The upside to Negative Equity?

housing bubble, facing negative equity?Sometimes I write articles that are inflammatory, today’s is of that ilk, I want to point out some of the upsides to Negative Equity. They are going to be put in a list with the upsides to getting hit by the number 47 bus. Anyways… The theme of this article is that for every downside there is an upside so today I will seek to find the benefits of Negative Equity, my gut feeling is that I definitely have my work cut out for me on this post!

100% mortgage, if you took out a 100% mortgage during 2007 and put down no deposit and in turn you bought for €300,000 then what you didn’t have to do was save up 30k of a deposit – what actually have to earn to save a deposit? If you are on the higher band of tax then you paid tax at 41% and of course there is about 5% of PRSI so we’ll say that you paid almost 46% in total. A €30,000 deposit would mean you had to earn about €55,000. So if your house fell by 10% and was at 270,000 then although you are paying off a loan of €300,000 there is €55,000 of ‘earnings’ you didn’t have to make in order to secure the property because there is no tax on lending.

That doesn’t mean that buying during a downward trend is smart and certainly today’s EBS and DKM report is sorely lacking in some key areas when they make comparisons about buying versus renting and now being the time to buy once you hold on for three years, doing the figures for this warrants a seperate post altogether.

I guess what I am really saying is that if you are one of the many people who currently have negative equity don’t fret too much, and don’t have emergency services talking you down off the roof because although things are not great today. There will be a recovery some day, that’s the nature of cyclical markets. The only real fear you need to have is if you are forced to sell today. In that case grab your ladder.

Sometimes when you are working in an industry it’s not easy to admit that things are not perfect, I imagine that Coopers all felt the world would cease to exist without barrels but here we are in 2008 and the Coopers Union probably has only a single member.

The other upside to negative equity is that if you did buy at a point where you are currently down some money think about this: I had to pay stamp duty on my gaffe, 3.75% and that was totally dead money, now stamp duty for First Time Buyers is history, tax relief at source is more than double what it was when I bought in 2003, now its €10,000 for a single person and €20,000 for a couple/two people. which means that despite rising rates actual payments are easier to handle, if you think about a world where you choose (just for a moment) to look aside from rates and prices and just to focus on what you’re expenses are month to month then the many people in negative equity are not in some dire life threatening crisis.

implosion in the property marketA clear downside is that a lot of people are in negative equity and once in you can’t exactly up-sticks and leave for the craic, houses are not liquid investments and the price drops in many areas are extreme, Dr. Alan Ahearne of NUI Galway is saying that contrary to the published figure of price drops of 7.3% that the figure was more like 10-15%, that must hurt but at the same time its not like you are walking out the door and having 10% of 300,000 taken at gunpoint, even though the net result may be the same.

The rental market is also taking a dip as you can see at the Irish Property Watch website, so if property and rents are in decline then it means that Ireland will perhaps cease to occupy top slots in the world for most expensive places to live. I would much rather see us all shortlisted for football, rugby, or even…. dare I say it…. The Eurovision. The ‘Most expensive place in OECD‘ is not a moniker to be proud of, actually most people failed to thank Bertie for that even though it all happened during the decade that he transformed our economy (single handedly naturally) into a Utopian example of financial success.

Negative Equity in Ireland will also calm a market that was in overdrive, honestly, when a day comes where between day one where a house is listed and day five the price goes up by 25% there has to be something wrong, I have seen that too many times, it was happening everywhere in 2006 and frankly I’m pleased to see the back of it all, it wasn’t sustainable nor desirable.

It will cut back on the insatiable greed, this is more a question of morals but has anybody noticed that everybody here got terribly greedy? Years ago people never even talked about money (I would like to think we were just better conversationalists!) but now folks are quick to tell you about the value of their house and how much they make etc. I think getting back to a normal property market will be a very healthy thing.

We won’t have to talk about property with barbers, this isn’t a slant on Barbers but I welcome the chance to get some local gossip from my barber rather than him asking me for advice (in part because I usually end up giving it yet its me who has to pay once I stand up out of the chair!) One investor from the days of the Great Depression used to ask shoe shine boys for tips then short sell those stocks, his name was Joe Kennedyand he helped predict the fallout of 1929, equally when everybody from a taxi drive to the milkman is talking property it’s a sign things will turn. That’s not to say that a particular Taxi Driver or Milkman can’t be a de facto expert with lots of real estate, I’m just using those trades to demonstrate the analogy. On a separate note Joe Kennedy had a son, John F. Kennedy.

The fire sales will mean some actual value may return to the market and for that everybody from First Time Buyers to Investors can be happy, a sensible property market with rational growth is a positive thing.

An interesting point came in about negative equity on a forum I frequent called the Property Pin and a man (whom I only know by the handle ‘Gekko’) I feel like the bad guy Agent from the Matrix ‘we know him only by his hacker name Morpheus’…anyways.

Gekko said that “Negative Equity is almost universally limited to First Time Buyers, due to the fact that they have least amount of equity. When you subsequently move to larger places you will have paid off a chunk of mortgage and have more savings. That negative equity just means their next, more likely bigger and more expensive house will be cheaper. i.e. your Negative Equity loss is €X, but your saving on your next purchase wil be some multiple of €X. Net it out and you will win. If you find yourself in negative equity it is an increased incentive to save in the short term. A good thing. If you find yourself in negative equity you might be less likely to over gear again (i.e. less likely to fall for the old bubble). A collective benefit would be that if enough people learned the same lesson we might avoid the next bubble for longer.” An interesting take indeed, and one based on common sense.

ben bernanke federal reserve chairmanWhen economics leaves the realm that the layman can understand, or inversely when it’s so dumbed down that it loses relevance then somebody somewhere gets hurt, this happened in both ways with the recent markets, leverage and things like CDO’s were complex derivatives and many investors lost out never fully understanding the underlying asset, equally people were buying property because ‘Property always goes up’ and that approach in the absence of fact is equally deplorable.

George Soros the world renowned investor does not think we will see recovery this year, he feels that the market is going to get worse and he feels that the Fed stepped in because they had to, unhealthy or otherwise he says that ‘it ought to be their job to prevent asset bubbles from developing’ and that task has not been recognised. Unfortunately for many people who are facing negative equity today the absence of that mandate means they will have to personally suffer for some time to come. Perhaps for Ben Bernanke and the others at the Fed its time to rethink their role

One Comment

  1. Cool blog, im a taxi driver and enjoyed that, thanks.

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