Is Negative Equity really that big a problem?

[Chris]

To dismiss the problem as people being frivolous, stupid, or not thinking in the long term is not looking at the bigger picture.

If people who bought near the peak of the market were looking at the long term, then why is this topic being discussed? If people had actually planned for the long term, then why did they not make even small provisions for the possibility of unemployment or wage cuts. As already mentioned, negative equity is only really a problem for people who are having difficulty meeting repayments for whatever reason. The only one these people can blame for this is themselves, for not having made any provisions for a rainy day.

Arguing for banks to be more flexible is utterly rediculous. It was the flexibility of central and commercial banks that was the cause of the financial crisis. Allowing people to go into even more debt, especially unsecured, is utterly short-sighted and completely ignoring even the most recent history. When in a whole stop digging!!!

 

[Chris]

I wasnt being smug I just think the level of greed in this country overall the last few years was sickening and some ppl sold their soul and would do anything for a few extra quid...

Greed is impossible to quantify as it is very subjective. I think the biggest problem was the utter blindness and ignorance of downside risk.

when somebody is making a fortune other ppl are generally suffering...thats the nature of capitalism (particularly when its basiscally unregulated) you know. On a positive note I think the country is more friendly recently due to the end of this getting rich quick nonsense....

No, capitalism does not naturally make some people rich and arbitrarily make less well off people suffer. Capitalism rewards those that take the right risks, and punishes those that take the wrong ones; that's the profit and loss system. And buying a house on leverage is a risk that can go eith way.
The boom bust cycle that causes so much difficulty for the economy is not a feature of unregulated free-market capitalism. It is government intervention, regulation and stimulus (whether socialist or conservative doesn't matter) that causes the malinvestments of the bubbles that always eventually collapse. The most central part to the economy is the monetary and financial system, which completely controlled by governments.
The western world has nothing even remotely resembling free-market capitalism, so blaming busts and people's hardship on lack of regulation is utter nonsense.

 

[canicemcavoy]

The boom bust cycle that causes so much difficulty for the economy is not a feature of unregulated free-market capitalism.

Example?

P.

 

[truthseeker]

The only one these people can blame for this is themselves, for not having made any provisions for a rainy day.

I dont disagree with this, but for some the rain has been falling longer and harder than they would have thought possible, I have friends with no job for 8 months or more - I would think it unusual for young people who are buying a first home to have provision made for a year or so or rainy days.

 

[RIAD_BSC]

I'm really confused by this. If you have a 25% deposit (plus stamp duty/fees) for a larger property, why not use this to pay off the negative equity on the smaller property? Are the properties so similar in price that 25% deposit for the house doesn't pay off the NE on your small property? You might then have to get a 90% LTV mortgage but with sizeable salaries that shouldn't be a problem. I thought the big NE problem was that people were facing having to get 100% LTV mortgages plus service NE debt on the old property.

It is quite simple. My 25% deposit is nowehere near enough to clear the NE. The reason the new house is so close in price to what I paid for my old place (much cheaper in fact) is that property prices have fallen by over 40% since then (the PTSB index way underestimates the fall, in my experience).

On current property, loan outstanding is 380k, value is around 210k, so NE of around €170k.

Property I want to buy is €310k (it would have been valued at close to €600k at the time when I bought my current house for €400k).

I have around €75k saved for a deposit (I have also have money set aside for fees and the €12k or so of stamp duty), meaning I would borrow €235k. Tack on the €170k negative equity, and my new loan would be €405k, close to what I borrowed the last time.

Loans of €405k, secured on asset of €310k, means new NE of €95k.....

Our combined income is now almost €140k (one public servant, one private sector).....

I would have thought this was a win-win for me and the bank..... I get to move house - the bank is on the hook for less NE, secured on a better asset. But the bank said no, because the regulator has warned it off NE mortgages.

To me, what I am looking for is not irresponsible borrowing, I don't want a handout of anyone's cash, but I am hamstrung by the prevailing opinion of people such as Funkf00t........

 

[Chris]

I dont disagree with this, but for some the rain has been falling longer and harder than they would have thought possible, I have friends with no job for 8 months or more - I would think it unusual for young people who are buying a first home to have provision made for a year or so or rainy days.

