Daft Report Published

Not enough analysis has been carried out on the effect of tracker mortgages on those in negative equity. For example, answers to the following questions would be useful:

– What % of those in negative equity have tracker mortgages?
– For those on tracker mortgages, what would the monthly cost of their mortgage be if they had bought their house at today’s market price, but had to borrow at today’s market rates.

My suspicion is that the answer to the first question is “a lot”, maybe even “a majority”. I also think that the answer to the second question is “about the same as their current mortgage”.

My point is that the difficulty that people have in making their mortgage repayments is not necessarily to do with the property price bubble (as alluded to in Daft report), but is to do with unemployment, reduced employment, failed businesses and investments, pay cuts, higher taxes and other changes in the financial circumstances of householders.

Blaming the woes of householders on a property price bubble is overly simplistic and stating things like “homeowners must accept that they will never be in a position to repay the loan and that by surrendering the property they will be able to make a fresh start” is nonsense. The relative cost of new financing, ever rising rents, poor employment prospects and the perpetually weak economic situation make a “fresh start” almost impossible.

Brioche, anyone?

@Bazza
Of course it was /is the property price bubble.
They have poor employment prospects because the money supply originated from bank credit.
When banks stop making credit their employment becomes tenuous and grot production slows & then drops like a stone.

Its all about the money /credit supply and what it is used for.
Our entire domestic economy was built on concrete credit dreams – Dirigisme or spending fiscal money on rational capital projects and then and only then using credit to increase Grot production and threfore eat the new surplus was a alien concept to our post 1987 political & banking generation.
But this malaise goes much deeper then some non sovergin Hicks on far western shores discussing the Boston / Berlin split.
It goes right into the Dark Heart of Basle.

The Census figures point to something very wrong happening to Tralee Urban.
I am not sure if the Apartments beside the canal is covered in this area but the population declines since 2002 is astonishing.
Tralee urban :Y2011 :4,885 Y2002 : 6,311 a decline of 22.6% !!
With 883 vacant buildings or 27.3% of the stock

Meanwhile a town of similar size and tourist focus – Youghal has experienced strong pop growth in its core despite a similar number of vacant homes (holiday homes ?)
Youghal urban :Y2011 : 6,990 Y2002 :6,203 a increase of 12.7%
with 905 vacant houses or 24.1% of stock.

There is something deeply strange going on in this country with my personel experience of Tralee (2011) being in a Dark Depression with the main tourist pub in Blennerville closed perhaps due to the ending of the tourist train route.

“As a result of the madness of the boom, we now have thousands of households paying a price for accommodation far in excess of the value they are receiving. ”

Who shall be happy ?

Was it the NTMA who gave a higher percentage drop this year thus far ?
Either way, there is a wide gap between both reckonings of asking prices and prices realised .
The Irish Times, too, running pieces on why it’s a good time to buy.
Yon Merry-go-’round returneth…

Correction – the quote in my last comment seems to be from the Introduction by Seamus Coffey rather than the data analysis section doen by Ronan Lyons? It is a bit unclear in the Daft report — the attribution of the different parts of the report is a bit difficult to follow.

Do consumers behave rationally?

If the people cannot be trusted to make their own rational decisions then what does that say for democracy?

The argument is not as one sided as Lyon’s portrays…there has to be some level of culpability apportioned to buyers as well as lenders.

A house in a particular estate may have sold for €350,000 because one bank was willing to lend one purchaser the money for such a transaction. The other banks provided similar mortgages to other buyers on the basis that the first transaction provided the “market value”.

This is precisely the point that John Corcoran has made time and again.

Bloomberg has a piece on Irish homeownership this evening, btw.

Current government policies are skirting around the major issue which is quite simply that personal debt servicing which includes a mortgage is impractical for tens of thousands of taxpayers and business owners. The banks have consistently massaged the figures to make the distressed seem smaller – make them bad but not catastrophic might be the motto.

There has been a total moral failure to look at any solution except through the eyes of the banks.

On the demand side there is strong correlation between disposable income, expectation of future disposable income, interest rates/cost of borrowing and the price of a house/apartment (affordability). Given current flat/negative economic growth, falling household incomes and high unemployment there is little incentive to purchase with the key 37-45 “house changer” demographic staying put in the face of considerable disposable income reduction in the past 5 years.

The fundamental house value needs to be based on these factors which are disimproving from a price increase point of view – we are moving closer to the ’80’s 2.5x gross household income multiple which was not a bad place to be at all and in reality presents a less risky point for funders to lend in to.

@Bond. Eoin Bond

2 months of mortgage can pay half a years creche fees and you can worry about paying it back at the end of 20 years and 2 months!

@Yields or Bust
I think what Seamus is suggesting is that those who cannot afford their mortgage should be allowed to walk away from their house, and let the bank (i.e. the Irish taxpayer) take the loss on what the mortgage is compared to the current value of the house. If I have understood correctly, what you are suggesting is that the taxpayer should take the loss, and the person who borrowed too much should also get to keep the house.

There are a few reasons why this is a bad idea:
(1) It removes the incentive for anyone to the pay the mortgage. Why take the kids out of private school, or cancel the cable TV to pay the mortgage if the taxpayer will absorb the loss? Anyone who can hide their income will do so, and let the taxpayer pay for their house. The Irish taxpayer is broke already. As long as the taxpayer pays all banking losses, we simply cannot afford for the banks to give away more free money than necessary.

(2) Houses are expensive and scarce. In most societies we decide who gets to enjoy the luxury of owning their own home based on what people can afford. In the last 15 years in Ireland, we have allocated houses to people on the basis of whether or not they were willing to borrow ruinous amounts far in excess of the value of the house. Those who were willing to take on this huge debt got to own a house. The rest of us had to rent. Now you want the renters to pay extra tax so those who bought can keep the house they can’t afford. Meanwhile there is no moratorium on evicting renters who can’t afford the rent.

