The Property Bubble is not Going To Last in Ireland

Piece written by Dan White -- Sunday Independent

 

Don't be lulled by talk of a recovery in the housing market - it's a facade, much like Potemkin's villages.  The 8% rise in average house prices over the past 12 months revealed by the CSO last week needs to be taken with a very large pinch of salt.
With the banks cutting back on mortgage lending yet again and only tiny numbers of properties changing hands, any sustained recovery in the housing market is still a long way off.

Last Tuesday , the CSO published its latest house price index. Not surprisingly, it was the CSO's assertion that average Dublin house prices had risen by 8% in the 12 months to July that attracted the most attention. While this was good news for anyone trying to sell a house or apartment in the capital the news from the rest of the country was not so good, with average prices outside of Dublin falling by 1.5% over the same period.

While, after more than five years of falling prices , any bit of good news from the housing market is welcome, it might not be a good idea to declare the property price crash over just yet. For a start, the CSO house price index only includes properties that were bought with a mortgage. While virtually all homes were purchased with a mortgage during the boom years, this is no longer the case.

Figures published by the Irish Banking Federation on Thursday revealed that while 2,852 mortgages were drawn down during the second quarter of 2013, 5,642 houses and apartments changed hands. In other words, cash transactions now account for just under half of all purchases. Unfortunately, these cash transaction are not being captured by the CSO figures. However, going on the evidence of auctions of repossessed properties where the majority of deals are for cash, it would appear that prices are down by 60% or more rather than the 50% indicated by the CSO data. Doubts about the reliability of the CSO figures are only part of the problem. Even if every house was being purchased with the aid of a mortgage, a far bigger obstacle to gauging the true state of the housing market is the fact that transaction volumes, either with or without a mortgage, have virtually dried up.

According to the IBF, just over 10,000 houses and apartments changed hands in the first half of this year. While this was up more than 10% on the total for the first half of 2012, it would be a brave man who would bet on the increase being sustained into the second half of this year. The number of housing transactions in the second half of 2012 - more than 15,000 - was artificially swollen by a number of tax breaks for first-time buyers that expired at the end of last December.

Far more likely is that the number of houses and apartments changing hands this year will be somewhere between the 18,000 recorded in 2011 and the 24,000 for last year, probably not much more than 20,000. What this means is that, at current levels of activity, each one of Ireland's almost two million houses and apartments can expect to change hands once every 100 years. That's clearly not a sustainable situation. And why have transaction volumes evaporated to virtually nothing? Blame the banks. Despite expensive advertising and PR campaigns designed to get us to believe the opposite, the brutal truth is that even based on the IBF's own figures, mortgage lending is still falling, down another 1% to €518m in the second quarter of 2013 compared to the same period last year. The IBF's claims that mortgage lending was up quarter-on-quarter are completely irrelevant, not to say disingenuous, as the first quarter is traditionally by far the quietest time of the year for the housing market.

So far this year the banks have approved €850m of new mortgages. Baring a sudden and unexpected increase, it is hard to see new mortgage lending for the full year going much over €2bn, a 95% reduction on the €40bn lent in the peak year of 2006. given the reluctance of the Irish banks to lend, even to good customers, and the obscene interest margins they are gouging from their variable rate borrowers, it hardly comes as any  surprise that a number of overseas banks, most notably the South African lender Investec, are looking at entering the Irish mortgage market. So no credit and tiny transaction volumes on the one hand, but an apparent price recovery, at least in the better Dublin suburbs, on the other. What the blazes is really going on in the Irish housing market?

Looking at the current situation, it's hard not to be reminded of 18th Century Russian statesman Prince Grigory Potemkin, chief minister and sometime lover of Empress Catherine the Great. Whenever the Empress got it into her head to journey through her vast territories, Prince Potemkin would travel a few days ahead of her constructing "villages" that were in reality no more than facades, populated by suspiciously well-dressed and fed "villagers" thus ensuring Her Majesty  rapturous reception wherever she went. While the Russians may have had Potemkin villages with an attractive facade concealing the poverty that lay behind, we in Ireland have a Potemkin property market, where the facade of an apparent increase in prices conceals the reality of tiny volumes and virtually no mortgage credit that still stands in the way of any sustained recovery.

A NEW DAWN OR MORE OF THE SAME - DEBT IN IRELAND

Most people are aware at this stage that the new insolvency laws are about to come into play in Ireland in the next few weeks.  The idea behind the new system is that the options for debtors within the scheme will allow households to gain control of their finances and deal with the uncontrollable debt problem in society.  Ireland historically over the last generation has had a very punitive system in place in terms of dealing with insolvency matters, and although some would view the new rules as some way off a solution, I suppose it’s a step in the right direction.

