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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.
TRACKER MORTGAGES
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.
NEGATIVE EQUITY
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.
Great article it would be interesting to see how many properties are in the NAMA portfolio that could help this issue
NAMA won’t release property for sale until the prices rise up further a property boom is what NAMA wants not affordable property
And so do we, remember Nama has spent our money and has to make it back
So you would prefer if NAMA helped to keep prices artificially high ,produce another housing boom and leave another generation of young people with massive mortgages that they can’t afford.NAMA should be made to sell everything off within 4yrs that would give a proper level to prices,also anyone holding on to land and not developing it should have big taxes heaped onto them,there is so much capacity in the construction sector to meet the demand in Dublin if only there was the will to act on it
Well said Michael. That’s exactly what they’re doing. Driving up the price so they can sell to wealthy landlords and the banks are the same. Don’t want to lend to the people who bailed them out in the first place. Yet again we are being conned by those who were supposed to help. The greedy pigs of the Celtic tiger never lost their appetite!
I get the feeling that the media are trying to kickstart another property bubble
All propaganda Ben
What has changed in the past year to justify such a sudden demand
Is it the increase in wages,all the new jobs that have been created?
No, it is the media ramping this up so some foolish people then feel the need and get the attitude to “buy now” or “miss the boat” and suffer later.
Propaganda at it’s finest, this wasn’t happening a year ago and nothing has changed expect media coming up with stupid articles but it is obviously working as alot of naive people are panic buying.
Don’t buy in Dublin in the next 5 years unless you have cash or 70% deposit, a crash is coming and it’s going to be the worst one yet too bad some people haven’t learned anything in the last 6 years and are too blind to see it.
On the button Jeremy
No frank. It looks like it’s already started. I bought Nov 2012 and houses on the same road have gone up by €100k no word of a lie and the houses are going sale agreed within 2 weeks.
John, tracker mortgage holders aren’t subsidised. They just got a better deal than you.
Unfortunately variable rate holders are having the screws turned by the banks.
Just an unfortunate downside to that type of loan arrangement.
Tracker mortgages aren’t directly subsidised. But when the bank looks at it’s loan/balance book, they see they have to make up the loses they’re taking on trackers. They then up the variable rates to turn a profit.
So no, they’re not directly subsidised, but trackers are propped/supported/bankroll by those on variables.
Personally I know this is just part of the market as it is: some you one some you lose. But don’t throw it in my face and say trackers aren’t subsidised. They basically are.
This article is written with Dublin in focus, properties else ware are quite low and affordable
That’s true but problems arise when you have a Dublin-based property owner with their head in the clouds owning a house in the west – NO IDEA whatsoever about the value of proper out here.
I don’t know what a tracker mortgage is.
Ah, the stereotypical enlightened comments that I’ve come to expect by readers on this site
Please, tell me more about your standup routine.
Please, also tell me more about how the govt are full of self serving wasters who are robbing us.
Is there *any* chance of critical, intelligent debate here?
No. I thought not
Now, back to your inane drivel that you’re lamely passing off as humour.
Ah, the sanctimonious, pseudo-intellectual drivel I’ve come to expect on this site…
Not commenting anymore? I was hoping you’d explain to me how you’re more intelligent and better educated than me.
How you’re superior to me based solely on my Journal comments.
How someone as facetious and ill-informed as me has no place commenting on the public comments section of a freely available news app.
Please Daniel, I need your guidance oh wise one!
Daniel isn’t wasting his time arguing with u. Your “joke” is the most rehashed and oldest comment on here. Nobody said u are uneducated or they are better than u but it seems u have an insecurity about it.
Internet comments…a most serious business!
Dublin is not London Damian.
I don’t see any Middle Eastern, Russian, Chinese, Indian,American Billionaires queuing up to buy property in Dublin Damian.
NAMA is so pathetic it even has to fund foreign vulture investors to buy blocks of 100′s of apartments in Dublin from them and even give them a a capital gains tax break Damian.
If there was such a “demand” why would NAMA not sell these properties to Irish Joe Public Homemaker (who let us not forget is financing this pathetic freak show)??
If there is such a “demand” why does are joke-banks not sell of the 1000′s of repossessed/distressed properties that they are holding onto ??