(3) Despite all the propaganda about excess supply, there is a real shortage of housing for sale in the cities, especially Dublin. This shortage is holding prices well above where they would be in a free market. These high prices are a real cost to our citizens, mostly to young people who would like to buy a home, but can’t afford to. It’s not clear to me why the government should spend taxpayers’ money to ensure that young families are excluded from the housing market by high prices, while older citizens who made poor choices during the bubble get to stay in houses they can’t afford.

I certainly feel sorry for those who bought homes during the bubble that they cannot afford. The problem is that nobody is speaking up for those who were not able to buy a house during the bubble, or for the new generation of young people who would like to buy a home now.

@seafóid:

http://www.irishtimes.com/newspaper/opinion/2007/0811/1186425117936.html

@ Paddy M

Thank you. I still haven’t gotten around to reading
The Pope’s Children.

Dafter

@all

Opposition Party Warning
EU Fiscal Pact May Breach German Constitution
By Thomas Darnstädt

Germany’s opposition Left Party says the fiscal pact agreed by 25 of the EU’s 27 members may breach the constitution because — the party argues — it can never be rescinded. Legal experts are divided. But Germany’s top court may be called on to settle the issue, and to rule on Europe’s future yet again.

http://www.spiegel.de/international/europe/0,1518,825166,00.html

POSTPONE THE IRISH REFERENDUM ON THE FISCAL CORSET NOW!

So: an unattributed source says something to someone “on the boards” who mentions it off the record to KD and now it’s proof that what exactly? There’s no NE problem?

@Roger

In your (1) above the issue being here is that the state is taking the loss regardless – why? Because the current owner can’t afford the current mortgage and no right thinking new purchaser is going to take on a mortgage of €200k on a house with a fundamental value of €100k. What you’re suggesting is that we should be on our guard for moral hazard practioners – we have been listening to that nonsense for that past 4 years and exactly how far are we down the line in fixing the problem which the dogs in the street know is preventing any hope of domestic economic recovery?

You make the most important point of all re the cost of fixing the banks – the dire business decisions of the banks should (and still can in large part) be borne by the financiers of those businesses through non payment of the PNs – were this to happen this mis pricing disaster could be fixed – and the taxpayer need not bear the cost of such awful business decisions. The Govt as you know has decided to place the banks in front of the people and as long as that persists then its nigh on impossible to fix the mispricng scandal and the country at the same time.

In your (2) above many would argue that in fact in many parts of the country houses are neither scarce nor expensive relative to incomes or indeed on most housing metrics – except these houses are largely located in Leitrim, Longford, Cavan, Sligo, Roscommon, Donegal and Westmeath. In addition rents relative to incomes have actually remained very stable even during the boom – the point which Seamus Coffey refers – and since the bust on average rents have in fact fallen by c25% on the last Daft.ie rental analysis. So if anything those renting over the past 10 years have benefitted massively relative to those who bought. The reason why there has been no tenants outcry is because on a relative basis renters are currently sitting pretty. The crazy over supply in the market has made it a one way bet as landlords trip over themselves to get tenants whilst rents have been moving ever lower.

This is what makes the Irish property bubble somewhat unique – the over supply was being played out on the rental market from about 2003 onwards as rents largely tracked CPI whereas somebody forgot to the tell the banks and the developers this rather important point – home buyers are largely price takers , and the bad luck in being born between 1965 and 1980 is really their only crime. My belief is that this is not sufficient evidence to convict them to a life of debt slavery, you seem to suggest that’s just too bad. In a market which is regulated and utterly credit dependant this is not a justifiable stance when average folk have been effectively duped.

If high prices in Dublin are a function of supply shortages and we live in a capitalist driven housing market then the consequences are likely to be felt in pricing. Rental yields in Dublin at close to 7% however are suggesting that housing in some parts is close to ‘fair’ value following on from PTT falls of c70%.

The plain facts are that many people should never have been allowed borrow the cash to buy mis priced houses. This is ultimately a banking error, not a consumer one as this is a credit/leverage driven market. In a leverage market those in control of the leverage control the prices. Therefore the banks in fact mispriced the properties and allowed the huge over supply to develop – banks cannot, in any reasonable view of the world, expect 100% of their cash back for such an error. Asking the taxpayer pay for these errors as the Govt has done should not be the whip to beat on the home buyer, socially this stance is hugely destructive.

@Yields or Bust

“The banks” do not have excess capital that can be used to compensate households for the banks’ earlier bubble-period complicity in encouraging housebuyers to take on big loans. Having Irish taxpayers compensate these homeowners seems a bit of socialism for the middle class paid for by the working class. If you think that the ECB (main funder of Irish banks) is going to pay this compensation/subsidy to Irish mortgage borrowers forget about it, that will not happen. It will be the Irish taxpayer or no one. The banks cannot pay it and the ECB will not pay it, so that only leaves the Irish taxpayer. You want to take money from hospital wards, school activities, social welfare, etc. to pay off middle class mortgages?

@Gregory
When you destroy middleclass debt you can then tax the new excess using Dirigisme principles.
The goal of these taxes should be to reverse the damage these credit “investments” created – to effectivally get people back into the centres of Waterford , Cork , Limerick , Tralee etc
This will dramatically reduce our balance of payments problems.

I favour fuel / car rather then property taxes myself.

If the state is not connected to false asset prices then it is free to engage in rational spatial polices.
Isolated houses could rot into the ground and yet the state would not give a jot.
A new cash market for houses would insue – the most rationally placed units would achieve the highest price.

