Just over 500,000 thousand homes have been built since the start of 2002. Probably the same number again of second-hand homes have been bought in the same period. With the guts of one million properties having changed hands since 2002, how many of those are worth less than now than when they were bought? And how many owners find themselves owing more to the banks than they if they had to sell now?

Taking the daft.ie asking prices by county from 2006 on, and Dept of Environment regional figures before that, it’s possible to construct regional average prices going back in the 1980s. Fortunately, we don’t have to go back that far – but we do have to go back into the first half of this decade. By my calculations, of the half a million homes built since 2002, about 50% are now worth less than when they were bought. That’s based on current asking prices. If asking prices are – as some contend – about 10% above actual closing prices at the moment, the number of homes worth less now than when they were bought rises to 340,000 homes – or two thirds of the houses built since the start of 2002.

But that’s only half the story. Or slightly less actually, as loans for new homes account for just under 50% of all loans. If that ratio is correct, another 286,000 second hand homes now have asking prices less than the prices they were bought for. Again, if asking prices are 10% above what’s actually trading out there, that figure rises to about 382,500. In total, that represents about 725,000 homes that have been bought since 2004 that are now worth less. Depending on whether you take Census or Dept of the Environment figures, that represents between 37% and 43% of homes in the country. Put in plain English, two in five homes in Ireland are worth less now than when they were bought.

How far back has Ireland’s property market rewound? The graph below shows average home values in eight regions for the period 2002-2009. There are three shades of colour used – the lightest (further to the right) are house price gains that been wiped out, the medium shade represents current asking price levels, while the full colour lines represent asking prices less 10%. Overall, the asking price for the typical home in Ireland now is similar to what the home was worth in March 2005. If you believe asking prices are overstating true prices, the typical home in Ireland is now worth the same as it was in July 2004. The two years of bust have undone the last two and a half years of boom. Homes in Connacht and Ulster are worst affected – they are worth the same now as they were five years ago in early 2004.

When were Irish homes last worth what they're worth now?

When were Irish homes last worth what they're worth now?

Negative equity is, however, something more particular. It refers to the outstanding debt that someone owes the bank. In other words, if they sold the house now, would they be able to pay off the remaining debt from the sale price? Naturally, this is a much more complicated exercise. Dept of Environment figures suggest that the typical loan-to-value of new homes since 2002 has been about 75%, while for second-hand homes it’s been closer to 73%. Fortunately, the figures give something of a breakdown. Making some ballpark assumptions for different years, for example any 95%+ mortgage in 2004 or any 70%+ mortgage in 2007/2008, it’s possible to give a rough estimate of the number of homes in negative equity.

Roughly speaking, about half of the homes that are now worth less than when they were bought are in negative equity, in the financial sense of the word. (This makes intuitive sense, as two out of every five mortgages is less than 70%, suggesting a substantial amount of households with some equity still knocking around.) That’s 340,000 homes where if the homeowners have to sell, they will not be able to pay the bank back solely through the money they get from selling the house.

The punchline is that about one in five homes in Ireland is now in negative equity.

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9 Comments

  1. ronanlyons said on May 1, 2009 | Permalink

    Quick clarification – this represents an upper bound (for the moment) as some (unknown) proportion of the 725,000 homes bought will have been subsequently sold on, some before/at the peak (and so avoiding negative equity) and others since (perhaps avoiding if in time, or else realising it).

    Any thoughts on how we could calculate how to strip out those welcome!

  2. Steve Daley said on May 1, 2009 | Permalink

    Ronan,

    As you’ll appreciate negative equity does not in itself impact either individual incomes or the national economy directly. Negative equity will likely freeze/constrain the housing market since homeowners will be less reluctant to sell. Negative wealth effects will indirectly reduce aggregate demand, but this is more linked to falling house prices generally than negative equity per se.

    The key trends that will mark significant economic problems in the housing/mortgage market are unemployment (as a proxy for distressed mortgages) and mortgage defaults. The former will obviously identify individual hardship and the latter will impact the balance sheet of Ireland’s insolvent banks. Let’s be clear, negative equity is a bank problem and households should not be expected to personally take the hit for poor banking decisions. Negative equity must be seen as a problem to be solved by writing down mortgage values to fair market-value, i.e. negative equity is a banking problem.

