House prices to fall further in Ireland

I don't care how good you are at PR or excel in the use of words, it would be impossible to suggest that I was a leading student of economics. That being said, I have no problem understanding the basics.

The media frenzy over the past ten days regarding the housing recovery in Ireland has been a little disturbing and premature at best.  Day after day we are seeing some journalists, estate agents and economists predicting that we have hit the bottom and that prices are beginning to recover across the country. Let me remind these erstwhile commentators of their first economics lessons. All other things being equal, when demand exceeds supply, prices will rise. When supply exceeds demand, prices will fall. Their most recent reports are suggesting that demand is now equalling supply thereby bottoming out the market and is now set to rise. What rubbish!

I'd suggest that they spend less time in the boutique cafes of Amsterdam and more time telling the truth. Over one hundred and eighty thousand residential and buy to let mortgages are in arrears of over 90 days. A leading treasurer at a UK bank once informed me that when a mortgage is missed by more than two payments, typically 60 days, only 2% of these people ever get their mortgage back on track. That’s a shocking statistic! What is going to happen with all of these buy to let mortgages, they are going to hit the market in the next few months more supply. Of the 100,000 or so residential mortgages in arrears, how many will be restructured and kept from the market. A few will but many borrowers are already returning the keys in advance of having their home repossessed - even more supply. I'm only touching the surface here and not taking into account the hundreds of thousands who have been able to keep paying by the skin of their teeth but are now experiencing real difficulty. There is a serious correction going on at present across both the residential and commercial markets in Ireland and further afield and this will continue.

I have found in my life to date that people generally react better and prefer to be told the truth, however hard that truth may be in 1995, I saw no amount of lawyers who promised me the world. Some promised me imminent release; others suggested I might only spend six months in jail. Many professionals only tell you what they think you want to hear. It’s a great way to make a sale and has worked for them for years.
The fact of the matter in Ireland right now is that the banks are in a particularly bad state. Their balance sheets are massively impaired and the IMF and Central bank only this year have told them to address the situation. This is only now beginning to happen. Make no mistake about it, the debt problem in Ireland is largely property related and as a consequence more houses will be coming to the market as the Banks seek to address their balance sheet deficiencies.

Every week in our Dublin office we are seeing more and more people come through the door that have significant borrowings in a serious state of negative equity looking for solutions.  One solution would be for the banks to offer all of their customers a new 15 year facility at a repayment level that works for the borrower, and hopefully ride out this storm over the next five or six years.  Dare I say if this was an option for people the borrowers would snap their hands off.  The very frustrating nature of the country’s current problems is that people borrowed long term money and because there has been a material change in the markets, the banks have called the loans in now, which has completely distorted the economy and left the country on life support.

Over the next twelve to twenty four months there will be thousands of houses come to the market across the country and my view is that prices will soften further up to 20%.  In fact Moody’s have already stated in March of this year that this is what they expect to happen in Ireland.   I agree that in the Dublin area there has been good activity in the past twelve months and this has to be welcomed, as everyone wants to see an active housing market; however with what’s around the corner, I would be very cautious with the optimism and words like recovery possibly premature.

Go and speak to people in Galway, Sligo, Cork, and Kildare and throughout the country and explain to them that the housing market is in recovery.  A client of ours only last week sold his beautiful detached home in Galway for €210,000.  The mortgage on the property was €575,000 – does this mean the market is in recovery – depends on your interpretation I suppose, but I certainly wouldn’t be cracking open the champagne if I was in that position.  As the banks are now gearing up to dispose of the stock that is impairing their balance sheets, let’s see how this one plays out, however I would urge caution across the board in the short to medium term.

 

Nick Leeson - GDP Partnership

www.gdpni.ie

A recovery in Ireland..... Really??

Whereever you look at the moment there is conflicting evidence in the economic recovery of Ireland. House prices we are told are showing some signs of recovery, although this is largely based in the prime Dublin locations yet the country as a whole is back in recession. It's very easy to put a positive spin on stories and bring the small positive to the centre of an overwhelmingly negative situation. Economists have been doing it for decades, some like David McWilliams with a touch of flair and accuracy but the majority of them with about as much success as me predicting the future value of the Nikkei 225. They are often aided and abetted by certain strands of the media that are looking for a good story, almost at any costs.

 Personally I think people respond better to being told the truth rather than being led down the garden path. It is easy to be fooled though. There is a lot of property being sold at the moment, typically it is large lot sales to either very wealthy individuals or large funds that are specifically set up to look for distressed assets that can be turned around. Even financial traders from the bond markets are getting involved, buying a loan book from one of the newly nationalised banks often has a far greater return than anything they can access in their own trading markets. The debt is considered as good as the government and for some there is a profitable play to be had. Whilst the state of the economy is part of the information used to make a decision, the focus is solely on how much money can be made.

 All markets are efficient. The stock market is an exceptionally efficient vehicle. It has bull runs as it races higher and bear stages as it collapses back to normally. It can be over bought or over sold but is always waiting for a correction back to normal levels. The property market is no different, the depth and length of the correction is directly correlated to the extent to which it was overbought. Japan, unfortunately became the poster child for an economy and property market that became the most overheated of modern times. The decades that followed saw deflation, stagnation, currency speculation and consistent economic uncertainty. It is only now, over twenty years on that they are truly seeing signs of turning the corner.

 Why would Ireland be any different. Its a far smaller nation and the correction phase should be easier but there is no way that we are at the bottom yet. The investors mentioned above would agree, they're not interested in picking bottoms in the market, they're only interested in looking at yields versus the cost of carry of the money and what can be achieved elsewhere. If a purchase ticks all of those boxes it will be done, if not it simply won't happen.

