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Tuesday 5 December 2023 Dublin: 5°C
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Column The housing market is a mess, so we must decide – will we be charitable or fair?

Incumbent property owners receive special privileges in Ireland – meaning some mortgagors will walk out of this crisis with the same assets they walked into it with, despite not paying for them, writes Karl Deeter.

MANY DEVELOPERS, home owners and investors will walk out of this crisis with the same assets they walked into it with, despite not paying for them. Why? Because being the incumbent property owner receives special privileges in Ireland .

Meanwhile, renters trying to buy and avoid increasing rents are at a disadvantage to existing owners – who are highly protected because at some stage they paid a deposit on a property rather than a deposit to a landlord. There is less sympathy for evicted renters than evicted mortgagors; if a tenant didn’t pay for two years people might, rightly, wonder what the problem was with a landlord who allowed this situation to arise.

This enables one class to sit tight while locking out another class. It doesn’t serve the interest of the innocent bystanders who didn’t buy into it all, and it doesn’t serve the interest of families who want permanent tenure and have to pay over the odds because of it.

Increased rent costs shouldn’t be falling on renters who are trying to buy but can’t while buyers who can’t pay avoid this. The argument that we’d have to house people whose homes get repossessed is also false: they can rent too.

The cost

What is almost never mentioned is the cost. We live in a world where numbers still matter, but the commentators often only ever mention emotions, ideals and political statements designed to gain support – rarely do numbers ever come into play, but that doesn’t mean they don’t matter.

The ‘split mortgage’, heralded as an excellent cure, is one such example. In the Bank of Ireland version, you pay interest on the whole loan and only capital on one portion; it’s the most aggressive so we’ll use it as the benchmark for ‘how to get maximum return’.

Remember, anything short of maximum return from a State-owned bank equates to a transfer from the bank to the beneficiary, which in this instance is the split-mortgage holder. There’s nothing particularly wrong with that, but we should still measure it and be aware of the cost.

Recently AIB said they’d split a mortgage, write off some debt and do the warehoused debt at zero interest. They take a €300,000 mortgage, split it down to €200,000 (the market value) then knock 20 per cent off that (€40,000 forgiven), €100,000 sits interest free then there is an additional circa €10,000 bonus written off if you keep paying.

It sounds great, and if you are on a tracker you get to keep that too.

What does this cost the taxpayer?

What doesn’t sound so great is the maths of taxpayer-funded costs. If there are 20 years remaining on the mortgage term, the non-accrued interest (taking a rate of 4 per cent) will tally up to about €80,000 the bank won’t receive.

The value of money in the future is worth less than the same amount today. If the bank gets money back in 20 years, we have to look at what that is worth in today’s terms or the ‘present value’. If warehoused €100,000 which drops to €90k if payments are made is expressed in today’s terms, you are looking at getting back a value of about €41,000 which is like €59,000 of debt forgiveness.

Again, great for the borrower. Add the two and the total benefit is in the region of about €139,000 before the write-down of €40,000 totalling €179,000.

Using a different metric of the interest received in a split versus what would have been received under the original loan, you come up with a combined figure close to €90,000 (then add on that €40,000 write-down) which at €130,000 is still impressive. The cash-flow benefit to the individual is around €140,000.

The question is simple, why do we see this as a good thing? Why aren’t we instead giving €130,000 or more to people with no home so they can buy a house? Who is best served by this and at a cost to whom? Why not cut out the administration and just hand people in arrears €130,000?

The complication exists to hide something, the granting of benefits to some at the expense of others.

Our tax will not be returned by loss-making banks

People who never got involved will have fewer goods and services, as our tax will not be returned by loss-making banks who seem happy to book losses now that they aren’t answering to shareholders as they have the backing of the State – hence BOI aren’t doing this.

There is nothing inherently wrong with wanting people to keep a property they took a loan out on, but at a cost (the one written about in the paper being the example here) of somewhere between €130,000 – €180,000 is that fair? Is it good economics?

It’s good ideology and spin, as is any story where borrower wins and bank loses (except for when that borrower is a developer), but one can’t help but think the numbers and costs were intentionally left out of all reportage.

There is a counterargument that the cost of repossessing is more, but that often isn’t the case and the realisation of capital now means banks could re-lend that money into the productive economy rather than locking it away, a move that will reduce credit availability – which is what what split-loans and term extensions effectively do.

It is nigh-impossible to have a sincere debate about this without the screeching hoards on every side claiming ‘foul’ of one sort or another, but if there is to be any truth at all in the process then we have to consider the costs.

Ultimately, if we are all to bear them, we should know what it is that we’re paying for while having a keen idea of the winners and losers – and perhaps most importantly to remember that we are making victims of innocent bystanders to feed property owners’ self-interest. Are we to be charitable or fair?

Karl Deeter is a founder and Compliance Manager at Irish Mortgage Brokers in Dublin 2. His expertise is in credit, regulation and financial advice. Follow @irishmortgages on Twitter.

Damien Kiberd: A new property bubble – but not as we know it

Column: Why are we still in denial about Ireland’s housing crisis?

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