You are right, it is unusual for young people to have rainy day funds for a year or more; I actually believe that most people in general have less than 2 months ainy day fund (based on friends and colleagues). This does not excuse the fact that people didn't make provisions for at least 12 months. This doesn't have to be through savings alone, there are plenty of insurance products that offer income.

Example?

P.

Without deviating off thread topic too much I suggest that you look into Austrian Business Cycle Theory, many resources on the web. It basically says that interst rates (set by central banks) that are lower than would be available on a free market and the issuing of additional money to 'stimulate' the economy results in over and malinvestments. Businesses can borrow at low costs, making it look like leveraged investments will pay off in the future. This leads to huge investment in capital goods leading to increased production goods prices, which leads to increased consumer prices. Eventually it is realised that the public does not have savings to spend on all the new products and the house of cards comes tumbling down.


Here are some examples from history:
1) the 1873 crash resulted from the introduction of fiat paper currency during the civil war (know as Greenbacks) and the subsequent inflation of the money supply. The downturn didn't end until the Greenback was abandoned.
2) the 1920 depression (http://mises.org/daily/3788) came about 6 years after the introduction of the Federal Reserve and its inflation of the money supply along with fiscal inflation of government to pay for WWI. The US, under Harding, cut spending and taxes drastically in 1921, and the depression ended after a mere 18 months.
3) President Coolidge and the Fed went on to reinflate the monetary system creating the 'golden 20s' which as we all know came to a total collapse in the 1929. Then came the big spenders Hoover and Roosevelt who went on huge public works and economic intervention sprees causing the Great Depression.
4) now let's look at more recent times: after the savings and loans crisis of the late 80s, the economy was reinflated with low interest rates, eventually leading to the dotcom bubble and burst.
5) again the economy was reinflated with cheap credit and new money after dotcom and 9/11 leading to the housing and credit bubble of 2007.
Get the picture?

 

[goingforgold]

Having watched primetime last night and having listened to all recent media speculation it would appear that some form of "nama for the people" (really hate that phrase) is on it's way after this review body publish their findings in September.

I bought a house in 2006 and I'm not in negative equity as I used all my savings and the funds from a previous house sale to take me out of negative equity. Are all these people who claim to be in negative equity really in negative equity? I mean if some sort of bailout for these people is granted will all their personal finances be looked at to ensure they are using all their savings to reduce the impact of negative equity.

Most people I know who claim to be in negative equity are ones who bought big houses or apartments in places they couldn't afford purely beacuse they wanted to! I want to live in a palace too but realised I couldn't afford it. What about giving something back to those of us in society who have lived modestly and have been prudent? I think the media are very biased towards the poor old person in negative equity...we need to get real here!

 

[RIAD_BSC]

There won't be a 'nama for the people'. The idea is beyond the pale.

There will probably eventually be two things that might happen:

1 - The banks will be allowed to grant some sort of limited negative equity mortgages to people with good incomes, but who can't move house because of NE.

2 - Compliant homeowners in heavy NE, in heavy areears, who have no prospect of paying it back through job loss etc, will be allowed lease or lease-to-buy their repossessed homes back from the bank under some arrangement....

Neither of them involves bailouts in the form of handing over cash...

 

[goingforgold]

There won't be a 'nama for the people'. The idea is beyond the pale.

There will probably eventually be two things that might happen:

1 - The banks will be allowed to grant some sort of limited negative equity mortgages to people with good incomes, but who can't move house because of NE.

2 - Compliant homeowners in heavy NE, in heavy areears, who have no prospect of paying it back through job loss etc, will be allowed lease or lease-to-buy their repossessed homes back from the bank under some arrangement....

Neither of them involves bailouts in the form of handing over cash...

How can you be so sure there will be no form of debt forgiveness? This is gaining huge momentum in the media. It would be absurd but I wouldn't be surprised at anything at this stage. I was speaking to a colleague who spent a lot of money on a property that was priced way beyond his means in my opinion. He now feels hard done by and feels his mortgage should be reduced. It is this sense of ridiculous entitlement that the media are driving.

People think NAMA has bailed out the developers. No it hasn't, they will still be pursued for their loans. The ordinary person needs to understand this and not think they are entitled to debt forgiveness because the developers got it.

