This is a selection of my MoneyComments on the property market in 2007
ST Moneycomment – Jan 31/07
HAUGHEY’S LEGACY: NOW WE ALL SPEND LIKE A CHARLIE
Charlie Haughey’s true legacy to the Irish people is surely the example he gave us of how rewarding it is to spend beyond one’s means. His family may hope he will be treated more kindly by future historians, but I think he’s already become the pin-up boy for thousands as the wildest spender of them all.
In his case, he achieved his lavish lifestyle through tax-free handouts from his business cronies, by intimidating spineless bank managers and by outright theft, but that doesn’t diminish for a second how seductive and inspirational was that lifestyle.
It may have taken us 30 years longer than Charlie, but today, nearly everyone with a half decent job and a modest mortgage can draw down a ‘mere’ €100,000 (as someone recently described it to me) of equity in their home and spend like a Haughey.
As our current Taoiseach subsequently discovered, after Charlie filled in the blank cheques that Bertie signed for him back in the ‘80s, you can buy a lot of bling with other people’s money (or OPM, as it is also known.) Today, it buys factory girls and bankers alike widescreen tellies, shopping weekends in New York, helicopter rides with the mistress, and if not the island itself, plenty of visits to one. You could even have a portrait of yourself on a horse painted for €100K and still have change left over.
Of course, the old crook didn’t have to pay back anywhere near the €45 million of OPM that he took. So if the Irish consumer is to learn anything from Charlie’s example, it is to cultivate a circle of rich businessmen before you get too fond of Charvet shirts.
ST Moneycomment – Feb 3/07
DELUSIONAL PUNTERS KEEP FEEDING THE BUBBLE
The level of complacency in this country about personal debt is mind-boggling: a new homebuyer survey shows that 45% of the people queried said they would happily pay higher mortgage interest rates if it meant they wouldn’t have to save for a deposit. That figure rose to 50% for first time buyers and those in Dublin.
The respondents didn’t say how much extra interest they’d be willing to pay, but let’s assume it would be just 0.5% extra, or today, typically 5.5% instead of 5% interest. In the old days when deposits were mandatory and 100% loans unknown, you’d be expected to put c€30,000 down if you were buying a €300,000 property. At an interest rate of 5%, spread over 30 years (a typical term today) you could expect to pay gross monthly payments of €1,430 and a total repayment of €512,200.
By happily paying 5.5% on a €300,000 mortgage, where no down payment has been made, the same person now has gross monthly bill of €1,680 and a total repayment over 30 years of €604,200. That chance to avoid paying a 10% down payment will cost €82,000. This example assumes that the rate stays at just 5.5% forever.
Unfortunately, there’s no shortage of buyers and lenders into this kind of monumental stupidity. And despite what the banks say, the proper stress-testing of loans, especially with first-time buyers, practically never happens. Nine out of
New buyers I meet say that not only are they never told the total cost of their loan, but they are never provided with a written schedule of rising rates and repayments to look at to help them determine whether they could afford their new home if rates were to rise by a further one or two percentage points. The suggestion now is that the banks are so sure that such an eventuality will never happen again – that is, that home interest rates could never reach 6% or 7% - that they are justified in not bothering with such rigorous tests.
One hundred percent loans are unsuitable for first time buyers. So are interest only loans and extended repayment terms, especially when the property market has been so overheated. Now that price increases have fallen back and interest rates and inflation is rising, there is a genuine danger that the person who is buying, or recently bought an apartment or house on such terms risks negative equity.
The demand for the lowest repayment loan possible is rising according to Genworth Financial, which undertook this latest debt study. Half those surveyed have taken out 35 and 40 year loans and seven out of 10 said their mortgage was somewhat of a burden. One in 10 said it was a heavy burden.
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MORTGAGE DEFAULTS? “IT COULD NEVER HAPPEN HERE”
Coincidentally last week, the Permanent TSB, one of the biggest mortgage lenders, announced that it is going into the sub-prime lending business with investment bank Merrill Lynch. It’s all part of the huge global mortgage securitisation market in which lenders like the Permanent TSB sell big bundles of mortgages in the form of bonds which are then bought by pension funds, hedge funds and other institutions.
The new company is called Springboard Mortgages but they don’t like the term ‘sub-prime’. Instead they call their products, “specialist” loans, a nice euphemism for higher than average cost debt for people with poor or irregular credit records who otherwise wouldn’t qualify for a more typical loan, even the 100%, interest only, 40 year variety.
A number of US sub-prime lenders have gone bust in the past couple of weeks.
There’s even a web-site (www.mortgageimplode.com) devoted to tracking these lenders which shows that 11 of the other top 25 such providers are either shutting down offices, laying off staff, are up for sale, have already been taken over or are involved in major lawsuits. And it’s all due to the end of the US property bubble and the inability of sub-prime borrowers – clearly at the bottom of the specialty lending food chain – to repay their risky loans.
