by David Thorpe
June 2010
It took Belgium nine months after their last election to agree a coalition, and in the intervening three years their Prime Minister three times offered his resignation before it was finally accepted. This could only happen in Belgium? Maybe but it still really makes me wonder how on earth our new “government” can properly set about addressing all the economic woes left by the outgoing administration. Whatever happens next, it is widely accepted that this mission is going to be long and painful and that we have quite a journey ahead of us before we return back to a “normal” economy whatever “normal” might be. This has been without doubt a difficult start to a year coming as it has on the back of a global recession. The prolonged winter snowfall followed by the chaos caused by the eruption of the Eyjafjallajokull volcano has made any chance of an early recovery this year even more unlikely. Then last month, just when we thought the volcanic disruption was finally over we heard that Ireland had once again been cut off by another ash cloud. Talk about kicking a man when he’s down.
It’s fairly well understood that the Celtic Tiger has had a pretty rough time of it lately and it is probably worth re-visiting how the Irish economy got itself into its current predicament. Most commentators agree that its love affair with property (and we can all relate to that can’t we!) was the major cause and which ultimately kick-started the credit-fuelled property bubble. The mid 1990’s saw housing demand increase in response to lower interest rates and increasing exports. This was followed by credit expansion fuelled not only by existing Irish banks but also by the arrival of new banks, new types of credit instruments and the inflow of capital from oversees. At the height of the market there were 18 mortgage lenders providing residential mortgages and competition to make loans was fierce. Looking back and speaking from my own personal experience as somebody involved in the processing and insuring of many of these loans, it is hard to comprehend just how quickly the lending boom took hold. Average house prices for new homes in Dublin reached 10 times average earnings and 17 times average earnings for second-hand houses. The percentage of mortgages with an LTV of 100 percent or more jumped from 5 to 12 percent between 2003 and 2007 while the percentage of loans with a term of more than 30 years increased from 10 to 35 percent in the same period.
The scale of the damage to the Irish financial sector caused by the property bubble is breathtaking. Property prices have continued to fall again this year and in Dublin, house prices fell by 10.3 percent in the first quarter of 2010. The year-on-year decline in Dublin from the first quarter of 2009 to the first quarter of 2010 was 24.5 percent. To put this further into context, average prices across Ireland are now at end-of-2002 levels and there has been a 34 percent decrease since the fourth quarter of 2006. The big question is will they continue to fall or as the Irish government would like to believe has the market now bottomed out. But this isn’t where the problem ends. Based on last year’s and this year’s actual fall in property prices it is estimated that by June 2010 over 50 percent of all mortgage holders could be in negative equity. The Bank of Ireland has already reported that 21.5 percent (40,000) of its residential mortgages are in negative equity and that the average level of negative equity is presently greater than €50,000. This leaves you wondering where the rest of the negative mortgage holders are hiding because there is huge difference between 50 percent and 21.5 percent. Perhaps the true number sits somewhere in the middle but I doubt we will ever really know.
One thing we do know is that Irish Banks are desperately trying to tidy up their balance sheets and are exploring a number of measures to tempt existing borrowers to move their mortgage elsewhere. The Irish Broker Association believe some lenders are particularly keen to get borrowers to give up their tracker mortgages which are loss making to them. One way of doing this has been to offer mortgage holders up to €15,000 to break their existing deal. It seems that many banks not only no longer want new customers but that some don’t want their existing customers anymore.
So what happens next? In late 2009, the Irish government created the National Asset Management Agency (NAMA) that has been designed to function as a “Bad Bank”. NAMA is in the process of acquiring property development loans from Irish banks in return for government bonds. The original book value of these loans is €77 billion. The original asset value to which the loans related was €88 billion and the current market value is estimated to be just €47 billion. NAMA is proving controversial to say the least and has attracted a huge amount of interest from both the media and opposition politicians. Earlier this year when NAMA revealed that it intended to acquire 1,200 individual toxic loans for a consideration equivalent to 47 percent of nominal value opponents of NAMA were outraged claiming that the government was squandering public money. It is far too early to tell whether NAMA will fulfil its role in leading the Irish economy out of the precarious position it currently occupies. Its draft business plan assumed a life of 11 years with full repayment of the loans by 2020. Whatever happens, that still sounds like a long road to recovery.
