Daft Report Published

Seamus has an introduction to this quarter’s DAFT report on asking prices for property across the country. This report is compiled by Ronan Lyons. The introduction is worth a read, with a key piece being:

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”.

The price reflects the amount of money that someone is willing to pay for a good. Value reflects the benefits that a good can offer. In most cases, these are the same but this does not have hold. Residential property provides accommodation service. 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.

This reality must be addressed and the burden of the mortgage debt is largely a function of the actions
of the banks so they must offer what ever forbearance is necessary to assist households. The banks must also realise that there are thousands of homeowners who will never be able to repay the huge loans they issued to them. It is very difficult to gauge the number of unsustainable residential mortgages that need to be ended but it could be anywhere between 15,000 and 30,000. These are households who are in deep mortgage arrears and negative equity and have little prospects of recovery.

The banks must face up to losses that exist on these loans. The 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. Households with unsustainable mortgages must be allowed to do so.

By Stephen Kinsella

Senior Lecturer in Economics at the University of Limerick.

117 replies on “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?

The problem with assessing the fundamental value of Irish properties is that rent allowance remains quite high and means that those who can just about afford to pay their rent are in an inflated market. One would be much better equipped to assess fundamental values if one knew how government policy will develop vis-a-vis local authority residential rates, property wealth taxes, rent allowance, and NPPR charges (let alone interest rates).

Mark to Market has made a mees of the residential and commerical Irish property markets. The fact that the arbiters of values (auctioneers, valuers and surveyors) are, subject to there being a liquid market, incentivised to keep values as high as possile is a major problem which remains unresolved. John Corcoran can justifiably get a few digs into them on this thread.

John Kay is very clear in explaining the defferences between fundamental value and mark-to-market in his book The Long and The Short of It. He also explained that essentially we have been the victims of a “febezzle”:
http://www.johnkay.com/2009/05/06/a-boom-based-on-little-more-than-a-bezzle

@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.

Seamus or Stephen,

Some pretty awful arrears stats from PTSB. I’d suggest that that the 15k-30k unsustainable mortgages is on the low side.

The media report 12% of PTSB are in arrears. However, this seems to be count based. Rating agencies and other market participants tend to quote based on loan amount. Looking at page 15 of ILP’s annual report (http://www.irishlifepermanent.ie/), it seems that 17.2% is the arrears rate (OO – 14.5% BTL – 25%).

“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 ?

When Ronan Lyons says “the banks” does he mean “the taxpayers” ? Ireland only has one bank that is near-solvent and privately owned (BOI). If “the banks” are to subsidize/compensate over-indebeted households it will essentially fall on the shoulders of the taxpayers. Irish banks are just shells they are not repositories of wealth that can be extracted for past misdeeds.

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…

2007 vintage. I think it was in the IT but can’t find a link

“Those who were regarded a decade ago as working class no longer see themselves as such. The Celtic Tiger has given them the opportunity to have a higher standard of living than their parents and they are grabbing it with both hands.
Crucially they can buy their own house. The oft-repeated claim by opposition parties that young people cannot afford a house is emphatically disproved by the facts. About 17 per cent of all houses in the country have been built in the past five years while the population has increased by 8 per cent in the same period.
Anyone with the remotest grasp of the new suburbia knows exactly who lives there. These are the people who voted Fianna Fáil in decisive numbers. ”

There is a very strong air of cad a dheanfaimid feasta.. over the scene today

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.

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.

@Stephen/Seamus

Perhaps you can explain to me the thinking behind what Seamus states in the paragraph quoted above because I’m at a significant loss.

“..The banks must face up to losses that exist on these loans. The 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. Households with unsustainable mortgages must be allowed to do so..”

So Seamus is accepting that the banks must take the loss on the loan because it is never going to be repaid – but at the same time he believes the current occupier should be required to leave the house ??

Now for the life of me can anyone explain how in Gods Holy earth that this represents a progressive policy choice.

Families, as Seamus correctly articulates above, that were cought in the crazy valaution and lending practices that I have alluded to here for the past number of years are now as suggested by Seamus to leave their homes and seek a new accomodation despite the fact that the bank is recognising that the valaution methodology they used in the first instance was fundamentally flawed.

Why does Seamus feel the need to punish further innocent consumers by asking them to up sticks and have them relocate – for what purpose exactly? Is it to teach them a lesson? Is is to remind them that in future they need to do the fundamental rental valuation analysis themselves and make a better investment choice next time (despite the fact that the world and its mother was in violent agreement with the property hoopla for most of the noughties ). I’m really at a loss here.

Surely its not beyond the wit of the banks to strike a common ground between those in distress and unable to pay the current mortgage and figure out a level which recognises the stupidity of the banks original lending and forces them to agree a revised amount which can be serviced by the current occupants. Socially this makes a whole pile more sense than Seamus’ bad borrowers cleansing regime.

