Is Negative Equity really that big a problem?

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Shawady

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I see RTE are doing a Prime Time special tonight on negative equity. In the preview, an economist reckons it is the biggest problem facing the country. But is it really that big a deal?

The way I see it, there are different categories of negative equity.

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.

Second group, people that bought before the peak and want to move at some stage. If they have being paying off the capital and continue to do so, they should reach the point in the near future where what they owe is less than value of house (assuming no more major drop in house prices).

Third group, people that bought at the peak and want to move. This is the group that I feel sorry for. I have friends that bought one bed apartments and now are at the stage where want to start family but can't move to a house for many years. But if this group is in minority is it not something that has to lived with?

Surely the benefit of keeping house prices affordable and keeping wages down would outweigh the problem of negative equity?
 
Shawady said:
I see RTE are doing a Prime Time special tonight on negative equity. In the preview, an economist reckons it is the biggest problem facing the country. But is it really that big a deal?

The way I see it, there are different categories of negative equity.

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.

Second group, people that bought before the peak and want to move at some stage. If they have being paying off the capital and continue to do so, they should reach the point in the near future where what they owe is less than value of house (assuming no more major drop in house prices).

Third group, people that bought at the peak and want to move. This is the group that I feel sorry for. I have friends that bought one bed apartments and now are at the stage where want to start family but can't move to a house for many years. But if this group is in minority is it not something that has to lived with?
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Fourth group, people that bought at the peak time & have to move because of the loss of their job, are in negative equity, & can't sell.
 
Fifth group, couples who have seperated and need to sell but cannot sell because of negative equity.
 
The huge level of debt involved is also a major problem. The property bubble has caused a two fold debt problem:

1. These mortgage repayments is effectively money going out of the economy. Consider that instead of using this money to buy goods and services, it is being given to banks.

2. Cost of living and doing business has increased significantly. Business rent has gone up hugely. These overheads are either passed on, or the business is not viable. When people have to pay huge amounts of mortgage, they also need to be paid more.
 
umop3p!sdn said:
1. These mortgage repayments is effectively money going out of the economy. Consider that instead of using this money to buy goods and services, it is being given to banks.
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No, this is not correct. Money paid to banks in repayments is not a net loss to the economy. It is not the case that the money, once with the banks, is destroyed. While banks are not lending out as much as they had been, i.e. credit contraction, this is a good, not a bad thing.
 
carpin taxt said:




Neither of these groups is large enough to justify a blanket "silver bullet" solution to the supposed 'problem' of negative equity.
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I agree. While I can't say what will be in tonight's prime time program, I'm sure it will be a couple of examples of people with 50% negative equity living in apartments or small houses, that want to move, and are pointing the blame at bankers, builders and investors. Best solution for people in negative equity: increase your mortgage payments or stay where you are.
 
No, this is not correct. Money paid to banks in repayments is not a net loss to the economy. It is not the case that the money, once with the banks, is destroyed. While banks are not lending out as much as they had been, i.e. credit contraction, this is a good, not a bad thing.
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If we had solvent banks, then this might be correct.

I have my doubts that banks actually do create wealth, even when they are solvent.

Neither of these two points is directly related to negaive equity. Negative equity does not increase the cost of the existing debt.
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It's the scale of the negative equity that's important. If I get a loan for €100 for an item, that then decreases to a value of €50, then this doesn't really matter too much in the whole scheme of things. If I've spent €500k and the value is only €250k, then there is a problem. This problem is magnified when thousands of people are in the same position.
It becomes a problem because when this debt is applied to the economy. People need to continue to be on big wages to pay it back.
Can you not see that this presents a huge negative feedback loop?
In real terms, the cost of debt does go up. Taxes increase, wages go down so to the mortgage holder, the effect is like an increase in cost of debt.
 
Negative equity

Why cant someone who has to move or separated people rent out their property and rent somewhere cheaper themselves? Maybe some could move back in with their parents too? Or some could rent out a room to ease the debt?
 
queenlex said:
Why cant someone who has to move or separated people rent out their property and rent somewhere cheaper themselves? Maybe some could move back in with their parents too? Or some could rent out a room to ease the debt?
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I'm recently separated. Our family home is in approx €200k neg equity.Renting out the house is not an option because what I would receive in rent would only match the amount I would have to pay to rent another house. I have two children so I would rule out renting an apartment, and the difference in rent would be minimal anyway. Moving in with my parents is not an option. Renting out a room is not an option I would consider, having two young children. So I can't see any way out of this.
 
carpin taxt said:
Neither of these groups is large enough to justify a blanket "silver bullet" solution to the supposed 'problem' of negative equity.
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I don't know of anybody who is proposing a blanket silver bullet solution for all. But solutions needs to be found for certain categories of people - those who have lost jobs and are in NE with massive arrears...... those who can't start families because they can't trade up..... couple who have separated etc....

