Irish Mortgage Brokers Blog

In providing a blanket ban on repossessions our regulator has deployed the bluntest tool in the box with all of the grace of a Rhino on ice skates.

We brought in a new Governor and Regulator with a view to creating real change, but it seems that populism reigns supreme given that Mr. Elderfields first major move since taking office was to give a one year blanket ban on repossessions - that is a textbook mistake.

Everybody accepts that the incentives in life are carrot on one hand and whip in the other, when it comes to arrears the carrot is that of getting your payments back in order, keeping your home, and feeling secure, the whip is that the bank will take your house. When there are no repossessions allowed there is neither whip nor carrot, you will keep your home, securely protected by unthoughtful legislation, and payments…. if you don’t make any you can still walk away after 12 free months.

When deposit rates drop and mortgage rates rise, you can thank the person who doesn’t pay their mortgage in part for this. Cruel? Yes, but banks wouldn’t be taking drastic measures if people were repaying their loans, and the frustrating part is that you can’t really hammer a bank with a ‘NAMA’ argument because those assets are removed from them and are not the root cause for rate hikes/deposit drops.

Essentially you may as well pay your neighbours mortgage, and the problems don’t stop there.

If people don’t make payments in a year, what incentive is there for the people who are struggling to repay to stay up to date? When you have several creditors hounding you the one shouting the loudest gets the response, really, people should be telling their credit card and unsecured debt holders to get stuffed, now they can do the same to their mortgage provider and not risk being kicked out.

That sends the wrong message out to everybody. It also shows that the regulator is willing to use carpet bombing in a situation where precision bombing would be more suitable. It isn’t a solution, in fact, you are likely hurting many borrowers even more by letting this happen (more on that later).

If banks have collateral that they want to repo’ out (for funding) then there are certain arrears/non-performance levels, above which counter-parties don’t want to take the collateral - that is what brought down Bear Stearns. If our banks are forced into allowing arrears to fester it will increase their risk, their credibility suffers as does their credit-ability: namely, they will be reliant even more on a state guarantee which is ultimately a cost to the taxpayer.

The sub-prime lenders were actually very honest in some respects, if you don’t pay your mortage they take your house, now we are forcing them to be part of the process, and yet they are not guaranteed by the state, nor are they getting a bailout and their clients will find it hard to bounce back from their arrears.

That will make it worse, you see, there are (right now) over 6,500 mortgages in terminal default, more than a year behind, the survival rate for mortgages at that point is negligible - without outright debt forgiveness. With another year of compounding (bearing in mind that now ALL lenders are subject to the new rule) that number will swell impressively to the degree where we have to bail out borrowers, the only question is who, and how much.

If you go into arrears and then move out in two years, you don’t owe your current balance, you owe the balance, plus the arrears, plus penalty interest - and that means a person is deeper in the hole come the end of it all, in fact, it would be more merciful to kick a person out and they could then avail of cheaper rent and get on with their lives without the life-burden that defaulting debt brings with it, in essence, our state wants to keep everybody on the hook come hell or high water and the sole beneficiary is the banking system, not the individual. One year down the line many borrowers will owe even more, they will be deeper in debt, and probably deeper in negative equity as prices reach bottom, they will be stuck, and far from having helped them, we will have made them worse off, where is the sense in that?

It is vital to see through the lie, and the programming, you see, most would have you believe that everybody wants to ’stay put’, but that is a default answer when there are no options, if people were told ‘you can get out of this and walk away with a different solution’ you might find their attitudes changing, because now it isn’t choice of ’stay put and deeper in debt’ or ‘get kicked out onto the road’, rather it addresses other elements of the problem.

I am reminded of the song 16 Tonnes, in which a guy tells St. Peter not to call him because he owes so much money to the company store. I’ll put that in perspective, the ‘company store’ used to be a general store run by mining companies, they were often the only place to buy any supplies in the remote areas where mines would be found, they extended credit, expensive credit, and you could pay it back with work, well, for many people, they didn’t have enough to afford the prices so they borrowed and borrowed until they literally owed their soul to the company store. We are doing the same thing, but we’ll tell St. Peter not to call because we owe it to the banks.

Haven’t any of you wondered why the banks are not protesting at such a measure? They cry quite publicly when they are forced to take write-downs, they have every excuse when they jack up rates, and yet not collecting on mortgages that are owed, even after a year of arrears and we hear nothing? The truth is between the lines on this one, I’m not saying its a conspiracy, but it definitely stinks.

