House Market Weakening?

[beattie]

Well, in that case we can expect lots of media coverage as our leaders speak on the issues of responsible lending, over indebtedness and the
unprecedented risks that Irish borrowers now face.

Or...maybe not, wrong country eh ?

There is a snowballs chance in hell that we will get responsible comments on the state of lending here etc in the near future. Austin Hughes was very annoyed that there are naysayers out there who may be unnecessarily spreading doom & gloom in the debate he had on Newstalk earlier in the week.
There certainly won't be responsible coverage from the print media as they earn too much from their property supplements to give impartial comment.
I only hear on this forum of tales where investors are subsidising their investments to the tune of 600 euro or so per month. I believe this to be commonplace and the banks are complicit in this. I don't think there will be any class actions taken here when it goes belly up.

 

[Marie]

From today's Irish Times:

The level of total non-government borrowing now stands at €282.8 billion, and has increased by more than €62 billion, or 29.8 per cent, in the 12 months to May.
In May alone, €6.6 billion was added to the level of outstanding private sector credit, which includes business and personal lending. That is the highest monthly increase in a year.


The figures show that the recent rising trend in borrowings continues despite repeated warnings from the Central Bank about the danger it poses for the economy.
The rate of annual growth in private sector credit has accelerated by levels just under 30 per cent throughout this year from rates of just over 10 per cent in early 2003.
Coming in the wake of two rises in euro zone interest rates, in December and March, yesterday's data suggests that monetary tightening by the European Central Bank has so far done nothing to dent appetite for debt. "Despite a background of rising interest rates and high energy prices, the Irish public continues to borrow money as if there were no tomorrow," said Alan McQuaid of Bloxham stockbrokers.
IIB chief economist Austin Hughes said that, stripping out business lending, "we reckon that total personal debt in the economy is now just shy of €130 billion, suggesting an average debt burden of around €32,000 for every man, woman and child in the country".
For the first time this year, non-mortgage credit increased at a faster rate than mortgage business, jumping by 29.7 per cent year on year - driven by a significant rise in demand for term/revolving loans.
Mortgage lending was 29.5 per cent ahead of the levels in May 2005. The level of residential mortgage borrowing now stands at just under €109 billion, up from just under €84 billion in May 2005.
Nationally, €2.1 billion was added to outstanding residential mortgage borrowings in the month and the Central Bank said that, if residential mortgage loans were to rise by that amount each month for the rest of the year, the annualised rate of mortgage lending growth would be 24.5 per cent by December.
The bank noted that mortgage borrowing has grown at an average rate of 23.4 per cent annually between March 1997 and December 2005 - a period when house prices in the State rose by 14.9 per cent on average each year.
According to the latest Permanent TSB/ESRI index of house prices, the rate of annual house price inflation has increased from a rate of 6.6 per cent in May 2005 to a rate of 14.5 per cent last May.

By the way there are other implications to all this, much much broader than housing and construction. I know a number of people who are in process of withdrawing their savings from Irish financial institutions; they would have too much to lose as the risk of 'bust' grows.

 

[room305]

By the way there are other implications to all this, much much broader than housing and construction. I know a number of people who are in process of withdrawing their savings from Irish financial institutions; they would have too much to lose as the risk of 'bust' grows.

I doubt a complete collapse of the banking system is on the cards.

 

[Marie]

I know very little about banking and finance which is why I find AAM discussions helpful . If banks and financial institutions 'own' - by dint of the mortgages they hold - large amounts of property, how can they survive a bust if the value of those mortgages drops quickly by up to one-third (as can occur with a housing crash) ? Can anyone explain?

 

[tiger]

The banks don't own the properties per say, but do have alot of outstanding loans backed by these properties falling in value.

If property is falling in value, it is presumably because less people are buying, and more people are selling, in some cases being forced to sell because they can't afford the payments any more (increased interest rates, unemployment...)