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!

”The banks must also realise that there are thousands of homeowners who will never be able to repay the huge loans they issued to them.”

The main reason for this is that banks create the money they lend by typing it into the borrower’s account. Ignoring cash which is negligible, what’s in circulation is the principal or partial principal of each loan. From this is economy must repay the principal plus interest. We owe more digital money than exists. Hence it’s inevitable that many will have to default.

It would be feasible for all bank loans to go according to plan if the treasury was able to create of portion of the money supply digitally, and debt free.

@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.

@roger

In order to ‘borrow too much’ there must exist a lender willing to ‘lend too much’.

The banks were reckless with funds and heedless of their shareholders’ interests. Both the Central Bank and The Financial Regulator’s Office knew that credit was out if control. These are gpbith state agents. It was the borrowers that ‘did it’ simply won’t wash for the average residential mortgage holder.

Unlike the lenders, many borrowers are not in, and will not be in, a position to repair their balanceheets in the foreseeable future.

A solution involving workfare that allows distressed homeowners to hold onto their properties, I believe, has merit but I will probably grow another head before any element in Official Ireland picks it up for serious study.

@Eoin

Hmm.

…“I’ll be honest, that is more than likely to appear in one of the papers tomorrow, I probably shouldn’t have covered it with you. But the thing is, it is based on conversations had with executives in banks, and I mean at board level. It has to do with going through conversations with collection teams in different companies. And it…no-one will go on the record with it. But what I am finding out, certainly, off the record, that those are the estimates. It’s a shocking number and I think that it’s a total finger in the eye to the people who are in genuine trouble, who aren’t in this situation by choice. And certainly with people who are strategically defaulting I think the banks should move in on them instantly. And instead focus any kind of resources or any kind of forbearance on people who have lost jobs and people who aren’t doing it because they want to.”

If this is correct then it would suggest last summer’s irritation of the movers behind the ‘debt forgiveness’ media blitz, towards those responsible for the skeptical reception they initially got, might have been misplaced.

Presume it wasn’t recorded yesterday…

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!

German lawmakers and the chancellor were all ears last Thursday when Gregor Gysi, the parliamentary group leader of the opposition far-left Left Party, addressed parliament. In the debate on the European fiscal pact, Gysi surprised his listeners with a few “constitutional issues” that “might” be worth “seriously considering.”

Gysi’s objections to the European pact for stricter budget discipline proved thought-provoking even for leading EU law experts. The agreement, says Gysi, a lawyer, violates Germany’s constitution, the Basic Law, because the country can never rescind it. He argued that Germany would be committed to drive with its debt brake on for all of eternity.

He may have a point. Steffen Kampeter, a senior official in the German Finance Ministry, confirmed what every reader of the treaty text will notice on the first read-through: “The treaty does not provide for a right to rescind.”

No to Austerity into Eternity!

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?

@grumpy

Not sure how that speculation squares with 450k unemployed and employment continuing to fall. There may well be those trying to game the system but wouldn’t it suit the banks to float generous estimates?

Recently, and socially, I had a conversation with an assessor acting for certain banks in the farming community. He didn’t raise any doubts about the bona fides of those he’s dealing with. I am not drawing any firm conclusions from that, just noting it.

@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.

There is an orwellian doulethink by those who complain that (Irish Excuse xtyy) “the banks mispriced my house”.

It is simple. Irrespective of the “pricing” of anything – if you have a few braincells you look at your bank account and income and decide whether or not you can afford it. Why would anyone consider that the already ripped off taxpayer who made their decisions using that basic rationale, should now bail out those who helped drive the price of houses through the roof.

@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 Connor

‘Having Irish taxpayers compensate these homeowners seems a bit of socialism for the middle class paid for by the working class.

The Irish Welfare State is a middle class construction, designed by the middle class for the middle class. This is in contrast to other regions of Western Europe where the welfare state had a working class or social democratic bent ….. socialism in Ireland has always been middle class

The Irish working class has continuously lost out to the middle, professional and landed/proprietorial classes in competition for jobs in the State sector, closed professions, 3rd level qualifications etc

& note the regressive nature of recent ‘austerity’ for the lower echelons …. socio-economics …. far as I recall a single Marxist emerged in Leitrim in the 1930s but he was swiftly deported by De Valera … think he bacame a Professor of Economics at UCLA or Berkeley or some such out of the way outpost ….

@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.

@ Gregory Connor

Surely you mean there is no more money for homeowners in a spot of bother because the EUR 64bn in petty cash has already been fluthered away on bond sharks and too big to fail but failed anyway property developers.

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.

