com/newspaper/breaking/2011/0519/breaking35.html

  37. @Joe – “will be designed to generate sales of properties controlled by Nama debtors or by receivers”

    That’s the final nail in the coffin for the rest of the Irish property industry then.

    I can see the four estate agents in my town ending up as charity shops (that seem to have opened in alarming numbers here in the past few months). It never ceases to amaze me that you hardly see a property for sale here these days (nobody wants to test the water) and yet we seem to be supporting four of them. Perhaps they are ‘waiting for something to turn up/the upturn’.

  38. @ A Punter. They will hit 450k anyway.

    The ones need demolition first are the myriad incomplete eyesores in s23 land. I am disinclined to demolish completed estates.

    Give them for the yanks in lieu of their €3,000 headage payments for bringing jobs here 🙂

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