Negative equity is here - but only for a tiny percentage of the market, says Marc Coleman
Is negative equity about to rear its ugly head? One of the most useful regular outputs on the mortgage market is the Irish Bankers Federation's (IBF) quarterly profile of mortgage lending. It might help provide an answer to this question.
To describe its latest report - for the first quarter of this year - as historic is being a bit dramatic. With data going back only to the first quarter of 2005 the word "historic" is a bit much. But even if no data previous to 2005 exists, the fall recorded in the number of new mortgages taken out in the first quarter, to 38,236 down from 48,637 in the previous quarter and down 19.1 per cent on the first quarter of 2006, is likely to be the first such fall since 2002. In economic terms, that 19.1 per cent isn't quite as scary as it looks. In terms of sheer value, mortgage lending declined by 7.5 per cent implying - all other things being equal - that prices were still significantly higher in the first quarter of this year than the same period of 2006.
But to answer the original question, we need to start by noting that in the last 12 months about 194,000 mortgages have been taken out in the 12-month period ending in the first quarter. When re-mortgagers, mortgage top-ups and buy-to-let mortgages are excluded, it appears that just under 79,000 of those mortgages were for first-time buyers (36,000 approximately) or mover purchasers (43,000 ball park). Let's call them "residential mortgages" for definition's sake.
If negative equity has emerged then it has emerged during this 12-month period for two obvious reasons. Firstly, this is the period during which the European Central Bank increased its main refinancing facility - the mother of all mortgage rates - from 2.25 per cent to 3.75 per cent. For those who got involved in the property market at the start of this period, interest rates have increased by a factor of two-thirds. As the IBF figures make clear, the number of first-time buyers has risen to its highest share since these records began. The shortness of that recorded span, notwithstanding, it still seems fair to say that a large number of (mainly young) people have entered a situation where their borrowing costs have increased dramatically in a short space of time.
The second reason for looking at this period is that the property market began to correct itself about half way through it. According to the most recent Permanent Tsb/ESRI house price index - for the month of April - average national house prices fell back down to levels prevailing in August 2006. Some further falls are likely to have happened in May and it seems fair to suggest that prices now are where they were in July 2006. Which means that, for around 58,000 of the aforementioned "residential" mortgages created in the 12-month period referred to, the price of their house is now less than it was bought for.
Negative equity is only a problem if you need to sell your property urgently, either because you can't make repayments or for family reasons. As regards the first motive for those who bought as first-time buyers - the most likely buyers to have 100 per cent mortgages - government plans to abolish stamp duty will boost the value of their properties while extending mortgage interest relief should cushion most of the blow of higher interest rates.
But what about those who need to sell houses recently bought for family reasons. Of the 58,000 mentioned above, around 30,000 are second-time purchasers (a number that, incidentally, will increase the longer house prices in the second-hand market continue to fall as they have been doing). As research by Lisney recently pointed out, there are 1,769,613 residential dwellings in the state. Assuming the figure above for the number of mover purchasers in a 12-month period is correct, about 43,000 (or 2.4 per cent) of existing residential property owners buy a new property each year. The percentage is probably lower for more recent purchasers, let's say its 1 per cent. If this is correct, then of the 30,000 second-hand purchasers about 300 will need to sell within a year. Happily for most of us, this number is not large enough to cause any kind of negative equity crisis. Sadly for the 300 in question, their number may be politically too small for the Government to think it needs to act.
Marc Coleman is Economics Editor of The Irish Times - firstname.lastname@example.org