@Amac

The point being the average taxpayer had little or nothing to do with the pricing of houses – that was the banks and the estate agents – hence the problems today. Banks always have the oppotunity before any deal to say NO.

@Gregory

By the way how much capital would it take to fix the error – if you know please pass on the info to the CBI because they spent €30m a year ago asking that very question and they’re still scratching their heads.

The point being had house prices being correctly valued – banks would have been short capital many years before the disaster came upon them. The directors and lending officers were paid to know better, their financiers took the risk that the management did know better. Both were wrong, badly wrong but aside from equity investors none have paid the price which the rules of capitalism suggest they should have – this is in fact the reason the hospitals and schools are short of capital because its being diverted to private buisnesses that should have been allowed to fail. No other argument or theory trumps this basic fact.

Your argument fails because you’re now an ‘owner’ as a taxpayer. You should never have been an ‘owner’ – that’s another Govt error. Would you really care less what a private bank agreed with a mortgage holder vis-a-vis their outstanding loans? I doubt you’d give a damn but the fact that the Govt has put you (and me) as owners of these banks shouldn’t have any bearing on the ‘correct’ thing to do giving the cicumstances thousands find themselves in. You need to divorce yourself from the ownership bias you have and come at the issue from the consumer side.

House buying consumers are not cash paying in the normal sense in that in 98% of cases they rely on credit to complete the transaction (during ‘normal’ housing markets in the RoI) – comparing them to any other ‘normal’ consumer is comparing apples to oranges. They are different. This is nothing to do with class this is basic cash v leverage markets. In a leverage market banks are paid to get the pricing right – just as a supermarket is paid to get vegatables or soft drinks priced correctly. When banks screw that up for nearly a decade they must bear some element of the downside in that mis pricing error. Anyone suggesting otherwise who teaches or lectures in the economic science field is surely misled.

The mistake here is that many believe this pricing error cannot be fixed because its a bail out for house buyers and its a sop to the middle classes. I believe this to be a short sighted narrow and ultimately self defeating view. Fixes are not going to be fair. We voted in our droves to fix the Northern Ireland question – not many cared about the fairness of releasing prisoners early to get the deal done or the rights of wrongs of the past 30 years at the time. There comes a time when the greater good question deserves an answer. I believe committing people who’s crime was their birthday to a life of suffocating debt – in a leverage driven marketplace – is a daft economic view of the world and will surely cement the domestic economy to the doldrums for another decade.

“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.

Bond. Eoin Bond… Says:
April 2nd, 2012 at 3:11 pm
Karl Deeter:

Celtic Tiger T**t.

David O’Donnell Says:
April 2nd, 2012 at 8:45 pm

The Irish Welfare State is a middle class construction, designed by the middle class for the middle class.
+1

I hear the ‘old folk’ tip the doctor ‘for his kindness’ – what a ****ing country !

I spent three days last week in London with the g&g, unpromtped, got inside line on two MM$ deals (middle class wanna be’s) and just rolled on.

@ Yields or Bust / Gregory Connor,

There were ultimately two sides to the deals that have spun the country into bankruptcy.

(1.) The Bank owners.
(2.) The buyers

(1.) The Bank owners were the share-holders, who profited for a long time from high returns, didn’t complain where it was coming from, and then were wiped out. The profits were immoral, it is just that there is no compensation for them (and it is an important lesson for the next generations of their families, and the whole country.)

(2.) The buyers bought at idiotic prices, and were happy that / wanted the price to go up after they bought, and THEY DID NOT campaign for the people behind them who couldn’t afford a home. This was also wrong, and should not be rewarded (and is also an important lesson for the next generations of their families).

(3.) Many people felt what was happening back then was immoral and refused to take part. They ‘won’ by the rules of the game (which they didn’t want to have to play, but they did, and they called it right).

There is now an attempt to intervene against these people (3.), stopping them from buying a home at the low price houses would eventually reach without intervention, by taking money from everyone and letting (2.) off, almost as if nothing had happened.
(2.) are entitled to shelter, but not to own a home at others’ expense. We already have a queue for social housing, and if they need help with housing they should join that queue, not jump it.

(3.) have of course already been acted against by the creation of NAMA – had all that stock come on the market then we could all buy a house for €5,000; and then Intel etc. could pay lower wages, and we’d lock in competitiveness for years. But this did not suit the people who got it wrong, and we have neither capitalism nor socialism, but a new type of feudalism.

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.

@ John Corcoran,

You’re going to keep posting that forever?
(at least we’re spared the letters after your name this time 🙂 They remind me of Myles na gCopaleen’s reply to the president of UCC, Alfred O’Rahilly, who signed a letter to the I.Times as:

~ “Dr. Alfred O’Rahilly BA, MA, PhD”.