“While the failures [of the sub-prime lenders] so far are small in number,” reported the New York Times on January 26th, “some industry officials are concerned that they could be the first in a wave. The subprime sector, which produced loans worth more than $500 billion in the first nine months of last year, could shrink significantly.”
Wall Street firms, explained the NYT, “were attracted to such lenders because they helped feed a pipeline of securities backed by the mortgages, a market bigger than the one for United States Treasury bonds and notes.”
Merrill Lynch, the Permo’s partner in this new Irish venture, “securitized $67.8 billion in residential mortgages in the first nine months of 2006, up 58.4 percent from the period a year earlier. But, says the report, “an increasing number of borrowers are defaulting on subprime loans earlier now than they did a year ago, often within six months of having taken the loan out, shaking Wall Street’s confidence in its subprime partners.”
It could never happen here, of course.
STMoneycomment- March 5/07
MORTGAGE INNOVATION GIVES ME A SINKING FEELING
When I hear about innovation in the mortgage and property markets, I get a sinking feeling. For example, I don’t think 100% mortgages, interest-only or 35 year loans are necessarily a very good idea, especially not for first-time buyers.
And while holiday leasebacks in France (and now in other countries) may have been the flavour of the year in 2006, the ‘guaranteed’ rental returns and ‘convenient’ management package they offer come at too high a price for my liking.
Anyone who really wants a holiday home or apartment in France should check out the market with the assistance of a good, local estate agent and then agree a management and service fee with them. You don’t have to tie up your money for an agreed nine to eleven years, pay back any waived VAT bills if you sell before then, and you are not restricted to buying in ‘qualifying’ leaseback destinations that the French government has licensed.
Anyway, the latest twist on this holiday home investment market is the condo-hotel, which is gaining popularity in the US, especially in popular beach resorts in Florida. The owner buys a room or suite in a hotel which they can book at any time for themselves while also enjoying a share of any income when it is rented to other guests.
The best buys, say property analysts, are in top grade hotels in top resorts with projected high occupancy rates, but it is a very new market and investors are warned that there is no re-sale track record yet.
No doubt this idea has already spread to popular Mediterranean resorts, but I can only imagine how hideously complicated the maintenance and management contracts would have to be to ensure the success of such schemes, not to mention the exit clause.
Given our insatiable desire for overseas property, condo-hotels will undoubtedly appeal to Irish holiday-makers cum speculators who prefer staying in hotels to self-catering villas, and who would prefer to pay a small, rather than vast fortune for their very own piece of the Algarve or Riviera.
No doubt these promoters will be making an appearance at a property show near you soon, if they haven’t already.
[Some well known Irish people subsequently lost money in the ‘invest-in-a-room’ scheme at the Powerscourt RitzCarlton Hotel]
ST MoneyComment – March 18/07
IT WILL ALL END IN TEARS HERE TOO
Anyone who is determined to buy a house they cannot afford should have no trouble raising a loan – there are now five sub-prime lenders who can’t wait to take your money. But this may not always be the situation.
The news from the United States about the meltdown of the sub-prime mortgage market – and the effect it has had on global markets - should be a timely warning to borrowers and lenders here that when interest rates start to bite, and house prices soften, it’s bound to end in tears.
A couple of months ago I noted in this column that a dozen or so US sub-prime lending banks had gone bust or were letting staff go. As of last Tuesday that number had risen to 36, the biggest of which, New Century Financial with a staff of 7,000, had its trading on the New York stock exchange suspended after the Dow fell 2% on that day alone, in response to the huge losses New Century was declaring.
The sub-prime market is in its infancy here with only a few lenders, the latest being Permanent TSB and the SHIP subsidiary Nua, offering higher cost loans to people with poor credit records. This market is already worth €1 billion and could grow to 10% of the €40 billion Irish mortgage market say its promoters, but if the US market, and increasingly the UK one is anything to go by, there is also a far greater chance of default risk than anyone predicted.
Sub-prime lending is big business because it can create big profits if everything goes to plan and borrowers keep meeting their monthly payments. But I would have thought it doesn’t take a financial genius to work out that people with bad credit records, who borrow huge sums at higher than average interest rates, are going to find it harder than the more prudent borrower to pay their bills when rates go even higher.
One of the consequences of a global property bubble is that lenders and borrowers leave their brains at home when they have their sights on even the most modest three-bedroomed, suburban semi-d.
The time-delay factor between here and the US means that our version of the sub-prime story will, I suspect, probably happen sometime in 2008. It won’t be a pretty sight.