Business goes down alot for the banks in terms of new loans, and default rates (bad debts) increase as existing loan holders start to go in arears. The banks then end up with these properties that are worth less than the outstanding loans.

If the value of the property drops, but people are still paying the mortage, then the bank is ok (but sitting nervous), and would still be suffering from the slow down in new business.

 

[whizzbang]

If banks and financial institutions 'own' - by dint of the mortgages they hold - large amounts of property, how can they survive a bust if the value of those mortgages drops quickly by up to one-third

Banks only risk is if prices fall below the initial cost of the house minus whatever the person has paid back in interest and loan repayments.

If someone gets a 300k mortgage and over a few years pays back 100k to the bank then the bank only really is at risk if the property value falls below 200k.

The only property they really stand to lose on are those bought in the last 3 years is my guess. These would have to fall to the original price 3 years ago and then also fall by the amount of repayments the bank has recieved. I guess that would cover a 30% to 40% drop. This is all speculation but I guess it might be how the banks calculate their exposure.

*edit* this is all based on the assumption that people hand back the keys of prices drop significantly. As the poster above says, if they keep paying the banks are sitting pretty.

It is an interesting question thought, anyone else got any details on how the banks see this?

 

[room305]

It is an interesting question thought, anyone else got any details on how the banks see this?

Judging by the comments of people I know who are actively doing the lending, it doesn't sound like such a thing has even been contemplated. Maybe at a higher level it has but I wouldn't bet on it. Things have got ruthlessly competitive and the shares of the financial institutions are trading at low p/e ratios across the board. Shareholders would scream blue murder if the banks started to curb their lending despite increasing demands from borrowers.

 

[conor_mc]

Don't banks securitise their loan books occasionally, which is effectively selling on the debts?

 

[bearishbull]

Banks only risk is if prices fall below the initial cost of the house minus whatever the person has paid back in interest and loan repayments.

If someone gets a 300k mortgage and over a few years pays back 100k to the bank then the bank only really is at risk if the property value falls below 200k.

The only property they really stand to lose on are those bought in the last 3 years is my guess. These would have to fall to the original price 3 years ago and then also fall by the amount of repayments the bank has recieved. I guess that would cover a 30% to 40% drop. This is all speculation but I guess it might be how the banks calculate their exposure.

*edit* this is all based on the assumption that people hand back the keys of prices drop significantly. As the poster above says, if they keep paying the banks are sitting pretty.

It is an interesting question thought, anyone else got any details on how the banks see this?

Any of the banks mortgage customers who took out their loans a few years back have sufficient equity to prevent the property being worth less than is owed,even if some mortgages taken out in last few years before a correction were worth less than outstanding mortgage most people would continue to pay their mortgage for fear of losing home,its only where incomes drop substantially due to something like mass unemployment that the banks dont get paid.

 

[bearishbull]

basically the vast majority of the customers have sufficient equity to prevent negative equity and once market keeps rising more and more people get sufficent equity to prevent a negative equity scenario. Also they do securitise the loans. Banks cant stop loaning money even if they think prices are gonna fall as the markets would crucify them and they would actually cause a drop in price growth/rises due to tightening of credit and the signals that would said.

 

[bearishbull]

People are so afraid of negative equity but they are actually in negative equity when they buy as the amount they are paying for the house in real terms when including interest can be up to twice the value of the house.

Buying a house for 500k on 100%mortgage over 35 years(assuming an average 5% mortgage rate) is costing you nearly a million euro in todays money, so house has to double after inflation over 35 years to breakeven.

 

[MugsGame]

Banks have to keep capital reserves to cover defaults on their loan books. The reserves required were increased recently, especially for high ratio loans (i.e. 92-100%). Some of the banks have a risk averse lending policy, e.g. AIB who don't offer 100% mortgages and commonly ask FTBs for a guarantor even where other banks would be willing to lend without one.