There are literally hundreds of solutions to our crisis, the most meaningless medicine would be the one we are seeing utilised, it doesn’t actually solve anything, it just puts the problem off for another year (winning votes in the process) and furthers my personal belief that we don’t actually have a plan, rather we have a hope, and all of that hope is predicated on a recovery happening sooner rather than later.

I pray for the knowledge economy, because the one we are currently being put through certainly lacks it.

On the 7th of February Ivan Yates spoke to Yvonne Hogan, Property Editor of the Irish Independent and Karl Deeter, Operations Manager of Irish Mortgage Brokers, asking for their opinions on the property market, where it has been, and where they believe it is going.

Primetime took a look at the mortgage market situation in Ireland on the 2nd of February, they spoke to various industry experts as well as people on the street about their feelings on the situation. The clips below are well worth watching.

In this clip Primetime spoke to people on the street, and the general opinion was one of empathy for borrowers in trouble but the overall tone was that people didn’t necessarily want to step in and have their tax money going to bail them out. Then David Murphy interviews an anonymous borrower who is in debt trouble, as well as getting the opinion of Irish Mortgage Brokers Operations Manager Karl Deeter and Paul Joyce of the Free Legal Aid Centre (FLAC).

In the second video Pat Farrell of the IBF (Irish Bankers Federation), Stephen Kinsella (Lecturer of economics at University Limerick, and author of ‘Ireland in 2050), Pauline Blackwell of FLAC (free legal advice centre) and Ciaran Cuffe of the Green Party talk to Miriam O’Callaghan about the issues of debt and the solutions for solving impaired mortgages.

The third clip looks at the effects of interest rates as well as the PTsb decision to increase their interest rates, featuring David Guinane of PTsb talking to an Oireachtas Committee. Charlie Weston of the Irish Independent newspaper (personal finance editor) also features.

Unless you are a cash buyer it isn’t a good idea to focus on property as a single cost, in a transaction there are two costs, that of the asset and then that of the finance for the asset purchase. I have done a few comparisons on costs where in two years time where a property has fallen a further 20% from where it is today.

As we expect margins on lending to rise considerably we have factored that in, along with moderate base rate increases. What we have done here is to take a view that prices may have fallen 40% from the peak to now, but they will fall a further 10% p.a. for the next two years, a further 20% from today or over 50% from the peak.

Purchase in 2010
€200,000 90% mortgage over 25yrs [€180,000] @ 4.5% [10yr fixed]
base rate 1% margin c.3.5%
repayment per month: €1,000
total cost: €300,000
balance after yr. 10: €130,785
Total Interest Paid by year 10: €70,845
Capital & Interest combined after 10yrs: €120,059

Purchase in 2011 (10% price drop)
€180,000 90% mortgage over 25yrs [€162,000] @ 6.5% [10yr fixed]
base rate 2% margin c.4.5%
repayment:€1,093
total cost:€328,150
balance after yr. 10: €125,568
Total Interest Paid by year 10: €94,828
Capital & Interest combined after 10yrs: €131,259

Purchase in 2012 ( 12% drop on 2011 or 20% price drop from 2010)
€160,000 90% mortgage over 25yrs [€144,000] @ 8% [10yr fixed]
base rate 3% margin c.5%
repayment:€1,111
total cost:€333,424
balance after yr. 10: €116,299
Total Interest Paid by year 10: €105,669
Capital & Interest combined after 10yrs: €133,369

What we can see is that the price of a property is one thing, but the cost of it is another, the price is dictated on the day of purchase (signing contracts really but in effect when you close), but the cost for non-cash buyers is dependent on the interest rates involved.

We can see that if margins (using the 10yr fixed rate) were to go from 350 basis points to 500 (which is only 1.5% more and totally reasonable within the 2-3yr time frame) while base rates moved somewhat conservatively as well that the reduced price doesn’t save that much in terms of monthly costings, in fact, the gain on the reduced capital sum is virtually the same as the additional cost, but (for me anyway) I’d rather have increased cash flow versus having a reduced capital sum - within reason of course!

Could this really happen? Take a look at the Euribor yield curve below, it is pricing in rate increases, but because this is market based and not from the ECB itself we can only use it as a guide, having said that, it is a guide based upon millions of transactions so perhaps it is as ‘real’ as it gets.

That banks will increase margins is a given, and people have a tendency to believe rates will stay low and they don’t look across the curve, if they did then lots of people would have been fixing their rates in 2004 but instead they went for fixed rates predominantly from 2005 onwards when rates were in an upward cycle and the upswing was already priced in! The reward for huge groups who made that decision was not only negative equity, but a higher financing cost in the process!

