Falling house prices raise negative-equity concerns

There have been mixed views on the future direction of Irish house prices, with some commentators warning of a sharp fall in house prices and raising concerns that some home-owners could find themselves with the negative-equity problems that plagued British home-owners in the 1980s.

A slowdown in the rate of growth of house prices has been recorded but many analysts suggest that the underlying strong demand for housing will continue to underpin the market. Concerns about job losses in the high-tech sector have dented public confidence in the housing market.

Much will depend on global economic conditions, with the major multinationals in the electronics sector unable to offer assurances in terms of the sustainability of their operations for the time being.

NCB economist Mr Eunan King suggests that house prices would have to fall by more than 70 per cent before a negative-equity crisis would ensue but for many borrowers, particularly those who took out mortgages in the past two years, a much smaller drop in house prices could be problematic.

Meanwhile, the British mortgage market, in which Bank of Ireland's Bristol & West subsidiary is a significant player, has received a broadly positive review in terms of its long-term health but there are warning signs of potential trouble being stored up with an increase in riskier lending throughout that market.

In a new report, Merrill Lynch says that mortgage book performance has been positive and improving as arrears and repossessions have fallen over the past several years. But it notes with caution that lending to riskier borrowers under less stringent criteria has increased this year, which could prove problematic in a weakening economy.

The British mortgage market is one of the largest in Europe with roughly £500 billion sterling (€794 billion) in outstanding mortgage loans. Bank of Ireland has close to 3 per cent of that market, with about £12.8 billion in outstanding mortgages. The market has staged a strong recovery in the 1990s with historically low interest rates and unemployment underpinning growth in real house prices.

Merrill does not foresee any significant downward adjustments in house prices over the short to medium term in that market although a serious macroeconomic shock would have an adverse affect on house prices there.

All in all, while the mortgage market may not be as buoyant as in recent years, mortgage lenders have some way to go before they will have serious cause for concern.