It’s called false market manipulation Damian.
And you’re lamely trying to feed the farcical frenzy.
My point is that that’s the type of pointless oneupmanship that goes on on this site, although I wouldn’t expect you to understand, you’re clearly not as intelligent or educated as me, a conclusion I’ve reached based on your single Journal comment.
Spot on ,An Ordóg Dearg , bloody spot on !
The crap that is posted on these sites are just that ,mostly crap ..
Are you kidding, didn’t a guy from the middle East just buy a site from Aldi and Tesco.
I know what a tracker mortgage is now, but I didn’t when in 2007, when I grabbed what I, as a naive young twenty-something, was terrified into thinking would be my last ever every opportunity to buy anything.
(In case you’re wondering, I did end up on a tracker)
Round and round we go, where we’ll stop nobody knows.
We made the decision a long time ago not to buy at all. Yes, it can get us down from time to time, but we live in a place we enjoy and wouldn’t be able to afford to buy in the first place. We almost bought 7 or 8 years ago, and saw what happened to those that did later on.
If Ireland was geared toward long term rentals, rather than short term one year leases and most places already furnished, it would help a lot of people in situations like ours.
Well written piece. I disagree with the proposal for tracker mortgage deals. As a variable mortgage holder, any deal to assist the already subsidised tracker accounts would be completely unjust.
I’d happily swap my tracker from 2006 for someone’s variable from 2000… Swings and roundabouts. I don’t think I’ve won anything by my negative equity purchase.
How, by the way are tracker mortgages loss makers? I borrowed from bank at 2% and they borrowed the same capital from the ECB for 1.25%, that seems to be a profit. Just because (hypothetically) I borrowed a car loan using the house as collateral for 12% doesn’t change the original performance? I know the bank borrowed badly on the basis of our collateral, but surely that is not the tracker mortgages fault?
When interest rates start to go back up my tracker will be be like strangle hold.. It is the difference between default for my family..
If banks brought their costs into line with the markup on trackers then that solves one problem.
Banks only borrowed short term to fund trackers, meaning they have the re-borrow the money every few months or so while you have a 30 year loan. The rate they borrow at has gone up substantially versus what tracker holders are paying back so they lose. Your tracker cannot be used as collateral to borrow from ECB. Idiotic operating model that has had disastrous consequences with more to come as the article points out.
The bank can’t get funding at the ECB rate in the current environment, they are paying more than the ECB plus margin amount that you pay, therefore they lose money on your mortgage every month. Banks do not secure the funding for the entire duration of your loan when you take out a mortgage they borrow short using deposits, corporate bonds, money markets and in normal conditions central banks and lend long in the form of mortgages, car loans etc.
of course – makes their mis-use of shareholder and depositors even worse when you look at it over the life term of a typical mortgage.
A well written informative a mostly accurate piece written here. So what’s it doing in the journal.
If that’s your opinion about the journal, why keep reading the articles? How grandiose of you to continue reading from your ivory tower.
Excellent article Damien. Food for thought as always.
I was being facetious. I was expecting the usual response that the journal is owned by daft and its all a conspiracy.
Interest rates will rise will rise considerable from historic lows at some stage( within 1-3 years in my view) .This will cause a world wide down turn.with massively over heated property markets in Hong kong ,London ,Sweden ,singapore ,bali ,Australia to name just a few.Ireland with its 117 per cent GDP debt will be a long for the ride.There is only so long that governments world wide can manipulate markets and print money to prop up the system for as long as possible .
Bank of England announced this week that interest rates will rise next year for sure…..you’ve been warned. The good times are over yet again.
The interests of the landlord class and have always been placed above the common social good in Ireland. If the state was truly interested in the welfare of society at large, it would use the taxation and legal systems to encourage owner occupier home purchase and strongly discourage property speculation.
As long as housing is treated as a profit center for the rentier elite and assorted vested interests, we will suffer the consequences as a society as demonstrated in the property bubble and crash and the current housing shortage crisis
Regarding planning, it will now be a stricter more costly and slower process thanks to the BC (a) S I 9. This act comes into force in March. Industry is not ready for it and therefore a slow down in new builds will happen while industry tries to catch up, well done to Phil Hogan for not listening to the warnings of industry experts. Never mind the fact it will increase the cost of a build considerably.