Not all Bog towns appear lost.
Nenagh despite or indeed because of its politics looks almost semi rational from a Google earth perspective at least.
Nenagh west urban : 5,111 a increase of 7.9%
Nenagh east urban : 2,912 a increase of 8.7%.
It seems to be on the cusp of critical large market town mass.
It may explain I.E. decision to keep the line open.
from wiki :”The key feature of the new timetable which comes into effect on 5th March 2012 is a new through service at 6.04am ex Nenagh to Dublin (Heuston). “This train will operate Mondays to Fridays inclusive. The two evening trains ex Limerick are advanced by forty minutes and the second such train will extend to Ballybrophy”

But it does not explain why the subarbs of West Limerick have no train service despite having 1 intact & 1 spur line to Castlemungret cement factory which directly passes the crecent shopping centre.
the ED of Ballycummin has a pop of 17,490 , this is a increase of 4,055 or 30.2% from Y2002.
It is not the poorest of Limerick areas…… if Midleton can get a successful Line why not the west Limerick burbs ?
Its a perfect line for a X 73500 type single unit , high frequency service.

“The recovery in the housing market will not be when prices start to rise; the recovery will be when activity starts to rise.”

Perhaps, but it needs to be over 24 months, not 3 or 4 quarters. We have a long, slow road ahead. Residential property prices have to decrease by between 50% – 70% of their current level. Because the economic situation is so dire, this decline will be slower and longer than previous bubbles/busts readjustments. There is great resistance to any decline in price. Many of the people in trouble had very little personal equity in the asset. It was principally borrowed equity. When the real cost of private transport comes ashore next year – watch out below! The market may undergo a swift correction. Our politicians seem to be completely unaware of the predicament. But are they? Can some people really be that dumb?

Someone mentioned rational consumers. There ain’t no such critter outside of an economics textbook. Thought everyone knew this. Behavioural economists certainty know it. And the most irrational consumers of all are the ones buying new cars and houses. Stands to reason.

The only real, and very unpleasant solution to the general debt predicament is a Jubille. I know it won’t happen. But in the future many will wonder why we refused to consider it. Who exactly is paying the taxes needed to sustain our economy? Perhaps more to the point, who is not paying? Can an income disparity of x 15 times above a basic income be justified on any grounds whatsoever? Some bank critters are being paid x 53 times a basic income. How do you classify this disparity? Better read Veblen again. He had some words-of-wisdom about the salaries of financiers.

To previous

No one can tell me ‘They’ didn’t know what the end game was.

An asset/property has two values, the price you can get for it,or the net present value of it’s future cash flows. If somebody auctioneed a 5 euro note on Grafton Street and an unwise person bidded it up to 20 euro, then a surveyor would value all 5 euro notes as 20 euro notes. Now we know the net present value of a 5 euro note is 5 euro. Likewise if an unwise person paid 2 million euro for a house whose net present value was 0.5 million euro ,then a surveyor would value all other similar houses in that housing estate at 2 million euro.

The commercial property market was similar. If an unwise tenant on Grafton Street paid a world record rent for a shop, then all the other shops on the street would be obliged to pay this rent, and surveyors would value all shops on Grafton Street accordingly.

Almost all of the Irish banks reckless lending was done using surveyors/auctioneers valuations. These valuations were as good as money. This is the valuation error that created the property bubble and bankrupted the country.

The eurozone is a group of seventeen countries with a combined
population of three hundred and thirty million people. All the member
countries have the same currency,the same central bank,the same interest
rates and the same commercial lease law, except one,Ireland.

Ireland has entirely different commercial lease law to all other
eurozone countries. The two components of all countries
commercial lease law is the length of the lease and the method used to
review the rent. In all other eurozone countries lease lengths are
short say three to ten years with break clauses ,and rents are adjusted
annually by increases/decreases in the consumer price index. In
Ireland lease lengths are long say twenty five years with no break
clauses, and rents are reviewed every five years by method of the
ratchet upward only rent review.
Irish commercial lease law was a twinheaded monster which
incentivised the massive overrenting of tenants ,and more devastating,
it was the rocket fuel for the valuation model in valuing commercial
property which created the massive commercial property price
bubble. Irish banks lent tens of billions against these toxic
leases not against the properties. If Ireland had
regular eurozone lease law it would have been impossible to have had a
commercial property crash.

@Grumpy, Bond Eoin Bond

and @Karl Deeter as I know you are usually out there hovering.

This 25% figure is not based on any hard evidence and appears to be, by the author’s own admission, coming largely from senior people at the lenders.

I know these lenders well. I know their execs well too and although they have told me they want to see the story changed so that they are not continually depicted as the bad guys every time they gouge their variable rate mortgage and depositing client base, I’ve never heard one of them mention anything about strategic defaults being a problem. If they thought for one minute this was happening, they would be down on so-called strategic defaulters like a ton of bricks. Even in America and the UK I don’t believe the problem Karl is raising is anywhere even remotely near this 25% figure so why would it be so vastly different in Ireland?

IMHO anyone who goes near the media with an ‘anecdotal evidence’ story about a subject in which people are suffering real hardship should be sent packing.

I would suggest this may be a bit of a self-serving PR exercise, one that unfortunately gullible hacks/sympathetic newspapers would dive on and give airtime. A little like the one about keeping commission payments instead of going the UK RDR (retail distribution review) route that Karl wrote about in the Sunday Times at the weekend.

What was that all about Karl? Do you earn commission and would prefer to see it kept? Everyone except brokers who receive commission accepts that this is not the best way of paying for financial advice and that’s why there’s a massive change going on around that in the UK and Holland at the moment and the rest of Europe is likely to follow suit soon.