Myles commented, “A doctor at both ends begob!” )

Re: your reply.
A. There was indeed reckless bank lending, and the bank-owners (the shareholders) were wiped out. Them was the rules of the game.

B. We were talking about residential mortgages, not commercial property rents (and yes, UORR, and the process, are/were wrong).

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.

@John Corcoran

You keep making this analogy – but it’s missing five major bubble elements:

1. Stock control via asset hoarding.
2. Planning/revaluation approval.
3. Funding.
4. Leverage.
5. The pass-the-parcel/capital appreciation game.

The €5 can be valued at €20 if it’s circulation of the stock becomes limited, a relevant authority gets to say anyone holding €5 can trade them for €20, a bank is willing to lend €18 against €2 to an “investor” to buy one and the other banks join in.

The valuations are derived from how much the banks are willing to lend against the asset class, how tight the supply is controlled and what mechanism exists to legally revalue the asset.

Valuers can go to a bog in Longford tomorrow and value it at €100 million but as long as no bank is willing to lend against this, the oversupply of other land is on the market and the planning authorities are not “minded” to rezone it then valuers are wasting their time.

Valuers are, in the words of that great philosopher, Eric Cantona, merely the seagulls following the trawler.

@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.

@ PR Guy

I have a friend who was on the collections teams at one of the banks, and he’d go out to clients who had started to go into arrears, to kinda give them a financial NCT and see if there wasn’t some way for them to manage their money a bit better. He told me, fully 18 months ago, that people were completely unwilling to change their lifestyles and make unpleasant choices to get back on track. Most of them didn’t seem particularly worried at going into arrears. These types of non-payer may be included in the “strategic default” tag. And, fwiw, both the IMF and Moodys have both highlighted strategic defaulting as their key concern with the new personal insolvency legislation. Making some claims that the broking industry is not the most pure or honest is an odd way to counter the claim which a lot of very fair minded people have worried about for some months now.

@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

@ What goes up

Professor Neil Crosby
Neil has been Professor of Real Estate at the University of Reading since 1994 having been previously Professor at Oxford Brookes and lecturer at Reading and Nottingham Trent Universities. Before that he was a practising valuation surveyor in a combined residential and commercial property private practice firm based in Nottingham. He specialises in commercial property appraisal and the commercial Landlord and Tenant relationship and has undertaken a series of major research studies funded by the UK Government and the UK property industry in these areas. In 2002 he was awarded the International Real Estate Society’s annual achievement award for his work in real estate research, education and practice. He has published well over 100 papers on the various topics listed above and the third edition of his textbook on Property Investment Appraisal with Andrew Baum was published in 2007.

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.

@Gregory

I asked you last time to explain your workings in relation to your assertion that

“..A key point is that “the banks” have no excess funds to compensate/subsidize over-extended homeowners..”

As I previously suggested the CBI conducted an exercise a year ago at a cost of €30m to calculate the exact answer to this question you obviously believe the €30m was badly spent as the numbers calculated at the time were a mile out. If so, whats your estimate?

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

Tuesday, April 03, 2012
Letter in today’s Irish Examiner

Act now on upward -only rent reviews

In his Árd Fheis speech on Saturday night Taoiseach Enda Kenny stated “We had intended to legislate to end upward-only rent reviews, but this proved impossible because of constitutional difficulties”.

Our country has the most anti-tenant commercial lease law in the world i.e. upward-only rent reviews tied to long leases, which have destroyed tens of thousands of sustainable Irish businesses and jobs.

This feudal lease law continues to destroy thousands of sustainable Irish businesses and jobs and is damaging the Irish commercial property market and preventing a recovery of the Irish economy.

A healthy commercial property market is a function of a healthy and growing economy, and not of feudal and damaging lease law.

If you persist with this cowardly and misguided u-turn, Enda, you will create an economic wasteland, and when our country arrives at this wasteland, nonsense surveyors’ property valuations based on this lease law will be irrelevant.

Our country is alone in the eurozone in tolerating this feudal lease law. Upward-only rent reviews are a suicidal form of self-sabotage.

Your Government has received a legal opinion from the esteemed former senior counsel Gerard Hogan stating that “Under Article 43.2.2 of the Constitution in the exigencies of the common good, the Government can interfere with these leases and allow commercial tenants market rents.

Also, landlords are entitled to market rents but not to compensation.”

In your election manifesto and your programme for government, you made a solemn pledge to the Irish electorate that you would allow commercial tenants market rents.

The time for action on this vital commercial issue is long overdue.

John Corcoran
Spokesperson
Irish Commercial Tenants Association
Glenageary
Co. Dublin

@ 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.

