It may be a buyers' market out there but many would-be home owners are reluctant to take the plunge, and are finding it hard to get a mortgage anyway, writes Simon CarswellFinance Correspondent
JUST WHY would someone buy a property when prices are forecast to fall further and lenders are tightening borrowing rules due to the credit crunch? This is the question occupying many prospective buyers as prices keep on declining and the global banking storm continues to rage. However, despite tougher times for borrowers, people are still buying - just not as many as during the height of the property boom.
In the first six months of this year, almost 30,000 new mortgages worth €8.4 billion were advanced to first-time buyers, purchasers trading up and residential property investors, so many still saw enough value to climb up on the property ladder for the first time or move up to a higher rung.
However, this level of activity is a far cry from the borrowing and buying binge of two years ago. In the six months to the end of September 2006, 58,000 new mortgages valued at €14.6 billion were advanced to first-timers, buyers trading up and investors.
First-time buyers have been hardest hit this year, as lenders have withdrawn 100 per cent mortgages and demanded larger cash deposits from new purchasers - at least 8 per cent of the property's value or €21,800, based on the average house price of €272,946.
Frank Conway, a mortgage broker and director of the Irish Mortgage Corporation, says banks have been pricing in the risk of property values falling further by reducing loan-to-value (LTV) ratios from 100 per cent down to 92 per cent on first-time mortgages.
Lenders have also raised interest rates as they pass on their own higher borrowing costs to customers, withdrawing the low-cost mortgages that borrowers enjoyed in the very recent past. The credit crunch has also reduced the amount of money banks are willing to lend. This, combined with the fact that many potential buyers are waiting for cheaper deals, has reduced activity in the property market sharply.
Jim Power, chief economist at Friends First, says buyers are right to hold off if prices are to drop further. He has predicted that they will fall by 45 per cent from their peak and estimates that they have already dropped at least 30 per cent since the first half of 2006.
The Permanent TSB/ESRI house price index, which measures prices based on transactions, puts the decline at 12 per cent since February 2007, though Power says there is a lag in this index and that few houses are actually selling.
He says that if buyers see a property they like and it fits their wish-list, they should try and drive the price down as vendors are willing to cut their prices to secure sales.
Bank of Ireland economist Dan McLaughlin said on Thursday that prices had fallen 9.4 per cent in the year to July and were now back to what they were in November 2005, though the rate of decline was slowing. He said it may be next year before "signs of stability" emerge.
This is little comfort to builders, who rushed to feed the buying frenzy. They have been left with an oversupply of unsold properties and have abandoned many new projects. It's estimated that 30,000 new homes will be built next year, almost a third of the number completed in 2006.
This has led to a shortage of cash in builders' accounts. Banks, eager to safeguard more than €100 billion in loans to the construction and property development sector, are frantically working in the background, helping clients through the freeze and renegotiating loans.
In some cases, banks have postponed interest payments, essentially giving builders free money - free for the time being at least - until they can shift some unsold stock. The banks believe it is in all their interests that their biggest developer customers are supported until the market improves and they can generate cash again to start paying interest.
THE EXCHEQUER IS also feeling the pain. Tax receipts from every major category of tax have fallen well below Government forecasts for the first eight months, with the haul from property-related taxes lagging the most severely, accounting for much of the deficit.
The State is facing a tax shortfall of at least €5 billion this year and this prompted the Government to bring forward the Budget by seven weeks to October 14th.
Brian Lenihan is facing a tough task in his first budget as Minister for Finance - he must quickly restore confidence in a rapidly deteriorating economy. It is likely he will have to introduce some measures to bolster the property market, knowing that the fortunes of the economy and the construction sector are so entwined.
The greatest challenge is to remove the logjam in the mortgage market and to encourage lenders to lend again. However, given that the banking crisis is a global problem, Lenihan is unlikely to be able to provide a domestic solution, though some changes could help.
Alan McQuaid, chief economist at Bloxham Stockbrokers, says that if the banks aren't going to sell more mortgages, then the Government should direct the National Treasury Management Agency (NTMA), which manages the exchequer's cash requirements and a €20 billion fund for the country's future State pension needs, to provide low-cost home loans.
"The banks are at the heart of the economy. If they do nothing, everything else will stagnate, so the Government has to take the initiative," he says.
Some bankers have raised the possibility of the State purchasing low-risk mortgages from the banks so they can lend any money generated to first-time buyers. Such systems operate in other countries. The best known are the US state-sponsored mortgage giants Fannie Mae and Freddie Mac, which own or guarantee almost half of all US mortgages.
