The first time buyer conundrum, to buy or not to buy?

At the moment in Ireland there is a conundrum for first time buyers: should you buy now and potentially over-pay on purpose?

It’s an unusual one and it partly related to property prices, it is a combination of taxation changes that will occur from the start of 2012 and expectations of interest rate changes from both banks and the ECB.

The argument of ‘rent or buy‘ is well established, we produced report on it with Peter Stafford (now of the IAVI/SCS) and Frank Quinn of Senior College Dun Laoghaire, but this is different – buy now or buy later isn’t taking the default of renting as an assumed continuous option, rather it is a case of delaying for the sake of market timing.

The changes in tax are on the tax expenditure side, namely TRS (tax relief at source).

Currently it is applicable to a maximum of €10,000 p.a. and the rates applicable are …

Read More

Bank cost of funds versus mortgage prices

Eurodollar or LIBOR cost of funds is a common phrase in banking, what does it mean or do though?

Banks borrow short term and lend out long term, they call it ‘maturity transformation’ and in doing so they aim to make a mark up on the money, it’s the same concept that a shop uses in selling cartons of milk, fundamentally the idea is the same.

The LIBOR rate is ‘London interbank offer rate’ and represents the cost of funds for a high quality non-governmental institutional borrower.

To get an idea of the cost of funds (and this is currently speculative because Irish banks don’t get offered funds at Euribor [euro equivalent of Libor]) all you have to do is a simple calculation.

We know that banks tend to use three month money and that means that any calculation will always have the interest rate reduced by multiplying it by 90/360 (3 months = 90 days, and 360 = 1 year [I know that in real life 1 year is 365 days but that small change of 5 days gives …

Read More

Property prices and property costs, they are not the same, so do you rent or buy?

We have seen a growing trend in our brokerage of people getting mortgage approvals (mainly first time buyers) and not drawing down, this might indicate some pent up demand in housing – which if it comes will be regular houses as opposed to apartments – or it indicates fear of buying in general.

The thing that is pervasive is the ‘price’ of housing, and the idea is to wait until we reach the bottom. That is a perfectly rational concept, and when you are not purchasing over a long term then the price now (we’ll take from financial market vernacular and call it the ‘spot price’ of housing) is the main thing to focus on.

However, that is only one part of the ‘price’ because the majority of new buyers are not buying for cash. The other price is the price of money, the financing costs. We indicated in our annual outlook that banks would, in 2011 alone, increase rates by a further 100bps or 1%, that any bank which isn’t government owned will have variable rates in the region …

Read More

Debt forgiveness & Writedowns, one in the same?

Below is a comment made by the Regulator at UCC while talking to a group of compliance officers.

“Reform of the bankruptcy regime could allow borrowers to earn a fresh start by discharging their debt over a reasonable period of time, Mr Elderfield said. However, he cautioned against debt forgiveness for the thousands of mortgage holders currently behind with payments on their loans.

Addressing compliance officers in Cork, he said it was understandable that some people wanted to go beyond rescheduling debt to consider some form of debt forgiveness.

“However, the cost of any support will need to be borne by the taxpayers or by the banks and therefore, in many cases, effectively the taxpayer as well, and this raises questions of fairness for taxpayers who are not in debt and, at a time of immense budgetary pressure, affordability for government finances.

“There is also the risk that any scheme would create perverse incentives and in fact make …

Read More

Competitive Currency Devaluations

I have been talking for some time about a ‘rip off’ that the US will attempt to make against China, that it could take a belligerent form (default) or a traditional and less likely to cause a war option (devaluation of the dollar). It seems to be playing out and going for option two.

Competitive currency devaluations are alive and well in the world, why? Well, in early 09′ I wrote about it on the Paddy Power Trader blog:

“One way of paying bond holders back (but not ‘rewarding’ them) is via a devalued currency with an inflationary environment thrown in, in fact the big robbery of this century is going to be (as it was in the past as per the 1870s first, and then via Presidential Executive Order 6102 in the 1930’s) a dollar based one, the only way the US can pay its debts is to essentially rip off the debt holders, domestically that won’t be so bad, but internationally it …

Read More

Household lending is up

It’s kind of funny how you can pick things up anecdotally and then see official figures confirm your suspicions. In August we saw a good number of draw-downs, I called a few friends in other brokers to see what was happening with them and they said the same thing, bumper numbers (albeit by 2010 standards they are still horrific).

The high savings rate has translated into a higher level of repayment/prepayment on mortgages, in our annual prediction we said that lending would sit still or drop for this very reason, but that may yet prove mistaken if the trend continues.

2010 is the first time I can remember ever having a flipped season, normally nothing happens in the summer, the action is all in spring and autumn. However, the thing that every other broker said [and this goes for our firm too] is that August wasn’t necessarily ‘busy’, rather it was the flow through of all the constipated pipeline of the first half of the year. That isn’t exactly a beautiful connotation but …

Read More

The Second Wave: How Development loans were banked and RIP’s

The fact that NAMA is now set to leave loans under €20 million with the banks is debunking the justification for its original creation.

Yes, there were bigger loans with bigger problems, and they have been covered on every facet, and that will form the bulk of NAMA’s asset book, but what doesn’t go across will be handled by the banks (who incidentally already manage NAMA loans on behalf of the agency, only the legal ownership goes to the agency).

In Bank of Ireland’s case this will account for €2.1 billion of loans of which €1.6bn is already impaired! That’s a massive 76% impairment rate, of which €800m has been provisioned for – so about half of the expected loss is covered.

That tells us nothing about every other institution though, because BOI is likely to be one of the healthier ones, they neither …

Read More

Interbank Yield Curve: 28th September 2010

It has been a while since I posted on the yield curve, the main reason was that I lost my daily treasury letter from Bank of Scotland when all of their reporting went back to the UK and the daily replacement by Lloyds didn’t offer sufficient time-line to give a full curve.

The interesting thing that has happened in the interim is that the rules regarding forward rate prices between mortgage rates and Euribor rates has disconnected, in the same way that the ECB and Euribor disconnected in 2007, by this I mean that it is fascinating to see the established relationship end but the implications are horrifying for borrowers because it has meant that their monthly payments have gone up at a time the ECB is keeping rates low for the purpose of loosening up the financial cogs.

Take a look at the difference between February of this year and today, we can see that the long term rates are coming down and that flattening of the curve means two things: the ‘new normal’ is predicted to be one …

Read More

Why a borrower bailout is not likely

The EBS is on the block and there have been countless headlines regarding the idea that debts might get written down by Wilbur Ross if the Cardinal Capital group (who he is backing) are the successful bidder. I have said that I doubt this will happen and will set out why in this post.

EBS carried out a PCAR (prudential capital assessment requirement) test in March 2010, it showed that they required €875 million in funding to come up to scratch. Thus far they received €100m in cash from the state and a further €250m in a promissory note leaving a gap of €525m to fill. The bids being touted are in the region of €550m meaning that whoever buys in is effectively bridging the gap and paying a small premium as well.

Take a look at a balance sheet and you’ll see that no matter what happens, that in the end assets=liabilities. That is an accounting identity, in our example we have a hypothetical bank which has assets and liabilities worth (for example sake) €100 million Euro.

Read More