This doesn’t mean property is in some widespread recovery, but it is a reminder to people that ‘property prices’ are not the only consideration in buying, if you could book a rate today and get it in two years that might be ideal, but because that isn’t possible then don’t forget to consider costs as well as prices.

We have put together a report outlining the trends we expect to see in the Irish mortgage market in 2010. Many of the opinions have been substantiated from within industry and are evident in market information, however, we cannot say with certainty that anything mentioned is guaranteed to pass, only that we believe these trends are the ‘most likely’ and stating the reasoning behind them. You can obtain the report by clicking on the image below.

If you have any questions please feel free to call or email our firm regarding same.

I think that the introduction of postcodes will usher in the foundation for property tax, and that the gains to be had from postal efficiency are not at the heart of the move toward a comprehensive postcode system.

Just to give the background to this post, the Sunday Tribune reported:

Residents in Dublin’s coveted D4 addresses have only two years left until their exclusive postcode is renamed by the Department of Communications, as plans for the new postcode system are finalised by Minister Eamon Ryan. The department plans to issue tenders for the system by Easter, but a delay has meant the code will not be in place until the end of 2011, and not early next year as planned.

Under the new coding system, areas such as Dublin 4 and Dublin 6 will be renamed under a new six-digit system, such as D04123 and D06123. However Labour’s spokeswoman for Communications, Energy and Natural Re­sources, Liz McManus, said the latest estimates for the new system show it will cost a minimum of €40m.

McManus has also said businesses will suffer further financial hardships as they will be forced to change their address records and data.”This is not the time to be implementing this system, and it appears to be nothing more than a vanity project for the minister.”

What does this have to do with Property Tax?…

In the budget speech Lenihan alluded to the coming tax on property, this quote is verbatim ‘In the Renewed Programme for Government we have accepted the recommendations of the Commission on Taxation on the need for a property tax. Considerable ground work will need to be done before a Site Valuation Tax can be introduced. Work will shortly begin on the registration of ownership and the valuation of land‘ (emphasis mine).

The idea of a ‘Site Valuation Tax’ means that a property isn’t taxed on what it will sell for, rather it is taxed based on the value of the site it sits upon, essentially the footprint of the property, and this is where Liz McManus is missing the point - if we have comprehensive postcodes breaking areas down into small parcels then you can start to apply a site value with meaning.

I like to use myself as an example, I live in Donnycarney in Dublin 5, suffice to say the value of the site I live on is nowhere near as valuable as the sites of my not to distant neighbours in Beaumont or Raheny, so you couldn’t have a site value tax for ‘Dublin 5′, but if that were to change, and instead my postal code was me and every house within 100 metres then it would make absolute sense to value them all the same (from a ’site’ perspective).

It would also mean that maintaining a national database on property site values would be far more simple, without them you would have to figure out the actual transactions in an area, see if it was comparable or not and test for proximity and other factors, it would be a quagmire. However, with smaller parcels you can use the average for surrounding parcels as well as transactions and other measures to get a really accurate non-distorting site value (there would be marginal distortion such as where a less-desirable neighbourhood meets a desirable - my own neighbourhood being a case in point where Donnycarney borders Clontarf, it would be important to have some small tinkering to take account for circumstances, but by and large huge tracts of land could have a common postcode and broadly common value).

Far from postcodes being a ‘vanity project’ they are fundamental to a rationally and well working database that can be used to get a letter to you, but also to impose a property tax.

Doubt it? O.k., then be cynical with me for a moment and ask ‘Do we have a badly functioning postal service where letters are regularly lost?’ (if you are in debt collection you might believe that to be the case!), do we need to get post to people quicker than we used to? And with the new codes, will it speed up the process or increase efficiency? Is the post office going to do away with half of their work force due to some new found efficiency? And most importantly, in a year where every expenditure going is being slashed, would €40m not make one hell of a difference to some pertinent project?

Unless you have your eyes closed then the push for postcodes ought to be screaming out the obvious at this stage…. postcodes = property tax.

We don’t need a better postal system, we won’t get to send letters for less due to postcodes. In terms of function, I have tested it several times, it works, really well actually, in fact, if you get an envelope and write on it ‘Karl Deeter, Dublin’ I’ll still get it. That’s how good it is, fact, so why all the effort to re-invent the wheel? Unless it’s really about something else?

CNBC hosted a discussion about whether home prices will go up in 2010, with Kenneth Rosen, UC Berkeley Haas School of Business; Matthew Garrison, The Matt Garrison Group and CNBC’s Diana Olick. The American situation is vastly different from that in Ireland but it makes for interesting comparison.

