Irish banks are open for business. Some are advertising the number of mortgages they approve each day. Others ask you to talk to them right away about getting your first home. But the shocking state of the Irish mortgage and property market is a long way from the image of happy couples smiling on the threshold of their new homes.
In late May, the truth about the home loan market was laid bare by the Irish Banking Federation and PWC. In their latest quarterly report, they showed that mortgage lending has essentially fallen off a cliff. In the first quarter of this year, there was less money approved and funded for mortgages than at any other time since the beginning of 2005 (which is as far back as the PWC/IBF numbers go).
Between January and March, total residential mortgage lending in Ireland was just €1.22bln. That may sound like a lot, but it’s actually a drop of 39% on the same quarter last year, and a staggering drop of 85% on the first quarter of 2006.
Contrary to some claims, just 77 people a day drew down mortgages in the first three months of this year. And of the small number of people actually getting loans, most of them already had homes. 61% of those who walked out of the bank with a cheque were topping-up, re-mortgaging or moving. Basically, folks that had enough equity to keep the banks from worrying about defaults and upside-down loans.
Interestingly, of 6,954 mortgages that were actually funded in the first quarter, 35% of them were given to first time buyers – this sounds great – but at just over 2300 loans funded, it was the lowest number of first time buyers given mortgages since the (IBF/PWC) records began.
So what’s going on? Why, when it’s supposedly such a great time to buy, interest rates remain low and the banks have been re-capitalised by the taxpayer, are we seeing the lowest number of home loans funded in over six years? (and probably much longer)
Of course, the days of 100% mortgages with furniture and kit-out add-ons are long gone but the swing in the other direction has been brutal. Banks are now requiring deposits of at least 8% and as much as 20% from first time buyers. Even in a collapsing property market these requirements are prohibitive, and eliminate a lot of potential borrowers, most notably first-timers of whom just 29 a day are getting the money they need to get into their first homes. There’s also the new and rigorous vetting that includes thorough financial inspections, job security checks, proof of savings habits, credit checks and so on.
Then there’s the arrears issue. Thousands of Irish households have found themselves unable to make payments on their existing home loans. In a statement a few weeks ago, the Financial Regulator said that more than 32,000 residential mortgage holders are over three months in arrears and 22,000 of those are more than six months behind. That’s more than 1 in every 25 mortgages held in Ireland. It is so much of a concern that Matthew Elderfield, the new head of the Financial Regulator reckoned that mortgage arrears may be “the biggest legacy issue” of the recession.
The Independent’s Charlie Weston had a closer look at the 32,000 arrears figure and in an excellent article published on 2nd June he revealed that that number of mortgages in trouble is in probably far higher because:
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Another 15,500 householders are getting mortgage support from the state
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Thousands more have renegotiated the terms of their mortgages to pay for longer so they can pay less now
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People who’ve lost their jobs are working through their savings to meet their payments
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More again have negotiated fixed payments that are a fraction of their standard mortgage payments
Although considered to be performing, these are troubled loans, which are not included in the official arrears figures compiled by the Financial Regulator. When Charlie Weston was writing his article he spoke to Aoife Walsh of the housing charity Respond, and she reckoned that 70,000 mortgage holders are in danger of default. That’s more like 1 in every 11.
Also worth a strong mention is the Moratorium - the government-authorized delay on repossessions for lenders regulated by the Financial Regulator. Introduced last year, a bank could not start proceedings to repossess a home unless a customer was six months or more in arrears. A welcome helping hand for struggling homeowners, but certainly a time-bomb waiting to go off.
So much so, that in February this year, Brian Lenihan announced that the Moratorium had been extended to 12 months. It looks like the 22,000 strong repossession time-bomb was just too much for the government to handle right now. But how can this be sustained when the numbers behind in their payments keeps escalating?
This week, the Irish Times reported that several banks have started selling off mothballed developments at knockdown prices. Other banks are sure to follow suit, which will likely start a snowball effect. The first of the schemes to hit the market are in desirable locations and have services like rail nearby; so they should sell – but they’ll most likely be picked up by investors, rather than the first time buyers who could really use them.
First time buyers probably wouldn’t get approval to buy into these dumped developments; after all it’s the banks themselves that are now flogging them off. And to make matters worse for the market in general, selling entire apartment schemes at hugely discounted prices will affect selling prices elsewhere, further depressing the market and making it harder to borrow to buy homes.
Irish house prices are still falling though. Today, Knight Frank, the global property consultancy, released their quarterly snapshot of the global housing market and in the first quarter of this year, Irish property values fell by 4.8% and are down 18.9% in just the last year alone. So bad is the condition of the Irish property market that of the 48 countries studied by Knight Frank, only Latvia, Lithuania, Ukraine and Estonia have suffered worse house price drops in the last 12 months.
Things have changed so much in the lending market, that in the last quarter of 2005, just as the Irish property market began to boil, Irish banks gave out 8 times as many mortgages to 8 times as many people as they did in the first quarter of this year. Back in late 2005, nearly 56,000 residential mortgages were funded in Ireland, over 600 per day. Their total value was a staggering €10.34 billion. And yes, that’s more than 8 times as much money as Irish borrowers received in 2010.
It’s difficult to know when we’ll see a turn-around, but it doesn’t look like any time soon. The Moratorium has rendered the banks toothless in recouping arrears and is acting as a disincentive for struggling households to maintain payments - especially on upside-down properties in undesirable locations. To further lend into the current falling market, banks would need to be certain that the risk of default was as close to zero as possible.
There’s simply too much pressure on the banks and very little incentive to for them to lend - despite their claims and campaigns to the contrary. Of the 77 people per day that are actually getting mortgages in Ireland right now, we don’t know their exact circumstances, but according to Michael Dowling of the Independent Mortgage Advisers’ Federation; banks are cherry-picking the customers they want.
And who are they?
Civil servants and medical professionals with permanent jobs in the state sector.
A version of this story first appeared on the Ferguson and Associates Finance Blog – more good articles and can be read at:
www.ferga.com
and
http://fergablog.blogspot.com/search/label/Mortgages
