YOUNG PEOPLE, EVEN those with good jobs and mortgage approval from banks, face an unequal struggle to buy a home right now. Out-gunned by rival bidders armed with cash they are trying to buy houses and apartments in a shrunken market which has long since ceased to work.
If you want to know how bad this can get, go to London where purchasers are paying prices north of Stg£500k for former council flats in gentrified parts of the East End and where young buyers are now being asked to make bids for houses and apartments without being allowed to inspect them first.
In Dublin the frustration felt in a market suffering from an acute supply shortage is aggravated by the return of endless over-dinner conversations about soaraway prices in prestige districts and by the unwelcome return of property puff-writing to the big newspapers.
The familiar philistine hyperbole of the Tiger years is back. This time it’s not in a market pumped up by limitless amounts of democratically available low-cost credit. It’s in a market where the rich and the professional elites (financial services and IT whizzes, overseas buyers and consultant doctors) hold all the high-value cards in the deck.
Some 10,000 properties changed hands in Greater Dublin last year according to the national property register. That’s not half enough to meet demand. And unless the government acts the problem will get worse, not better.
The Irish Banking Federation claims 54% of mortgages at end 2012 were ‘trackers’, the vast majority priced at a small margin above the ECB base rate which is now a paltry 0.25%. Others think the number is well in excess of 60% with AIB, Bank of Ireland, Ulster Bank and PTSB carrying €70bn worth of the loss-making loans.
The problem is that trackers are a thing of the past, now unobtainable. Nobody holding an-ECB linked tracker is going to forfeit it by moving home and replacing it with a new, variable rate mortgage carrying a coupon which is up to 3% per annum higher. Counting buy-to-let mortgages there are 830,000 home loans in the country. So if the 60% figure is correct some half a million of these homes are off the market more or less permanently.
Some official estimates suggest 400,000 mortgaged homes are in negative equity. That is to say the outstanding debt to the bank exceeds the market value of the property. Sell such a property and you crystallise a permanent liability with no residual matching asset.
The bulk of this property – some 300,000 units – was probably bought during the overheated market from 2004 to 2007. A lot of these borrowers will also fall into the ‘tracker’ mortgage group.
Will the banks ultimately be forced to split the cost of picking up the tab for negative equity with the borrower? Persistent reports suggest that AIB (and others) are doing this already. Faced by uncertainty over how the banks will jump, owners who are in negative equity won’t be willing sellers in the short term. Many will hold off, hoping that the idea of cutting a deal with your lender will become the norm and, simultaneously, hoping that the market will continue to improve thereby floating them away from their uncovered debts.
Taking the prevalence of trackers and the negative equity problem together a significant part of the housing stock is not for sale. This is happening at a time when the number of new house completions nationally has withered away to less than 9,000 a year or 10% of peak levels achieved during the boom. The forward outlook for construction remains poor, even if indices of sectoral sentiment are improving. The number of planning permissions being sought across the entire construction sector is less than a quarter of peak levels.
Construction is slow to restart, causing housing stock shortage. Image: Eamonn Farrell/Photocall Ireland
Despite rhetoric from the banks about their willingness to lend the main banks’ exposure to the housing market continues to decline by about 5% a year in net terms. More than half of house purchases in some districts are being made by cash buyers who can shut out purchasers who must get clearance for home loans from the banks.
To add to the complexity of a market which is not satisfying demand and which won’t do so anytime soon there is the issue of householders who are deep in arrears on their housing loans.
Some 150,000 mortgages are in arrears, of which 107,000 are over 90 days in arrears. Defaulting loans account for 16.4% of mortgages provided to owner occupiers and for 26.6% of loans used to purchase buy-to-lets. The application of codes of conduct by almost all lenders in the housing market, effectively delaying re-possession of property in both categories, must limit any tendency towards distressed selling by mortgage holders who are ‘in over their heads’.
In other housing markets, such as the US, such property might simply be put up for sale. Here many homeowners may be holding on to property: some 80,000 of the home loans in arrears are behind for periods in excess of 360 days.
The government has also been pushing hard for banks to agree arrangements for ‘permanent restructuring’ with distressed borrowers. These arrangements include extended loan terms, mortgage splitting and arrears capitalisation.
Very little analysis appears to have been done on the impact such arrangements might have on future mobility within the housing market. And this is not a simple issue. The official policy of forbearance clearly produces social gains: lower levels of homelessness, the sustaining of family units and the avoidance of damaging social dislocation.
No matter which way you look in the big urban centres, supply is a big problem that’s here to stay.
Is there a solution?
So far, there are the usual prosaic ‘solutions’ on offer. Like suggestions to Dublin’s four local authorities that they should speed up the planning process or that they should facilitate the development of infill sites. There are even suggestions that some unwanted ‘commercial’ property be converted to ‘residential’.
But the elephant in the (planning) room remains untackled. That is the need for a strategic programme of high-rise development in chosen districts. It is, of course, the only way to avoid urban sprawl and the attendant 40-mile commutes. It is also the way to ensure the most efficient use of expensive items of public infrastructure like suburban trains and light rail.
Sustained economic growth will progressively unravel the problem of negative equity, but paradoxes abound in this area. Employment is already growing by 2% a year: more growth means more jobs and this means higher demand for housing. And this, in turn, means more expensive housing. Which may leave you with a vicious circle.
Your tracker mortgage or your home? Image: Shutterstock.com
On tracker mortgages the government has tried to find an EU-backed solution, but only to half the problem. The idea being mooted is to remove the loss-making trackers from the banks and put them in a special purpose vehicle whose funding would come from low cost European bond issuance. This would solve a financial headache for the banks but it would not improve the mobility within the housing market of those with tracker mortgages.
Surely the best way to do this is for the government/EU/banks to offer a lump sum ‘bounty’ to the mortgage holder every time an existing tracker is extinguished. In other words, if you pay off a tracker and exchange it for a variable rate mortgage part of your old debt should simply be written off.
There is no point in leaving a problem to market forces if market forces cannot operate. Mistakes made in the past by banks, government and consumers coupled with the issue of legacy debt will immobilise many consumers indefinitely unless action is taken.
Cheap European money and banks obsessed with market share created the credit bubble and the associated asset price bubble. Both must help government find a solution. Don’t forget that EU promise of special help for Ireland made on the final weekend of June 2012.
One thing is certain, radical ideas are needed right now, not in five years’ time. Otherwise young people won’t be able to buy apartments and houses in a marketplace where there is no great tradition of providing high quality rented accommodation on long term leases.