But back to strategic defaults. There are always going to be some who game the system but they are small in number whereas the vast majority of those in arrears are living in genuine fear for the future welfare of their families. Something that you have probably never experienced Karl.

Actually, it’s quite a daft story when you consider the number of lenders, brokers, estate agents and other intermediaries who have gamed the Irish mortgage/house selling system to their own advantage. Sadly, those in arrears don’t generally have access to the media to promote their side of the story.

@What goes up says

Professor Neil Crosby’s online response to this Irish Independent letter “Bubble values” 29th February 2012

“The analysis may be simplistic but unfortunately it is not flawed. Banks ask valuers to tell them what the market value/exchange price is at a point in time and then lend vast amounts over time based on that simple number. The surveyor gives them that simple number and do not think it is their job to tell the banks that the question they have been asked is stupid on its own and what they should have asked for is the underlying value. It was obvious in 2005 and 2006 that prices in the property market were higher than could be sustained by any rational cash flow analysis. But in a culture that rewards individuals for short term performance rather than longer term perspective, it was in neither the bankers’ nor the valuers’ interests to stop it. I cannot see anything in what the UK regulatory authorities have proposed that makes me think they understand the role of property valuation in driving asset bubbles and will prevent it all happening again sometime in the 2020s.”

Neil Crosby
Professor of Real Estate and Planning
University of Reading

A key point is that “the banks” have no excess funds to compensate/subsidize over-extended homeowners. “The banks” are broke and are only functioning due to receiving subsidies themselves, via the Irish government, ECB and Irish Central Bank. If homeowners are going to be compensated/subsidized for their over-extended borrowing it should come honestly and directly out of tax revenues. This subsidy to over-extended borrowers should not be hidden by having it channelled through the banks. Squeezing cash out of the banks for effective borrower subsidies and then shovelling taxpayer cash into them on the other end to keep them on life support is just subterfuge. It is doing noone any good except middle class homeowners receiving a hidden subsidy who would not be eligible for direct tax-based funding. This also keeps the banking system permanently on life support. “The banks” are such an easy target for subsidy-hungry interest groups when they are publicly owned. Banks give the false impression that they are stuffed with cash when actually they are bust.

It is like that old adage

Don’t tax me
don’t tax yee
tax the man behind the tree.

The banks are the man behind the tree that can be used to create free money.

Im finding it ironic that people employed in the finance industry are concerned about people who are acting towards their debts in a very calculating way completely without any moral code governing their conduct.

@Gregory Connor… The banks are indeed broke, but the NAMA banks are still overpaying themselves and living very nicely off the public purse. Their permanent employees, directors and executives have yet to be impacted in any way (except their pride) by the consequences of their actions

@ Gregory Connor

Jean Baptiste Colbert (1619–83), Minister for Finance to French King Louis XIV reputedly said: “The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.”

In modern times, it’s interesting that the punters as well as finance ministers seem to like stealth taxes.

So routing relief via banks would be the option of choice.

Some of the household charge protesters at the weekend likely had a few pints before heading home, chewing the fat no doubt about the iniquities of double taxation.

@ Peadar Coleman

Myles na gCopaleen wouldn’t have been impressed with the president of the German ZEW institute who styles himself: Prof. Dr. Dr. h.c. mult. Wolfgang Franz.

— or the Hungarain president who cogged his thesis!

@ John Corcoran

If Ireland had regular eurozone lease law it would have been impossible to have had a commercial property crash.

Impossible indeed in a system where land was made ‘scarce’ in a country that was 4% urbanised at a time of mass hysteria.

“the banks” have no excess funds to compensate/subsidize over-extended homeowners. “The banks” are broke and are only functioning due to receiving subsidies themselves, via the Irish government, ECB and Irish Central Bank.”

Nice one. “The Irish taxpayer has few excess funds to compensate/ subsidize over-extended corporate looters and legislators addicted to spending other people’s money. The taxpayer is only functioning due to the re-circulation of ‘funny money’ via the Usual Suspects.”

I can only pay taxes out of my income or my savings. If the latter are zero, and the former is reduced? Now what? Oh, I reduce my discretionary consumption. Gee, that’s nice!

Someone mentioned that lots of critters are a tad resistant to reducing their lifestyle endowments. Jeeze, that has been known for centuries. Only a totally irrational critter would do a voluntary retrench in times of hardship. However, if the economy does collapse, as it will, if our legislators persist with their current economic and financial hubris, then folk have no choice. I recommend reading about the experience of folk after a devastating war. Sobering. The folk survive but their political structure goes into the rubble.

The substantive issue is – a shortage of moolah. 😎

The Irish Times reports that IBRC will have to take a ‘haircut’ of 74 per cent on the Sitserv deal. This amounts to 110 million. There won’t be any outcry or public frowning over this commercial outcome.

Yet when it comes to residential mortgages, the mere mention of owner discounts causes convulsions.

The worst case analysis for unemployment under the Blackrock stress tests has been exceeded. Many of those unemployed will not find work again barring a miracle. Employment is falling. Arrears can only worsen by any layman’s measure. The present limp strategy will see mass repossessions by default unless some radical rethinking on personal penal debt is undertaken.

@John Corcoran

Okay – I’ve tried to engage and all you’ve done is repeat previous posts without addressing the points I raised.

Is there any point in engaging with your argument?

@PR Guy
Well said.

Karl needs to put numbers to his assertions – but i fear he doesn’t have any.

@The Alchemist

+1

The question is why does this issue cause such ‘convulsions’.