Economically and socially, negative equity is more than just a 'supposed' problem. It is a real and tangible problem, and a massive one at that, for many people, for society and the economy at large.

The 'let-them-all-swing' brigade thinks the problem of negative equity will go away if we ignore it for long enough. It won't.
 
umop3p!sdn said:
If we had solvent banks, then this might be correct.
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Yes, the banks are insolvent, but this doesn't change the fact that paying off debt is benefitial to the economy, and does not result in a loss to the economy.

umop3p!sdn said:
I have my doubts that banks actually do create wealth, even when they are solvent.
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I agree, central and commercial banks are the central cause of the boom/bust cycles, which are detrimental to the economy. Production and savings should be the only driver of the economy.
 
RIAD_BSC said:
Economically and socially, negative equity is more than just a 'supposed' problem. It is a real and tangible problem, and a massive one at that, for many people, for society and the economy at large.
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Yes, negative equity is a tangible problem and a large problem for individuals, but not for society or the economy as a whole. I also agree with the OP, that the number of people that actually "need" to move and are in negative equity is rather small.

RIAD_BSC said:
The 'let-them-all-swing' brigade thinks the problem of negative equity will go away if we ignore it for long enough. It won't.
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Of course it will work, in time mortgages will be reduced and negative equity as well. It may take 5 years, 10 years, who knows. The simplest solution is to increase mortgage payments. Might sound tough, but it's the only fair solution.
 
umop3p!sdn said:
1. These mortgage repayments is effectively money going out of the economy. Consider that instead of using this money to buy goods and services, it is being given to banks.
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Except the money raised initially went towards paying builders, developers EA's, bankers, electrical supply stores, furniture stores etc so it is not really lost money.
 
People are still unprepared to take responsibility for their own decisions.

Could we look to the past and the intense financial problems Irish people and people all over Europe - have had over the years? In times of difficulty people were prepared to do what it took to deal with their problems, they cut their cloth to suit. So for example (researching family history thanks to the recent online census) many, many people, inlcuding my grandparents who I had previously understood were regarded as prosperous - took in paying guests to make ends meet. They certainly didn't have holidays - not even in Ireland let alone abroad but they saved for their children and their children's education. Have we experienced anything to compare with Germany after WW2?

On the radio during the week I heard a woman explain how badly off she was - so impoverished that, while she could afford a 2 week holiday abroad with her kids she would be really stretched when it came to back to school expenses. The interviewer sympathised instead of asking why she wasn't saving the holiday money.
 
putsch said:
People are still unprepared to take responsibility for their own decisions.

Could we look to the past and the intense financial problems Irish people and people all over Europe - have had over the years? In times of difficulty people were prepared to do what it took to deal with their problems, they cut their cloth to suit. So for example (researching family history thanks to the recent online census) many, many people, inlcuding my grandparents who I had previously understood were regarded as prosperous - took in paying guests to make ends meet. They certainly didn't have holidays - not even in Ireland let alone abroad but they saved for their children and their children's education. Have we experienced anything to compare with Germany after WW2?

On the radio during the week I heard a woman explain how badly off she was - so impoverished that, while she could afford a 2 week holiday abroad with her kids she would be really stretched when it came to back to school expenses. The interviewer sympathised instead of asking why she wasn't saving the holiday money.
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I couldn't agree with you more!!!!

People's expectations of what they are 'entitled' to is so far removed from reality it is unreal. I heard the same radio interview, and couldn't believe what I was hearing. It's time for people to get real and wake up to the changed tune of the music.
 
people bought property with loans taken out over 20/ 30 years. Why now just because there has been a property drop do they want help.. there loans are long term. There is no such thing as instant gratification. property investment is about time bythe time there loans have been paid back there property will return to the value plus inflation .. Calm is needed. If you bought 3 years ago expecting to exit now with profit you were STUPID sorry
 
jerry2623 said:
. Calm is needed. If you bought 3 years ago expecting to exit now with profit you were STUPID sorry
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And what if people, like me, are in a situation where we didnt buy to make a quick buck, but now need to sell because of seperation and cant because the banks are not willing to look beyond their manuals/handbooks that were written up before thousands of people ended up in NE?
 
Chris said:
I couldn't agree with you more!!!!

People's expectations of what they are 'entitled' to is so far removed from reality it is unreal. I heard the same radio interview, and couldn't believe what I was hearing. It's time for people to get real and wake up to the changed tune of the music.
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I totally agree with this Irish people seem to have such an attitude of entitlement. I think a lot of people here could do with living abroad for a while to see how much tougher life is in other places....even in somewhere like the US if ppl saw the projects over there and these places it might open their eyes. Thanks to the 'celtic tiger' (I hate that phrase though I have to say haha) ppl's expectations are just ridiculous here....
 
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