Irish Mortgage Brokers Blog

I hope you enjoyed the first round of economic history from 2008 to 2011, I think it is time for round 2.

Alan Greenspan was on CNBC last week and his interview is a very interesting take on Europe - which happens to be the first thing he looks at every day (European Bond Markets). Meanwhile Lloyds are reporting that the risk of a 2nd recession in the UK are higher at c. 25-30%.

Greece is the crisis that just keeps giving, The Telegraph has the usual Eurosceptic line but it isn’t about being smug any more. The Greek referendum call of recent days came out of left field and while it may never actually occur the political optics show that the Aegean issues are far from solved, along with the replacement of military officials (the interpretation being the fear of a coup).

And German joblessness is higher for the first time in 2 years, standing now at 7%. The rate of inflation in Germany is currently 2.6% (HICP at 2.86%), having remained over 2% since January 2011. The issue with that (and unemployment that wasn’t growing) is that it lead to a ‘Goldilocks delusion’ where not cutting rates and fiscally conservative policy was considered best. It seems now that Germany has not decoupled from the rest of Europe.

Growing resentment about profligate EU members along with some fear inducing inflation as well as rising unemployment make for a very grumpy Germany, it does not bide well for negotiations. Perhaps hindsight will equally not bide well for the Germany that handled the Great Recession so well (from an employment perspective) either?

Of course at home here in Ireland we are about to pay €700,000,000.00 to speculative/junk rated bond holders who in any normal circumstances would be jumping for joy at a 50% haircut. Politicians are walking out of the Dail due to the lack of discussion, and bingo halls being raided by cops [irrelevant but a sign of the times!].

The Central Bank of Italy (Banca d’Italia) €-Coin ‘one figure for all European GDP’ statistic is also showing a sharp down-trend at present, negative for the first time since September 2009. Italy, with the worlds 3rd largest debtor at €1.9 trillion Euro, and winner of ’scary chart of the day’ almost every day regarding their bond spreads v.s Germany.

I don’t know of any model that can capture and create metrics out of the information flying around at present. There are interesting twitter based investment tools that use crowd sourced information to imply the trajectory of the markets, but I’m not privy to being under the hood on those.

What I am trying to say is that all of this news doesn’t paint a pretty vista, and in this analysts opinion the October/November 2011 period will be another big turning point or cusp. I last made a call like this in January of 2008 (and while it seemed grim at the time it was understated in retrospect), and during that time I went entirely to cash and advised all of our private clients to do the same until late 08′ early 09′.

Today I am repeating that call - to stay out of the markets for a while and see what comes of this all. You might miss out on the Spring 09′ moment, but you won’t face the burn on the road that gets you there. The news flow is simply too negative at present for confidence to go any other way than down, capital preservation remains key.

Until Central Banks step up to the plate (and it our long held belief that they must and will -they are already our lifeline) with the multi-trillion multi-lateral approach there is no reason to do anything other than earn interest.

An excellent analysis of the issue with banks being bailed out, banks get into trouble and they are rescued (bailed out) or they default and creditors take a hit. However, often times the sovereign gets into trouble as well. Does the Sovereign then privatize assets or default themselves? Assets such as the banks fall into the hands of foreigners at that point - as we have already seen with Bank of Ireland.

We were delighted to take part in the making of Richard Currans documentary ‘Property Crash, Where to Now?’. It is the follow up to 2006’s ‘Future Crash’ in which he predicted the demise of the Irish property market.

The full version is available on the RTE player, we just posted the clip that we took part in (showing off for our loved ones basically!)

There are two sets of statistics floating around; on one hand you have the banks who claim that they are lending and also that the demand for credit simply isn’t there - a belief further expounded by John Trethowan. Then on the other hand you have the likes of PIBA who counter claim that 80% of applications are being refused.

So it is important to break down the vital components. First of all, the debate often centres around Small Medium Enterprise (SME) lending; even if demand for that type of credit isn’t there it doesn’t automatically translate into a reduced demand for mortgages. The point being that we can’t compare SME loans/business loan demand to that for mortgage credit.