Lenihan may shudder at the idea of the State buying mortgages in a declining market, particularly since the US government was forced to bail out Fannie Mae and Freddie Mac last weekend in a move that has effectively doubled the US national debt to almost $10 trillion.
However, there may be a simpler way to generate cash for new mortgages. Instead of buying loans from the banks, the Government could charge them for a State insurance policy on some of the mortgages, which would make them more attractive to investors in the securitisation markets. These markets have been ravaged by the global crisis. In effect, the State would be endorsing the mortgages to encourage investors to buy them.
One senior banker, who said this option has been floating around within banking circles, described the proposal as "a very balanced way" to kick-start mortgage lending as it removed the "moral hazard risk" of the Government having to bail out the banks by buying mortgages.
There's no doubt the Irish market needs some stimulus. The value of first-time buyer mortgages has fallen dramatically this year. The property market starts with first-time buyers whose purchases help other home-owners to trade up and builders to fund new projects.
Officials within Lenihan's department are considering other ways of helping new property buyers struggling to raise larger cash lump sums for deposits. This could involve an expansion of the affordable housing scheme, with the State perhaps providing up to 30 per cent of the value of a property, which means the buyer doesn't need a cash deposit.
Most senior bankers have publicly said no Government intervention is necessary - property prices should be allowed to fall so houses become more affordable, they argue. However, privately, some believe Lenihan has to do something to breathe life into the sector.
Paul Short, president of the Independent Mortgage Advisers Federation, says this summer was the quietest since he started working as a mortgage broker 13 years ago.
"It is a combination of a shortage of money to lend and far tighter lending criteria. We have had a number of enquiries from people who want to buy but we cannot get them what they want."
He says that banks are becoming far more forensic when assessing new borrowers. Several years ago banks would have been content with a letter from a parent saying they were giving their son or daughter a lump sum for a deposit. Now they want bank statements showing how the money was raised.
A recent survey by Davy stockbrokers found that banks were unwilling to increase their loan offer, even if there was a guarantee from a parent or if a room was being rented out and that lenders were offering first-time buyers a mortgage averaging five times their salary, 11 per cent less than in October 2007.
Last month, in the first sign of stricter lending to people working in the struggling building sector, IIB Bank, the country's fifth largest mortgage lender, said it would only accept up to 80 per cent of their income when assessing mortgage applications.
"There is a lack of confidence out there," says Short, "and there is a bit of desperation on the part of developers to flog their developments."
Earlier this year, some builders were offering new cars and up to €20,000 in kitchen fittings if people bought their houses. Now developers Bernard McNamara and Ray Grehan of Glenkerrin Homes are willing to provide interest-free loans to buyers who can't raise deposits. Grehan said on Thursday that Glenkerrin has had "a couple of hundred" enquiries and expected to secure 20 deposits (each for just 5 per cent of the property's value) by yesterday.
Some brokers say they can secure loans for first-time buyers with smaller cash deposits but they have to pay a premium - as high an interest rate as 6 per cent, the first time rates have risen to this level in seven years.
While most lenders say they are open for business, they are really only looking to lend to buyers with bigger deposits or home owners with lower mortgages trading up.
Siobhan McAleer, founder of the broker network, The Mortgage Shop, says: "First-time buyers without a history of making loan repayments are regarded as high risk and banks are looking for bigger deposits to reduce their risk. Customers seeking a mortgage on a loan-to-value of 60 per cent, for example, are a very safe bet and there is still some appetite among lenders for good quality mortgages."
Not surprisingly, switcher mortgages are the only growing sector of the market, as lenders want less risky borrowers with lower debt and a solid track record of repayments.
As for buy-to-let investors, banks have increased rates to new borrowers and reduced the cap on loans. Longer-term interest-only loans have become rare as banks want investors to pay off capital and interest as new borrowers are less likely to profit from selling properties.
First-time buyers are not getting the same deals that were thrown at them when mortgages were cheap and plentiful. Despite the significant changes in the mortgage market, weaker demand is as much to blame for the lower level of new lending. Many potential buyers are waiting for prices and borrowing costs to fall, and for cautious bankers to loosen their lending rules. But the 13-month-old global crisis shows no sign of easing as fears grew last week over the financial health of another US investment bank, Lehman Brothers, Wall Street's fourth largest.
Mark Twain described a banker as someone who lends you an umbrella on a sunny day but wants it back when it starts to rain. Unfortunately, there's a deluge out there and most prospective buyers will wait indoors until the dark clouds start to clear.
They could be waiting a while.