Property Market TV Hurray!

Expect John the intolerable will be along soon to poo poo this research and the facts on the ground. Followed by a denunciation of leamer for talking down the us economy

The one metric that I find most surprising about our residential property bust is that we are down 43% from peak according to the CSO and given inflation has been flat since 2007 (I think we are 0.1% only up on a CPI basis) the real decline from peak is also 43%.

Northern Ireland, sans ECB cheap money, planning gombeenism, our Keystone Cops financial regulation, our ghost estate legacy and oversupply and with an unemployment rate of just 7.4%, is already down 45% from peak and in real terms, stripping out inflation, 52%.

Yes there are instances of prices 70-80% off peak but the CSO tracks eight mortgage companies and in the last year for which cash figures are available, 2009, cash accounted for just 6% of the total market.

What is most remarkable about our bust is not the collapse, but the structures we have put in place to distort, retard and generally prevent residential property finding its natural level. And these artificial interventions probably make our bust unique, so a 4-year bust, a 6-year bust, a 10-year bust? Who knows, with the level of distortion in the Irish (Republic) property market, it could last decades.

@JS
“What is most remarkable about our bust is not the collapse, but the structures we have put in place to distort, retard and generally prevent residential property finding its natural level. And these artificial interventions probably make our bust unique, so a 4-year bust, a 6-year bust, a 10-year bust? Who knows, with the level of distortion in the Irish (Republic) property market, it could last decades.”

See Ezra Klein’s piece in Washington Post today, “Could This Time Have Been Different”
http://www.washingtonpost.com/blogs/ezra-klein/post/could-this-time-have-been-different/2011/08/25/gIQAiJo0VL_blog.html

Scroll down to where Klein discusses research by Reinhart & Rogoff that compares financial crises to “normal” financial downturns. “The historical record, they said, showed that “the recessions that follow in the wake of big financial crises tend to last far longer than normal downturns, and to cause considerably more damage.”
. . .

“But financial crises tend to include a substantial amount of private debt. When the market turns, this “overhang” of debt acts as a boot on the throat of the recovery. People don’t take advantage of low interest rates to buy a new house because their first order of business is paying down credit cards and keeping up on the mortgage.”
. . .
“Perhaps as a result, in 10 of the 15 crises studied, unemployment simply never — and the Reinharts don’t mean “never in the years we studied,” they mean never ever — returned to its pre-crisis lows. In 90 percent of the cases in which housing-price data were available, prices were lower 10 years after the crash than they were the year before it.”

@ Stephen,

A lot of people suggest the lack of credit is driving house prices down. Although I think Irish house prices are still too high, I wonder if the adjust would be more gradual if credit was freely available. i.e. are potential (credit) buyers anymore rational than those from 4yrs ago? We are drawing them from the same population.

Anyway my question is what does the theory say about asset prices being driven by credit? Is a heathly market one where the credit based price equals the cash price?

I was thinking about this w.r.t. car prices vs property. Although not on the same scale, many people need credit to buy a new car. However car loans don’t seem to drive price higher. My most likely explanation for this is cars depreciate in value and lenders factor this in.

Is this the end of nama wine lake?

http://www.bbc.co.uk/news/world-south-asia-15236222

@ahura

I think the key difference is that the supply of cars can generally be adjusted to match demand.

I used to attempt to lecture people to the effect that the increased earnings and credit in Ireland were basically first order being used to inflate property prices rather than benefit the nation very much. My reasoning was that the culture meant that most people would all choose to use their new found “wealth” to try to acquire the same asset type – they were all after the same thing.

It was a hard sell.

26 reasons by property prices will continue to decline for a long long time

A) Income taxes will rise substantially for everybody
B) Significant Property taxes will be introduced for owners
C) Significant Indirect tax increases- VAT/Excise
D) Interest relief for investors will be further reduced from current 75%
E) Rent Allowance will be decreased by some material percentage
F) Personal Insolvencies will increase when the law is changed in their favour
G) Continued downward wage pressures-or no pay increases at least till 2015
H) As competition in Banking is reduced then mortgage margins will rise
I) Emigration will continue by current and future potential homeowners
J) NAMA releasing finished properties onto the market mopping up demand
K) ECB raising interest rates to normal levels once Europe crises recovers, ie by 1%-3%
L) Property owners/investors in tight financial straits will be forced to sell
M) People realise that property in Ireland is still expensive vs other countries
N) More builders are put into receivership and properties are sold at large discounts – don’t forget there are 300,000 empty properties
O) Rising fuel prices decrease disposable income and discourage commuting
P) The Croke Park agreement falls apart and public sector pay falls
Q) Unemployment rises and
R) Loss of economic sovereignty
T) Deflation or very low inflation causes debt to have to be repaid in full rather than inflated away at lenders expense.
U) Stiffer regulation forces banks to provide mortgages with more caution
V) Interbank lending to Irish Banks does not return to pre-crisis levels and the Banks have to price margins very conservatively-A given
W) Building costs decline further as NERA is disbanded and new build houses can be profitably sold for less.
X) Development land has plummeted so land costs can lead to further downward pressure on prices of future developments.
Y) Commercial rents continue to decline and contagion negative pressures apply to residential rents leading to lower property asking prices
Z) Contrarily the current booming birth rate will provide demand in 25 years time-for subsidised housing at the least

You can add the eurozone crises etc to that now too.

@ Grumpy (/ Eoin),

I’m thinking more of the effect on the demand side rather than supply. I mentioned ‘cars’ as an area where credit is often used but doesn’t seem to increase price.

Say we have 3 scenarios where buyers A and B wish to buy the same house. Scenario 1: no credit: buyer A has 250k savings and buyer B has 200k; so buyer A sets the upperbound for the price. Scenario 2: Bank X provides loan (of up to 300k), buyer A and B compete; bank X sets the upperbound for the price. Scenario 3: Buyer A has 250k savings no credit and Buyer B has 30k savings and credit, buyer A and B compete; bank X sets the upperbound for the price.

So unless buyers A and B show some discipline when accessing credit, bank X has a great say in determining the price. It’s probably fair to say that Scenario 1 will have the lowest house prices. I’d suggest that an extreme version of scenario 2 happened in Ireland between 1997 and 2007.