SI 9 should not dramatically increase house construction costs (.5-1%) (and technically isn’t part of planning), especially when compared to bored planners / An Taisce looking for TIA, RSA, EIS and SSFRA on every permission and An Bord Pleanala delays.
The larger issue is the lack of confidence in “developers” as they have all been tarred with the same brush to the extent that funding for new development will only be from foreign investors of funds.
The best solution would be for “co-operative developers” to come together and do a deal with the bank directly to use mortage approval to fund the land purchase, planning and construction costs. This could reduce the net cost to the consumer by 20K and provide segragated risk to the bank. This is too drastic a concept for now but maybe in the next 5-10 years.
Excellent article. The chickens are beginning to come to roost with regard to the non policy that the country adopted on mortgage arrears. The idea of forcing banks to have a policy of inaction on mortgage default was flawed at the outset, bringing us to the current situation whereby thousands of homes throughout the country are occupied by people who cannot afford the property which they technically “own.” The collapse in property prices that followed the crash was not allowed to continue as it should have done had properties such as these been forced onto the market. Until these properties are released onto the market that issue will remain bubbling under, creating an unreal pressure on both the property and banking sectors. Similarly the banks’ difficulties with trackers must addressed to allow them function properly. Expecting the financial sector to operate with the double whammy of mortgage arrears coupled with lending at unprofitable rates will only serve to hamper any national recovery. Whatever way we wish to punish banks for past mistakes must not hamper the greater good of country.
The current property price boom in selective areas also shows that the property in the right area will always find a market. The stark truth is that those potential homeowners with the means to buy property will only buy in areas where there is employment and infrastructure in place. Those who seek to buy with cash for investment will seek out the same areas, no longer buying tax relief in a small satellite towns that boom invented. The urban wastelands in smallish towns created by erroneous tax relief policies are destined to remain just that – wastelands.
The long term issues are deeper than just banking and taxation policies however. The national obsession with home ownership for everyone is not sustainable following the crash. The key for success in the future will be all about planning for the type of living that we are clearly moving towards i.e. far more urbanised concentration than ever seen in the past in this country. The political interference in planning that was endemic in the past must be left in the past. Proper property taxation policies alongside planning must discourage the maintenance by the public purse of the thousands of narrow byroads that lead to lonely rural mansions built in the boom and ensure that access to future such one off builds are funded by the owners alone.
Interesting article, i think you miss one point though, those on tracker mortgages who do not want to move, if they could suddenly move house, they still have to move somewhere else. That does not help the supply situation, it just increases the amount of people looking for homes with an equal amount of homes up for sale. Its like add one house to the market but also add one person looking to buy, they therefore cancel each other out. The main issue is our demographics and increase in population looking to buy.
Not necessarily Baz. It’s the tiny volume of transactions that is strangling supply. Increase the volume of transactions (not the overall supply) and prices will fall to what the market can bear. They have this in the US as well and it’s called “foreclosure stuffing”.
It’s similar to the phenomenon that sees AIB valued at €80 billion and it’s caused by the fact that only 0.2% of the total shares are actually tradable. If the other 99.8% of shares were publicly tradable, the price would collapse.
I can see some logic in more choice having an impact on price as people become more choosy and have higher expectations of what they can get. However the overriding principle (And i’m not economic expert) i would assume is simply supply and demand. This goes back to my original point, so more people looking with more transactions may have some impact on price but i can’t see how it alone could correct the market to its normal path? Again i’m not an expert just thinking logically.
Read all about it Baz. It’s semi-common in the US but has never happened here before and due to the scale of our arrears, we’re about to become something of a test lab for it.
http://www.canfieldpress.com/foreclosure-stuffing.
Thanks for the article some interesting reading there.
I have thought it about it some more and i can see how mathematically it can decrease the pressures on the demand forces over the supply forces. if you have 100 homes to sale and 200 people chasing them for example that’s 2 to 1 in favour of the demand force.