There are three phenomenons still to hit the Irish property market, all with negative effect.  Many of the buy to let investments that are in negative equity, all the consensual sales that distressed borrowers have to engage in and all the repossessions that are starting to increase in numbers have to come to the market. It is as simple a case of supply and demand that you will ever see. As more residential property makes its way onto the market, the prices have to fall. Interestingly I have the benefit of working in Northern Ireland over the past twelve months and the observations I would have is what has occurred in that market is now happening in the Republic.

I don't know what its like where you live but in Galway the 'For Sale' signs are popping up everywhere. Gone are the dilapidated signs that have been there for the last four years, mildewed and overgrown with weeds. The new signs are all bold colours and sparkling clean and announcing that there is business to be done. But its not nice business is it. Most are distressed sales, properties where receivers have been appointed or a series of investments that have seen the borrower lose almost everything. It certainly goes against the psyche of the Irish nation. Repossessions have never really been part of the home-owning process but they are now a real and present danger. One hundred and sixty homes were repossessed in the first three months of this year. On its own it doesn't seem like too big a number but its a significant increase on previous months. Add in those properties that have been sold with the consent of the borrower and lender and the number would be significantly higher.

The only ones really benefiting are the estate agents, they had a great time during the boom and for those who survived the initial years of the gloom, its not too bad now either! They provided you with mortgage solutions when you were looking to buy the property. Now that you are down on your knees they are looking to find you a buyer for that very same house at a fraction of the price. It was and is a fee fest, whether you are a solicitor, accountant, insolvency practitioner or estate agent, you get paid whatever the situation. The very real danger is that they are not always acting as aggressively as they should in the interest of those in difficulty. All have a huge interest in staying 'on side' with the banks, after all that is where the majority of their work is coming and will continue to come from for the next five years in this country.

The new Insolvency legislation will advance this sale process further but only if bought into by the banks will we see a re-basing of household debt in Ireland. The problem though is that the banks will retain the say in most applications to the courts and unless they are coerced into the process by the regulators or Central Bank, it will not work. For now though, with repossessions on the increase, it is more important than ever that you stay engaged with your lender and seek good independent advice.  The idea of holding onto your property portfolio if it is in negative equity, simply will not be allowed to happen.  As time moves on and interest rates rise which will happen at some point, the pain threshold will increase yet again – not a nice thought really for everyone.

Banks and Provisions - One huge Black hole!

Over the past few weeks its become clearly obvious that many of our banks in Ireland are really struggling to work out how to deal with the ongoing property market collapse and banking crisis. Most at this stage have employed their own internal property, planning and accountancy professionals to gain a better understanding of where things are possibly heading, however their overall plan seems more and more flawed as each day passes.

 The reality in Ireland is that there is no bank lending going on, there won't be any lending in the short to medium term and banks are getting smaller, closing down branches all over the place. What does that tell us ? Well one thing it does tell us is that money is scarce and lending a thing of the past.

Today in Ireland apart from one of the banks who have told everyone they are exiting the country, and are taking a very commercial position regarding winding down their book, the rest are really struggling to work out how best to deal with the problems they face. Most are obsessed with putting their customers who on many occasions they lent the money willy nilly in years gone by through hoop after hoop after hoop. A trend of very late is that some of the banks are refusing to take offers which have been made on the properties, with the reason being, -- we have that on our books at a higher value!!!! So let me get to the point on that very note.

 

Provisions.... "A balance sheet item representing funds set aside by the bank to pay for losses that are anticipated to occur in the future. The actual losses for the earmarked funds have not yet occurred, but the general provisions account is counted as an asset on the balance sheet. For banks, a general provision is considered to be supplementary capital under the first Basel Accord." 

So generally banks are minded to not sell any property that does not fall within their provision threshold which is understandable - therein lies the problem and big problem I would suggest.  If an offer comes in lower than what the bank have provisioned for then they are inclined to knock back the offers. Very simply if the banks are doing their jobs correctly and valuations accurate, then the provisions on the loans would all in line with where the market really is, so when the customer tries to sell the property on the open market and an offer comes in on the property, the bank would be inclined to accept the bid right? Wrong actually.  The major issue affecting banks in Ireland today and becoming more and more evident is that the banks are not strong enough to take the losses that are heading their direction as a result of the property collapse and they're own provisions on the toxic loans are ambitious to say the least.  This is a huge problem and as the property market continues to fall for different reasons, the problems for the banks will continue to intensify  - in fact its the banks worst nightmare.  Recently the Financial Times reported that the British banks are looking at a £40billion black hole in their balance sheers  fro this very reason and to be honest, its looking more likely that there is a significant black hole on the balance sheets of the Irish banks - its just no one knows the extent of it which is worrying!

In 1998 I qualified in Estate Management and the definition of market value back then was; "

 

Market value is the price at which an asset would trade in a competitive auction setting price after an accepted marketing period."....  15 years later and this definition remains the same - in fact, It has never changed. So when a banker tells me that they are not prepared to accept the offer for an asset which has been on the market and marketed fully for an acceptable period of time, I know that they simply have not provisioned properly for that property loan.  The issue then being that in 18 months time the market value in a depressed marketplace will be less than that of today- a never ending spiral.

You see I understand property, I have been qualified for quite some time, I understand the markets and understand the risks. The issue is the people you speak to in the banks often do not have the same level of understanding and the decisions being made at credit level often do not make any commercial sense and it seems that they are gambling on the market returning to some kind of normality or in some cases it would appear they haven't really given their decision much thought at all.

The property market will continue to flounder along the seabed in Ireland for the next 5-10 years, in fact until credit returns.  Banks need to smell the coffee and sort themselves out, get their provisions in order and stop trying to dictate to the market what Market value is. If they continue on their current policy they're will only be one outcome for them all - more pain and potentially a fatal end to their business affairs on this island. 

 

 Conor Devine MRICS