@MH

“Some of the household charge protesters at the weekend likely had a few pints before heading home”

Go bhfóire Dia orainn ! I can’t believe the neck. Pints! They should all be interned on that island on Lough Derg and forced to do that 48 hour rosary on infinite loop with half of the time devoted to walking around barefoot. The Troika could supervise via overhead drones. Would that be good enough for them ?

“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. 😎

@ Seafóid: There are other options: flares + pots and pans: petrol bombs and aeroilized rocks. Pints seem a very mild option indeed.

Now, that Lough Derg thingy. PR Guy might be able to make a touristy thing out of that. Very character building I was assured: never tried it myself. Preferred high-speed bikes. 🙂

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.

VAT applies on many goods and services without protest but local charges invite protest because taxes have been paid via income tax.

I was not saying people shouldn’t drink.

For example, Ireland is one of the few countries that provides water free.

Per person water use in Ireland is about 37,000 gallons a year – between two and three times the average for the rest of Europe. (Per person water use in Ireland is almost identical to that in the US but the US has one of the highest per person water use rates in the world.)

http://newswatch.nationalgeographic.com/2012/02/10/ireland-charge-for-water/

@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.

@Gregory
Its much easier to print money rather then tax – we are now in a non optimum currency.
From a national economy perspective we devalued the currency when we / ECB? backed up international malinvested credit deposits with national fiscal agents.
Of course we are no longer in a national economy yet at the same time are expected to pay for international credit without a European fiscal agent (Which I don’t want any part of either)

PS I love these currency protectors in the ECB – the hypocrisy is mind blowing – as if they never understood the central flaw of Peels bank act.
Incredulous simply incredulous.

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.

@ The Alchemist

Hasn’t the Government agreed that banks should writedown loans on a case-by-case basis?

I assume that knowing the culture, if there was a system where for example TDs would have an input, it would open the proverbial floodgates.

The fact that a defunct bank has still a payroll of about 1,000 shows that different rules apply when the State has direct responsibility compared with the firing of tens of thousands in the private sector.

@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

@YorB
“Banks always have the oppotunity before any deal to say NO.”

And borrowers hadn’t? We are talking about adults who knew exactly what they were getting into, and who gambled that the rise in prices would go on until they managed to exit – making a nice killing. The airwaves were full of them to the extent that “flipping” was a cliche at the coffee docks.

@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.

@BW
Re flares + pots and pans: petrol bombs and aeroilized rocks

You could add unicorns and cannonballs, palaces and piers,trumpets, towers, and tenements, Wide oceans full of tears, flags, rags, ferryboats
scimitars and scarves and every precious housing dream and vision underneath the stars

They should have just declared the banks bust and started all over again.

AIB reminds me of El Cid on that horse

@ 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.

@Brian Woods Snr.

“Very character building I was assured”

I usually find anthing described as ‘character building’ involves being cold, wet, abused or a combination of all three.

@Bond Eoin Bond

“I have a friend who was on the collections teams at one of the banks…”

‘I know someone who knew someone’…… seems to be the whole thrust of this 25% story!

Mudslinging with little or no real evidence behind it by people with ready access to the media (against those who don’t) is something I have to put up with day in and day out – it happens more frequently every passing year and it gets on my tit5.

And yes, I know that ‘I was only following orders guv’ and ‘I have to earn money to feed my family somehow’ are poor defences against being involved in that kind of work but I am planning my escape this summer when I take two months off in a converted monastary in Italy to finish a bonkbuster based in the financial services community. ‘Phew what a scorcher’… in more ways than one hopefully.

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?

@PR Guy

+1

This story is a load of codswallop. The bank has the option of enforcing their rights against people not acting with bonefides. If they are not doing so then the banks owe us a massive apology.

The 25% figure is clearly horse-manure. The people Eoin refers to may exist but they are not strategic defaulters and they can be dealt with through enforcement. It sounds like a good story and it appeals to our desire to blame somebody.

What is really going on is the banks are conducting a PR war to try and guard against an insolvency system where the banks have to put up or shut up – either repossess the property or restructure the debt. This is not gaming the system. This is fair and humane insolvency. This is the anti-dote to moral hazard. This is the avoidance of slavery.

The banks are the people to blame. Don’t let them create distrust and disunity amongst the people they have robbed and ruined.

@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.

@BEB

Surely given the limited upside that the banks have always had in this market would/should of itself discipline them as lenders to know what represents good and bad practice. Lending money for 2004,2005,2006 and 2007 in vast qunatities into property deals at rental yields less than 10 year German Bunds is not the definition of sound lending. If banks lose money playing this game does it not seem equally as stupid for the same banks to seek 100% of their cash back as they are currently doing.

The upside to house buyers is fundamentally a leverage play on the original equity in any deal and the tax break that any capital gains are allowed. Banks can always dictate the LTV in any deal thereby limiting the potential gains to any house buyer in a bullish market.

