ANALYSIS:ANALYSIS: HOW DO you encourage people to buy a home at a time when the price of property is continuing to fall?
The National Asset Management Agency (Nama) believes it may have part of the answer.
It says there are two main issues which are affecting the stagnant residential property market. Firstly, buyers are afraid to purchase a home for fear of being saddled with negative equity. Secondly, there are difficulties accessing mortgage finance.
To help surmount these obstacles, Nama is proposing a mortgage product in conjunction with the major banks which would protect would-be purchasers against negative equity.
It works like this.
* A property in Nama is for sale at €200,000 in 2011. A couple approaches a bank with a €20,000 deposit, seeking a €180,000 mortgage. The couple are however worried that the value of property may fall, leaving them in negative equity.
* Nama will defer 20 per cent of the property's current value, €40,000 in this case. The payment of this amount will only be due to Nama if the value of the property is maintained or increased over the next five years
* All dealings by the couple are with the bank - they do not deal with Nama at any stage. The bank approves the €180,000 mortgage, the purchase is completed and repayments begin.
What happens next? One of two things.
If the property retains or improves its value, Nama collects its outstanding €40,000 from the 2011 purchase price after five years. The couple's repayments do not alter.
The other possibility is that the property's value falls and is now independently valued at €160,000. In this case, Nama waives €40,000 from the purchase price and the couple's repayments are now based on €140,000 rather than €180,00. The bank and couple reschedule remaining repayments to reflect the new position.
The Department of the Environment, however, has serious concerns over the scheme. It runs counter to its housing policy which states that incentive schemes to buy homes were part of the problem that led to the housing bubble in the first place. In addition, Minister for Housing Willie Penrose says it could actually distort the market by inflating property before the market has had a chance to fully bottom out.
Nama, however, takes a different view. It says it will begin the scheme on a trial basis with about 750 houses or so later this year and during 2012. The agency's chief executive Brendan McDonagh has suggested the scheme could eventually apply to 5,000 houses and apartments.
It is, it points out, a short-term measure to address the concerns of potential purchasers who are approved for finance by their banks, but who are concerned that they may be exposed if prices fall further in the future.
It is not an attempt to "call the bottom of the market" but a market test to gauge actual latent demand. "Indeed it is quite the opposite, as it enables transactions to take place now which can be flexible enough to accommodate price falls in the future," a Nama spokesman said yesterday.
But what's in it for the State?
By stimulating activity in the residential market, it would help bring in more taxes. In fact, if 5,000 houses or apartments were sold for €200,000 each, this could raise €135 million for the exchequer through VAT receipts.
The most the State could lose on the scheme, according to Nama, is about €65 million.
This is the difference between the amount raised in VAT
from the property sales and the €200 million which would be waived in the event that the properties fell further in value over five years.