By David Thorpe
October 2011
It has been impossible to get through a single day this week without somebody feeling the need to offer me their view as to whether Wilkinson or Flood should start against France. Turns out they both will. I also find it almost impossible to have a single conversation without somebody speculating about what will happen to the Greek economy and the knock-on effect of it defaulting on its debt might have on Europe and the wider global economy. The truth is nobody knows. We have never been here before. Trying to guess what the German government or the European Central Bank might or might not do is pointless. These are uncharted waters and we can all expect a bumpy ride. Our TV screens are full of pictures of angry Greeks demanding that the proposed cuts in pensions and public spending are reversed. It does not make for happy viewing. Meanwhile a little closer to home there is some equally worrying news and I don’t mean the opportunistic rioting and looting that swept our major cities over the summer. By a little closer to home I mean Ireland.
The Irish property market has taken a sustained battering since the global economic meltdown. House values in Ireland are now 43% lower now than they were at their peak in the first quarter of 2007. Negative equity is restricting people's options with the majority of those who bought homes in 2005, 2006 and 2007 now unable to sell their homes. But that’s not the whole story. There are approximately 750,000 residential mortgages in Ireland amounting to some €115 billion of debt. However, interest rate hikes, fuel costs and austerity measures are pushing people further into arrears. The number of people in mortgage arrears in Ireland has more than doubled since the end of 2009. One-in-nine homeowners are now finding it difficult to keep up with monthly payments and are either officially in arrears for more than 90 days or have struck a deal with their banks to restructure the mortgage. Some 40,000 householders are behind on payments by more than six months. What is more, there appear to be no long-term solutions for struggling borrowers. Inevitably, falling house prices will increase the size of losses on defaulted mortgages.
As the level of mortgage arrears continues to deteriorate the Government continues to search for potential industry-wide solutions for distressed mortgage borrowers. They have ruled out a blanket debt forgiveness scheme because of the potential cost and the risk it would encourage people not to pay off their debts. Instead banks are being asked to look at making other arrangements with borrowers such as temporary shared ownership. It is rumoured that some banks are writing off mortgage debts in a few cases but only where the property has been repossessed. The most common restructuring is switching borrowers from capital repayment to interest-only payments.
One thing that history teaches us is that economic downturns do not last forever and some commentators are already suggesting that Ireland’s may already have come to an end. This may not be immediately obvious to Irish homeowners struggling to pay their mortgages. There is no doubt that unemployment continues to rise, but it is at a slower pace. It jumped from less than 5% of the workforce at the end of 2007 to 12% by June 2009, but it has hardly increased since then. Or put another way, nearly 90% of the workforce are in employment.
There are other encouraging signs. Figures released just before Christmas showed that Ireland’s GDP rose by 0.3% in the third quarter of 2009 which was more or less in line with the rest of the euro-zone. That said, spending by consumers, companies and the government all fell in the third quarter. GDP rose only because imports fell even faster. However most economists remain cautious saying that quarterly GDP numbers will always be skewered by seasonal factors.
It is not as if Ireland is alone in all of this. The rest of the euro-zone is hardly flying along and the euro currency is still weak .This could actually help the Irish economy as it is likely to deter the European Central Bank from raising interest rates in the near future. This is the last thing Irish home owners and banks would want to see now given the current level of mortgage arrears and negative equity. A weak euro also means that Irish exporters are able to sell more goods to other non-euro markets such as the UK and the US which are historically their biggest markets. Admittedly it is hard to get too excited about the trouble affecting the rest of Europe but if it means that Ireland is able to obtain some sort of competitive edge then that is something to cling to. And that has to be good news for Irish homeowners and banks.
David Thorpe - Group CEO First Title