Ronan Lyons | Personal Website
Ronan Lyons | Personal Website

How many Irish homes are in negative equity?

  • ronanlyons ,

    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!

    • The Irish Economy » Blog Archive » Negative Equity in Ireland ,

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

      • Steve Daley ,

        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

        • Gerard O'Neill ,

          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?

          • ronanlyons ,

            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

            • Stephen Kinsella ,

              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?

              • NAMA’s Free Lunch for Shareholders « The Free Marketeer ,

                […] 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 […]

                • Homes4sale-orlando ,

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

                  • Where in Ireland has seen the biggest increase in unemployment? « Ronan Lyons | Blog ,

                    […] How many Irish homes are in negative equity? […]

                    • How many mortgage-holders are faced with unemployment? « Ronan Lyons | Blog ,

                      […] How many Irish homes are in negative equity? […]

                      • Five years, six property markets, mixed fortunes « Ronan Lyons | Blog ,

                        […] How many Irish homes are in negative equity? […]

                        • Negative equity, the property market and unemployment in Ireland | Ronan Lyons ,

                          […] 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 […]

                          • AJ Bowe ,

                            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.

                            • Another ‘economics post’…but with 100% more Life Magazine! | and ever onwards to prudery. ,

                              […] 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. […]

                              • Clive ,

                                • Ronan Lyons ,

                                  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.

                                  Leave a comment