Now I’m not arguing that mortgage credit is a bad thing. It’s very important and helps a great number of people. But I don’t think it’s healthy if it drives the price. I don’t have any problem where banks enable larger numbers of people to purchase houses, but offering individuals larger and larger amounts of credit only really benefits the seller. Cheap housing should be easier to sustain; though this is problematic given existing levels of outstanding mortgages.

I was kinda hoping there was a well known rule/ law (commandment or something) of economics that covered this, but had escaped me.

@ Stephen,

That’s for the link. . Your paper deals with post crash, it’s the buildup I’m thinking about.

@Ahura Mazda

There is a well known rule in relation to property which works well, works in almost all parts of the world and works despite the prevailing interest rate.

Buy when market rental yields are greater than 10% and sell when market rental yields move to 5% or below. Always be in a rush to sell at 5% or below and never be in a rush to buy.

You simply cannot go wrong. Bring it to your grave.

@Johnny Foreigner

You also have some economists on the airwaves, who were less astute than you, claiming that basically the only reason you didn’t take out a mortgage was because you couldn’t get credit.

@grumpy
Indeed. One would imagine from all the ‘analysis’ that everyone who could buy did buy. Simply not true.

@AMcGrath
Agreed but let’s not give Joe Public the Homeowner too much of a break. Most of them shudder at the thought of renting and let’s not even mention social housing. Most would consider a squatter to be a parasite. Ironic.

@remnant
And let’s not forget the massive tax evasion still being perpetrated by the BTLers.

The ’empathy’ you note is as fake as a two-bob note, it’s naked self-interest. Where was that empathy in the 90s when rents were going through the roof and families were shuffled by the BTLers from one grotty hole to another like pieces on a chess set?

1: Shelter is not a discretionary spend.
2: Renting was actually more expensive than buying.
3: The credit bubble represented the only time in our history when we could house and support our population without them having to emigrate (sad but true).
4: The banking system is still broken

And one more – the mob that took out all the 110% liar loans have eliminated reasonable credit availability for the generation coming behind.

…And the horse you rode in on you foreign ignoramus.

That “mob” was simply those young Irish people who wanted to have a secure roof over the heads of their families, without the ever present threat of a gombeen landlord throwing them out on a whim. Tenants have little to no rights in Ireland in practice.

And as to the “liar loans”, how dare you. How dare you suggest that first time buyers, with no experience or understanding of the property market, with no clue of how the mechanics of compound interest even works, could ever have known more about what was going to happen to their mortgages than the professional crooks who gave them the loan and sentenced them to a lifetime or debt or an almost certain bankruptcy.

[b]HOW DARE YOU[/b] attempt to divert the majority of responsibility the national mortgage disaster from where it RIGHTFULLY BELONGS; with the reckless, predatory and irresponsible banks who knowingly fuelled a doomed property bubble for their own financial benefit. The banks who conned two generations of young people into unsustainable debt, who deliberately gave more more debt in 100% mortgages to sustain the bubble when it began to falter, who shamelessly gambled the wealth of a nation and then blackmailed the same to cover their losses. The real liars, who took out colossal interbank loans and defaulted on every single one of them. HOW DARE YOU.

All of them innocent as the pure driven snow, never thinking of the capital gains, only wanting to put a roof over their heads.

There is no innocence in this crisis, only degrees of guilt. But the rank guilt of six banks in Ireland outweighs that of all the rest of her 4 million people put together. The only reek that rivals it is that of the Irish state, and it’s continued, wilful failure to bring justice to the over-mighty few who mortgaged all of Eire to jackals even greater, and who still stand unpunished for it.

No-one is going to come out of this smelling of roses, but in spite of the insults and injustice heaped upon them, the honest people of Ireland can still remember the scent of lilies.

@ OMF

+1 ………. nuff said

@OMF

Stop, please, my heart is breaking. The ‘roof over my head’ line is a real talking point these days isn’t it? Wanting to own a house is simply a desire, nothing more nothing less. People all over the world choose something else whether it’s living with parents, renting or social housing. Do you look down on these people with their pathetically narrow ambitions? You’d be disgusted by the smelly Germans and French with their silly little rented apartments. I agree that renting in Ireland is not pleasant. Imagine if all the money and effort spent on chasing the ‘dream home’ had gone into agitating for legislation to improve the rental market.

As to the picture of the naive Irish parent (almost certainly with babe in arms), browbeaten into submission by the evil banker – pull the other one it’s got a green flag wrapped around it. There’s a canny mcsavvy accountant deep in the heart of most people who pull on the ‘ordinary Joe’ disguise.

Two questions

1. There is a form in front of you. It asks you to state your income. You make 20,000 a year. You put down 40,000. Is that a lie?

2. What should we do for all those perfect nuclear families you love who are currently renting? How can the State rush to their aid given that their lives are so miserable by your account?

People all over the world choose something else whether it’s living with parents, renting or social housing. Do you look down on these people with their pathetically narrow ambitions? You’d be disgusted by the smelly Germans and French with their silly little rented apartments.

Again, your ignorance of the Irish domestic situation is glaring. There has never been a history of tenant right in Ireland, up to and including the present day. With the exception of protestant tenants in Ulster, most tenants never enjoyed even the most basic protections from the capricious whims of landlords. The long term effects of this can be seen in the marked contrast between farmsteads in Ulster and the rest of the country.

The precarious situation of tenants extended and still extends to residential tenants. Ask about the flippancy with which landlords treat deposits. Ask about the proliferation of 1 month leases. Ask about the lack of leases in many cases altogether. Ask yourself just how advanced tenants rights can be in the only country in the developed world without a national property register.

People buy in Ireland because it is dangerous and foolish to rent in this country.

1. There is a form in front of you. It asks you to state your income. You make 20,000 a year. You put down 40,000. Is that a lie?

More ignorance. In Ireland, there was little in the way of the US “sub-prime” market you are referencing here. All of the households who took out loans in Ireland were making considerably more than that, and all their details were accurately recorded by the bank. Every form was in proper order on the borrowers end.