STMoneyComment – April 22/07
PROPERTY INDUSTRY DENIES THE BUBBLE HAS MET ITS PIN
I was wondering how long it would take for the ‘shoot the messenger’ reaction to happen after last Monday night’s PrimeTime report [with Richard Curran] on the possibility of a property crash here.
The ‘what if’ scenario was left to the closing minutes of the programme, which ended at 10.45pm, but at 9.04am the next morning my inbox had received the first angry denial. “Last night’s programme should be dismissed as fiction…a soft landing for the Irish housing market is still possible and is the most likely scenario,” insists Marie Hunt, of CB Richard Ellis, who mainly sell commercial property.
Ms Hunt said “all the fundamentals that have been supporting the Irish housing market for the last decade are still intact but the pace of buying activity has essentially halved as a result of nervousness and uncertainty.” The “unfounded doomsday scenarios …will only fuel this negativity further.”
Aside from the irritating music, I thought the programme pretty much encapsulated what every price, employment, productivity and inflation survey has been revealing for the past year: that when all the features that create an asset bubble begin to unwind, prices fall.
In our case the ‘perfect storm’ of conditions that created a bubble far bigger in Ireland than the American, US or Spanish ones, included not just the excess cash that central banks have been artificially pumping out since 2001 when the dot-com bubble crashed, but historically low interest rates as well. Coming as these did with lower personal and corporate tax rates here, record levels of immigration and high demand, there was nowhere for property prices to go but up.
Lending standards inevitably fall during credit booms, and Ms Hunt is talking through her hat when she criticises the programme for suggesting that “the ‘negative equity’ scenario that occurred in the late 1980’s in the UK could occur in Ireland considering that Irish lending institutions are working under the remit of the Central Bank and continue to stress-test potential borrowers to 2% above ECB rates.”
The Central Bank could do nothing for years but wring its collective hands at the sight of banks shovelling money at buyers with wholly inadequate incomes, who could barely pay their credit card bills let alone get a downpayment together without parental assistance. Why else does she think the 100%, 40 year, interest only loan is such a big hit with first time buyers?
I don’t know if there will be a property crash in 2008 or a soft landing. But contrary to what the industry believes about ‘negative sentiment’ causing the end of the boom, the history of asset bubbles suggests that there is going to be a lot of pain before the current cycle ends and starts all over again.
The last thing the government and the property industry want is for us to batten down the hatches. But there are two Ireland’s to contend with: the one where people have lots of equity in their homes, very little debt and substantial savings. And the other, younger Ireland with no equity, no savings, lots of debt and no job security unless they work for the public service.
The property market will recover its glory days and people will spend with abandon again when lots of high value jobs are created, exports surge and the cost of borrowing becomes cheap again. It will help if the US economy does not go into recession.
And that’s going to take more than wishful thinking by people who rake in big commissions flogging bricks and mortar for a living.
ST MoneyComment – May 6, 2007
LABOUR CAN’T RESIST MEDDLING …EVEN AS BUBBLE COLLAPSES
“A new approach to housing policy is needed,” says the Labour Party manifesto. And they are absolutely right, but just not their approach.
Under their new ‘Begin to Buy’ scheme, which promises to enable “every working household…to begin to buy a home” in their own community a young Dublin couple, for example, both earning the average industrial wage and with mortgage approval of just €250,000, would seek the approval of their local housing authority to buy a property worth €400,000. The housing authority then guarantees the balance of the loan by taking a proportionate stake in the property. The house-hunter undertakes a minimum quarter stake in the home.” The couple then repay their approved mortgage of €250,000 “while the housing authority will also finance the balance, through a new Housing Assistance Fund which will be established through the National Treasury Management Agency.”
Once the house is secure, it is up to the occupant to increase their share by buying more of it from their partner, the housing authority, or they can sell their share and even, says the Labour Party, move onto their next house under the aegis of this same scheme “if necessary”.
Since that’s all the information about this scheme in the manifesto, you could be a long time chatting on the doorstep before you find anyone to flesh out how much this plan will cost the taxpayer.
But how will this scheme be funded? With current tax expenditure which the NTMA already uses to pay off the national debt and fund future pensions? Or with new taxes or local authority charges? On what grounds will the applicants qualify? Income only? Social need?
They way I see it, a young TCD graduate couple, or example, earning €33,000 each from their first jobs are less likely to be able to buy a home in their family neighbourhood of Dalkey than the young couple earning the same wages, but eager to find a home in their Darndale neighbourhood. Will they both be treated equally by Pat Rabbitte’s new housing agency?
A big part of the housing market mess in this country is already down to years of relentless government meddling in property in the form of tax incentives and relief. That, and relinquishing control of interest rates when we joined the euro.