My own belief is that with the taxpayer now owning the banks this has changed the dynamic – and yes I know the State owns NAMA and the feeling should be exactly the same but its not, primarily because the majority of ordinary folk hear of NAMA and they turn off as it has no day to day involvement in their lives. The ‘Pillar’ banks and the like are obviously different – people have an attachment and Gregory O’Connors bias as noted above is typical.

The commercial reality is very different. Stupid loans simply won’t be paid, however a written down version could no doubt be serviced. The ongoing question is how does one determine the amount of the write down to get both parties on a firmer footing. I suggested here many times that that calculation simply has to be a yield based which is the only long run metric that stands the test of time in the property market. If Govt/CBI/Banks are not willing to engage with this model I’ve absolutely no doubt I’ll be still proposing such a regime this time next year just as I was in 2008, 2009, 2010 and 2011. All the while the problem gets worse.

PS PS – I really mean printing…… not printing & loaning at interest (LTRO) which is deflationary.
I really expected much more inflationary Base Euros by this stage as not only whole sections of commercial activity but entire countries are wasting limited & declining resourses via a overvalued currency.
You cannot get effective good & service substitution under this absurd monetory envoirment.

@MH
Jean Baptiste Colbert (1619–83), Minister for Finance to French King Louis XIV reputedly said:
“The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.”

re your comment about the household charge. The real problem with that in my view is that the tax is neither one thing nor another and the circle as it is can’t be squared. It is completely irrational to keep saying at every opportunity on media ” it’s to pay for services” and then to exclude all local authority tenants who gain more from services than their neighbours up the road who have bought their houses.

Either it is a property tax – i.e a tax on an asset, or a service charge – it can’t be both without twisting logic.

I was trying to think of some geese plucking ,feather ruffling, golden goose killing, etc analogys but it was too much trouble, anyway you know what I mean

@Amac

You are correct borrowers can always walk away but a banks day job when they are dealing with a willing borrower is to show some level, even a minimal amount, of competence in their bread and butter business and properly weigh up the pros and cons of each and every loan. Without credit the property market is a very dreary place.

Lending money at less than 1% net rental yield in many parts of Dublin in 2006 showed breathtaking stupidity on the lenders behalf – it’s their day job to know better. Borrowers enter the property shop perhaps twice on average in their adult lifetime, they are novices in virtually every conceivable definition of the word whereas the banks are Regulated to know and are paid to know when to start,stop or slow down. That’s their job.

The error in this crisis rests full square with those who originated the credit binge and that’s our beloved banks – no amount of guff will change that basic fact. In a credit driven market the music always starts with the loan origination tune.

@ YoB

mortgagees had an unlimited upside when purchasing property, the banks on the other hand had a fixed income asset. It seems odd to suggest that the person with most of the upside has no responsibility, while the guy earning 100bps per annum is totally at fault. I would suggest that not everyone who bought a house was as clueless as you make out, lots of people made informed decisions that they felt were the right ones at the time.

JC,
Do you think tge failure of Peats is solely down to leases or could it have something to do with the shift to online.?
I see you now operate under a new banner, did you fall out with the old Retail Excellence crew?
I don’t know why you persist in lobbying the Ceann Comhairle. Even if he was so minded to agree with you he is supposed to be above politics.
If you get your debt written down, I as a stakeholder in the banks have to pay for your folly. Why?

@Eoin

To suggest that house buyers had “unlimited upsides” is wrong. The upside was always limited. It is a pity lenders weren’t competent enough to advise consumer borrowers of this.

The borrower has to suffer losses before the bank suffers losses. The bank will generally not suffer losses even if the borrower suffers losses once the borrower can still pay.

The bank only suffers when the borrower is INSOLVENT. Even then, the borrower loses their property, their savings and other disposable assets. the bank loses the difference between market value and the cost of the loan to the bank. That is not moral hazard.

The opposition from the banks to a fair insolvency regime and their belief that they are entitled to maintain insolvent people as their slaves is pretty disgusting. I hope that common sense prevails in the legislative process.

@ YoB

you seem to be implying that im looking for sympathy for the banks. I’m not. I’m simply suggesting that people taking out mortgages equal to 10x earnings should perhaps bear a greater share of the responsibility than you are willing to allow. As i said, they were not all clueless in their decision making, and many of them were very keen to access as much leverage as they could get their hands on. We take part in many activities, financial or otherwise, in life that we are not “experts” on, or where the other side to the transaction has an information advantage than us. That does not absolve us of all responsibility however.

@ Zhou

the use of the word “unlimited” is a rhetorical exaggeration, but the point is that for very little (if any) equity, homeowners got truly enourmous “participation” in the housing market. While not everyone conciously “realised” this was what was happening, a significant part of the market quite obviously did, and either actively sought out this exposure, or at the very least did not seem to care too much about its implications. While you are suggesting a very reasonable “arrears -> insolvency -> foreclosure -> fresh start” process, many do not agree with the two middle elements of this, and are arguing for a debt reduction on a simple “ability to pay” premise (possibly even on a simple negative equity premise, in fact), purely on the basis that the bank should’ve known better and horribly misvalued assets back in the boom. This to me seems the pure definition of moral hazard, even though i am not a purist in abhorring it.

@BEB

I do agree there is a shared responsibility so in practice let it be shared – let the home owner service a mortgage that he/she can actually service and let the bank take the hit on the write off.

The bank still earns its margin on the remaining loan balance, the mortgage is right sized to the fundamental value of the house and the domestic economy now has a chance. In the longer term surely more winners than losers under this strategy.