The problem in Ireland was that the banks didn’t need people to lie on their application forms. The banks were the ones doing the lying; conning people into lending far more than they could sustainably afford, over-lending to deliberately drive up the housing market, and then lying to the central bank and financial regulator about the true extent of the banks own insolvency. The Irish mortgage crisis is entirely the creation of the six Irish banks and no-one else. The banks were fraudulent.

You seem to think that Ireland is identical to your own country–a typical American conceit. Ireland is different. Irish lenders were different. Irish banks were different, albeit just as greedy and fraudulent as American ones. If you want to contribute responsibly to the mortgage debate in Ireland, please, educate yourself further on what you’re talking about.

More TV from last night, Tonight, with Vincent Browne.

http://www.tv3.ie/shows.php?request=tonightwithvincentbrowne

On it, Browne repeatedly asked Brendan Howlin if the government would instruct NAMA to go after loans to the full value the property developers borrowed from the banks, rather than the amount that NAMA paid for them after the haircut.

I haven’t got sound on this computer, so apologies I can’t point you at the right time on the show.

@OMF
I rent in Ireland. It’s not as pleasant as it could be. It’s not dangerous and given the bubble it was far from foolish. I’ve no idea what the blather about the history of Ulster is for – I guess you’re one of those guys who gets hungry every time he reads about the famine.

“all their details were accurately recorded by the bank. Every form was in proper order on the borrowers end.”

Oh my aching sides.

“You seem to think that Ireland is identical to your own country–a typical American conceit.”

Just because I’ve put ‘foreigner’ in my stage name doesn’t mean I am one. Just like you aren’t necessarily a freak. I think.

@Gavin Kostick
“I haven’t got sound on this computer”
I told them MIME was a bad move…

@ Gavin

that line seems to come from Harry Crosbie’s interview on the Late Late show. It sounds a bit far fetched to me. I could imagine NAMA going easy on property developers who cooperate with them and generate value in particular property assets, but it won’t be as simple as NAMA only looking to get back what they paid for the loans. For instance, lets say NAMA pays 60M for a 100M property, and it sells on for 70M – you think NAMA isn’t going after that 10M? Thats cuckoo insane. Maybe they won’t chase the other 30M, but what Crosbie stated, and VB continually restates, makes zero sense in that context. I imagine it’ll depend on what assets are there to be chased and what cooperation and value-add they got from the developer.

@Bond.

No I think you’ve got it wrong the fact is if the sale goes through at €70m then NAMA gets the €70m. The fact remains that teh €30m is written off – what else can they do? There is no further assets to sell. I simply don’t see any upside for a bank doing what they did to Mick Wallace yesterday – whats the financial benefit for a bank – the guy has no money, aside from a TDs salary. Explain the reasoning here.

The bigger issue is of course that the €30m is written off. Why can it be ok for NAMA – a State agency to be pragmatic and economcially sensible and take the view that the original valaution was wrong – the price today is supposedly fair and yet many thousands of homeowners don’t seem to be able to get similar deals with State owned banks with regards their mortgages. The pain goes on.

@ YoB

(a) the issue was that VB/Crosbie claim that NAMA is only going looking for the 60mn that NAMA paid for the loan, not the 70mn the property sale generated. You seem to accept that that is a bizarre suggestion.

(b) on the 30mn – if the developer has loads of assets left over, i assume they will try and get their hands on some or all of them. Not all of them are broke, it’ll depend on a case by case basis, and, as i suggested, how much the developer actually helped to get the asset sold off at a decent price

(c) If Mick Wallace is completely broke (ie he doesn’t have any pension or personal assets?), then you are right, whats the point in chasing him, because his currently salary will never even make a dent in 19mn of debt. However a homeowner oweing 250k and earning 40k a year clearly has some long term ability to repay a significant portion of the 250k. There’s clearly moral questions there about sweating people for cash for the next 15 years, but it makes sense for the banks, looking after their own interests, to try and do it. Liam Carroll will never repay the couple of billion he owes, ever ever ever, and never even repay 1% of it in all likelihood. An average homeowner will always have the potential to repay 50%+ of whatever he owes to the bank, no matter what.

NAMA are not making a call on the current “fair value” of the asset, they’re making a call on what they can practically hope to ever get from a developer when you gauge up the entire cooperation vs debt outstanding vs bankruptcy equation.

@disgruntled observer

We could argue forever about the ECB and interest rates. What matters is that it ends up being a transfer of money from savers to people with debts.

Regarding the State paying my rent, yes you are right. I’d be happy use the Rental Supplement scheme as a model for the proposed mortgage forgiveness scheme You don’t get anything if you (i) refuse social housing (ii) have a job (iii) have other capital or savings. You can only get the supplement if you live in accommodation where the landlord/bank approves of it. The maximum you can receive is matched to rent supplement.

@Gavin Kostick

“Browne repeatedly asked Brendan Howlin if the government would instruct NAMA to go after loans to the full value the property developers borrowed from the banks, rather than the amount that NAMA paid for them after the haircut.”

I think we all know the answer to that now… and they will eventually get a discount on a discount (and a number will have still salted enough away somewhere to live out a comfortable life).

Interestingly, I was talking to a banker this morning who’s been dealing with a non-NAMA developer loan problem this week. After asset sales they can bring it down to about 3m owed. The bank offered to write off a massive chunk (I know not why), leaving the guy still owing half a million in the vain hope that at some point over the next few years he might be in a position to pay it off. He went berserk, expecting it all to be written off. When queried about his lifestyle and cutting his cloth etc. (which is very high roller/international/expensive lifestyle on what seems to be very little income according to his statement of means) he went even ‘berserker’!

Imagine what it must be like when you are dealing with people who owe tens/hundreds/thousand of millions if this is the attitude of the minnows….

I can understand someone struggling/unable to pay their mortgage for relatively piddling amounts getting upset at seeing a small group being let off with huge sums and it would be helpful if there were a consistent approach on property debt, regardless of who you are or what you owe..