If banks chose to work off lower LTVs (and in many cases zero equity down) in a market where yields are less than equivalent ‘risk’ free investments then hard to feel too sorry for any institution which now finds itself on the wrong side of that crazy bet, particularly when their own margins as you correctly note are largely fixed.

Survey after survey suggests the financial knowhow of many consumers is too dire to even imagine. This is why the industry is Regulated. You know this to be the case.

The vast majority of people who bought during the period from 2001 to 2007 should have been advised against such a purchase as the rental yields were screaming ‘danger here’ even in 2001. The sad reality is that the ‘advisors’ in nearly all cases dreamed only about rising prices as most advisory heads had their snouts firmly in the rising price driven commissions/fees trough. The result being independence went out the window. You also know this to be the case.

@ 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.

@michael h

Whatever system is put in place for loan discounting should have some measure of transparency – herds of pigs overhead. What are the public interest directors doing in this regard may I ask?

Given the complexion of Irish political culture and the solid bias towards deference to one’s ‘betters’, not to forget endemic corruption, my fear is that not all those seeking or requiring discounts will be treated equally.

The person for example who borrowed today and tomorrow to buy shares in an institution he or she was associated with, but has had to downsize by selling the pile in D4, may find the path to discount paved with felicitations whereas Joe the forklift driver may fare out less fortunately.

It is pretty much clear that many people in the private sector who were once well-off, even if only on paper, are bust right out the door. Not all of them can afford a quickie UK bankruptcy.

Between Game and Peats more than 200 jibs have been lost. Twitter are recruiting for twelve new positions if I read the headline in the Irish Times correctly.

Anyone who believes that personal debt will be sorted out by a quick turnaround in employment is delusional.

If there is a solution to personal debt that doesn’t involve debt discounting and which doesn’t completely thrash social morale, that would great but that would require radical thinking.

@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?

@ YoB

actually, my bigger question is who gets the upside on any increase in value of the asse?

@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.

If you google search “debt foregiveness Ireland”, the second Ad boldly claims:
“The Irish Government Insolvency Act Can Wipe Upto 75% Of Your Debt”

Of course nobody will seek to take advantage of such arrangements.

This opens up the wider issue of future credit availability in Ireland. Good luck finding someone to lend to you if they fear repayment is optional.

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

BEB

‘mortgagees had an unlimited upside when purchasing property, the banks on the other hand had a fixed income asset.’

That’s an exact description of the illusion which was created. Too good to be true. All casinos work like that. A small number of gamblers can have big returns, but the vigorish (house take) delivers a steady return. The banks were always going to be bailed out.

@TK
I know Tralee pretty well for a Cork boy, my concern was for the hollowing out of populations withen tradional old town boundaries whether that is market towns of intermediate or larger size, county capitals or small citys such as Waterford ,Limerick or Cork.

Spatial madness is a particular concern for this Dork.
With apartments that I believe are empty (?) or nearly empty near the Train /bus station or the current state of apartments near the canal which may be half empty ?

From a rational urban rather then suburban viewpoint Youghal has now a bigger population then Tralee.
For basically the same reasons I don’t consider Douglas village a part of Cork city although we would be splitting technical geographic hairs at this point as it forms a continuous concrete area with Cork city now despite it being part of County Cork
en.wikipedia.org/wiki/Douglas,_County_Cork

Anyway Tralee exhibits the most extreme limit (In Munster ?) of this now sadly common phenomena in our towns & cities which makes the input costs into our resourse heavy lives reach even higher extremes.
But I concede the location of the train / bus station is now much more central then it once was due to the counterbalancing northern sprawl.

PS Any sign of getting the Blennerville steam train up and running again ?
It was a great loss to the town in my opinion. but a Fenit tourist train would have been much better – with many train passengers more aware of the engine if it left close to the station.
If yee do it again make Fenit the destination.

@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.

@ Paul

correct. And do we refund people idiotic enough to gamble their lives away in a casino?

@John Corcoran

There isn’t even a public database to maintain and publish relevant details of all property transactions including sales, lettings and rent reviews

In the past anyone who didn’t like the modus operandi was encouraged to leave the country . I think that’s one of the reasons the legal and regulatory frameworks are so shoddy.

@ 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

@ Garry

“why save the casino?”

Cos we’re a bunch of gambling addicts and we live in Vegas…

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?

@zhou_enlai

The surveyors/auctioneers were responsible for three important and interlinking practices which created the bubble and crash.

First the valuation error i.e valuing all 5 euro notes as 20 euro
Second the ruinous commercial property lease law
And third 95% of all property sold in the state is sold by surveyors/auctioneers.
They controlled where the vast property advertising money was spent. Almost all of it was spent with the broadsheet media and the Irish Times got the lion’s share. Therefore these auctioneers controlled the Irish Times property propaganda and all the other broadsheet media property propaganda. They had enormous influence in these papers editorial policies.

