Great article in the idependent
Sunday April 18 2010
It is the worst nightmare for many, but up to 350,000 Irish homeowners may be in negative equity, a leading government agency said this weekend.
If that is true, then well over one-in-three Irish mortgage-holders owe more on their home loan than the value of their property.
Because of the recession, increased unemployment, pay cuts and the credit squeeze, Irish house prices have fallen between 40-50 per cent and there are now thousands of people struggling to meet mortgages on properties that are worth far less than the value of those loans.
In a recent study, the ESRI (Economic and Social Research Institute) predicted that close to 200,000 mortgage-holders will be in negative equity by the end of this year.
However, speaking to the Sunday Independent this weekend, David Duffy, the author of the ESRI report, said in fact the figures are far higher, because his report took a conservative assumption on the fall in property prices.
He said: "The study I did was based on the assumption of a price fall of between 30-35 per cent. That is more on the conservative side of things. If you were to take a drop of between 45-50 per cent (a more extreme but realistic price drop), the numbers in negative equity would be about 350,000."
According to Central Bank statistics, the total number of outstanding residential mortgages in Ireland at the end of September 2009 was 791,634.
The total amount outstanding was €78.6bn.
Bank of Ireland said that 43,000, or 21.5 per cent, of its residential mortgages in Ireland were in negative equity. The bank has 199,000 domestic mortgages.
Mr Duffy said that the vast majority of those in the red are first-time buyers, because they were the ones who got in the market when it was at its peak, and were the ones who most took advantage of 100 per cent mortgages. The average level of negative equity is now above €50,000.
The average first-time buyers are facing another 10 years before they will get out of negative equity, Mr Duffy reckons. Second-time buyers who bought in the past six years are likely to be stuck for another six years.
Individual homeowners in negative equity will not have a problem if they can meet their monthly repayments and do not want to move. However, Mr Duffy warned that vast numbers of people owing more to their lender than their home is worth will be a huge drag on the economy.
Another major area of concern is the investment property market, which exploded during the middle of the last decade.
Overall, according to latest government figures, there are at least 310,000 second homes in Ireland. But while official data is not available, it is well accepted that many teachers, gardai, prison officers, doctors and lawyers got involved in property syndicates during the boom, the vast majority of whom are now in deep negative equity.
But, the excess of the Irish wasn't confined to this island.
Well over 225,000 Irish investors bought foreign properties, and many thousands of them are now in negative equity in countries throughout Europe. Portugal, Spain, France and several Eastern European countries like the Czech Republic, Bulgaria and Hungary were the locations of choice for the property-mad Irish buyer during the last decade.
The Algarve in Portugal became a top attraction for Irish investors with numbers buying properties, either in full or in timeshares, soaring between 2002 and 2008.
The regions of Quinta Do Lago and Val do Lobo in the Central Algarve were popular with Irish buyers, due to their proximity to Faro airport, which is linked directly with Dublin and Shannon by Aer Lingus and Ryanair flights.
For example, a four-bed villa in Lagos, west Algarve, which now costs on average between €450,000 and €590,000, would be down 30 per cent on the peak prices three years ago.
Portugal and the Algarve have been badly affected by a drop in its tourism trade and because of the international recession.
According to Martin Date, director with the overseas property company Oceanico, the downturn in the Irish economy has "inevitably had an impact [on the Portuguese property market]. Some people are trying to offload their properties. Throughout last year, there was very little appetite for Portuguese property from the Irish market."
In Hungary, buoyed by the economy back home, the Irish flocked in their thousands to buy into the foreign property dream and, according to estate agents, many of them paid for their apartments and houses in cash.
And it wasn't just the well-to-do who were flocking to the banks of the Danube.
Christopher Follenus, Capital Eyes real estate agent in Budapest, said: "You did have everybody, we had taxi drivers, doctors, we had bus drivers; they covered the whole spectrum."
Dr Tunde Harron, a Budapest-based property lawyer said that between 2003 and 2008 thousands of Irish bought properties along the Danube, but since then the flow from Ireland has stopped and many have sought to sell up quickly.
"In the five years up to 2008, I had over 1,000 Irish clients who bought properties with me. Since 2008, they have stopped coming, they have stopped investing in property in Hungary, and some of them have tried to sell their property because they need the money at home," she said.
Some of those who did have to sell up in Hungary had to do so despite taking a 40 per cent hit on their investment, following a collapse of the Hungarian currency and its recession.
As the price of many of these overseas properties collapsed -- some by as much as 80 per cent -- many owners didn't have the option of selling their holiday homes to pay off the massive loans thrown at them by the banks.
The difference between the current market value of their holiday home and the amount of money borrowed a few years ago to buy it has become so marked that many owners of overseas property are facing financial ruin.
"At the very least, thousands of Irish people are in trouble with overseas property," said Tom McGrath, a senior partner with Dublin law firm Tom McGrath & Associates.
"There's a huge amount of people falling behind on the mortgage repayments for their holiday home.
"A lot of them want to walk away from the property and hand back the keys -- but it's not that simple anymore. The borrower has to do a deal with the bank," he added.
Sunday Independent of Ireland
Article from SUNDAY INDEPENDENT
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