I guess eventual interest rate rises (significant ones) aren’t a million years away and the problem is just going to get worse as far as I can see. But as some of the comments above mention, you are always going to get the ‘chancers’ who want to jump on a bandwagon they don’t really need and if there’s one thing my beloved Ireland is full of, it’s chancers.

The bank shareholders have been wiped out. The banks are now owned by the taxpayers .Any renegotiation of the mortgages will have to be financed by the budget ,sooner or later. Any quantitatively meaningful relief of the mortgage holders will enormously increase the budget deficit. At the present time is it sensible?

The ‘blame’ might be said to lie mostly with bank-employees – top management & directors. But I’m not aware of clear-outs there?

Banks have no incentive to write anything off unless they are presented with a worse alternative. The worse alternative is: Bankruptcy.

The current legislation makes the threat of bankruptcy an empty one as borrowers consider the consequences to harsh.

If a 5 year bankruptcy had been an option then some people would be more than halfway through it and could be looking forward to getting out from under unpayable debts in a not too distant future. But reforms to help those needy are blocked.

@Yields or Bust
“I can honestly say I know nobody who owns a foreign holiday home.”

Head off to Wexford or Kerry the next time a bank holiday weekend comes around. I’ve seen it estimated that as much as a third of the residential building in Ireland at the height of the boom was on 2nd properties.

“what part of P60 do you not understand?”
What part of self-employed and self-assessment do you not understand?

“Your tone suggests we all went to the Bahamas every other month on cruises of a lifetime – again untrue. Evidence suggests the mortgage equity withdrawals was a massive UK issue – not so here.”

I’m saying that a lot of people engaged in conspicuous consumption because they thought they were rich because they thought their houses were worth a lot more than they really were. I lived in Ireland during the boom – the ugly consumption really did happen.

“By the way after retirement and with no income aside from a State pension how exactly do you pay for your rent?”

I’m not against the idea of buying a house – I would like to buy a house. I agree – it would not be pleasant to rent in old age or have to rely on the government for accommodation. Does that mean I should buy an overpriced house I can’t afford. I’d prefer a third option – buy a house when it’s affordable. If that means waiting then I’ll wait – since when was deferred gratification not an option?

Sorry for drifting back on to the topic.

I thought Richard Curran’s “Property Crash, Where to Now?” was pretty weak. He spent far too much time trying to set a date for when property prices reach a floor. Besides disagreeing with his conclusions, I think bottom-picking (itself) prolongs the adjustment.

The Pat Kenny show was odd. He was more animated than usual and seemed to be driving the direction of comments being made. Even Ronan Lyons got short shrift. There was one bit where Pat suggested that the banks lose nothing and only the foreclosed mortgagee loses. I’d be surprised if PK believes this. Hopefully personal circumstances weren’t effecting Pat’s performance.

The ‘new beginning’ mortgage solution was presented as a 3-way win. Very little detail was provided and no poking was allowed. At a glance it seemed to me that the person could service the mortgage so I didn’t see why it should be restructured.

@OMF
Not for the first time, I wonder what property bubble you’ve just lived through and whether it was the same one that I did.

@Gregory
The banks can pay by no longer existing as credit machines although I do not expect such a outcome.
Watching Richard Currans latest piece about the property crash.

John Bourke formerly of Irish Permanent was quoted

“Everybody wants a bit of it and why wouldn’t they , the deserving , the less deserving and the undeserving – they all want a bit of that and even the undeserving might want a bit of it.
AND THAT WOULD WRECK THE WHOLE SYSTEM.”

What I think he means by this is that it would destroy the CREDIT SYSTEM – but the credit system is not the money system.
Irving Fisher wanted to nationalise money – not the banks , when you nationalise banks you nationalise the credit/ debt.
The debt owns the goverment , so therefore the goverment does not own the banks.
Whats really sad about Currans programme is that it links asset price growth via credit growth – which is indeed the only outcome with this present private money system.
That means that real production is tertiary to credit production – getting the real wealth accumulation back to front.
Which is indeed what we have witnessed and will continue to witness.

@Gregory

Please for Gods sake don’t get suckered into the arguments that it takes two to tango and an asset is only worth what a buyer is willing to pay for it blah blah.

For the love of God your a man of intellect please don’t fall at the last fence. That’s the sort of stuff Joe Duffy comes out with the banks have been recpaitalised to the tune of €24bn. They have ample cash to cover their lending errors.

Property is a leverage driven business – if the credit doesn’t flow the market reverts to cash only buyers and prices collapse – this is what we’re seeing at the moment. In other words the credit providers in a leverage driven asset market dictate the market price – this is as true today as it was when banks first started to lend against property – and the fact is banks in such a market will ALWAYS dictate the market price, never the consumers.

If banks misprice the asset class against long run cash valuation metrics such as rental yields then its the banks who should pay the penalty. They price the product. They always have the opportunity to say no to any deal. This is a leverage driven market it is ordinarily not a cash market. That’s the fundamental difference between buying vegatables on the square and buying property – the normal consumer has virtually no say in property price – it is the preseve of the banks to dictate if the price is fair or otherwise.

If banks get that pricing model wrong, it is simply absurd to suggest that the consumer should bear the cost of that error. I refer to my comment above regarding the daft legal position for borrowers who can’t sell houses because of the actions of the banks in the wider market. As indicated this is a leverage market so errors on behalf of the credit providers need to borne by them.

Lending is a risky business the margins banks make compensates for that risk – the risks are many including valuation risks – it’s the banks JOB to price these risks correctly. With PTT falls likely to be +70% or more it is crystal clear the banks failed in their duty to get the numbers right.

Quite why you can’t see this is beyond me.

Borrowers have a duty to repay their loans however if the actions of the banks in the wider market ensure that situation becomes untenable then who is really to blame? In a leverage driven market the onus simply has to be on the banks to ensure a stable fairly priced market all else is somewhat irrelevant.

@Johnny

Eh the small matter of the Unguaranteed Bond Holders – all €16.4bn of them at the last count.

We do indeed own the banks – others would suggest not BOI I would suggest that without the Govt stepping in when it did BOI would have gone the way of the rest of them.

