Facts or Fiction - The Housing Market

Wednesday 30th October 2013

A dictionary definition would state that Propaganda is a form of communication aimed towards influencing the attitude of the community toward some cause or position by presenting only one side of an argument. For Propaganda to work it is usually repeated and dispersed over a wide variety of media in order to create the chosen result in audience attitudes.

Once again we are being told that demand for property is outstripping supply in Dublin and that prices are being pushed higher and higher. Official figures are showing that the rise in prices is as much as 12% this calendar year. It also outlines it’s the fastest rate of growth since 2007 and is entirely driven by the Dublin market, however there appears to be evidence that it is creeping outside the capital.

As much as anybody else I would be looking for signs of improvement in the market but I would also be acutely aware of how easy it is to manipulate a market. For five years, every market commentator has been looking for the smallest sign of a 'green shoot' of economic recovery. As some of the statistics now appear to be confirming.  Any housing market is largely based on sentiment. Sentiment, if powerfully driven by media is largely irrational. As soon as you make decisions based on sentiment, you need to be fully aware of the facts.

Propaganda often presents facts selectively to encourage a particular synthesis, or uses loaded messages to produce an emotional rather than rational response to the information presented.

The way that these latest set of statistics from the Central Statistics Office (CSO) have been presented do exactly that. It’s important to remember that

·         The divergence between Dublin and the rest of the country suggests a market supported by a lack of supply – this will very quickly not be the case

·         An influx of cash buyers currently into Dublin supported by tax exemptions and above average yields is currently compensating for weak mortgage lending.

·         There are well over 100,000 distressed mortgages in this country which need to be dealt with. This figure is rising… fast!

We all want to believe that the market is changing. Heaven knows I spent three years at a desk in Singapore, hoping that each change of direction wasn’t the false dawn that the last one was. Unfortunately those Eureka moments are very few and far between. Talk of property prices increasing is providing some people with the hope that there is a light at the end of the tunnel, an end to their problems. Talk of solutions that revolve around interest only periods or split mortgages that rely almost entirely on a revival in the property market are not solutions at all – they only delay the inevitable.  Similar to putting a sticking plaster on the Niagara Falls on many occasions.

The more worrying point is that we are seeing people in our debt advisory business who are now thinking that their investment portfolio of houses is going to come back to where it was – very simply, this is not going to happen.

Any attempt to boost confidence in the property market, any attempt to sway sentiment with limited observance of the facts, any such propaganda should be treated with the utmost care.  Movement in the property market in Ireland, absolutely and must be welcomed.  Putting the kettle on for prices to recover to where they were…. Well I think most would accept this is more of an illusion than reality.

 

Nick Leeson

A Zombie Nation

 

Wednesday 30th October 2013:

Ending the zombie business crisis plaguing the economy would be a cheap and easy way to boost growth, argued insolvency professionals, urging George Osborne to push banks to take the plunge on bad debts and write down the debt to aid any projected recovery.

Around 50,000 firms are thought to have no hope of repaying their loans in full, and are seen by some as a drag on growth, tying up bank and labour resources unproductively.  It has been reported that there is in excess of 100,000 others with good growth potential but that are struggling in the weak economy.

The time has finally come whereby Banks are having to address this issue either aggressively through the insolvency legislation or through mediation and working with the businesses to achieve an amicable solution. Whichever approach is taken by banks, the emphasis will be on business owners to demonstrate that their business can grow and succeed.

GDP Partnership has been pioneering the mediation route for the last three years and has achieved many successes from both the perspective of the borrower and the bank.

Unfortunately the main cause of a lot of these businesses woes are that they borrowed heavily in the last ten years against assets which have now fallen dramatically in value, and in this part of the world it has largely been on property. This fall in asset value has now caused the borrowing to be unsustainable and significantly impairing their balance sheets. It is this now unsustainable debt which is holding the company back from growing and adding value to the greater economy.  The net result of this is the banks on many occasions are draining the what was once a progressive business, of any cash to prop up the bad loans in the company.  Even more worrying is a trend which has been on-going for the past while is that banks are draining company's of cash to prop up loans that directors of the company took out in their personal names.  This is not right and is suffocating the business and any chance of it growing and in many occasions continuing to trade.
 

An equitable and fair solution to this problem is for both borrower and lender to share some pain. In many cases there is an opportunity for the lender to re-base the loan to an affordable level that the company can service; this level may or may not be equal to the market value of the asset, however to get the bank to play ball it must be a better proposal to the nuclear option namely winding the company up and appointing a receiver to sell the assets. If it can be demonstrated and presented properly that by agreeing to re-base the debt at a figure which is a better option for the bank than the doomsday scenario, then most banks today will listen. 

In the past few months our team have reached a number of agreements with the banks on this basis, which is a very positive development.  However the health warning here is we need the banks to move faster and be more transparent in their dealings.

It makes so much sense to approach the debt problems facing the country with a solutions hat on as opposed to that of a funeral director.  There are now thousands of zombie companies across the nation from Derry to Cork and unless, those in this unfortunate position bring the solutions to the banks, their futures are going to be in serious jeopardy. 
From a banking perspective let’s hope the industry becomes a lot more proactive in this regard and takes a more pragmatic view when it comes to writing down the debt, and letting businesses get back on their feet again.  We need a more medium to long term approach to be adopted for this to happen.

