Researchers say that souring residential mortgage lending does not pose anywhere near the same risks to an economy as poisonous commercial property loans. Home owners, it is said, if they keep their jobs, will continue to meet mortgage payments even when the value of their homes drops well below the value of the mortgages. The depth of the economic plunge here is, however, unprecedented. The numbers behind the housing market give cause for concern. Here are the most important factors facing the market.
1. The census is probably the best guide to the potential problems lurking in residential loans. The survey, which was carried out at the height of the boom, categorises every type of house, apartment and local authority housing unit in the Republic. There are 1.46 million dwelling units housing 4.12 million people. The 420,429 dwellings in the Dublin area house 1.14 million people. Across the state, in 2006, there were almost 570,000 households with mortgages and 498,500 households which either had paid off their home loans or were renting. There were 105,500 households paying rent to local authorities and, about 145,000 households paying rent to private landlords.
2. David Duffy of the Economic and Social Research Institute (ESRI) calculates that 200,000 mortgage payers are currently in negative equity. From the census figures, this means that almost one in three mortgage payers is in negative equity. Duffy calculates that house prices have to date fallen 30-35% from their peak, meaning that many who bought their homes between 2004 and 2006 have already seen savings put in to buy their homes evaporate.
3. Not every household in negative equity will stop paying their monthly interest payment to the bank. Duffy says that research in the US suggests that 10% of householders in negative equity have a high probability of defaulting. It takes another catalyst such as the catastrophe of unemployment, illness or household income dropping from illness or marital separation to trigger a default. Britain's Council of Mortgage Lenders (CML) says that during the 1990s recession there, an increase of unemployment, and associated drop in earnings, was the major catalyst in triggering negative equity for home owners. Mortgage-interest rates were very high in Britain at the time too. But "despite extensive negative equity and protracted economic weakness the vast majority of borrowers met their mortgage payments in full and on time every month", said the CML. However, other aspects of the CML research from the 1990s is altogether less reassuring for guessing what will happen in Ireland during the much deeper slump here. In Britain, the number of homes falling into negative equity rose after home prices fell from their peak of the late 1980s to the record trough in 1993 by an average 13%, and by 25% in the southeast of England. Irish home prices have by official measure already fallen by more, and it would be a brave person to think that prices will not continue to fall.
4. It gets a lot scarier at this point. Fitch, the ratings agency, last week estimated that Irish prices from their peak in 2006 or early 2007 will fall an average 45% before hitting their bottom. "Ireland is undergoing one of the deepest recessions of all advanced economies," said Fitch's Alastair Bigley. Based on the ESRI figures, a drop in house prices of close to 50% will push 350,000 into negative equity here. Based on the US research, that suggests that 35,000, or about 6% of all mortgage borrowers, will be unable to pay their loans. Fitch also warned that it was "inevitable" that the banks would pass on their higher funding costs to borrowers in higher mortgage rates. It is a good bet to assume that at a time of rising taxes this will increase the numbers falling into negative equity.
5. As the unemployment rate has quadrupled in quick order to over 12.5% and will probably continue to rise to 14% next year, the signs of stress are already showing. Last month, 423,629 people were on the Live Register because they had lost their jobs or were now working part time only, up from the 240,217 people signing on a year earlier. Goodbody Stockbrokers chief economist Dermot O'Leary said that the policy of forbearance between the banks and troubled borrowers showed in the "dramatic" lengthening in average mortgage from seven to 10 years in just over a year.
Mortgage borrowers, even those who have not lost their jobs, have needed to reduce their monthly mortgage payments by lengthening the repayment terms of their loans. The figure that shows the absolute stress of unemployment is the big rise in the number of people who have been forced to turn to the mortgage-interest supplement to meet their monthly mortgage payments. The Department of Social and Family Affairs said that by the end of September, 14,100 people were in receipt of the mortgage assistance – amounting to an average weekly payment of €81.40. The figures suggest that an additional 250 people a month need the supplement to keep paying the banks the interest-only part of the mortgage payment. Only 4,111 people needed the supplement at the end of 2007.
6. The ESRI and other analysts estimate that construction and retail have suffered the largest job shake out. Homeowners losing their jobs in these industries will probably be facing the biggest struggle to pay their mortgages. The CML in Britain said that in the 1990s, the largest proportion of people falling deepest into negative equity were first-time buyers. In Ireland, it is a good bet that young first-time buyers working in construction or retail face the highest risk of struggling to meet mortgage payments, if their income drops significantly.
7. The Irish banks have about €150bn in their home-loan books. But Fitch's Matthew Taylor says calculating the hit Irish banks will take from defaulting mortgage payers is "the real difficult" figure to forecast. About a fifth of all impaired mortgage loans on which a payment has not been made for 90 days will go bad. "I would expect the provisions for residential loan books to increase but we do not have a figure," he said. Sebastian Orsi, banking analyst at Merrion Stockbrokers, said that the "relatively small" mortgage provisions will rise to about 1% of the overall loan books.