 

[Chris]

Having watched primetime last night and having listened to all recent media speculation it would appear that some form of "nama for the people" (really hate that phrase) is on it's way after this review body publish their findings in September.

I bought a house in 2006 and I'm not in negative equity as I used all my savings and the funds from a previous house sale to take me out of negative equity. Are all these people who claim to be in negative equity really in negative equity? I mean if some sort of bailout for these people is granted will all their personal finances be looked at to ensure they are using all their savings to reduce the impact of negative equity.

Most people I know who claim to be in negative equity are ones who bought big houses or apartments in places they couldn't afford purely beacuse they wanted to! I want to live in a palace too but realised I couldn't afford it. What about giving something back to those of us in society who have lived modestly and have been prudent? I think the media are very biased towards the poor old person in negative equity...we need to get real here!

You deserve applause for doing the right thing!

I agree with you on giving something back "to those of us in society who have lived modestly and have been prudent". Now I do not want any sort of handout, but it disgusts me that I now have to pay more taxes on my savings interest and investment capital gains; this is punishing those people that were prudent and made the right decisions, and it is a huge disincentive to investment. Politicians are spewing out the same rhetoric over and over, "it's the banks' fault", "it's the builders' fault", "it's the regulator's fault", the list goes on. But yet it is all these institutions that are being rewarded and not one politician is coming out and saying: "We messed up, it's our fault"; instead we get: "some things we did were not so good, but only with the gift of hindsight". Spineless offspring of female canines, the whole lot of them!

Appologies, rant over.

 

[Draigean]

First group, people that are planning on staying their home for a long time and are able to make their repayments. No problem here and if they are on tracker have lower repayments compared to 2 years ago.

What a site this is already! I just registered tonight as I want opinion and information on a personal matter (but I must do some reading on it first) but I'd like to answer the above point, the way I see it.

"No problem here"? I cannot agree. Take this example.

Johnny buys an apartment in central Dublin in July 2007 for €500,000. In this part of the country prices have dropped by 50%.
Therefore if Johnny had waited 'til July 2010 to buy his apartment, he'd have saved himself €250,000 plus the interest. That's a problem!

 

[goingforgold]

What a site this is already! I just registered tonight as I want opinion and information on a personal matter (but I must do some reading on it first) but I'd like to answer the above point, the way I see it.

"No problem here"? I cannot agree. Take this example.

Johnny buys an apartment in central Dublin in July 2007 for €500,000. In this part of the country prices have dropped by 50%.
Therefore if Johnny had waited 'til July 2010 to buy his apartment, he'd have saved himself €250,000 plus the interest. That's a problem!

so does Johnny expect the taxpayer to give hime €250,000 just so he can feel better? Not going to happen hopefully. When you buy shares or property one has to realise the value of their investment can fall as well as rise. Irish people need to get real here. I bought a lotto ticket yesterday and didn't win. I want the government to give my my €5 back! Where does this end!

 

[cartman1]

Another group of people affected by negative equity are those who have also been caught at the wrong time with high levels of short-term debt i.e. ccs and personal loans who can't then re-finance because they are in negative equity.

There should be no debt forgiveness scheme as it would be unfair to those who didn't over-stretch themselves but the banks should be forced to offer other options such as term extensions, debt for equity swaps and re-mortgaging to include short-term debt if it makes long term sense. They were part of the problem so they have to part of the solution. These measures can always be reversed by individuals in a few years time if there circumstances improve.

 

[Chris]

There should be no debt forgiveness scheme as it would be unfair to those who didn't over-stretch themselves but the banks should be forced to offer other options such as term extensions, debt for equity swaps and re-mortgaging to include short-term debt if it makes long term sense. They were part of the problem so they have to part of the solution. These measures can always be reversed by individuals in a few years time if there circumstances improve.

I agree 100%, rewarding anybody for bad decisions is a rediculous idea. And yes, banks (especially central banks) were the main part of the current problem. But the problem was excessive levels of debt, and allowing people to go into even more debt is just going to make things worse.
As for your suggested solutions, I don't see term extensions as possible, because people are already on 30 or 35 year mortgages; debt for equity swap is not possible, as there is no equity; re-mortgaging to include other debt is just opening the door for more short-term debt.

