Buyer be aware

Fears that falling house prices will leave buyers trapped by negative equity are stalling the property market, writes Laura Slattery

'NEW PHASE: launching soon," claim the faded posters, blazoned across elephantine concrete blocks where the lights never go on after dark.

"Soon", passers-by realise, means whenever buyers are once again willing to hand over appropriately large cheques to own a patch of what are disparagingly known as the "shoebox suburbs" - or Legoland - but now also go by the crude shorthand "ghost towns".

Nobody knows how many unsold or abandoned houses and apartments there are dotted around the country, but at the last count there were at least 45,000 second-hand homes for sale. Sellers with permanent for-sale placards in their front gardens are sticking up new "reduced price" signs. At some builders' offices, where once there was a line of customers, only creditors cross the threshold. Not everyone can afford to wait for the turnaround.

But what everyone now wants to know is just when will the Republic's housing market turn around?

People who bought at the peak and are now trapped by negative equity - owing more to the bank than their house is worth - may have hoped the worst was already over.

But the Republic is among four countries that look "particularly vulnerable" to a further correction in house prices, the International Monetary Fund (IMF) warned yesterday. On Wednesday, credit-rating company Standard & Poor's declared that the Irish housing market, in common with that in Spain and the UK, faces a "severe and painful" decline: far from being shaken off by the summer, the downturn will extend into 2009, it said.

The outlook used to be far less cloudy. Estate agents said last autumn's deathly quiet selling season would not be repeated. Economists predicted that the monthly price falls, which began in March 2007, would stop by mid-2008.

"I think that particular scenario is becoming more of a long-shot," says Dermot O'Leary, economist at Goodbody Stockbrokers, who blames the fading chances of an interest rate cut before the summer and a stubborn overhang of unsold housing stock for the lengthening odds.

The average supply of unsold stock in the US housing market is seven months' supply. In Ireland, there are enough second-hand homes on the market to satisfy buyers for 12 months. The number of new properties with no name on the deeds is not known. Goodbody reckons there are at least 6,500, but says this is likely to be an underestimate, as only one property in a development is usually advertised.

"It's a big black hole in the data. It makes it very difficult to know where house prices are going to go over the next year," says O'Leary.

"Nobody knows what is going to happen to house prices," says Annette Hughes, director of DKM Economic Consultants, which yesterday published an analysis in Irish Property Buyer magazine saying that buying is more economical than renting.

"You are better off to buy rather than rent, unless house prices fall forever," says Hughes. But that would be "an unreasonable scenario", she adds quickly.

DKM's conclusion that buyers of a typical Dublin apartment will be better off than rent payers after just three years is based on the assumption that there will be a 10 per cent fall in house prices this year and a 3 per cent rise in 2009 and beyond. Even if prices continue to plummet, falling 5 per cent in 2009 before returning to annual growth rate of 3 per cent, people who buy their first homes now will eventually become better off than those who don't - in 2013.

But all of this is a long way from the days when the fevered scramble to get on the property ladder was driven by the very real prospect that house prices were rising so fast that buyers would already be sitting on tens of thousands of equity before their couch arrived.

Despite the claims that the "tipping point" between renting and buying is now tilting in favour of the latter, many would-be first-time buyers will take one look at DKM's forecast that house prices will fall 10 per cent this year and think maybe, just maybe, they should hold out a little longer. If no one else is buying now, then why should they be the fool that jumps in?

"Trying to call the bottom of the market is hard," says Paul Short, president of the Independent Mortgage Advisers Federation (Imaf).

"We're now really looking at the third quarter for confidence to come back. There is no question that people are more cautious and taking a more jaundiced view of it."

But why is timing so important? The answer is simple: negative equity. If your mortgage exceeds the value of your home and you need to sell it, you lose money on your purchase - and not just a little loose change.

A first-time buyer who took out a 100 per cent mortgage to pay for a house with the average national price tag for first-time buyers is now in negative equity to the tune of €24,700.

Average prices paid by first-time buyers have plunged 8.9 per cent from €279,400 in February 2007 to €254,700 in February 2008, according to the Permanent TSB / ESRI house price index.

So what if property prices fall another 10 per cent? The first-time buyer who bought in February 2007 will be out of pocket to the tune of more than €50,000. The buyer who took his pick of averagely priced properties in February 2008 will be in negative equity to about €25,500.

At this stage, the February 2008 buyer needs an 11 per cent increase in house prices to get back up into the black. The February 2007 "peak" buyer needs house prices to climb 22 per cent before they can escape negative equity.

With recent buyers weighed down by such staggering debt burdens, it is little wonder that lenders have now effectively withdrawn 100 per cent loans.

Goodbody estimates that about a quarter of the people who bought houses in 2005 and 2006 - about 35,000 households - will be in negative equity by the end of this year. Fine Gael finance spokesman Richard Bruton says about 70,000 people who bought in 2007 have slipped into the red.

As intimidating as it might seem to the buyers themselves, many economists, lenders and market-watchers stress that it doesn't matter if people are in negative equity unless borrowers find that they can no longer afford to pay their mortgage - if they lose their job, for example. Unfortunately, almost 8,000 people lost theirs in the first three months of 2008.

For house prices to start rising again and existing borrowers to escape their sticky situation, future borrowers need to start filling up those empty shoeboxes. But fears about the Irish economy have put doubt in would-be buyers' minds, says Short.

"I don't think we've seen the end of the malaise."