How anyone thinks that the affordability problem would be made anything other than worse by local authorities getting directly involved in the subsidized buying and selling of starter-homes is mind-boggling. It would only distort the true price of the property, and maybe incentivise a few developers and sellers to hike up prices, though I doubt if anything except a reverse in interest rates will stop the market’s day of reckoning.
STMoneyComment – Nov 19/07
SMUG GOGGIN THINKS HE’S DODGED A FINANCIAL BULLET
The only financial ‘bullet’ of any merit that we have dodged in recent years, is the one with ‘sub-prime’ written on it, and even then, only because there was insufficient time for the sub-prime lenders and brokers to sell them in any great quantity before the market blew up in their faces.
Anyone who thinks we wouldn’t have also had our own little toxic brew of bad mortgages – given a chance – hasn’t been paying enough attention to the size of so-called ‘prime’ personal debt that we’ve marked up in the last six or seven years.
I’m sure Bank of Ireland’s chief executive Brian Goggin knows just how lucky he is – he certainly sounded smug enough last Wednesday at the announcement of his billion euro plus profit results for the past six months.
He was beside himself on RTE’s Morning Ireland, gushing about the strength of his bank and his optimism for the economy and the housing market, if not for 2008, then in 2009, once we get over this little “modest correction” in property prices.
Even the huge increase in bad retail loans in the past six months, from €33 million to €57 million, doesn’t seem to be alarming the optimistic Mr Goggin, who dismissed the rise by saying this came from an historically low, “unsustainable” base and “looks more dramatic” than it really is.
Rising indebtedness is a bad thing. It’s serious and worrying, even if it isn’t ‘sub-prime’. As the biggest mortgage lender in the state – to first time buyers with no money down seeking interest only, 35 year loans as well as to the more financially secure – he must suspect that the prospects of defaulting loans and foreclosures is only going to get worse, not better.
Brian Goggin, and every other banker and broker in this country has no choice but to talk up the market. But how does he know that in 2009 there will be some magical reversal of fortunes and that credit will get cheap again, incomes will soar along with house prices and the threat of higher oil, food and healthcare costs will somehow all disappear?
Perhaps he needs to look more closely at his crystal ball. For goodness sake, Bank of Ireland’s share price has dropped 40% since the start of the year – he certainly didn’t predict that. And aside from the unexpected rise in bad debts, his forecast that mortgage lending volumes would finish up 12% for the year to March has been downgraded to 9%.
Just because Goggins’ crystal ball is cracked doesn’t mean that he shouldn’t pay attention to what’s happening all around him: only four out of every 10 households could even afford a typical Irish mortgage today, says the Central Bank.
Oh, and the OECD just reported that we have the highest income to debt ratio at a whopping 175%: that is, we owe €175 for every €100 we earn.
ST MoneyComment Dec 2/07
AN ECONOMIC SINKHOLE IS OPENING BENEATH US
Will he or won’t he – lower the top rate of tax, cut stamp duty, raise the excise on ‘old reliables’ like cigarettes, the pint or petrol?
We’ll know for sure by close of business on Wednesday when the Minister for Finance Brian Cowan has finished delivering his fourth Budget to the nation. I think it fair to say, however, that it’s going to take a lot more than mere tinkering with the nation’s finance to plug the economic sinkhole that is opening up beneath us.
Take stamp duty, for example. The builders and auctioneers are whining for the Minister to cut stamp duty rates in order to stimulate the moribund housing market. (They’d also like him to extend even more mortgage interest relief to first time buyers.)
Yes, the rates are too high, and in a falling market act as a disincentive to most buyers, but especially to young families who want to trade up to bigger homes, and to pensioners who want to trade down to smaller ones.
But no matter how much he tinkers with stamp duty, no one with half a brain is going to jump back into this market until they’re pretty sure prices have stopped falling. And the power to ensure that lies not with the Minister for Finance, but the head of the European Central Bank, and even he cannot guarantee that in the current climate the banks would pass on the lower rates.
Stamp duty should certainly be addressed, but with prices falling is more mortgage interest relief for first time buyers really justified? What about those young families who need more space? And what about all those other discriminatory, wasteful and daft tax reliefs?
Aside from mortgage interest relief, which, like private health insurance relief, is nothing more than a massive subsidy for their respective industries – why are billions in child benefit payments still paid out tax-free with no regard for income or means? Ditto for free medical cards for all over-70s. And why are higher earners still getting to collect the lion’s share of billions of euro of tax relief on private pension contributions?
Cutting public services, raising taxes and putting a moratorium on hiring new teachers and Gardai is the usual, lazy way the governments address tax shortfalls; a root and branch pruning of waste, tax disincentives and inequity stands a better long-term chance in restoring faith and confidence in the economy.