In simple terms the previous financiers all get zero for the effort – but unfortunately in the wisdom of the ECB they don’t see it that way. Quite why your guess is as good as mine. Don’t quote contagion back to me becuase most sensible folk believe that argument to be as hollow as Pat Neary.

@Johnny

No its not the parties that need to talk – its actually the ECB and the Irish Govt. Sadly you’ve already paid – what we’re trying to do here is get some of the loot back. Repeat – you’ve already paid.

By the way why are people so animated about potentially helping out the average guy and so happy it seems to have the banks once again dictate proceedings?

It seems odd when the folks in NAMA are willing to be a lot more pragmatic about the original daft bank lending practices and valuation techniques but the size of the NAMA issue is many many multiples the cost of fixing the mortgage mess, and the developers are getting paid in ‘managing’ the problem and will likely see significant write offs.

It seems as if many Irish people are quite happy to see thousands of fellow Irish live a life with absolutely no prospect of ever seeing the other side of a German pension fund bond investment in BOI or AIB. This strikes me as very odd behaviour.

Correction “They saw themselves as livestock ?”

Banks going back into their tradional business will be disastrous in the long run.
The economy can no longer afford to take from the future via private credit provision.
We must spend money rather them credit so as to increase whatever meagre wealth we have remaining.
Despite the propoganda Japan from the mid 90s to mid 2000s has increased real wealth rather then funding a tempory unsustainable growth spurt via credit inflation that is payed for perhaps a decade after the event.

@ Johnny Foreigner

Rock on!! Well done, holding your corner – and sorry for the ad hominens. There’s no public policy rationale for transferring taxpayer income to people SOLELY on the basis of decisions they entered into with regard to mortgages/property purchases? And no one has convinced me that I should pay to keep someone in their (larger?) owner-occupied house when I myself am renting. Or, that, such mortgage holders are more deserving of state help than, say, handicapped kids with special needs whose assistants are being cut, etc.

But hey, guess what, we don’t even get to have this debate in Ireland – the media, VIs, et al jump straight to the “self-evident” conclusion that stressed mortgage holders are a “victim group” worthy of your and my tax monies – and have a God Given right to their family home”. Just like they jumped to the conclusion that property prices could only go up!!!

Couple of points:

a. The banks were indeed reckless but bank shareholders have been wiped out……

b. If banks committed frauds on the mortgage holders – shurely we’d see loads of criminal or civil cases – and the overturning of what were, after all, voluntary contracts. I’m sorry but IMHO, barring fraud/force/mental disability, being stupid or greedy shouldn’t spare you from the consequences of a contract.

c. Smoke and mirrors on Michael Davitt and the landlords, most oppressed people on earth etc. And what does it have to do with the price of tea in China anyway? (e.g. someone putting a BMW on their mortgage, parents buying multiple homes for their teenagers).

Newsflash: Peasants/tenants were dirt everywhere in Europe well into 19th century (e.g. Austrian or Russian landlords had security of tenure – Serfdom meant they literally owned their tenant peasants). Landlordism was ended in Ireland by the forced expropriation of the landed class and UK taxpayer funded loans for purchases – a privlege denied English tenant farmers for example – who usually only got land ownership in the 1950s and 1960s as the Labour Government’s inheritance tax laws started to bite.

d. As to “social chaos”_ is this just shorthand for and criticism of the US model (lose your home but no recourse), I’m wondering would many Irish folks in negative equity actually prefer that outcome?

We do indeed have a problem with the concept of personal responsibility in this country. Just had a laugh at that syndicate of solicitors all claiming that they should be absolved of their personal guarantees for some property punt – because they didn’t understand the legal documentation.

@ Johnny Foreigner

The Dork has the right of it above.

“The problem with that argument is that depositors such as this Dork which stood at the sidelines for over a decade – (I was sceptical since 1995 & bearish since 2000) would not have had such large deposits without the banks loaning out unsustainable credit.”

You think you were so smart staying outside of it all, but you weren’t outside of it. You’ve been as duped as the average first time buyer if you think you are. You and everyone else here, commenting on this thread, taking their respective positions are in the same eco-system. Savers and debtors are not mutually exclusive from each other. One doesn’t exist without the other. Your position reminds me of the Germans who see trade deficits as moral vices and surpluses as virtues. They’re two sides of the same coin.

You’re not the virtuous creature you think you are.

@ remnant

“As to “social chaos”_ is this just shorthand for and criticism of the US model (lose your home but no recourse), I’m wondering would many Irish folks in negative equity actually prefer that outcome?”

I’m sure there are those who would love that outcome, and considering the scale of the debts that have been heaped on people in what they assumed would remain an inflationary market, but turned out to be the exact opposite, I wouldn’t blame them for it. BUT, first you should know what’s actually happening in the states. First and foremost, non-recourse, doesn’t mean you don’t have a legal obligation to pay. You do. And most people, and I would assume people here would be the same, are choosing to pay if they can. If you’re foreclosed on because you can’t pay, you get principal writedowns and walk away free. If it is considered a strategic default, the banks in the states can and are taking people to court. So who are the strategic defaulters there. Overwhelmingly, they are those with second properties (i.e. speculative/investors, as opposed to owner/occupiers).

I refer you to Yves Smith on this one. She’s written extensively on the American mortgage market.

I would also like make the point, that far too many people on this board can’t seem to get their head around the concept of the family home, as opposed to an investment. Most people are not buying their home so that they can flip it at a later date.

And finally. No. By social chaos, I meant social chaos. Those satellite images are horrendous. Each one of those dots represents misery.

@DO:”This mess is a consequence of a century of government policy.”

I’d re-write that somewhat. A century of background – maybe, but it certainly dates from early ’70s. Build up was fitful until ’90s. Then it got real traction.

Gov to blame. Somehow doubt it. Haven’t the brain-power. Though if they were only looking at a short-term gain, yep. Over 70 yr though? Too many banana skins to slip on.

@ Bklyn_rntr “… there is plenty to be pissed off about.” Spot on! Just wish some folk would direct their fire at those actually responsible. But then if you start naming the – ahem, guilty, you run a bad risk.

The duty of sheep(le) is to be shorn. Until we decide otherwise!