 

[canicemcavoy]

Johnny buys an apartment in central Dublin in July 2007 for €500,000. In this part of the country prices have dropped by 50%.
Therefore if Johnny had waited 'til July 2010 to buy his apartment, he'd have saved himself €250,000 plus the interest. That's a problem!

Property prices either go up or go down.

You seem to be suggesting that when they go up, there is no problem and the purchaser is entitled to all the profit.

However, when they go down, it is a "problem" that presumably must be fixed - presumably by those who did not buy.

 

[Shawady]

What a site this is already! I just registered tonight as I want opinion and information on a personal matter (but I must do some reading on it first) but I'd like to answer the above point, the way I see it.

"No problem here"? I cannot agree. Take this example.

Johnny buys an apartment in central Dublin in July 2007 for €500,000. In this part of the country prices have dropped by 50%.
Therefore if Johnny had waited 'til July 2010 to buy his apartment, he'd have saved himself €250,000 plus the interest. That's a problem!

But whether the house is still worth 500K or now 250K, it does not affect the mortgage repayments. If anything, because of the recession, interest rates have dropped so the repayments are now less.
I know people in this situation. They are technically in negative equity but because they are on a tracker, their monthly fininacial situation is better because of lower mortgage repayments. If they are not planning on moving, why should the government do anything fo rthem?

 

[csirl]

In my opinion, a lot of the people who want to start families and are trapped in small apartments only have themselves to blame. A lot of them bought with a view to trading up. They thought that they could sell the apartment on at a profit and use the proceeds to fund buying a house. I dont accept that the majority of young couples would not have forseen that they might have kids within the next few years. They bought with short term profit in mind.

They should have bought a more suitable property or rented until such time as they could afford something suitable.

 

[orka]

Johnny buys an apartment in central Dublin in July 2007 for €500,000. In this part of the country prices have dropped by 50%.
Therefore if Johnny had waited 'til July 2010 to buy his apartment, he'd have saved himself €250,000 plus the interest. That's a problem!

It's a severe annoyance but it's not a problem if Johnny's circumstances haven't changed (in which case the problem is with the changed circumstances not the negative equity...).

 

[GarBow]

A lot of them bought with a view to trading up. They thought that they could sell the apartment on at a profit and use the proceeds to fund buying a house.QUOTE]

How could the sale of an apartment alone fund a trade up to a house? Surely when prices were rising they would have risen on both properties simultaniously?

People did, perhaps, buy apartments with a veiw of being in a better financial position in a couple of years and then trading up. The property crash, pay reductions and tax increases have made this an impossibility and not in the short term but for many years to come.

Some process to facilitate these people should be concidered, not a debt forgiveness but a NE mortgage or similar for those who can prove payment capability exists. As mentioned before, all personal savings and investments should be used to reduce the NE.

I really think that people who bought a property, be it a house or apartment as their PPR and who now find themselves in this position should be helped out. Not by tax payers money or any other 'bail out' but by lender flexibility and with all moneys being repaid. IMO anyone who purchased property purely as an investment deserve fully to suffer all and any consequences that NE on these proprties may bring. This was pure blind greed in most cases.

 

[cartman1]

I agree 100%, rewarding anybody for bad decisions is a rediculous idea. And yes, banks (especially central banks) were the main part of the current problem. But the problem was excessive levels of debt, and allowing people to go into even more debt is just going to make things worse.
As for your suggested solutions, I don't see term extensions as possible, because people are already on 30 or 35 year mortgages; debt for equity swap is not possible, as there is no equity; re-mortgaging to include other debt is just opening the door for more short-term debt.

I don't agree Chris. There seems to be an undercurrent with many people (not saying you) who aren't in any financial diffilculties that there shouldn't be any new solutions offered to those who are in difficulty to make their position more manageable without letting them off the hook.

The solutions I proposed would strike the balance:
1. term extension to 50 years for example - some people may want to pursue this option and then sell up after 30 years when they are retiring and trade down or they could reduce the term in 10 years time if/when their circumstances improve.
2. What I mean by debt for equity swap is that the bank take part ownership of the house in exchange for a reduction in the loan outstanding. Again the mortgagee could always reverse this in the future or they could sell the property in the future as joint owners with the bank.
3.Debt restructuring usually has strict conditions attached and people should be given a second chance. I think a lot of people have learned very harsh lessons in recent years and most are unlikely to do it again.