AIB latest report "House price rises can't be sustained - John Beggs"

http://www.rte.ie/business/2006/0411/housing.html
"AIB did not foresee a sharp fall on house prices, but 'a protracted period of stability' "

Does anyone else see how taking away future price growth expectations pulls the rug on the pyramid? Ive stated several times on this forum that like any asset bubble it's the EXPECTATION of future capital gains that's at the heart of the issue. Selling on for a higher price to the next contestant is crucial whether it's tulips, land in Louisana, Dot com shares or whatever.

In the irish property market todays price growth is driven by expectations of further price growth. Take away the EXPECTATION of future price growth and why buy? Why would Mr & Mrs FTB rush to buy, when they can rent cheaply, save a bigger deposit and buy for the SAME price later. Where's the panic? Similarly why would Mr BTL get into a mortgage that exceeds rental income when there's no (to paraphrase the Irish Times property section) "long-term capital gains" to be had?

"[Beggs] said it was possible that economists had underestimated the short-term level of demand"
That's because IMHO a large portion of demand to purchase property is driven by speculation and fear, NOT the need for shelter per se. If shelter is in such short supply why then are rents so cheap?

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And they still don't really explain how the "fundamentals" say that prices will rise by 20% when incomes are growing at 10%-ish over the same time period. Bear in mind we are aleady starting from price levels which relative to income are amongst the highest in the world!

As I said to my wife during the RTE 9pm news tonight - imagine you are chief economist at AIB. Most indicators are saying there is the potential for a significant correction in the market if interest rates rise further. Do you:

(a) Say - it's not sustainable, but it is ok - we'll get a soft landing, so don't worry.

or

(b) Errr - the market is overheated and may collapse. (A market collapse would after all bring about a monumental fall in AIB's share price as it scrambled to unwind itself from the mortgage market).

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Yes agree AIB are not going to pull the house down. At least they are not offering those ridiculous 100% loans AFAIK

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beattie said:

Yes agree AIB are not going to pull the house down. At least they are not offering those ridiculous 100% loans AFAIK

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If they are offering 92% loans secured on an asset overvalued by 30% it is'nt going to make a huge difference.

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"ah sure people have been saying prices will stop rising for years and they were all wrong ,i'll buy now before they go higher" average punter 2006

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Ultimately they're no more informed than the rest of us.

People will all be right and all be wrong with this I think.

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bearishbull said:

"ah sure people have been saying prices will stop rising for years and they were all wrong ,i'll buy now before they go higher" average punter 2006

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Is that you Bertie?

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Oh to be a fly on the wall, when the directors of AIB made the decision to forsake the profits they could have earned from ‘no money down’ 100% mortgages. Allowing your competitors to pick off the last few stragglers, while watching from the sidelines, illustrates either a degree of ethics driven forbearance or rational risk assessment, seldom witnessed in the Irish banking ‘industry’.

When the inevitable does happen I advise any admirer of the thespian art to watch Irelands bankers feign surprise. The pathos will be faked, but the shamelessness of the performance will be worth seeing.

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Duplex said:

Oh to be a fly on the wall, when the directors of AIB made the decision to forsake the profits they could have earned from ‘no money down’ 100% mortgages. Allowing your competitors to pick off the last few stragglers, while watching from the sidelines, illustrates either a degree of ethics driven forbearance or rational risk assessment, seldom witnessed in the Irish banking ‘industry’.

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That makes me want to keep my account at AIB - at least they have some morals (or at least some sense). When everyone else is feeding at the trough, it must be hard not to join them.

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Banks are a business that make money by selling debt. Cant really blame them, they want their money back firstly and interest on it secondly. They have shareholders, bondholders and staff to pay.

The real reason for the pending bust is the lack of foresight, planning and prudence by our government. Listening to Bertie the other day at the IMI just made my skin crawl.

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Glenbhoy said:

If they are offering 92% loans secured on an asset overvalued by 30% it is'nt going to make a huge difference.

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GB,
some of us think property is MASSIVELY overvalued. I know Im in the minority on this specific issue. IMHO the bust will not be a 'correction' then business as usual. We're talking a grinding year-on-year unwinding of prices to where they were YEARS ago. A sea-change in sentiment towards property. Shirts will be lost. That's what a 'bust' is after a 'boom'.

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No, AIB don't do 100% mortgages. I have had long conversations with an AIB mortgage advisor on that subject.

In any case - personally speaking, the issue, as far as I'm concerned, is less the 100% mortgage and more the "Arrah, you can have five, six times your annual income by way of a mortgage" regardless of whether it's 92% of the house price or 100% of the house price. And while we're at it, I don't think 35 year mortgages are a good idea either but that's just this funny foible I have about trying to pay off debt ASAP. I think the Central Bank should perhaps have introduced regulations regarding salary multiples and mortgage terms.

