Will buy-to-let properties in arrears come to the market?

A combination of rising property prices and increased pressure from the Central Bank to sort out arrears is expected to result in a significant number of distressed buy-to-let properties being released to the market in the coming months.

However, the numbers are unlikely to impact in any substantial way on existing supply shortages. Since the crisis first began, there has been speculative talk of the banks needing to offload distressed investment properties, but this has never quite materialised, despite the scale of the problem.

The latest figures from the Central Bank, for September 2014, reveal the extent of distress among this cohort of properties, with about 26 per cent (38,463) of all buy-to-let mortgages in arrears, and of these, some 31,619 are in arrears of plus 90 days; 28,280 are in the plus 180 days category; and 15,435 in arrears of plus 720 days. However, action has been limited, with just 65 properties sold during this quarter, for example, and 13 repossessed.

Lack of action David Hall, chief executive of the Irish Mortgage Holders Organisation, which helps consumers deal with personal debt, says that the lack of action on buy-to-let mortgages is "the single biggest mystery of all time for anyone involved in the last five years".

While the number of rent receivers appointed to buy-to-let properties continues to rise "98 per cent of times they are never removed", notes Hall, with rising rents in urban areas making such properties potentially more attractive to rent. A key inhibitor to the banks taking action on distressed buy-to-let properties is that the legal process in Ireland is "exceptionally long", notes Goodbody economist Dermot O'Leary. Another factor is a preference by the banks for "kicking the can down the road" and hoping that the economy will pick up.

“There hasn’t really been pressure applied to banks in terms of buy-to-let properties,” says O’Leary.

Hall believes that the lack of action thus far comes down to a financial decision to maximise profits, given that the banks have already written off the losses on those properties.

Maximum price

“It’s arguable that the banks have just waited for the maximum price possible in respect of buy to let...and by waiting they can actually wait for profit,” he says.

With prices now up substantially in some areas, repossessing and selling on a property is becoming a more attractive prospect for banks.

“As prices continue to rise, and as the level of collateral improves relative to provisions on those loans, the more likely it is for the banks to move,” notes O’Leary, while Hall agrees that we’ll likely see more action in this space this year.

Already, there are signs that action on buy-to-let mortgages has been gaining pace. In November, for example, Bank of Ireland disclosed that it had repossessed 621 properties (299 of which were buy-to-let) in the first six months of 2014, and had sold 80 such properties. From 2010-2014 the bank had repossessed just 645 properties, selling about 60 per cent of them.

The lack of action on buy-to-let arrears sits starkly against a background of reduced supply, rising prices, and a dearth of social housing.

Significant

According to myhome.ie, for example, there are currently 21,709 residential properties listed for sale across the country on the portal – so if even a portion of those 15,000 or so properties in arrears of more than 720 days were repossessed and sold the impact on the market could be significant.

In some cases it might just have the impact of the property’s ownership, rather than its occupancy changing as investors seek to buy these properties with tenants in situ.

But despite the scale of arrears in this sector, and the possible impact it could have on supply if the banks were to put such properties on the market, information on buy-to-let properties is patchy at best.

It is unclear where the houses are located – information critical to anticipating demand – whether they are vacant, if they are apartments or family homes, and how many borrowers account for the loans.

“We seem to only have pieces of the story but the whole picture is relevant,” says Hall.