Secondly is ‘what constitutes a refusal’, and this is where common sense diverges. Even the bank accept that if you seek €200,000 and are only offered €100,000 that it is a loan not fit for purpose, this even goes for SME loans - imagine trying to borrow 80% of a machine purchase at 200k and then trying to come up with €60,000 you can’t raise? Mortgages are no different, if people don’t have the ability to bridge the difference between the purchase price less their deposit and the loan sanctioned then it is an effective refusal.

If one wanted to be cynical, they would advise the banks to say ‘yes’ to absolutely everybody and only offer them €100 maximum. This ruse would be quickly seen for what it was, and yet when you add in a few zero’s and

Having given the banks support to the point of no return it now seems acceptable for even the Credit Review Office to use the ‘reduced demand’ argument to tacitly approve the strong chance that BOI & AIB will miss their combined lending target of €6,000,000,000 to Irish companies over two years.

If you have no demand in one area then why not funnel those funds which ‘must be lent’ to wherever the willing borrowers are? That our vested interest comes into this is evident - but it is frustrating to see a market down 95% and the issue of loan supply being a strong driver in the lack of transactions.

The vast majority of people who want to purchase a property simply cannot get past the underwriting hounds who have gone from being puppies in the last decade to being dogs at the gates of hell over the last two years. And the blurring of lines between different types of credit and the gathering of statistics give two totally different stories, but much like any cake, you have to look at the ingredients going into it, and in our opinion at least, the way ‘approvals’ are counted and accounted for is wrong, meaning credit is nowhere near as available as we are told it is.

The Tobin tax was a transaction tax first mooted in the 70’s, it was meant to be a tax that would reduce blatant speculation in currency markets.

The revived idea of a ‘financial transaction tax‘ is as flawed now as it was then, because it will likely hurt investment, reduce liquidity and institutions will pass on the cost to private individuals as was seen in the example of Sweden who implemented one for several years in the 80’s. .

However, there are issues in the current market which are distortionary and where a tax might aid the market and reduce volatility, I’m talking about algorithmic trading and high frequency trading. Much of the volume (on US exchanges estimated at c.60%) is not due to people making calls on the market, rather it is on computers that execute trades in short amounts of time, taking a minute profit each time - in many cases they do it just to earn the exchange commission (a fee the actual stock exchanges pays to active traders).

The financial arms race is at the point where people are putting machines in the actual stock exchanges just so that they can get an extra nano-second upper hand on people outside of the exchange, is this the ideal of price discovery or is it a rent seeking activity? I would go with the latter.

So the tax would instead be a Pigovian tax rather than a Tobin tax. A Pigovian tax is there to reduce undesirable outcomes (negative externalities in economist speak), if you decided that algorithmic trades are part of the issue then you could tax based on the time a share was held even if it sells at a loss. This would reduce liquidity provided by the algorithmic trades but is liquidity a universal good and would it exist without algorithmic trades?

This approach would be better than outright bans on short-selling, which do not aid in market transparency. It would also be a more easily understood (by the public as opposed to practitioners only) solution than the up-tick rule which is really only there to punish a short to some extent.

A tax based on the time an investment is held could go to zero after 24 hours, the point is that it would eradicate much of the black box activity which is dominated by investment banks at present. You could argue that this is a fair hedge, but was the idea of electronic trading to use the speed of light as the ‘investors edge’?

Ockhams razor applies on this one in my opinion, and leads to a ‘no’. It only exists and an investors edge because it can be utilized and lead to certain outcomes, not because it serves a market function of itself. Which is why a sliding scale based on the time a security is held may be a good idea (or maybe not?!).

A regular household investor would likely never face this tax, it would specifically be something that allows speculation but taxes the brand of it that is operating in an area of the market where only machines trade, there are not humans capable of doing what the algorithmic traders do, they can programme the function but a human can’t do it as fast.

This may reduce the efficiency of an organization, one could argue that having a machine do a trade faster is efficient and therefore reduces the bottom line, while I empathize with that opinion, I cannot sympathize with it because the frequency and the machine actioned trades are the problem, not the platform.

Algorithms are not the devil, nor can we blame them, but they are not there to create an efficient market, they are there to give a certain group of investment banks who spent a lot of money on them a rent collecting ability. Thus the need to tax that activity, if it must exist and they cannot prove the advantage to society general (because the disadvantages are clear) then pay up.

The preference for letting property for 1 year is often suitable for both tenant and landlord alike, however, if we do start to see people showing a propensity for longer term renting then creating a lease that facilitates this is vital.

