Monday, 29 July 2013

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

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