The AIB report is interesting because it is the first interested party to suggest things as they are now are not sustainable. It's a bit like the Elephant in the Corner which no one wants to mention...

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Calina said:

It's a bit like the Elephant in the Corner which no one wants to mention...

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Yes, but the elephant is wearing a fake mustache !

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I think the Central Bank should perhaps have introduced regulations regarding salary multiples

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I think that this would have prevented the whole property boom and the massive long term damage that it has done to our economy. I thought that the central bank was unable to do this though. Can anyone clarify this?

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Everyone agrees that in its current form it is unsustainable, it has to be because people cannot afford to buy their first property. IMO the banks are well aware of this and are being both selfish and foolish. One recent event in particular, that being the sale and leaseback AIB's headquarters in the property boom heartland of Ballsbridge would certainly indicate to me that all is not rosy in the garden.

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Calina said:

I think the Central Bank should perhaps have introduced regulations regarding salary multiples and mortgage terms.

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Very good point Calina. Where did this "3 times your salary" figure come from that they used to use years ago? Was this only around as a recommendation or a piece of advice that the banks are free to flaut as they see fit?

Having regulations tying mortgages somewhat to wages makes sense I think. Although, could it lead to a situation where everyone could get priced out of the market except for the rich and we have a landlord class and tenant class all over again?

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Purple said:

I think that this would have prevented the whole property boom and the massive long term damage that it has done to our economy. I thought that the central bank was unable to do this though. Can anyone clarify this?

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According to the Central Bank's website their functions include :

Central Bank website said:

Contributing to the maintenance of a stable financial system in Ireland;

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It looks as though this might now the beef of the Irish Financial Services Regulatory Authority under the following

IFSRA website said:

The refinement of a regulatory approach based on risk profile and impact of default

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I don't see how it wouldn't be possible...but you never know...

On the other hand, the State has benefited from massive stamp duty income lately...

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Afuera said:

Very good point Calina. Where did this "3 times your salary" figure come from that they used to use years ago? Was this only around as a recommendation or a piece of advice that the banks are free to flaut as they see fit?

Having regulations tying mortgages somewhat to wages makes sense I think. Although, could it lead to a situation where everyone could get priced out of the market except for the rich and we have a landlord class and tenant class all over again?

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The problem with a lot of these suggestions is that they should have been implemented years ago. It's just too late now. If the central bank waded in and insisted that banks stick to a policy of 3-4x salary multiples it would immediately cause an enormous crash which is in nobody's best interest. Given the state of the market, any direct intervention could be disastrous. True, it's possible that it will end in a crash anyway but we all have a vested interest in hoping that won't happen (whether we own property or not) because of the huge part that the construction industry currently plays in our economy.

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GB,
some of us think property is MASSIVELY overvalued. I know Im in the minority on this specific issue. IMHO the bust will not be a 'correction' then business as usual. We're talking a grinding year-on-year unwinding of prices to where they were YEARS ago. A sea-change in sentiment towards property. Shirts will be lost. That's what a 'bust' is after a 'boom'.

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That indeed may well happen - I would prefer if it did'nt (as I imagine we all would - I don't fancy moving to Krakow to pick mushrooms).

I think that this would have prevented the whole property boom and the massive long term damage that it has done to our economy. I thought that the central bank was unable to do this though. Can anyone clarify this?

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In my brief time in monitoring mortgage approvals (3 yrs ago now), we were of the belief that Central bank could pull a licence (from a tied agent) or severly censure the bank, if it looked likely that info on applications were false, that stress tested affordability exceeded 40%, if deposits were loans etc. However as I neared the end of my stint, Ulsterbank offered the first 100% mortgage - within the bank we waited with bated breath to see the central bank reaction (I hope they're not waiting still, as there may have been a slight admonishment in private, but that was it).

That makes me want to keep my account at AIB - at least they have some morals (or at least some sense). When everyone else is feeding at the trough, it must be hard not to join them.

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Is that you Bertie??

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As an addendum, when I came back to the country after a prolonged period away, a mortgage advisor at an AIB in Dublin explained that they would have to be a bit more circumspect because the Central Bank was getting interested in banks' leniency regarding the 92% limit and the salary multiple limit. That was back in 1999. I don't see any evidence to say they actually followed through on it though.

One of the points that was made as the rules (for want of a better word) loosened up was that interest rates were so low, that there was room for manoeuvre...which only works if interest rates stay low.