    I think it is important to stress the fallacy of negative equity, as I believe housing is still beyond reasonable affordability ratios and price-to-earnings ratios. The possibility of destroying capital in the residential sector would be a major correction that would allow construction and the housing market to recover. This is a political question and Irish homeowners and the Irish economy have nothing to lose if banks are compelled to write-down mortgages as is happening in the United States.

    anemeconomy blog

  3. Gerard O'Neill said on May 1, 2009 | Permalink

    One way to clarify your clarification is to ask those with mortgages if they face negative equity.

    In a survey my own company did in February, 15% of those with mortgages thought their homes would be worth less than they paid for them (see slide 26 in this post on my company’s blog: http://amarachresearch.blogspot.com/2009/03/debt-of-nation.html)

    Sounds about right don’t you think?

  4. ronanlyons said on May 1, 2009 | Permalink

    Hi Gerard,
    Good solution! I’m also very happy that the two entirely separate ways of estimating something come back with answers in the same ball-park. Indeed, if 20% is the upper bound, and perhaps one in five has bought again since 2004, then that takes it down very close to the 15%.
    Thanks for pointing out that study – it’s amazing how short my memory has become!
    R

  5. Stephen Kinsella said on May 4, 2009 | Permalink

    Another great post Ronan, but I guess it’s a moot point as there isn’t enough liquidity in the system to actually affect a series of purchases of more or less similar houses to test the hypothesis. Let’s say 100% of Irish houses bought since 2005 were in NE, because of a combination of aggressive financing and current market conditions. I can’t actually get a sense of how much negative equity in the system, because no one is buying those houses right now. Even if the (very) few houses sold in the market are actually experiencing NE, the only way to test that might be to look at refinancing options put forward by banks for the rest of the mortgage the hapless house seller now has to stump up for. That’s the worst situation to be in: no asset and a new loan to repay, with no stream of benefits forthcoming. So the NE level actually constitutes a lower bound on reservation prices for the house. Or am I off my meds?

  6. Homes4sale-orlando said on May 8, 2009 | Permalink

    Nice Blog! How many american homes are in Negative Equity?

  7. AJ Bowe said on November 16, 2009 | Permalink

    Yes, this is a terrible issue for the individuals involved. But it is also an issue for the wider economy with reduced consumption, lower incentive in invest in real-estate, poor labour force mobility, and increased provisions/potential losses for the financial industry.

    See Reset 2010 for a presentation on this.

  8. Clive said on April 1, 2011 | Permalink

    The figures for the number of new homes built that you quote HERE, are completely at odds with the number quoted at http://www.esri.ie/irish_economy/permanent_tsbesri_house_p/

    - Please explain.

  9. Ronan Lyons said on April 4, 2011 | Permalink

    Hi Clive,
    I use Department of the Environment figures. I am unable to see from the link you included any specific references to housing completions. Perhaps you could elaborate.
    Thanks for the comment,
    Ronan.

7 Trackbacks

  1. [...] Lyons reports some striking calculations on the potential extent of negative equity in Ireland.  He estimates [...]

  2. [...] would also insulate the banking system from further shocks. For example, Ronan Lyons notes the increasing level of negative equity amongst Irish home-owners. If optimistic forecasts [...]

  3. [...] How many Irish homes are in negative equity? [...]

  4. [...] How many Irish homes are in negative equity? [...]

  5. [...] How many Irish homes are in negative equity? [...]

  6. [...] worth less than what their current owners paid for them. A month ago, I estimated that as many as 725,000 properties in Ireland are worth less than their last purchase. Of Ireland’s 1.7m households, just over one third (or about 600,000) are owner occupiers [...]

  7. [...] 500,000 houses have been built in Ireland since 2002. 340,000 of those are now worth less than they were back then. There are now approximately 621 ‘ghost estates’ around the country, comprising almost 300,000 unoccupied homes. [...]

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