The problem you will immediately voice is who takes the loss on the write down. In the normal course of events the capital structure of the banks bear that cost – given that the Govt have ensured the loss won’t fall where it should have, it is now been shouldered by the taxpayers/citizens. This I agree is unfair, sadly fixes, as mentioned here before, will never be fair and as a result we should insist at the very minimum the PNs are not paid and the remaining bond holders get zero. Why not?

* asset!

@Gregory Connor

Some lite reading:

Understanding Contemporary Ireland

Richard Breen, Damian Hannan, David B Rothman, Christopher T Whelan

1990, Gill & Macmillan, Dublin

Weberian Class Based Analysis …. Useful overview pre Real Decade and Ponzi Decade and Present Odious Decade … but still relevant.

@Eoin

Whereas some people unreasonably want banks to be forced into debt forgiveness and being barred from foreclaosure, such proposals are pie in the sky and are no threat to the banks.

The banks opposed debt in excess of the value of a property being considered unsecured. That is wrong and unhealthy. That debt is unsecured once the security is realised. It cannnot have priority over unsecured debt.

The banks also want control over the formulation of a settlement. That is wrong too. An independent body should be entitled to make a proposal which the bank can either accept or reject. The bank should have a veto but should not control the process. If the bank exercises its veto the person whoucl be in a position to force the bank to realise its security and to have its unsecured debts dealt with like the other creditors.

Just to respond to Dork of Cork, the population you are referring to is actually not the full population of the town of Tralee but the population of the DED (District Electorial Division) of Tralee Urban. The actual population of the town proper as governed by the Tralee UDC boundaries is 20753 as per the 2011 census which consists of other DEDs. The DED you refer to does show a decline but the other DEDS that make up Tralee showed increases so the overall population of the town increased. This also does not include environs/suburbs (continuous built up area outside the town) which would add another 3000. So it is not accurate to compare Tralee to Youghal as it is a much smaller town. Kilkenny, Ennis or Wexford would be more comparable towns. That’s not to say there are an unprecedented number of vacant properties in Tralee however.

The Dork of Cork Says:

April 2nd, 2012 at 10:40 am
The Census figures point to something very wrong happening to Tralee Urban.
I am not sure if the Apartments beside the canal is covered in this area but the population declines since 2002 is astonishing.
Tralee urban :Y2011 :4,885 Y2002 : 6,311 a decline of 22.6% !!
With 883 vacant buildings or 27.3% of the stock

Meanwhile a town of similar size and tourist focus – Youghal has experienced strong pop growth in its core despite a similar number of vacant homes (holiday homes ?)
Youghal urban :Y2011 : 6,990 Y2002 :6,203 a increase of 12.7%
with 905 vacant houses or 24.1% of stock.

There is something deeply strange going on in this country with my personel experience of Tralee (2011) being in a Dark Depression with the main tourist pub in Blennerville closed perhaps due to the ending of the tourist train route

@ John Corcoran

If Ireland had regular eurozone lease law it would have been impossible to have had a commercial property crash.

Has this claim become inoperative?

@MH

The last word should have been “bubble”. Also there are three components to all countries commercial lease law -the length of the lease, how rent is determined and exit strategies/break clauses.

The reckless Irish banks lent long money with very high LTVs because of our long leases ,UORRs, and no break clauses. By way of example in France and the Benelux countries there are three year rolling leases with rents adjusted annually by the CPI–thery are known as 3/6/9 leases. You sign a nine year lease with breaks in year 3,6,and 9. The rents are adjusted annually for the nine years and then in year nine a market rent is established.

equally speaking Eoin, why save the casino….

One law for everyone

@ seafoid

Why did no other eurozone country have a massive commercial property bubble and bust?

The eurozone is a group of seventeen countries with a combined
population of three hundred and thirty million citizens. All member
countries have the same currency,the same central bank,the same
interest rates and the same commercial property lease law except one,Ireland.
Ireland has very different commercial property lease law to all other eurozone
countries. The three components of all countries commercial lease law
is the length of the lease,the rent determintion process and lease exit
strategies/break clauses. In all other eurozone countries lease lengths
are short,say three to ten years,with break clauses and rents are
indexed annually to changes in the consumer price index. In Ireland
lease lengths are long,say twenty five years,with no break clauses and
rents are reviewed every five years using the ratchet upward-only rent
review process. This review process used the highest rent as evidence
against all tenants and was open to malpractice and corruption.

Irish commercial lease law was a twinheaded monster which incentivised
the over-renting of tenants and more damaging,it was the rocket fuel
for the commercial property valuation model which created the monster
commercial property bubble. When this bubble burst it destroyed our
entire Irish banking sector. Reckless Irish banks lent tens of billions
against these ruinous leases,not against the properties. If Ireland
had had regular eurozone commercial lease law it would have been almost
impossible to have had a commercial property bubble and crash.

John Corcoran
Spokesperson
Irish Commercial Tenants Association

John corcoran’s point is well made in this discussion.

The same valuers who were destroying the commerical property market with their upward only valuations (which operated irrespective of any clause in any lease) were also destroying our residential propery market.

Towards the end of the property bubble, valuers started to panic and it became hard to get valuations for commercial property to match the prices agreed between buyers and sellers. The dictum of “that must be the market price since that is what a willing buyer will pay” was abandoned in the face of the crash. Valuers were worried about being sued by the banks.

The property bubble peaked in or about the end of 2006. This means we are now approaching the end of the 6 years during which the banks can sue the valuers for negligence.

How many valuers of residential properties have been sued by lenders on foot of their cut price drive-by valuations? Is it really the case that none of the valuers were negligent, that they were right not to take any notion of fundemental value into account?

Or is it the case that the valuers were nto negligent because they did not take on any liability to the banks? Of course, this would mean that the bank valuation process was a sham to defraud the bank itself, the regulators, auditors and the market. So which is it?