Brian Snr.

@Johnny

‘I’ve made it clear that I want to buy. I’m not like the German or Japanese housewives who are salting it away till kingdom come regardless of price – I want to buy now, just not at these prices. And my demands on price are not ridiculous given that we are still above the long-term trend.’

This is the point I’ve been making on this thread for years. The price is the key to all this mess. Your analysis was obviously ahead of the posse but you seem to think that the posse was simply in it for a big bet. They were not. In the vast majority of cases the buyers, who I have significant sympathy for, were average folk who simply wanted to buy a house and who felt that prices were running away from them, so they saved and stepped onto the housing escalator.

Sadly we now know most of them (300k in round numbers) got their timing wrong.

300k average people getting their timing wrong in an asset market driven by 3rd party lenders simply should not happen. The lenders knew or at the very least ought to have known the prices relative to rents simply made no sense. It’s worth remembering that 98% of Irish residential transactions simply would not happen without the leverage providers approval. As I’ve indicated many many times banks always had the opportunity to say no to these deals – they chose not to – and cannot now suggest they too got it wrong – its their day job to understand the market which their credit effectively controls.

From about 2000 onwards the long run relationship of average net rental yields was breaking down. You may correctly argue that the normal folk should have seen this coming. My argument has always been that this is a leverage driven market and those in control of the leverage control the prices. The banks have the skills to know when the market is hot or cold – this is their job. Any banker lending money into a property deal at net yields of 1% in Dublin in Q1 2006 simply cannot expect that deal to go to plan – all market evidence in the property world will quickly tell you that the upside risks are completely outweighted by the downside expectations.

Rental yields mean revert banks know this, does the average consumer? I’m pretty sure they don’t.

A letter in today’s paper should be apposite,

“Sir, – The fuss over the closure of the barracks in Mullingar (Home News, October 10th) illustrates perfectly the thoughts of the French economist Bastiat and the 18th-century Scottish historian Alexander Tytler, who both said, words to the effect, “A democratic society will collapse when everybody thinks they can vote themselves a share of somebody else’s money.” – Yours, etc,

R D BANTON, Kevin Street, Tinahely, Co Wicklow.”

http://www.irishtimes.com/letters/index.html#1224305638447

Though Ireland may be the exception, they just emmigrate or ring Joe Duffy instead. Why for example haven’t we insisted on implementing the suggestions in another letter in the same paper today:

“Sir, – Because Mick Wallace gave personal guarantees, he may now be declared bankrupt and if that happens, he is deemed unfit to represent the people who elected him and will have to give up his seat (Breaking News, October 10th).

On the other hand, the bankers who made the banks bankrupt still get massive salaries and pensions. Equally, the politicians who made the country bankrupt by giving guarantees with taxpayers’ money also retain their posts, pensions and expenses.

The very least that should have happened is that all bankers in charge of the banks during the period when they were working towards bankruptcy, should not be allowed to act as directors again and any politician (including opposition TDs) who voted for the bank guarantee scheme, should have to give up their seat and their pension.

This bunch should then be joined by the faceless public servants and regulators who served their own interests so well and did not give two hoots about doing the job they are employed to do. – Yours, etc,

CIARÁN SUDWAY, FRICS, FSCSI
Crannagh Way, Rathfarnham, Dublin 14”

@Bklyn_rntr

Now all the government has to do is find a 50 billion pot of gold somewhere ~(30,000*1,600,000 households)

Easy peasy

@Brian

You need to find a comparable house in the area that is currently being rented that your relative intends to buy. Local estate agents, local newspapers will have details of whats currently on offer in terms of rent – work on the basis that you can at the very least bargain down by 10%.

So you now have a cash cost of a comparable property – over the long term we know that this rental cost should (will in time) be 7% of the value of the house on a net basis. The net is important becauase the market norms suggest 1 month is lost to landlords to covers their costs.

So for example if the rent was €1,500 per month. The house should be valued as follows:

Rent @ €1,500 pm *11 = €16,500/0.07 (long run net yield average) = €235,714.

The €235k can be compared to peak prices – I’ll hazard a guess that €235k compared to peak will represent a fall of c66%.

Mean reversion in terms of yield also means yields can and do go beyond their long run average. The ALLSOPS auctions suggest that residential property is currently selling in a cash market (86% of all ALLSOPS transactions are for cash) at 8% yield for houses in the wider market (8.36% in Dublin, 7.68% Rest of Country).

There is no doubt that the number of cash only buyers will dwindle as time moves forward and then you’re facing a propect of a normalised leveraged market resuming (if at all). Given the additional financing risk with a leveraged buyer my thought would be that the yields have to push out further (prices lower) to compensate buyers for the additional deal risk.

Where do the yields eventually get to? I haven’t a clue – but what is likely is that top line i.e. rents will fall from here as the Govt rent allowance is curtailed however the impact this move has on market rents is extremely difficult to model but it simply has to be negative. In Dublin where supply in tighter the impact maybe less severe.

So yields pushing higher than 7% I believe is a given, so the €235k above would, if I was buying represent the max I would be willing to pay given the facts as presented here.

@YorB

“As I’ve indicated many many times banks always had the opportunity to say no to these deals -”
Are you implying that the borrower had no choice?
Look Johnny Foreigner has taken yards of abuse for opposing the suggestion (HOW DARE HE?) that people like himself who saw the bleeding obvious that houses were grossly overvalued over the last 15 or so years and waited patiently for the inevitable collapse, should now be penalised for this prudence or “deferred gratification” as the sociologists put it. Although a home owner myself I agree 100% with everything he said. Unlike his opponents he uses no obfuscation, evasion, or attempts to evade personal responsibility. Sure the banks were reckless in lending to people who cannot afford to pay – both to homeowners and developers.

There are always people who take out loans and find later for whatever reason they can’t pay. I am sure there are people in genuine hardship due to their own ill-advised or reckless borrowing. Frontline only managed to put up front a couple of the more obviously well heeled, which I guess is hardly likely to encourage much sympathy from the rest of us.