This third item was the fatal one–the media faciltating this propaganda. There were other useful idiots like the soft landing economists etc etc. In matters of church or state the man with the money carries the weight.

@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.

@ zhou-en-lai
There is no economics without politics, and no politics without social relations. One has to consider the meaning of people’s actions, and why they have credibility in the eyes of others.

The valuers simply played their semi-unwitting part in the Ponzi game. Most of them knew it wouldn’t last, but they didn’t reckon on the devastation that would ensue. Without complicit bankers, solicitors, auctioneers, accountants, architects, public representatives and public officials, their ‘valuations’ would have been laughed off the stage. They were part of a social system.

The ‘false’ valuation were treated as ‘true’ at the time when they were issued. When the officer in charge of the firing squad says ‘Fire’, he is not just making a statement. He is performing an act of execution. You will be well and truly dead as a consequence, unless the squad mutinies. Not many professionals mutinied in the bubble, because the incentives were just too juicy.

‘In Bourdieu’s terms, “The use of language …depends on the social position of the speaker;” hence, the authority of language “comes to language from outside. This “outside” is composed of the social conditions within which language games are situated.
From my own study of language I have come to the conclusion that speaking is inseparable from the distribution of power in a society. In all the cases with which I am familiar, the distribution of power in society is unequal.

Consequently, the analysis of language games should not be separated from an awareness of social classes and of the relative social position of speakers. In this regard, as John Thompson notes in his commentary on Bourdieu, the institutionalized social relations of speaking establish “who is authorized to speak and recognized as such by others.”

http://www.philosophy.uncc.edu/wcgay/pubbourdieu.htm

The bubble and bust illustrates, in a spectacular way, the ‘social magic’ which underpins all our relations with each other. No effort will now be spared in burying the irresponsible conduct of the supposedly responsible persons and bodies involved. Where actions cannot be buried, they will be reframed as understandable, unfortunate mistakes. Sure we are all human etc.

Any other course of action would risk disturbing the ‘normal’ order of society, and the respected status of the ‘independent’ self-regulating professions. We couldn’t have that could we.

@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.

@paul quigley

Do you think that explains why no auctioneer has been sued for a dodgy valuation of a residential house?

Also, how would solicitors and architects have “mutinied” in practice? Wasn’t the mantra to shop around? If a guy won’t do work in a competitive market becasue he has doubts about valuations (in respect of which he has no expertise) and is not sure of the buyers income (which is none of his business) then you just go elsewhere to somebody who understands his function is not to advise on price.

Auctioneers are professional valuers and carry insurance to back it up. That is their skill. Solicitors and Architects are not insured or permitted to give such advice. Why have the banks not gone after the insurance which is supposed to pool the risk of autioneers’ negligence?

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

@ zhou

It is not for nothing that they say the best way to rob a bank is through the front door. The word kleptocracy was invented to describe certain kind of regime. That is ‘robbery as normal business’, and ‘robbery as normal government’ respectively. It reminds me of the old joke in the Beano:
‘When is a door not a door ? When it is ajar’. It’s all about how an action is framed. Condoms were such objects of shame and concealment here only a few years ago. Now teenagers joke about them. The rules of sex changed.

White collar crime thrives because it is surrounded by a wide umbrella of more or less dodgy professional practices. For every really dodgy one, there are dozens of fairly dodgy ones. For every one of those, there are hundreds of slightly dodgy ones. Angels can dance on the head of a pin, as the Revenue and the tax accountants well know.

Incentives matter , and part of the ‘art’ of professional practice is knowing how far one can ‘safely’ go. Those ‘prudential’ limits are not fixed, but respond to organisational and other changes. A big professional firm is not the same as a High St practitioner. In Pierre Bourdieu’s expression, the dominant maintain their position by constantly changing their stance.

The professionals in this situation went way too far, both individually and collectively, and they blew it bigtime. Their governing bodies are still busily looking the other way, and hoping that we will discover oil, or maybe even be hit by a tsunami. Anything to take the heat off what went on.

There was a recent high court case in which the judge decried the appalling standards of legal practice. I would suspect that this was only the tip of a profession-wide iceberg, with conflicts of interest and principal-agent problems at every turn. The bank involved was not one of the domestic banks, and so less likely to have come under ‘political’ influence to keep mum. One wonders what the Deep Throats in AIB and Anglo might know.

That above case alone would be enough to deter the lawyers from opening any other box. As the Italians say, ‘vergogna !’. NAMA may make a loss for the taxpayer, but it is succeeding in its core mission of pouring concrete over a veritable Chernobyl of professional malpractice and bad standards. Three layers of fencing. Move along, nothing to see here.

