Rising house prices lift 45,000 out of negative equity

ESRI research suggests households benefiting from recent surge in property prices

The ESRI estimated that the total number of mortgage loans in negative equity peaked at 314,000 in late 2012

The ESRI estimated that the total number of mortgage loans in negative equity peaked at 314,000 in late 2012

Fri, Aug 1, 2014, 01:00

Rising property prices, particularly in Dublin, are lifting thousands of households out of negative equity, according to new research.

A study by the Economic and Social Research Institute (ESRI) calculated that recovery in house prices last year alone reduced the number of mortgage loans in negative equity by 15 per cent.

Based on mortgage data obtained from the Department of the Environment and the Irish Banking Federation, the institute estimated that the total number of mortgage loans in negative equity peaked at 314,000 in late 2012.

Property price growth last year – which saw values rise by nearly 16 per cent in Dublin and 6 per cent nationally – reduced this number by approximately 45,000.

At this rate, the ESRI is predicting the number of households in negative equity will have fallen by 43 per cent by the end of the year from its peak in 2012.

The study found Dublin accounted for more than 40 per cent of mortgages in negative equity at the height of the financial crisis, equating to 125,000 loans.

However, the number of negative equity households in the capital has fallen more steeply than in the rest of the country over the past two years.

According to the ESRI, the number of negative equity mortgages in Dublin fell by 35,000 last year, which equated to three-quarters of the improvement experienced nationally, reflecting the stronger house price growth in Dublin.

Nonetheless, the study indicated there were still a large numbers of borrowers in negative equity greater than 20 per cent of the house value at the end of last year, the majority of which were first-time buyers. “Negative equity can have harmful effects on an economy through its impact on a household’s consumption, savings and labour market mobility,” the report’s author, David Duffy, said. “The combination of property price increases and mortgage repayment has reduced the extent of negative equity in Ireland in recent times which is positive for the economy overall.

“The expectation is that, with house prices continuing to increase in 2014, we should see a further decline in negative equity numbers.”

The reduction in negative equity should in theory also improve the balance sheets of the country’s main lenders with less provisions having to be put aside for anticipated loan losses, which in turn should lead to more lending.

Despite the improving outlook for indebted homeowners, figures from the Central Statistics Office (CSO) released yesterday suggest many households remain under the cosh financially with disposable income continuing to fall. The CSO said gross disposable income of Irish households was €22.2 billion in the first quarter of this year, representing a fall of €1.1 billion or 4.8 per cent on the previous quarter.

The figures suggest the increase in disposable income from more people being at work is being offset by the downward pressure on income from new taxes and charges associated with the Government’s long-standing austerity drive.

Minister for Finance Michael Noonan has vowed to do something for hard-pressed middle-income households in the upcoming budget.

Most indications suggest that he is likely to widen the income tax bands in an effort to take more people out of the higher tax bracket.

The CSO figures also show that during the same period there was also a decrease in quarterly household expenditure, which dropped €138 million to €19.6 billion.