OUR contemporary Celtic crisis is akin to a three-leaf shamrock. The first component is the banking failure.
This has been subject to unlimited resources in the form of €40bn for NAMA to take toxic assets off balance sheets and subsequent recapitalisation of €50bn to date.
The second facet is the fiscal deficit arising out of the imbalance in our public finances. At last, politicians are obliged to implement a credible four-year budgetary plan.
The final fiasco relates to our housing crisis. Remarkably, no cohesive action plan has been formulated to address this debacle.
In 2007, when the recession took hold, a seasoned observer predicted economic recovery would only be apparent six months after a floor had been found in property prices.
The average house price, according to the Permanent TSB/ESRI house price index, has dropped from a peak of €311,078 to €198,689 now. This represents a 36% drop so far. If average house prices fall by 50%, it is estimated that almost half of all mortgages would be in negative equity.
What went wrong? Between January 1996 and December 2009 an incredible 797,857 new housing units were constructed. This is a jaw-dropping statistic when considered in the context of the number of households in Ireland.
While CSO and other statistics vary marginally, it is generally acknowledged the total number of households in Ireland is 1.6 million. The National Institute for Regional and Spatial Analysis (NIRSA), based at NUI Maynooth, informs us that as of the end of last year, 1.98 million residential units existed in the state. Mind the gap — 398,000.
What on earth were economists advising the construction industry thinking of in terms of population growth? No conceivable demand for either holiday homes or buy-to-let accommodation could have justified such an oversupply. No amount of replacement homes through obsolescence or change in house size formation could have validated the orgy of building.
The blame game includes the greed of avaricious developers, excessive credit from reckless bankers, tax incentives from promiscuous politicians and the absence of regulatory limits through the planning/zoning process.
Painful problems stemming from this splurge are manifold: 200,000 mortgagees are currently in negative equity; 30,000 of these are in repayment arrears of more than three months, with 10,000 residential loans in full default — facing prospects of repossession. Ghost estates have now been quantified at 2,846. These contain 33,225 empty units ready for sale. 10,000 require significant additional building work, costing €1bn to complete these schemes. Planning permission was granted for a further 60,000 units that have no likelihood of being constructed or required.
These statistics inadequately reflect the human distress arising out of a collapsing housing market. In people’s lifetime, their biggest liability and most precious asset is the roof over their head. Official public housing waiting lists stand at more than 60,000 applicants for social housing. Focus Ireland estimates the real demand to be in the region of 100,000 homes.
Amazingly, the Government has appointed no senior cabinet minister with overall responsibility for resolving our housing crisis. Junior ministers Michael Finneran and Ciarán Cuffe last week published the national housing development survey.
Having quantified the problems, what did they do? Yes, you’ve guessed it… another high-level expert group “comprising key stakeholders” to report on “practical policy solutions”.
This is similar to the other expert group (just as high level) that’s examining the problems of mortgage arrears. This paralysis by analysis is endemic in public administration — always one report away from concrete action.
No new legislative proposals to reform bankruptcy law, despite recommendations from the Law Reform Commission. No new social housing initiatives to convert NAMA housing assets into local council houses. No new imaginative rental to purchase accommodation blueprints, whereby householders can convert early years of tenancy into home ownership.
No impetus by the Department of Finance to attract private equity funds to establish qualified investment funds for the acquisition of distressed and unutilised assets. No long-term lease initiatives (eg, 99 years) by county councils to acquire empty housing stock.
A comprehensive package of measures is required. There is deep denial about the need for an endgame to our housing and mortgage predicament. This is not due to neglect, it’s deliberate. The impairment on our banks’ and building societies’ balance sheets will only worsen if further embedded losses are identified in AIB, Bank of Ireland, Nationwide and EBS. Fast-forwarding and crystallising the extent of house value reductions will underline the requirement for greater recapitalisation. The viability of NAMA’s business plans will worsen if there was to be a further sharp reduction in house prices. Better to maintain zombie financial institutions than face full realities. The ultimate solution is, as always, market-based. Supply will only equal demand when the price is right. Liquidators and receivers of collapsed construction firms are now setting the floor price of residential accommodation.
Unfinished apartments (47) in Ballybofey in Co Donegal are now for sale at a median price of €11,700 on the basis of a total price of the block at €550,000. The capitalised value of rented housing is still out of line with purchase prices. Based on a capital yield of 5%, valuations can be calculated at a multiple of 20 for the annualised rent. A yield of 7% gives a multiplier effect of 14. This means if the yearly rent is currently €15,000, the house is worth between €300,000 and €210,000.
A CURSORY check of property supplements will confirm prices have not yet fallen to these ‘ready reckoner’ levels. The Government must expedite market correction. The lowering of stamp duty would help shift property that is currently not selling. NAMA needs to activate property disposals, even at depressed prices, to remove the overhang of their property portfolio on the market.
A proportion of NAMA bond finance needs to be earmarked for new mortgages to facilitate those wishing to acquire their own homes, with affordability capacity based on real incomes.
An exit for distressed mortgage-holders needs to be established or facilitate converting freehold to leasehold.
Repossession of houses is unavoidable. The crucial incentive is to allow people to escape personal guarantees, based on further debt liability beyond the resale price. A scheme of debt forgiveness or default should be executed, where the house is surrendered. These exceptional circumstances go beyond moral hazard, through the forfeiture of your home. The legal period of bankruptcy needs to be reduced to three years so that the unprecedented housing tsunami facilitates long-term survivors, particularly young couples. Further delays in downward corrections of the housing disaster only defer our misery. The real ‘rock bottom day’ will have arrived when there is sustainable stability in the housing market.