If you then add 100 more people with trackers willing to sell then that changes it to 200 homes and 300 people chasing them, that’s now 3 to 2 in favour of demand but that has helped ease the force of demand.
However there are issues for Ireland, we can’t assume that all those with trackers want to move, nor can we assume they are all in Dublin. proportionally it could be the case that those with trackers who want to move are in areas where the market is still flat and already has enough supply?
However i can see how it would be a welcome factor in reducing demand pressures and therefore price somewhat
QE in USA is being phased out. Global interest rates will ultimately rise. Unrest between China and Japan – dispute over islands may lead to war + trade barriers, Ukraine, Syria, Venezuela hot spots may have political fall outs. Ireland is totally exposed to external factors. A property bubbly driven by rich foreign investors may skew the Irish property market, leading to a selective correction.
Hi Conor, yep you’re right, we are effectively trapped. We’d love to be able to upgrade to a house some day, but the way things are, it’s just not an option. If there was a chance of conditional tracker mobility we’d maybe be able to consider it.
The only thing is, we’re trapped one way or the other- our apartment is in massive negative equity like most people’s. I suppose for the moment we’re just grateful that we’re trapped at a nice low rate, unlike so many of our friends who aren’t so lucky.
Seamus, a tracker mortgage is one where the interest you pay is based on (tracks) the main interest rate of the European Central Bank -as opposed to a fixed/variable which is determined by the Irish banks.
We have a Tracker mortgage, and its great! I remember thinking it was risky at the time.. “maybe we should just be safe and fix it, or get a variable? What if the E.C.B rates go up?” When we bought the apartment we were paying €1300 a month, but now thanks to the tracker, we pay €750 a month.
Of course we would love to consider the possibility of getting a house some day with a garden, our own driveway and no noisy neighbours…. but the way things are now there’s no way we could afford it, and we’d be absolutely mad to give up our tracker and start paying twice as much!!
Jenny ironically that tracker mortgage has you effectively trapped where you are now as moving trackers is not an option with most lenders making moving impossibly expensive for many…..
tracker mobility (conditional at least) would greatly increase mobility for many and address much of the bottleneck, however the banks just do not seem willing to consider such a move and tracker mortgage holders will not give them up leading to this impasse…..
Great article
Where did the arrears figures come from., if the dept of finance they are masssaged and do not include sub-prime and other types.
Why did the the chicken cross the road? Irish politician/economist/journalist: “Build more houses!”
i dont know what a tracker morgage is
(
or when a joke has become seriously dated it seems :)
The good news (got to look on the bright side) about the current bubble is that it’s mostly cash and this cash is helping to fill the black hole labelled “debt”.
Every little helps.
Another article encouraging people to, amongst other things, buy apartments. Absolute madness.
You’d have to have the twisted brain wrong of a one off man mental to want to buy an apartment anywhere for the prices they are asking. Unless, of course, you want to rent it out for €1,300 a month.
But if you want to buy one to live in, it’s entirely unaffordable.
If anyone is familiar with some Asian systems of property renting such as the jeonsae system. Basically the renter will deposit say a large sum 60% or higher, of the Property value to the landlord and they then live in the property as a Tennant. They pay no other rent to the landlord as it is then his responsibility to make a profit. These are usually long term rentals. When the Tennant wishes to leave the entire sum is returned. This system would need a functioning property market to make it work.
I don’t know what a Tracker Mortgage……….. D’OH!!!!!
Thanks for a great article well thought out and articulated.
However, like during the previous housing bubble it’s again a case of buyer beware!!!!!
Wonder how many will decide this time, not to buy in. Everybody has a choice!!!!
Dirty article.
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In support of the purposes explained in this notice, your device might be considered as likely linked to other devices that belong to you or your household (for instance because you are logged in to the same service on both your phone and your computer, or because you may use the same Internet connection on both devices).
Your device might be distinguished from other devices based on information it automatically sends when accessing the Internet (for instance, the IP address of your Internet connection or the type of browser you are using) in support of the purposes exposed in this notice.
The choices you make regarding the purposes and entities listed in this notice are saved and made available to those entities in the form of digital signals (such as a string of characters). This is necessary in order to enable both this service and those entities to respect such choices.
Non-TCF/GVL Vendors
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