It took Belgium nine months after their last election to agree a coalition, and in the intervening three years their Prime Minister three times offered his resignation before it was finally accepted. This could only happen in Belgium? Maybe but it still really makes me wonder how on earth our new “government” can properly set about addressing all the economic woes left by the outgoing administration. Whatever happens next, it is widely accepted that this mission is going to be long and painful and that we have quite a journey ahead of us before we return back to a “normal” economy whatever “normal” might be. This has been without doubt a difficult start to a year coming as it has on the back of a global recession. The prolonged winter snowfall followed by the chaos caused by the eruption of the Eyjafjallajokull volcano has made any chance of an early recovery this year even more unlikely. Then last month, just when we thought the volcanic disruption was finally over we heard that Ireland had once again been cut off by another ash cloud. Talk about kicking a man when he’s down.
It’s fairly well understood that the Celtic Tiger has had a pretty rough time of it lately and it is probably worth re-visiting how the Irish economy got itself into its current predicament. Most commentators agree that its love affair with property (and we can all relate to that can’t we!) was the major cause and which ultimately kick-started the credit-fuelled property bubble. The mid 1990’s saw housing demand increase in response to lower interest rates and increasing exports. This was followed by credit expansion fuelled not only by existing Irish banks but also by the arrival of new banks, new types of credit instruments and the inflow of capital from oversees. At the height of the market there were 18 mortgage lenders providing residential mortgages and competition to make loans was fierce. Looking back and speaking from my own personal experience as somebody involved in the processing and insuring of many of these loans, it is hard to comprehend just how quickly the lending boom took hold. Average house prices for new homes in Dublin reached 10 times average earnings and 17 times average earnings for second-hand houses. The percentage of mortgages with an LTV of 100 percent or more jumped from 5 to 12 percent between 2003 and 2007 while the percentage of loans with a term of more than 30 years increased from 10 to 35 percent in the same period.
The scale of the damage to the Irish financial sector caused by the property bubble is breathtaking. Property prices have continued to fall again this year and in Dublin, house prices fell by 10.3 percent in the first quarter of 2010. The year-on-year decline in Dublin from the first quarter of 2009 to the first quarter of 2010 was 24.5 percent. To put this further into context, average prices across Ireland are now at end-of-2002 levels and there has been a 34 percent decrease since the fourth quarter of 2006. The big question is will they continue to fall or as the Irish government would like to believe has the market now bottomed out. But this isn’t where the problem ends. Based on last year’s and this year’s actual fall in property prices it is estimated that by June 2010 over 50 percent of all mortgage holders could be in negative equity. The Bank of Ireland has already reported that 21.5 percent (40,000) of its residential mortgages are in negative equity and that the average level of negative equity is presently greater than €50,000. This leaves you wondering where the rest of the negative mortgage holders are hiding because there is huge difference between 50 percent and 21.5 percent. Perhaps the true number sits somewhere in the middle but I doubt we will ever really know.
One thing we do know is that Irish Banks are desperately trying to tidy up their balance sheets and are exploring a number of measures to tempt existing borrowers to move their mortgage elsewhere. The Irish Broker Association believe some lenders are particularly keen to get borrowers to give up their tracker mortgages which are loss making to them. One way of doing this has been to offer mortgage holders up to €15,000 to break their existing deal. It seems that many banks not only no longer want new customers but that some don’t want their existing customers anymore.
So what happens next? In late 2009, the Irish government created the National Asset Management Agency (NAMA) that has been designed to function as a “Bad Bank”. NAMA is in the process of acquiring property development loans from Irish banks in return for government bonds. The original book value of these loans is €77 billion. The original asset value to which the loans related was €88 billion and the current market value is estimated to be just €47 billion. NAMA is proving controversial to say the least and has attracted a huge amount of interest from both the media and opposition politicians. Earlier this year when NAMA revealed that it intended to acquire 1,200 individual toxic loans for a consideration equivalent to 47 percent of nominal value opponents of NAMA were outraged claiming that the government was squandering public money. It is far too early to tell whether NAMA will fulfil its role in leading the Irish economy out of the precarious position it currently occupies. Its draft business plan assumed a life of 11 years with full repayment of the loans by 2020. Whatever happens, that still sounds like a long road to recovery.