Today we will cover some very practical tips which may help you get a better price when you are looking at a property. We suggest you take this list and print it, then as you are looking at a property check the various sections and use it as a rationale for your asking price, there may be things that were overlooked as well, so at worst this will help to ensure you don’t make unnecessary errors in deciding whether or not a certain property is good or not.

1. Is the garden in need of work? - If so you could ask that they either correct it or that you want more money off, a garden is generally a good selling point so if it is not well presented it can be a ‘red light’ telling you to go through the place with a fine toothed comb.

2. Does the fencing/walls need repair? - again, if there are any issues ask that they are remedied or they can discount the price by what it may cost to put the issue to rights. This goes for side gates/front gates/garden fences etc. Make sure they are all functional and open and close with ease.

3. Do Gutters or fascias need work? - This can be a real pain and badly working gutters can cause all types of problems from spillover which will put damp into walls or moss growing up the side of the building. Make sure the gutters are modern and well working. There are two times you should check out a property if possible, firstly on a rainy day, secondly at night (to gauge the area in the evening in terms of night activity - in particular any anti-social activity, and lighting - for security).

4. Is the chimney sound and working? - Apart from the obvious fire hazard, it is important to make sure the chimney isn’t cracked (check attic wall) or that there aren’t bird nests blocking it (doesn’t only happen in derelict houses!), any issues warrant a drop in asking prices.

5. Does the house need painting or decorating on the interior? This can sometimes be a ‘moving in task’, it doesn’t have to be, ask the seller to paint the place.

6. Are the windows and doors sound? (I made this error when buying my own home!) Check ALL of the windows and doors, make sure they open and shut easily and are fully functional, that means every window and door, if there are any issue the automatic solutions is as always ‘ask that it is put right or get a reduction in price’.

[We'll cover more ideas in the near future, we have about 40 ideas in total]

The actual method you can use to ensure this happens is to ask that these things are listed and put in the contract and then a certain amount is held back by the solicitor until you have been able to check that everything on the list that was negotiated has been taken care of.

I can’t believe I’m about to say it…. But today I’m writing about niche recoveries in the property market, not the ‘whole’ market but rather that of giving an example of where we are seeing opportunity from an investment perspective. It is lonely territory because I have been so totally bearish on property for so long that a hint of bullishness is uncomfortable for me at this stage!

Recovery isn’t a destination, its part of a larger cycle, for every boom there is a bust, and for that reason we have spoken in the past about what recovery ‘might look like’ rather than ‘when’ it will occur.

The hallmarks of what a residential property recovery might look like are, in our opinion: property price stability in a range that is closer to traditional multiples of the average wage of the prospective buyer, a return of some inflation, rent price stabilisation (ideally tracking inflation) with yields at or above 6 to 7% and supply/demand dynamics in balance.

We don’t have any of those things in the Irish market in 2009, we probably won’t have those things in 2010 either, in particular the issue of oversupply will take many years to play out but that doesn’t mean that there is zero recovery or opportunity the same as a stock market crash doesn’t mean that every stock on the market is a failure, in equities you pick shares, in property you pick locations (which is usually based on proximity to infrastructure or certain local services), property types, and filter out as much risk as possible via pricing.

Which brings us to my belief on recovery in the property market which will be defined by stratification and pockmarking, what I mean by that is: recovery will happen at certain strata in the market (specifically starting close the bottom end of the market in non-apartment 2nd hand properties) and will be geographically pockmarked in certain neighbourhoods. Today we will discuss some areas and share our thoughts with you on it from an investment perspective.

We have used figures from Propertyweek.ie (valuers database), MyHome, and Daft in order to attempt to show that in some areas and on some levels there are genuine buying opportunities with desirable yields.

We are based ‘kit out’ costs as c.5% of the purchase price and while there may be some deviation above or below that, we make the assumption to demonstrate the wider argument which is the recovery of the market in certain locations at specific price ranges when weighed against rental incomes, closing costs are 2% and stamp is not applicable as we are only looking at investment property below the threshold of €125,000.

The area of focus is Stoneybatter on the North side and the Cork St. area on the South side, they are roughly at mirror locations on opposite sides of the river, in close proximity to the city, adjacent to the Phoenix Park, the Luas, Heuston Station and with a plethora of shops, schools and standard city amenities nearby.

Ashford Place, Stoneybatter - asking price €120,000
Fingal Street, Dublin 8 - asking price €110,000

These properties are amongst the first to come to the market at these prices, and while they may not be representative of the standard prices in these neighbourhoods, they do show that there are properties with motivated sellers and that in the future you can reasonably expect more to come to market at a similar price point.

Both of these properties are below the minimum threshold for stamp, but also for obtaining a mortgage, so it will likely only appeal to a cash buyer, so we will compare the yield to cash deposits taking that as a risk free rate.

