Irish Economy

Up to 60,000 households threatened by negative equity and unemployment

03 Jun 2009

"While the government is right to worry about its fiscal, financial and unemployment crises, the prospect of tens of thousands of households unable to repay their mortgages is one that it cannot ignore."

UPDATE July 2009: I’m working on this topic more formally at the moment (with Liam Delaney in the Geary Institute) and hope to have more exact figures by the end of the month, which will reflect the latest house price, unemployment and other data available, as well as better estimates of loan amortization. It will also calculate the total amount of negative equity in the country and the number of households in severe negative equity (more than €50,000). The overall revised headline in that context will probably read “About 50,000 households threatened…”, so a downward revision, but not by much. Now, back to the original post…

Recently more and more attention has been paid around the world to the problem of negative equity. Estimates from the US suggest that one in five homeowners there may be in negative equity, while in the UK, the worry is of a return to the horror stories of the early 1990s. Negative equity – where the house is worth less than the loan outstanding to the bank – effectively traps people in their homes, as they can only move if they can clear their whole debt, i.e. they can only move with the permission of their bank.
Economically, Ireland has been worrying about other more pressing matters of late. The three biggest problems we face are the financial crisis, where our banks can no longer oil the wheels of the Irish economy, the fiscal crisis, where tax revenues this year will be about EUR23bn less than the Government thought two years ago, and the unemployment crisis, where anything up to half a million people will be out of a job by this time next year.

It’s probably not surprising, then, that the property market – which was such a sensitive topic as recently as the elections of 2007 – is no longer attracting the same amount of attention that it used to. This is compounded by the lack of an official database of transactions. An absence of authoritative statistics means that we have to rely on indicative statistics instead, such as asking prices or stock for sale. What we do know is that asking prices have fallen up to 25% since their peak in early 2007. If you believe, as many do, that houses are selling for about 10% less than their asking price, that means house prices have fallen by one third in the space of two years. And all the pressure at the moment on house prices is downward.

In such an environment, significant numbers of properties are 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 with a mortgage (or mortgage-holders, for short), as opposed to tenants or owner-occupiers living mortgage-free. If current asking prices are about 10% above actually traded prices, this means that almost one quarter of mortgage-holders, or 137,000 households, face negative equity.

Negative equity, however, is not an issue if you are happy where you are living and you are secure in your income. Your property may not be worth what it was at the peak, but you can still pay the bills and don’t have to move. Negative equity becomes an issue, though, where you have to move or where your income is not secure. Given that many of Ireland’s property purchases, particularly for first-time buyers, were ‘property ladder’ purchases, i.e. people bought one-bedroom properties as a stepping stone to the property they’d actually like to live in long-term, a certain demographic of buyer – probably in the late 20s – may have to move in the near future.

The other issue – income security – is even more serious. Unemployment has doubled in every county in the country and in fact trebled in the last two years in some counties, such as Louth, Cavan, Laois and Meath. Nearly 400,000 people are unemployed at the moment, and some of these have to be people who bought properties in the last five years on the assumption of secure employment. Given that about 150,000 people were signing on, even at the height of the boom, this means that 230,000 people – or perhaps one in seven households – have been hit by ‘unexpected unemployment’.

So almost one in four households faces the problem of negative equity, while one in seven is coping with unemployment. Assuming (in the absence of better information) that the recent rise in unemployment has been unrelated to whether people own their home, this means that 1.1% of households, almost 20,000, already face the twin problems of unexpected unemployment and negative equity. The map below and on Manyeyes shows the breakdown of this across counties, as well as a scenario for mid-2010. For 2009, the 1.1% varies significantly by county, from less than 1% in places like Tipperary and Dublin to 2.5% or more in Cavan, Leitrim and Longford. Already, a clear pattern is emerging in relation to mortgage-holders hit by unemployment – the north of the country has been worst hit.

Unemployment and negative equity by county in Ireland

Unemployment and negative equity by county in Ireland

The scenario for mid-2010 is based on the numbers signing on reaching 500,000 (and assumes that the current pattern of increases in unemployment continues) and on properties prices falling a further 25% from their early 2009 values (so a fall-from-peak of up to 40%). In that scenario, almost half of all mortgage-holders would be faced with negative equity – that’s one in six households. Almost 60,000 households, 3.5% of the total, would be faced with the joint problem of unemployment and negative equity. Again, this varies around the country, from below 3% in Cork and Kilkenny to more than 5% in Laois, Louth and Westmeath.

While the government is right to worry about its fiscal, financial and unemployment crises, the prospect of tens of thousands of households unable to repay their mortgages is one that it cannot ignore. This will more than likely not be a blanket phenomenon across the country – it is likely to hit certain areas worst, in particular the Border counties and Dublin’s commuter belt.

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4 Comments

  1. Brian P Woods said on June 4, 2009 | Permalink

    Apposite comments. Neg. Eq. is an insidious, destructive process. It may be a temporary problem if you expect that inflation (increase in money supply) will reduce your debt burden. However, if it persists beyond 24 months, things will get quite intractable: owners cannot sell, except at a loss, mortgage lenders will be left with a real writedown (one that has to be noted on their balance sheet). Bad news all round.

    My understanding is that the median price of a residential property (in a specific area) should be not more than x3 the median wage in that area. Also, you should not be paying out more than 28% of your gross income on all the expenses associated with your home (mortgage, insurance, local gov taxes – whatever). If this is correct, then residential property prices have to decrease by significant margins. More bad news!!

    Brian P

  2. karl deeter said on June 4, 2009 | Permalink

    negative equity only becomes an issue in three different scenarios: mobility, switching mortgages, and in any situation where there is financial hardship.

    In financial hardship negative equity only means you can’t sell the house (for a profit) and move on. Even if you didn’t sell at a loss [broke even], if you lost your job you would have to come up with rent. In many cases negative equity is part of the mix, not the genesis of the problem.

    in mobility issues you can rent out your home and rent elsewhere, if you want to switch loans…. ya can’t.

    any other situations applicable?

  3. les said on June 6, 2009 | Permalink

    Ireland in reality will be hit with a wave of repossessions as has occurred in USA. These repossessed properties will simply be sold off cheaply at loan value or below to reduce lenders exposure.Deflation will inevitably take a firm grip. Hold tight this is going to be a very very rough ride!!!

  4. Luis Dyer said on April 27, 2010 | Permalink

    Although a belated comment, I agree with Ronan–negative equity is not a problem if borrowers have stable income. In those cases, unless the borrower must move and leave the house, market losses will not materialize.
    Said that, we must recognize that a household without stable income is a problem regardless he/she has negative equity, so the discussion should focus on the borrowers’ capacity to pay his/her debts (debt service to income) as equity position on a house is more related to incentives to repay a mortgage loan.

3 Trackbacks

  1. [...] Ronan Lyon’s final post on this thread is available at this link [...]

  2. [...] tallies with numbers I presented two years ago, which suggested that if the Live Register hit 500,000 and if house prices fell by 50%, we could [...]

  3. [...] tallies with numbers I presented two years ago, which suggested that if the Live Register hit 500,000 and if house prices fell by 50%, we could [...]

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