Archive for March, 2010

The Economic and Social Cost of the Housing Crash

Aoife Walsh is National Communications Officer and Media Spokesperson with Respond! Housing Association. With almost ten years experience in the community and voluntary sector, specialising in public relations, marketing, advocacy, lobbying and event management, Aoife manages all broadcast and print communications for Respond! Housing Association, as well as all online social media and the website.

The past three years has seen a dramatic reversal in fortune in the Irish housing market with unfortunately many casualties along the way. From the high of 2006 with record construction of 93,000 houses and apartments, came the low of 2009 when the number of families in arrears and facing repossession reached unprecedented levels. There are a number of reasons for this dramatic turnaround in the fortune of Irish homeowners and not all can be attributed to the global downturn and the Irish recession. As a country we became obsessed with property and housing and we moved away from speaking of a home – instead it became a commodity or an investment. There was a rush to buy, buy, buy and the property bubble contributed greatly to the Celtic Tiger. Tax revenue was generated for the State and tens of thousands additional jobs were created in construction and related sectors. More people than ever placed that first foot on the property market and the number of mortgages being granted almost doubled in a decade. With this came increased levels of residential debt. We borrowed, not only to fund the biggest purchase of our lives – our home – but also to fund our lifestyle. Personal debt was the equivalent of 58 per cent of disposable income in 1996 but by 2007 this had reached 175 per cent of disposable income. By international and Irish standards, our personal debt and mortgage debt levels had reached extraordinary levels.

At the time it seemed not only logical, but also financially astute to purchase property. It was after all a safe bet. Entry to the European Monetary Union had brought with it lower interest rates. Competition in the mortgage market from foreign-owned banks and sub-prime lenders also meant discounted rates to borrowers. New financial products such as longer term mortgages, 100% mortgages and interest only mortgages meant more people could access a loan to purchase property. Lending criteria moved away from the traditional three times your salary, to nine, ten and in some cases in Dublin even thirteen times your salary. From 2000 to 2008 alone, more than 760,700 mortgages were issued in Ireland.

However, that was then and this is now. Things have changed dramatically in the past 3 years and while 2009 may have been annus horribilis for many homeowners, there will be little relief in 2010. With unemployment predicted to increase by a further 76,000 this year and interest rate increases expected by both the European Central Bank and financial institutions, tough times still lie ahead for many. According to the latest available figures, we now know that more than 28,000 families are more than three months in arrears on their mortgage payments. As part of the recapitalisation of Bank of Ireland and AIB last February, a new Statutory Code of Conduct on mortgage arrears was put in place. This code included a moratorium on repossession for one year for both banks which was extended to other financial institutions by the Financial Regulator in February of this year.

However, even with this moratorium in place, there was still a dramatic increase in the number of repossession cases coming before the courts on a weekly basis. In fact, in just two years the number of applications for possession orders made by lenders trebled. The majority of the cases currently before the courts relate to homeowners who fell into arrears in 2007 and 2008 but as we know unemployment has increased dramatically since then. What we see before the courts at the moment is only the tip of the iceberg. On one day in November last, 18 orders for repossession of family homes were made in the High Court. This is no longer unusual and unfortunately looks set to be repeated in the weeks and months ahead. To make matters worse, it has now become easier for lenders to repossess homes due to the Land and Conveyancing Act 2009. This Act means Lenders no longer have to endure the expense of bringing repossession cases to the High Court, they will now be able to reduce this cost by bringing cases to the Circuit Court instead.

To add to the pain and stress of many homeowners, negative equity means there is little hope of selling the family home in order to repay the mortgage in full. Negative equity occurs when a drop in house prices results in the value of the house being lower than the outstanding debt. It becomes a real problem when a person experiences financial difficulties due to unemployment, divorce or illness. It is estimated that almost 80% of all those in negative equity are First Time Buyers, young couples and families who bought at the height of the boom when prices were at their highest. These families may now be struggling to repay their mortgage in the knowledge that the value of their home may have fallen by €100,000 or more. The option of handing back the keys and walking away is simply not realistic for the vast majority as they are liable for the difference between the resale value of the property and the outstanding mortgage. Of course don’t forget the other legal, auctioneering and security costs the mortgage defaulter will also have to pay.

If house prices continue to fall as they have done in the past 2 years, up to 350,000 homeowners could be in negative equity by the end of this year. While many think the only impact of negative equity is on the homeowner at risk of default, this is simply not true. There are also economic implications for people living in negative equity as it can have a negative effect on consumer spending because consumers tend to spend less as they feel less wealthy. It also dampens mobility in the labour market as the option of relocating or upgrading seems less likely. Research also shows that homeowners in negative equity tend to behave like renters and invest less in their home; adding that extension or purchasing a new kitchen is put on hold until house prices pick up again. Assuming of course the property market returns to the levels we saw in the mid 2000s.

So now that we are aware of the problem, is there any solution? Certainly plans and supports can be put in place to alleviate the pressure on people. I would suggest that there is no one solution, rather a co-ordinated approach with a range of measures needs to be adapted. Options that can be offered to people include reduced interest rates, longer maturity dates, rolling up of outstanding interest, the bank taking an equity stake in the house and the bank taking ownership and leasing back the property to the resident with rent payments coming off the loan. These options will all assist people currently struggling with mortgage repayments but ultimately do not deal with the problem of negative equity. To tackle this, debt forgiveness needs to be considered and short selling is one option that is quite common in the United States that helps those in arrears and negative equity. A short sale occurs when a property is sold and the bank agrees to a discounted pay-off that is less than the outstanding mortgage. The benefit to the bank is that they won’t have the legal costs of seeking a repossession order through the courts, and if conducted quickly, arrears, interest and other charges will not be allowed to accumulate. The obvious benefit to homeowners is that they can move forward with their lives and not be burdened with outstanding mortgage debt and a poor credit rating affecting their ability to even access a credit card for many years.

Finally, we have heard very little discussion on the societal impacts of the recent economic downturn on families. The stress for those struggling to keep a roof over their heads cannot be underestimated. This recession has more than just financial impacts and in time we will see the real effects on people’s physical and mental health and on their family relationships.  Anecdotally we hear of more people suffering depression, increased numbers at risk of suicide and increased marriage separation rates. There will be a cost to helping families and homeowners in difficulty but the longer-term cost of failing to act may be greater.

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