@John

My experience of valuers is that very few of them are LSE graduates! They are not bright enough to hatch grand plans although they know the value of talking up the market. The papers knew which way the wind was blowing and they hoisted their sales. It is like the lobbyist who targets the guy who agrees with him and then writes the legislation for him. The newspapers went to their target merket and told them what they wanted to hear.

I had an interesting experience of dealing with a valuer engaged by a tenant to negotiate a new rent after the expiry of a lease. The market was falling like rock at the time. The valuer said there was no basis for arguing for a lower rent than was paid for a nearby premises a couple of months earlier.

Don’t forget this valuer was acting for the tenant alone! Even in the midst of a property crash the likes of which had never been seen before anywhere in the world, even without an upward only rent review clause to hold him back, he was still applying an upward only model.

The story had a happy ending though. The tenant went to the landlord with his accounts and offered a lower rent. He told the landlord he could let the judge decide if he wasn’t wiling to accept it. The landlord accpeted it.

@Paul
The euro masters believe (perhaps rightly) that they have bypassed politics by making the monetory authority (I love that word) a political authority.
The recent Irish CB monetory financing of a insolvent bank with the ECBs nod , not a illiquid one (Lombard street is a distant memory it seems) and then the subsequent offloading of this debt onto the fiscal authority supposedly to prevent inflation ( my eye this is pure criminality in my book) illustrates the political monopoly of power these bastards truely have.

The mix of papers in this issue also indicates the internationalisation of the Journal. The first volume of the Journal of Valuation was virtually exclusively UK and dominated by the University of Reading, its first home. You can almost picture Andy Baum, the first editor, running up and down the corridor pleading with colleagues for papers to fill his new love child. The latest issue has no authors based in the UK and they come from as far away as Australasia, Asia and Europe. The papers are on a diverse range of issues which include leases, retail rents, airports and mixed use developments. It also includes one paper on one of the issues that seems to be exercising many minds in the real estate industry and that is sustainable buildings.

rity of both did know; they didn’t However, one issue that was strangely lacking from the accepted papers was whether valuation had a part to play in the financial crisis and its solution. I found this surprising given that Sir John Vickers, head of the Independent Commission on Banking in the UK suggested that;

“The shock from the fall in property prices, even from their inflated levels of a few years ago, should not have caused havoc on anything like the scale experienced. Rather than suffering a ‘perfect storm’, we had severe weather that exposed a damagingly rickety structure”. (Vickers, 2011, p2)

However, in his interim report, although there are mentions of real estate they are all refer to how we got into the mess in the first place, they were not part of the solution. But more recently, the head of NAMA, John Daly, addressed the Chartered Surveyors in Ireland and suggested that valuation and valuers had avoided their responsibility by hiding behind the excuse that they had done as they were asked by providing market values, no more or no less.

“The crisis in which Ireland now finds itself has, as its source, a banking implosion which was driven ultimately by a property market bubble. It would be remiss of me to appear in front of a gathering of construction and property professionals such as this without raising the question of whether, at least collectively, you could have been more vigilant in drawing attention to the enormous systemic risk which was being created. Many of you must have wondered about the sustainability of the ever-escalating upward price spiral that was developing by the middle of the last decide, a spiral driven by cheap money and by a coterie of bankers and market participants who appeared to lack a basic understanding of the dynamics of a properly-functioning market. You must have questioned whether a fourfold increase in commercial and residential property prices in the decade after 1997 could possibly have been justified given its ever-increasing divergence from the trend of economic growth over the same period.
I expect that the valuation professionals amongst you will claim that your job is to provide the best estimate of the market price of a particular property at a particular point in time. However, there is a widespread external view that your responsibilities are more extensive than that. This applies also to other professions such as accounting and auditing which have been similarly criticised for adopting a narrow interpretation of their responsibilities during the evolution of the banking and property bubbles. At a time when many lay people with no great knowledge of the property business were becoming increasingly alarmed at the disconnection between the prices being paid for properties and the intrinsic long-term economic value of those properties, could the two professional bodies not have signalled some concern at what was taking place?”

(Extract from address by Frank Daly, Chairman of NAMA to The Society of Chartered Surveyors 12th April 2011)

NAMA is the Irish National Asset Management Agency and was established in December 2009. Its purpose is to acquire assets in the form of property-related loans from the Irish bank. The overall objective of this process is to bring stability to the banking system by removing impaired loans from the balance sheets of individual banks.

The message is clear. The valuation profession should be identifying ways in which it can extend its advice beyond confirmation of current price and signaling to not just clients but to a wider community about the dangers of asset price bubbles. Real estate professionals have a wider duty than to the client. The academic community, through these and similar pages, has a duty to aid real estate professionals to undertake these tasks and should be identifying and testing approaches by which these objectives might be achieved. However, when it does, does anybody listen?

This presupposes that the industry and its academic support network actually knew we were heading for a fall. My view is that the vast majoknow when and they didn’t know what would prick the bubble, but they did know that it would be pricked. Any cash flow undertaken in 2005 and 2006 with any sort of objective inputs would get to a negative NPV, certainly in the UK or Ireland which, if you believe the global indices accurately reflect differences between countries, had the highest peak and the largest falls in asset values. If they got a positive they were cheating.

This also presupposes that anybody wants to stop a financial crisis ever happening again and that is highly debatable. The behavioural finance literature is depressing in that it shows that there are too many opportunities to make money and too few risks of losing it in a bubble and crash. So it is a shame that the UK ICB doesn’t realize that real estate could be a much bigger part of the regulatory solution as well as being the problem because, without a sound regulatory solution, it will all happen again.