Our business GDP partnership set up a debt advisory team in 2010 and we have been very successful with this model in Northern Ireland over the last few years; typically bringing solutions on behalf of borrowers to creditors, mostly institutions.  Although the banks are particularly difficult to deal with we would have seen a seismic shift in their attitudes along the course of the last few years.  The insolvency system in the UK works quite well, and generally if Mediation by our team is hitting a brick wall then our clients will avail of the options at their disposal under the insolvency laws. The huge difference between the insolvency laws In the North is that they have been working more than twenty years – the huge challenge facing the South of Ireland is that a completely new system is just about to be introduced.  Having spent some time studying the options available to deal with the debt overhang, it’s very clear in my view, that in the short to medium term there will be organised chaos in the weeks and months ahead.  Over the past few months I have spoken with a number of legal, accountancy and insolvency firms in Republic of Ireland, and the feedback on the new rules is overwhelmingly negative.  Under the new system there will be two key players 1) Approved Intermediary and 2) Professional Insolvency Practitioner.  The AI deals with the lower end unsecured debt and the PIP will be dealing with the secured and unsecured debt.  Last week the ISI handed out 14 PIP licences to the first batch of professionals and the idea is that over the next few months, more PIPs will get their licence to practice.  The success of this new system in my mind lies with the attitudes of the banks in Ireland.  Very simply if they do not play ball and accept the proposals put forward by the borrowers, the system will spectacularly fail.  This is at the heart of my concerns and is a very real possibility.  In my experience the bank will not want to be dragged into a personal insolvency arrangement and worse bankruptcy case.  They will want to get their pound of flesh out of their customer on a one to one basis. This is power for the course in Northern Ireland and will be duplicated in the South of the country.  It’s very straight forward from my point of view.  If the banks do not pay ball then they need to be held accountable by the Central bank who is telling anyone who wants to listen that the banks will be working positively with the new rules. I am not so sure about this given my experience of the past few years.

The key for me in all of these things is education.  Education for the borrower around the options, banks policy and devising a plan that is best for them and their family.  Make no mistake about it; the island of Ireland has way too much debt, from a sovereign, SME and personal point of view.  We will not recover and move forward as a nation to the debt overhang is dealt with.  For me this will take a minimum of five years, and unless the banks in the country toe the line and start being proactive and more transparent in how they run their business, the pain will continue for some time yet.  I will be watching with interest how the next few months go in terms of the new framework now in place.

Conor Devine MRICS

Banks don't want the keys back!!

Accounts recently filed by AIB’s mortgage unit include details about the health of the bank's mortgage lending and their efforts to restore normality, make for very grim reading. What the accounts show is that repossessing property is not a solution for either the Bank or Borrower. In the last year AIB have forcibly repossessed and sold 17 properties for €2 million with an associated debt of approximately €6 million, this resulted in a LOSS of €4 million to the Bank. AIB will now look to the borrowers for repayment of this €4 million loss.  The chances of them retrieving all of the shortfall…well, I’d say there is more chance of Joe Brolly getting the freedom of County Tyrone!!!

 GDP Partnership has been pioneering an alternative method to forced repossessions for the last 4 years in Northern Ireland and more recently in the Republic of Ireland. This is the Consensual Sale method which results in a greater return to the Bank on the sale of the property and also maximum debt reduction for the borrower. The Consensual Sales method is where the property is sold privately by the borrower on the open market to achieve the best possible price, all with the blessing of the bank. As we have all come to know when word gets out that a property is being sold by the bank its value typically plummets at times up to 50%.

The consensual sale process mitigates this risk, which clearly is better for the bank and borrower.  The other positive for the bank is that they do not have to instruct their lawyers or receivers saving money and time.  In conclusion it’s the best way forward on many occasions.

The method requires both bank and borrower to work together in an open, willing and transparent manner. GDP Partnership has been working to facilitate this relationship between bank and borrower through our mediation services. Our experience has proven that debts issues can be successfully and quickly resolved to the economic benefit of borrower and bank through the mediation and consensual sale process.

Over the next few months, thousands of properties will be coming to the open market as the banks continue with the very difficult job of cleaning up their balance sheets. It would be our view that we will see a more consensual approach being applied to the sales process and less fixed charge receiver appointments.

Conor Devine MRICS – Principal