One way to hedge against (the unlikely event of) a run on the Irish banks is to diversify your savings across multiple institutions, particularly those based outside Ireland (e.g. Northern Rock!).

 

[room305]

Buying a house for 500k on 100%mortgage over 35 years(assuming an average 5% mortgage rate) is costing you nearly a million euro in todays money, so house has to double after inflation over 35 years to breakeven.

Not necessarily. Your mortgage isn't inflation adjusted so your house only needs to double in price in nominal terms to break even.

 

[Marie]

So effectively the banks and other lenders have neither a financial nor an ethical stake in cooling and steadying the property market. Presumably the Irish government cannot act unilaterally to put the breaks on. Though logically the situation seems crazy it appears there won't be any 'weakening' in the foreseeable future as long as people choose to crowd into the market.

 

[room305]

Hmmmm ... this was bugging me so see what you think of these calculations:

Original cost of house: €500k
Avg. interest rate: 5%
Term of loan: 35 years
Total interest: €560k

Inflation rate: 5%
Real interest repaid: €305k

So your house will need to be worth €305k more in real terms in 35 years to break even. Assuming inflation of 5% per-year over 35 years that €305k will have a nominal value of €1.6M.

So since you paid €500k for the house, to get away clean (i.e. to have paid the bank back and still be able to resell your house for €500k in real terms) then your house will need to be nominally worth €4.4M in 35 years.

 

[Guest107]

€67,333 of PERSONAL debt for every single living person in Ireland .

Its actually €32,000 of personal debt according to the [broken link removed]and the other €35000 is business debt .

In the UK (60 million people)the directly equivalent figure for total personal debt is £1.2 Trillion in total or about £20,000 per person .

xe.com Universal Currency Converter ® Results Live [broken link removed] as of 2006.07.01 16:52:53 UTC.

20,000.00 GBP United Kingdom Pounds = 28,912.95 EUR
Euro 1 GBP = 1.44565 EUR
1 EUR = 0.691732 GBP

The AVERAGE IRISH PERSON NOW OWES 10% MORE THAN THE AVERAGE BRITISH PERSON

Thats a recent one

 

[MugsGame]

But wouldn't you expect that? Irish interest rates are (currently) lower. Our population is younger.

 

[thefisherman]

the bottom line is that property is overvalued, i l saw a 4 bed house that was selling for 450000 with sitting tennants paying 1200/month. now there is no way that those figures add up- even on an interest only mortgage the rent would not cover the cost and given that interest rates are rising and rent is static no investor worthy of the name would risk putting money or equity on it.
yet it sold for 475000, which makes me wonder. there must be people out there buying house's with little or no understanding of what 'investing' actually means.
just because the banks will lend you the money to buy property does not make it a good investment.
if/when the interest rates goes up once or twice more, there will be alot of people who will see that their investment is actually a money losing albatross that will drag them down unless they sell them.
prices will come down.
rents will also come down as our guest workers head of to other greener pastures.and more houses become available to rent pushing the rent down even more.

why do we irish think that our property bubble is somehow different from other property bubbles?

 

[Neffa]

The AVERAGE IRISH PERSON NOW OWES 10% MORE THAN THE AVERAGE BRITISH PERSON

Maybe what's even more interesting is that residential borrowing increased in one month in Ireland by €2.1bn while the UK increased by £9.1bn (€13.3bn). We are in pole position and racing ahead at over twice the rate of the UK. Scary. I wonder what on earth we would do if interest rates get to circa 4.5-5%.

 

[bearishbull]

Not necessarily. Your mortgage isn't inflation adjusted so your house only needs to double in price in nominal terms to break even.

Actually i factored in inflation using the mortage calculator at www.jeacle.ie/mortgage the real interest on 500k for 35 years @ average 5% is 333k in TODAYS money, i dont think this calculator takes inflation into account on principal repayment element of the mortgage repayments,the 500k borrowed is reduced by inflation rate after every principal repayment but im too lazy to work it out!