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
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