Ireland is now well on the way towards the next general
election. Many observers doubt the ability of the coalition to last beyond this
year, let alone run to full term in mid 2012. Even though it could be argued
that the economy is now in a state of fragile equilibrium (revenue more or less
on target, unemployment more or less static) there is a weary public acceptance
that things will not get easier, that several tough budgets lie ahead and that
the Celtic Tiger chickens are coming home with a vengeance.

polls indicate that, whatever about  recognizing that any alternative government
would have to pursue fiscal policies and tough measures broadly similar to those
the government has taken since2008, the electorate seems determined to hold
Fianna Fail in particular (in power since 1997) responsible for bringing the
crash about. Public ire has been compounded in recent weeks by growing awareness
of the human cost of the crash and the necessary remedies, set against the
amounts committed to bailing out the banks. Stealth cuts affecting carers for
the mentally and physically disabled have brought people onto the streets while
public attention has now also begun to focus on the housing and mortgage time

For better or worse the government has pursued a particular policy
towards the banks and the developers, including a wide ranging guarantee
covering the banks and their investors.  No one has answered satisfactorily what
the immediate consequences for the economy of not issuing the guarantee in September 2008 would have been.  Yet the issue has
clearly left a sour taste when combined with the money sunk into buying the
banks’ doubtful loans, leaving only a bare cupboard for everyone else. There is
no money to stimulate the economy and little beyond words to offer succour to
those in financial straits, including, for the first time, significant numbers
from the politically important middle class.

Given the Irish attitude to
property ownership, the housing and mortgage situation may prove perhaps the
bitterest legacy of the Celtic Tiger. The economy going belly-up is seen as a
problem for society, or the EU. The debt of the individual is very much a
personal problem. Factor in property and many raw nerves are exposed. The
spending spree on property during the boom touched a great many people.
Properties were remortgaged; equity was drawn down, often for frivolous consumer
spending. But most went into the property boom, fuelling it. Credit, cheaper
than ever before, was widely available. Nearly everyone who could, borrowed.
Young people, first time buyers, scrambled to get on the property ladder while
they still could. And now …the party feeling has been replaced by a

Currently the housing market is stagnant. Property prices have
crashed, by between 33% and 50% depending on location. Virtually all new units
bought since 2003 or 2004 (the level to which prices have now fallen) are in
negative equity, and prices have yet to bottom out definitively. Demand has all
but disappeared. Compounding this, the banks, so recently profligate with
lending, have now rediscovered prudence, prompted by a new and tough financial
regulator, and will only lend small multiples of income and no more than 80% of
the cost, further discouraging new and first time buyers. There is no trading up
as those already in at the bottom are crippled by negative equity. Very few new
houses are being built and much of visible construction consists of project
completion on behalf of creditors.  There is no prospect of improvement in the
short term.

The country is sprinkled with “ghost estates”, located mainly
(but by no means entirely) in rural areas. These date from just before the crash
and include partially completed houses, as well as estates and apartment
complexes all but finished but with few or no buyers or occupants. Estimates of
the numbers of unoccupied or unfinished dwellings vary widely but the number is
considerably in excess of 100,000. Many, particularly in the west, are unlikely
ever to be viable. Some form of triage approach appears most likely with some
estates destined to be abandoned or demolished, others earmarked for fire sales
(any fire sales in desirable areas are likely to depress the market

Mortgaged properties in negative equity can be broadly divided
into two – those where the owner is coping and those where the owner is under
pressure on the mortgage (job gone or income reduced or with a short term loan
falling due). The first group face no immediate problem and collectively will
aim to hunker down in the expectation that prices will rise again in the medium
term as the economy recovers.

The pressing problem lies with the second
group and this is now fast becoming a political issue. Many are young or first
time buyers who got mortgages of up to 100%, sometimes more, for amounts of
$250,000 or up. Many are currently in negative equity of at least a third. Where
jobs have been lost there is simply no way the mortgage can be met. The bald
figures are that, at the beginning of July, one in twenty five residential
mortgages (32,321) were three months or more in arrears, a figure expected to
increase rapidly as temporary moratoriums on repayments expire and as interest
rates inevitably rise above the current historic lows. There is no risk sharing
with Irish mortgages. The keys cannot be handed back. The borrower remains
liable for the full amount of the loan – a financial albatross which threatens
to retard the pace and strength of any economic recovery.

The government
has, up to now, approached the issue warily. The lending institutions were
prevailed upon initially to delay taking action over arrears and so far this has
worked in most cases. This is probably due as much to the weakness of the
institutions (what would they do with a surfeit of repossessed properties in a
falling market in any event?) as to the government’s entreaties. In early July a
government-sponsored expert group suggested a negotiating process for borrowers
in difficulties but left open the option for the banks to repossess failing all
else. Time will tell how successful this approach will be. The last thing the
government wants is a flood of repossessions and /or bankruptcies affecting
ordinary people.

The group’s next report, due in September, is to deal
with the elephant in the room – negative equity – and is expected also to
consider the hot potato of possible debt forgiveness. The debate on this has
already begun, focussing on possible percentage write downs by the lenders, and
/or the state assuming part of the loans. Among the arguments against are that
writing down would further weaken the banks and that the state has no money to
intervene. A further point has been made that to bail out those in trouble
would invite “moral hazard”, i.e. the delinquents – or others – would do it all
again given the chance. I cannot recall morality being invoked when the banks
and developers were being rescued! And if the banks merited help for the benefit
of society, who is to say that people do not? This one will run.


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