We objected and rightly to the bailout of the bankers. For consistency sake alone we are morally obliged to object to bailouts of others who contributed also fairly directly to the bubble. Two wrongs just will not add up to right.

I meant income tax household, so assuming 1.5m houses and excluding pensioners and welfare recipients, the total would probably be 30bn, and if half of them spend some of it, then approximately 10% + of this amount would return to the government in the form of consumption taxes.

My point was, €16bn was the number mentioned as unsecured bondholders, €6bn is the amount we are told that was already provisioned by the banks, that is a total of €22bn using bad maths (the provisions are reserved and the bonds are not really new capital) but anyway, since we are already in the land of assuming that a) mortgages can be forgiven without any contagion effect and b) unsecured capital already on the BS can be treated as new capital, why not use those same assumptions to actually propose something that would help demand, and therefore employment. More importantly it would be fair to all income taxpayers, the spenders and the savers alike!

@AMcG: “We objected and rightly to the bailout of the bankers. For consistency sake alone we are morally obliged to object to bailouts of others who contributed also fairly directly to the bubble. Two wrongs just will not add up to right.”

I’d go along with this – to a point. But there are two distinct issues and althought they are intimately connected, their causes and outcomes are vastly different. Confusion is understandable.

One ‘wrong’ was perpetuated by persons who put themselves forward as ‘professionals’, but who were behaving in a deeply flawed manner. The other group were ‘amateurs’ (the vast majority I would guess) – sheeple if you wish. So their responsibility is of a much different kind.

The key issue here, and it is still being dodged with all the amazing foot-work skill of Cassius Clay – and then some: the totally unequal nature of the formal (legal?) mechanisms available for individuals who borrowed to purchase residential property (as their home – not as a speculative investment) – as opposed to incorporated companies some of whose senior personnel misrepresented (lied?) about the financial status of their companies, to the leader and deputy of the elected government of this state. So, across whose back is the stick being applied? And, why?

It might be some excuse, but little comfort, to admit that we have never encountered such a drastic financial predicament. But what is totally inexcusable is the steadfast obduracy of our politicians, ardently urged on by their Bankster buddys to put into place any plausible process to resolve (permanently) this dreadful mess. And do not neglect to inquire about the ‘interest’ the Civil Service chappies may have.

Diliberate misrepresentation is somewhat different to ill-informed, excited behaviour. No? Quite!. So punish the fools, and reward the cheats.

Brian Snr.

@BW Senior
“One ‘wrong’ was perpetuated by persons who put themselves forward as ‘professionals’, but who were behaving in a deeply flawed manner. The other group were ‘amateurs’ (the vast majority I would guess) – sheeple if you wish. So their responsibility is of a much different kind. ”

I was of course referring to the principle that it wrong to use my money to bail out banks who borrowed (and lent) recklessly on the bond market. For the same reason it is wrong to bail out tose who fuelled the house price bubble by paying inflated prices, for ,in many cases whether you admit it or not, speculative reasons. Even for not speculative reasons.

We are fond of referring to our high standards of education – but suddenly naivety and ignorance is being trotted out as a defence for what was at base greed – a desire to get on this mythical property ladder. Bail these people out and no lesson will have been learned – The bubble will reinflate in the certain knowledge that their is no real downside to the bet. Caveat emptor!

The spin from the debt forgiveness brigade who include, as someone else as pointed out above, some high profile vested interests such as Constantin Gurdiev, is that any solution would be confined to the truly needy. Frontline put some pretty obviously unneedy examples up front, fuelling my suspicions that there are many relativly well heeled waiting to jump on the bandwagon.

@AMcGrath

For the umpteeth time please can you understand what I’m saying – the housing market is a leverage driven market, it is not a cash market in its ‘normalised’ state.

This matters beyond all the rest of the arguments laid out here and elsewhere.

Without leverage the market simply stops to function. The providers of the leverage are the banks. They have the choice to let you or I play in that market. If as borrowers we chose to play then common sense would tell you and everyone else that the banks are comfortable with both your choice and theirs.

The players in the market accept the rules but, and its a very large but, the games do not begin unless the banks allow it to begin. So stuff said such as a property is worth only as much as someone is willing to pay for it is simply wrong. Its a daft thing to suggest. A property deal (in 98% of cases where leverage is required to get the deal over the line) is utterly dependant on the bank saying yeah. Without their blessing the games stop.
So as a result a property is actually (in 98% of cases) only worth how much a bank is willing to lend against it. Please for the love of God get this. It’s quite important.

Given the above – the truth of the matter is that banks ultimatley price property – not consumers. Think about this.

A developer buys land and goes to the local bank with a plan to build 50 new houses – he submits his estimates on costs and unit prices to clear the bank loans and make a profit, the banks either agree or disagree on the numbers. On the assumption that they agree – the banks already know the minimum prices that the units have to sell for to clear their loan and to allow the developer make a living.

My basic argument is that is virtually all cases presented to the banks since about 2000 the unit prices in such deals relative to actual rents on the ground for similar properties made no sense. In simple terms the banks have agreed on prices that were completely unrealistic from the get go.

ALL mortgages agreed and sold thereafter based on these prices (the banks prices) were wrong. Repeat the prices were wrong.

Now the question is does the pricing error sit with the developer, the bank or the mortgagee?

In my view, as indicated above, none of these transactions would have seen the light of day unless a lending officer or a director in a bank gave it the green light. Not one house would have been built (in the vast vast majority of cases) without the blessing of the bank.

The leverage the bank supplies allows the wheels to turn. They set the minimum prices and consumers have a choice to accept them or not. Should the consumer know if the prices are right of wrong? You believe he/she should – I believe the consumer ordinarily wouldn’t and takes advice in relation to a large transaction such as the purchase of a house. They ask an auctioneer, the ask parents, they look at
similar deals, they ask solicitors, they ask accountants, they weigh up the pros and cons.

Now did the average consumer over the period from 2000-2007 ever receive advice to the effect that the houses are approximatley 40%-70% overvalued? Well given the number of houses bought and sold in the period the answer was probably no. Was the advice received dire? Yes – primarily becauase most of the professionals (and non professionals) giving it had a vested interest in ensuring that the answer was to buy and buy today. The Govt also encouraged that the answer was buy and buy today because of the various reliefs etc provided.