The fact is that the ‘12 month term’ is partly irrelevant, what it does do is set out the terms and agreements; but during that 12 months the renter obtains the right to stay for a longer period under ‘Part 4′ of the Residential tenancies act 2004 (a 4yr cycle).

This is often a point of contention in eviction cases, so it is vital that people wishing to avail of Part 4 write to the landlord stating this between 3 and 1 months before the end of the tenancy date, although it can exist even without notification being given.

But today we’ll assume that both parties to the lease want to engage in a longer term choice. There are a few primary issues that each of them will want to cover.

1. Who pays for certain aspects of the upkeep? It is a good idea to sit down and negotiate this point and have it written into the lease, so mowing lawns (for instance) may be assumed to be the landlords responsibility -it is – but if you agree to have the tenant do it then it should stand.
2. Rent reviews is a big one, a longer lease comes with the risk that the person can fix their cost going forward, for this reason we would suggest doing two things. Firstly have a review date, and secondly have a ‘collar’. The review date needs agreement, so every two or three years would be a good idea. The ‘collar’ sets out the change – so if you had a 15% collar it would mean that the rent at that review date cannot go up or down by more than 15% and otherwise you set it at ‘market rent’.
3. The ‘market rent’ should be the average of two estate agent opinions, one from each party; not ideal, perhaps not even totally accurate but it is a way to ensure that 3rd party opinion is front and centre rather than personal battle on the topic.

These are the two main considerations, there may be others for wear & tear and maintenance of other things that you may want to negotiate on. Negotiating at the outset doesn’t guarantee results, naturally, at any point either party can renege on their agreement and revert to the PRTB or courts or otherwise, but it does take care of the majority of issues you might encounter.

Agreeing these things in advance also sets out pricing which is one of the main concerns of a renter (along with quality levels/location etc.).

Conference on “Bringing Retrofit to Market“, supported by SEAI, Sponsored by AIB, ESB Electric Ireland and Saint Gobain. Croke Park Conference Centre 23 September 2011

- Key theme is how to stimulate loan offerings to consumers who wish to invest in deep energy retrofit of their home or business

- Will provide overview of government’s new energy programme Better Energy, which plans transition away from grant supports to more market-based supports

- On the day, the findings of the IIEA/SEAI report to Government” “Thinking Deeper: Options for Financing Home Retrofit” will be launched.

Fascinating video (that takes some time but is well worth it). This video looks at the various issues surrounding growth.

I put on my thinking caps last week and drafted a paper called ‘Designing a Debt Relief programme with minimal moral hazard to address the Irish household debt overhang‘.

We were every happy with the write up it got in the Sunday Independent via Carol Hunt.

There is far too much talk of ‘moral hazard’ in the public debate to date, instead we should be also considering ’separating equilibrium’ (which is kind of the opposite of moral hazard - it’s the ‘pain’ that comes with moral hazard ‘gain’).

To do this you have to create a programme which works within some of the parameters of the existing laws (new legislation must still take account of what exists before it), look at the operational aspects of the scheme (how it functions in real life), design a general algorithm of the process and most importantly have an ‘incentive alignment’ which means that neither party voluntarily makes an action to the intentional detriment of the other.

So I failed if you take every metric together, but what does come out of this is that you could have a somewhat prescriptive debt solution that works rapidly, uses established methods and that is fair to both bank and borrower.

The statement that we ‘can’t afford the cost’ is a legitimized fallacy, one that if you repeat it often enough becomes true. Contrary to that is the fact that loans that cannot be repaid will not be repaid - if you accept that then there is a cost, the question is whose lap does it land in? The banks via writedown/writeoff or the taxpayer via additional welfare costs?

An easier way to think about this is as follows: A cost is a cost, and the question is really about who bears it rather than whether it exists or not. This is just another example of the banking system hoping to offset their costs on other parties, it is the ultimate rent-seeking behaviour.

I am hopeful that a few people will read this and critique the heck out of it (please critique here or post a link to where we can find the critique), because this is HOW the subject advances, to date it has all been on subjective stances as to what is ‘right’ or ‘wrong’. On the cost front we used a simple comparative cost rather than a macro-economic one.

If nothing else, this paper will cure insomnia!