A search on Daft.ie in the same area shows rents ranging from €900 to €1,000 but most are advertising at €950 for a similar property, I have my doubts on the asking price on rentals so we’ll pear that down to the lower end at €900 and run some figures and take a middle ground purchase price of €115,000

Cost: €115,000 + €5,750 (5% kit out) + €2,300 (2% closing costs) = €123,050

Annual Rent: (assumed 11 months occupancy in 12) €9,900

Yield: 9,900/123,050 = 8%

Best cash deposit yield: Anglo fixed 1yr @ 3.8%  (regular saver accounts offer more but not on lump sums)

The property is yielding 211% more than the best cash deposit rate currently available.

There are other costs involved, for instance, letting agent fees (if you use a letting agent) and second home property tax, but the 8% yield demonstrates that cash used to purchase this property (in particular when the investment window is medium to long term) would easily outperform any deposit product currently available, it is also beating AAA corporate grade bonds as well as sovereign bonds (excluding the likes of Venezuela).

What this doesn’t mean is that we are seeing widespread ‘green shoots’ however, it does mean that there are sensible investment options in the property market with yields which justify the risk, and mantra of ‘property is dead’ is simply not true, it is just a demonstration of current crowd behaviour minus any specific analysis, and that in itself presents an opportunity as people sell on fear under market distressed conditions.

These opportunities should only be weighed up after careful consideration (I haven’t viewed either of these properties) and appraisal of not only the property but the surrounding amenities and infrastructure, but one thing is for sure, in certain pockets at certain price levels there are genuine opportunities in the market.

Yesterday the National Asset Management Agency (NAMA) legislation was brought out in the Dail (that’s the Irish Government buildings for our international readers) . We have put some of the developments into simple graphs to give an idea of the way NAMA will work and what the prices are as well as what they mean (for the pedants out there- they were drawn by hand to demonstrate the point).

So the total value of the loans is €68 billion, adding on €9 billion in rolled up interest - development accounts often had this factored into the end sale price, generally showing c. 15% profits (as a minimum) with the roll up included.

The €77 billion in loans will receive a 30% haircut (across the board) meaning the price paid will be €54 billion. It is important to note that different institutions will see larger haircuts than others, so it might be that BOI gets 20%, AIB 25% and Anglo 37% / INBS 42%, the 30% represents a varied pot in which individual loan sizes and haircuts will vary, having said that we know already that the biggest discounts will need to be applied to INBS and Anglo.

Brian Lenihan stated that the original value of these assets was €88 billion, of which the loans were €68 billion (before rolling interest was added on), an average LTV of 77% applied (which is over standard commercial lending levels so some more digging may be needed to see if there were cross-security/cross collateral considerations or cash flow producing securities for additional lending involved). These loans will being bought for €54 billion imply a 40% drop in the values of the assets on an economic basis (not today’s market price basis).

Each loan going to NAMA will have 185 queries/questions required on the property itself, and a further 300 on the loan, that means the diligence will be c. 500 questions that must be answered for each property. The staff of NAMA (c. 50) can’t cope and thus the banks are taking people out of credit and having them go to work for NAMA but on the bank payroll, so in essence NAMA has outsourced the work at no additional personnel cost which was a smart move (one of few).

The actual value of the assets in today’s market is (we are told) €47 billion, this means that there is an upfront shortfall of €7 billion, so no matter what happens there has been a potential tax payer cost of €7 billion at a minimum, obviously that is the market value though and not a long term value which assumes that prices will eventually rebound (the estimate is 10% in 10yrs), that point can be argued for and against, the issue will be (in my opinion) the ongoing cash flow to ensure loans are serviced. There isn’t any information put forward about expected default rates and that could easily skew the numbers.

The debt is also predicated on Euribor and while Liam Carroll’s case was tossed out of court because it relied on low interest rates, we have pegged the NAMA on the same hopes! It tells me that this plan probably wouldn’t stack up if it was provided judicial oversight, then again, fairness was never part of the plan.

Having said that, of the assets going across c. 40% of them are cash flow producing assets - in some cases this is blocks of apartments that were retained by developers and let out or other commercial rents. The banks will have a big job ahead of them in the near future: they will have to raise some capital quickly to avoid dilution of their shares/potential nationalisation (or at least majority state ownership which is effectively the same thing), if today’s share price performance is anything to go by the appetite is back so this seems likely to be a working solution. NAMA isn’t about fairness, and in that respect it is a massive failure, it is about a plan with a chance and in that respect it has a better chance of success than the alternatives put forward.