The banks won’t purse the insurers, I imagine, because they cannot afford to have their own internal practices scrutinised. Their incentive structure at all levels was designed to encourage over-valuation and over lending. As the taxpayer is getting hit for the Full Monty, why should the insurers volunteer to pony up ?

As for competition in the market, and the difficulty of dissenting from the ‘hype’, on only has to think of the famous psychological ‘fake torture’ experiments in the US to understand the power of Groupthink. It is the rare individual who can stand apart from the crowd.

I reiterate that there is an unspoken, but absolutely solid consensus among all of the main players, including powerful media interests, that these skeletons are not to be dragged out. If they do not hang together, they will hang separately. Mahon is a tiny part of the story, which is about a historic failure on the part of our leading individuals and institutions. Betrayal.

Joe Lee made the distinction, in his magisterial Ireland 1912-86 between the performer principle and the possessor principle. These authors distinguish between inclusive and extractive institutions. They are certainly not anti-capitalist, but they are singing the Dork’s song, and we sure have some champion extractors on this little isle.

http://whynationsfail.com/

@ 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!

@Brian Woods Snr

Yes the Irish Times are the mouthpiece for the property industry/landlords and essentially a property play with a newspaper tagged on. Their chairman David Went was CEO of IL&P from 1998 till 2007 and was responsible for it’s demise. No Irish Times journalist will be writing a book about that story.

On the UORRs story riddle me this. FG,Labour,SF,the Greens and almost all the independents fought the last election on banning UORRs in legacy leases. FF now want UORRS banned in legacy leases. So all the entire Dail want this to happen

Minister Shatter late last May stated to property week magazine ” that there was a job crisis and under article 43.2.2 of the constitution the government will introduce legislation in the autumn to ban UORRs in legacy leases. Esteemed former SC Gerard Hogan agreed with the Minister and also stated “landlords are entitled to market rents but not to compensation”.

Minister Shatter also said “it would not affect NAMA’s valuations. Colm McCarthy agreed with the Minister in his report on ” The economics of adjusting commercial rents”

We live in a democracy,all TDs want to ban UORRs, the economic argument is compelling ,the Minister for Justice and SC Gerard Hogan said it’s constitutional.

The Mahon Report ” Corruption is systemic and endemic in Irish political life”.The vested intersts have prevailed over the public interest. FG/Labour are as corrupt or more corrupt than any previous Irish government.

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

One add on…

If mortgage holders have a cause of action against the bank let them bring it – but we should not retrospectively change the law of contract and/or tort so as to impose extra duties on lenders. There may be an argument (in my view a bad one) for imposing duties on lenders in the future with respect to how much they lend vs income – but to impose such duties retrospectively is simply a sneaky way of granting mortgage holders welfare payments – and that would be grossly unfair

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.

@christy

I would have thought with even the most basic reading of the various posts just above your last two in relation to the mis pricing of property for the best part of a decade would have been sufficient to at least give you some scope to realise that proclaiming the viewpoint in line with the famous ‘let them eat bread’ stance is not going to move the sitution on.

The properties were mis priced and the mortgages attached were are as a result similiarly ‘wrong’. Why is this so hard to understand? A market which is utterly controlled by the banks and which is likely to see PTT fall in prices when the dust finally settles of c80% on average is a market which has for all intents and purposes gone ‘wrong’ – normal market price corrections do not exhibit 4/5ths in falls. Only a fool would suggest that that sort of decline is part of the risk in playing in any market – perhaps in a cash market, but not in a market where Bond above is keen to tell us that the banking margins are so slim.

I suggested to Gregory O’Connor above that he needs to divorce himself from the unrequited ownership we all now have of these banks and look instead to the commercial reality of hundreds of thousands of the citizens becoming debt slaves for the next 25 years. No economy can recover with that hangover.

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%.

@ Ahura

I have no skin in the property game, but your attempt to reduce the process to atomistic transactions between individual buyers and sellers is thoroghly misleading.

You are missing the point made by so many other posters, namely that house prices were not reflective of in a free market, but rather of a rigged game. The market was grossly distorted by irreponsible (but temporarily profitable) credit expansion. Even if some buyers were actively speculating in property, the majority of people were stampeded. There was mass panic to get on the ladder.

Banks may have honoured the letter of the individual contract, but thet have dishonoured the spirit of the law, which is supposed to equitable. They have also destroyed public trust in their own institutions. It is difficult to find words to describe the failure involved, but it goes way beyond mere busines faiure. The word treason comes to mind.

@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.

@Gavin

I’m assuming you were an adult when this happened! If not, are you sure it wasn’t a priest?

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 “

Comments are closed.