So the Journals, including this one as it has its 28th birthday this summer, need to keep publishing work that not only advances our theoretical understanding, but also addresses the major practical problems of the day and ultimately aims to impact on the behaviour of real estate markets in the future.

Neil Crosby

University of Reading

July 2011

@ John Corcoran

Ad in today’s IT Business Sect (Commercial Property)

hwbc: 50 Grafton Street

“Upward only rent reviews”

What’s the story here? Two fingers!

This is a complete no-brainer!

Because we both own the banks and have guaranteed their liabilities, any debt relief (above and beyond what would be profit maximising) for mortgage holders is a loss for the state.

(In the case of BOI we would suffer some of the loss – but we are not even controlling shareholders in that bank so forcing it to write off debt seems unlikely to encourage future private investment!)

Therefore, debt relief is a transfer of wealth form the state to mortgage holders – i.e. a social welfare payment – but those payments are made on a needs basis.

Now, mortgage holders are perfectly entitled to the same welfare as everyone else; but they are not entitled to more welfare payments simply because they foolishly bought a house in a bubble. That’s nonsense – utter nonsense

The attached Lex FT article dated August 31st 2009 explains that the upward only rent review lease clause was a bomb waiting to explode. The UK escaped the explosion because soon after their property crash their economy boomed and the crisis was averted. In Ireland`s case the explosion destroyed our banks and our country. Upward only rent review tied to long leases, just didn`t destroy the tenants, it massively inflated the commercial asset pricing model which created the monster commercial property bubble.

UK commercial rents

Published: August 31 2009 20:22 | Last updated: September 1 2009 09:10

Most industries are suffering from falling prices. Not UK commercial property. Property trusts such as British Land and Derwent London have reported relatively upbeat earnings figures; in spite of continued falls in property valuations, rents have generally remained strong. This is largely due to “upward-only” contracts, whereby rents rise through the life of a company lease, whatever the state of the broader market. However good this industry norm might sound for landlords, it also represents a potential timebomb.

As Nomura’s rent-free move to a new London headquarters shows, the problem comes when contracts, typically for five years, but sometimes 10 or more, expire or otherwise lapse. If market rents drop in the interim, leases are renegotiated at lower rates. That is what is happening now, after vacancy rates doubled over the past two years. By March, new rental contracts in the City had dropped by more than a third. This has re-focused minds on the remaining life of property companies’ leases. At Land Securities, about 22 per cent of lease contracts will expire or can be broken by 2013. At Derwent London, it is almost half.

Upward-only rents have come under pressure before. In 2004, the government considered banning them. That initiative fizzled out in the boom, but now tenants have become increasingly vocal; Ireland banned such contracts in July after retailers complained they gave an unfair advantage to new entrants. Meanwhile, high street heavyweight Philip Green, owner of the Arcadia Group, is seeking other concessions. Landlords have successfully argued in the past that upward-only reviews keep overall rents down by providing certainty of returns and ensuring a stable supply of new properties. The recession, and property surplus, are putting paid to that. Meanwhile, the timebomb ticks on.

Yields or Bust,

House buyers come to a price with the seller. If the buyer wants to increase his purchasing power he goes to the bank for the loan. The price is agreed between buyer and seller. If the buyer pays too much, that’s their choice.

If, as you say, “properties were mis priced”, then the buyer should deal with the seller. I don’t accept the bank should be responsible. If you’re overcharged by a restaurant, the credit card company should not be expected to pick up the difference.

With regards “debt slaves for the next 25 years” – borrowers signed up for this. Banks have honoured their part of the contract. SVR borrowers may feel aggrieved, but they were probably paying higher rates when the ecb rate was 4%.

@Paul Quigley

“the majority of people were stampeded. There was mass panic to get on the ladder. ”

The ‘panic now and jump on that ladder’ message was not only aimed at the buyers. It was even put out in such a way as to get parents, friends, employers, etc. to encourage/pressure buyers to move as quickly as possible before prices went up even further – right up to and even past the peak.

There was a deliberate and systematic attempt to keep stirring it up over many years by those who would profit from it (not just banks of course).

I know.

@ Paul Q,
yes there was a flood of credit and a mania. When bubbles burst people involved lose their shirts. Should dotcom losses be bailed out? It should be remembered that the owners of irish banks have been wiped out. And bond holders should have been hit. It should be noted that there are alternatives to buying houses.

@ Gavin K,
given the day, your anecdote reminds me of another. There was a young couple who ate some forbidden fruit. Although they had been lured into this by a silver-tongued snake, it was the young couple who got evicted from eden.

@Gavin Kostick

“My favouriate moment was when an attractive young person on the Rathmines Road offered me a lollipop if only I would come into the local Building Society.”

Not one of my stunts I’m pleased to report 😉

Though I have advised more than one company to improve the attractiveness of their people at the coalface (or lollipop mine if you prefer). One needs to try and make them look like the people in their TV ads or customers get confused and think they’ve walked into the wrong place.

Damian Kibred article Sunday Times February 2011

“A very strong PR campaign has been launched to protect the vested
interests of a small coterie of institutional property owners in the
debate over upward-only rent reviews. In tandem,there`s some
bleeding-heart commentary on the impact of the planned reforms on the
National Asset Management Agency`s balance sheet. The theory is that
Ireland will become a pariah state if it decides to protect its entire
rertail economy–including 200,000 jobs–by moving to a more
business-friendly property leasing system.

This campaign to protect the current leasing system is special pleading
of the worst kind. It is the sort that enabled the British Liberal
party to ignore the great famine of 1847 so its theories on market
economics might not be disturbed. Its time to get real “