Conor Devine MRICS

Austerity - The Low Hanging Fruit !!

As the dust starts to settle on the seventh austerity budget in five years, the ripple effect of many of these measures will take many months to really hit home. Once again those affected are the most vulnerable and those most in need of help – the low hanging fruit which are easiest to reach and place in the bucket. In a country crippled by debt, there had to have been other options but the elected voice of this country failed again to act.

The last five years has seen one laceration after another inflicted upon the back of those with the most heaviest burden. Has it ever been any different? Hundreds of years ago, the same class of people would have been at the front of the line, cannon fodder for any opposing army. The Generals would have held back in the rear, still enjoying the finery's of life whilst everyone else laid down their life in a bloody mess. Its not much different today, the politicians pontificate in Leinster House, protecting their brethren, flexing their muscle and letting others bear the pain. I'm as far from a socialist as you can imagine but I laugh at modern day politics. Twenty years ago in the City of London, every time an election loomed, every trader and banker was making plans to move location if Labour won as the higher rate of tax was set to rise. They didn't have far to go, Dublin would have been fine as the Labour here is really a sheep in wolf's clothing and wouldn't have been worth bothering about

Yes, the Budget complies with Troika guidelines but in taking from those most in need is not only not addressing the real debt problems in this country, is adding to them. Banks are now remodelling your debt, some may call it restructuring but don't be fooled. Right now its all about compliance, a box ticking exercise to make sure the Troika is on side. Never forget the banks have the security of your home if you have a mortgage. Unless there is meaningful restructuring with an element of write down, you will likely find yourself back in a situation where you can't afford to pay at some time in the future, now very possibly, the very near future. The bank's will not care if they have to move on your house in one, three or five years time, they always have the security of your bricks and mortar. When the dust settles on the 'Troika' era in Ireland, the banks have ticked their boxes and been complicit. I can guarantee two things

The banks, if not already will make huge profits with little recourse to the taxpayer, and secondly

banks will be far more aggressive in the repossession of homes in the future.

That's their way of saying thank you.

Nick Leeson - Partner GDP Partnership

 

A Clean Slate - Debt, The New Cancer

The Insolvency Service of Ireland started taking applications for its new personal insolvency measures this week. I get the impression that there was nobody beating the door down, nor a long queue forming. That’s no surprise but not for the reasons that you hear many commentators making. Nothing affects people quite like debt, historically it has a dark and sinister undertone that the majority of people keep as far away from as possible. The financial tsunami that we have experienced in Ireland means that it is affecting far more people than it ever has done in the past. Many people will find it easier to talk about a lump that they have found somewhere on their body than be willing to talk about their struggles to pay or not pay their bills. Unfortunately that is the way that it has always been.

There is no doubt that the new legislation has been met with consternation, confusion and a certain amount of resentment because of the limitations that it imposes. Equally so there is no questioning that it has spectacularly under-delivered in relation to the most important aspect – bankruptcy. But it still represents real opportunity for those who use it correctly, whether that is by implementing one of the measures or by using the options that are available as a bargaining tool.

 

Unless you learn about the options available, educate and empower yourself to use them where applicable, it is impossible to make informed decisions about your path forward. Debt brings with it huge social and personal cost. Look around you, you can see it everywhere. We cannot control what the government does with budgets and austerity measures to put the country back on track but you can regain control over your personal situation. Granted it will take a little time and any new insolvency legislation does take time to bed in. Look at the United Kingdom, there was the same consternation, confusion and resentment when the legislation was changed ten years ago but now it is an efficient system that allows people to start again. It has it's critics but it works!

Right now Ireland is at the start of that cycle and it may well take five years to bed in, as it did in the United Kingdom but everyone has the right to avail of the legislation and in my opinion, should.

So whilst most commentators will tell you that the new legislation is an unmitigated disaster, with the exception of the bankruptcy component, I'd say that it can work. But if you don't understand it, don't educate yourselves about the options available, the Insolvency Service of Ireland will sit idle. Please don't allow that to happen.

 

Debt is quite simply an affordability issue

•                     If you can afford to pay, you should

•                     If you can't afford to pay, you simply can't and a solution has to be found.

 

With the education that is required in this area, there also needs to be a fundamental shift in the way that people approach mortgage debt and the family home. In part, this is included in the new legislation. Some simple examples, A couple living in a three bedroom house on their own with no children who cannot afford to pay the mortgage should simply downsize to a property that they can afford to pay for. If you are living beyond your means, for your own financial and healthy well being, you have to make a change. Much is being made of protecting the family home at all costs. In many cases this is ridiculous, split mortgages, warehoused sums and 20 year claw backs are a waste of time. Everybody owes it to themselves to achieve a realistic, sustainable solution. All mortgage debt is secured, banks will expect to receive back all of the money that they have secured on your property. Who can blame them? But they as well as you have never experienced the degree of difficulty that individuals are now facing.

 

Rest assured, there is always a solution, Don't Panic.

Author :: Nick Leeson Principal

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