Now given these facts and they are the facts can you understand that average person , who only ever wanted to buy a house to live in, and in the meantime can no longer afford it (because of job loss, pay reductions, rate increases etc etc) and can’t sell it and can’t potentially move on in life for all the reasons above should feel agrieved from the turn of events as pressented?

Only a fool would suggest they at least deserve that the banks, in mispricing the deals in the first instance and flooding the market in excess property and screwing up the market for the next 10 years, should at the very least be partly to blame and suffer some monetary penalty.

Basic logic would suggest this to be the case. It’s not about fairness its about logic.

The other question for me which arises is that if the ownership of the banks was still in the private sector (I appreciate its a rather large if) would you really give a damn what agreement the banks and your neighbour came to in terms of debt forgiveness? I know I wouldn’t – so is the ownership of the banks the real issue in preventing people allowing the banks to deal with their mis pricing error. As time moves on it seems to me that this is becoming the case.

Yield or Bust,

Please stop saying ‘the banks’ when contrasting with ‘the home-owners’, you should compare the (then) ‘bank-owners’ on one side of the deal, and the ‘home-owners’/borrowers on the other.

The ‘bank-owners’ were the share-holders, who were wiped out.
There is no bail-out for them (and rightly so).

‘the home-owners’ were on the other side of this private deal between a private company and a private individual.

the whole deal went bad for both PRIVATE parties.
but they managed to drag the rest of us into it and mess up the economy.

not only did the buyers in this private deal mess up their own finances, they collaborated in supporting the immoral high house-price structure and didn’t object, agitate, protest about how rotten it was, in fact the OPPOSITE – THEY WANTED THEIR HOUSE PRICE TO GO UP AFTER THEY BOUGHT AND TO HELL (OR JOBSTOWN) TO ANYONE BEHIND THEM WHO COULDN’T AFFORD THE SAME QUALITY HOUSE, A LESSER QUALITY HOUSE, OR ANY HOUSE AT ALL !

In normal times, the ‘bank-owners’ (the share-holders) made good money when the bank was well run, if the risk went bad they lose – it did and they did. And the same is true on the other side of any PRIVATE deal that goes horribly wrong for both sides.

Karl Deeter rightly said last night that these people now want to jump a queue of 100,000 people on the social housing list by converting the house into social housing and STAYING IN IT!

They are entitled to shelter – but get in the queue. When their houses are then used to clear the people AT THE TOP of the social housing queue, then these people can be housed (although snobbery may mean they won’t like all of the accents their kids will have to hear).

It is important to teach a multi-generational lesson so that Irish people do not get involved in this type of mania again, and getting a social house when it’s YOUR TURN will help instill a sense of fairness.

Also please read Gregory Connor above again.

@AMcGrath

Average property consumers visit the property shop once or twice in their adult lifetime. Hence the reason why they place a high degree of reliance on advisors – banks and the like – because these guys are doing this day in day out and they ought to know – yeah?

In all respects the nomal property buyer is a complete novice and despite your obvious higher intellectual calling many property consumers are less fortunate. When the special advisors are all wrong and were so for the best part of a decade it hardly seems logical that the ulitimate consumer – the real novice in the room – carries 100% of the burden of everyones elses error. To me, a reasonable sort of person, this state of affairs simply does not pass even the basic smell test and as a result I feel it requires a fix because it’s infecting all aspects of the economy despite the fact that folk like yourself pretend otherwise. In any walk of life fixes were never designed to be fair.

@YorB
If the reference to “your obvious higher intellectual calling” is an attempt at sarcasm then I feel it is a little uncalled for. The only intellectectual quality required when making such a once in a lifetime purchase is a basic common sense. Most people are equipped with this to some extent but obviously many let greed override their better instincts.
If house prices are increasing annually by figures well in excess of your annual salary, then common sense is screaming at you – that there is something rotten in Denmark. Why would any householder work when their house was apparently generating more “income” than their job. Did everyone believe that this state of affairs would continue indefinitely? Many did and many others thought they could call the bottom and get out ahead of the crash. Not so easy with illiquid assets like houses, and so many are stuck and now want those they thought they were smarter than to bail them out.
I agree with john o’brien if you gambled and lost take your medicine and your place in the queue. The shareholders were swallowed without a second thought and in fairness to them little or no complaint.

@John & AMcGrath

And the unguaranteed bondholders?

‘I agree with john o’brien if you gambled and lost take your medicine and your place in the queue. The shareholders were swallowed without a second thought and in fairness to them little or no complaint.’

Shareholders are in the game to make money the vast vast mojority of those who buy a house are in it to put a roof over their head- greed is not the driver – you obviously believe it is, I think you’re wrong.

If greed was the game then people would be timing the market and going from owner occupier to renter and back again to take advantage of the likely price moves. There is simply no evidence that this was the case.

People buy homes to live in them not to play the market – so using terms such as gambling is missing the point. In the event that people moved and made money they invariably recycled the cash into another house purchase for the purpose of living in it. I moved 7 times in 12 years because of work requirements – I never once believed I was gambling with my family and their requirement to settle down.

‘If house prices are increasing annually by figures well in excess of your annual salary, then common sense is screaming at you – that there is something rotten in Denmark’

This is precisely my point.

The evidence that is now emerging is telling us that the house prices were wrong when compared with the market fundamentals. My argument has always been that the market is dependant on the banks leverage and they price the assets. If they mispriced them can you please explain to me why the consumer should be asked to pay 100% for their mis pricing error?

You believe the consumers should have known better and not engaged -what I’m suggesting is that those who wanted to buy should have been advised to stay away as the prices were fundamentally wrong. The banks have an obligation under Regulations not to sell financial products to consumers that are unsuitable the normal caveat emptor is set aside in financial transactions involving a Regulated financial institution. The prices were unsuitable as they were out of step with the rental yield fundamentals but the banks still continued to lend.

No amout of I’m not paying from my neighbours mortgage guff can get around that awkward fact.

The banks screwed up their customers the market and sadly the country.