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IMF and negative equity

  • 14-07-2010 10:03PM
    #1
    Registered Users, Registered Users 2 Posts: 9,031 ✭✭✭


    From the RTE site
    RTE wrote:
    The IMF has also urged NAMA to begin selling off its portfolios quickly and aggressively, in order to return the property market to normal conditions in the shortest possible time.

    The Washington-based fund has repeated its call for the Government to consider a narrowly targetted support mechanism for heavily indebted homeowners to limit the economic and social fallout from the financial crisis.

    It says the banks, bolstered by State capital, could absorb the initial costs, and could use the social welfare system to identify eligible beneficiaries.

    It says the process of reducing the economic stress on homeowners would be helped by having what it calls an overdue shift to a more efficient and balances personal insolvency regime. This could allow for a swifter and less costly alternative to the current bankruptcy laws.

    What does this mean in English?


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Comments

  • Registered Users, Registered Users 2 Posts: 802 ✭✭✭Scarab80


    From the RTE site

    What does this mean in English?

    They are advocating a very limited debt forgiveness scheme for people in negative equity with no future expectation of being able to meet their loan commitments.


  • Registered Users, Registered Users 2 Posts: 13,778 ✭✭✭✭Inquitus


    From the RTE site



    What does this mean in English?

    How the fcuk can the property market return to "normal conditions" if the Gov dump property onto the market now, aggressively, and at record lows.......surely this would drive down prices further, putting more homeowners into negative equity, making it impossible for them to move house and further killing off what weak demand there is?


  • Registered Users, Registered Users 2 Posts: 27,585 ✭✭✭✭noodler


    Two things to me

    1) They fear the Government holding onto the NAMA assets for too long and then trying to dispose of them all in a small time frame (all in year 10 as an extreme example).

    With so much property on the markets at the moment though, it is hard to see how NAMA could force a sale of its assets at a price that would breakeven. They;d have to wait a couple of years at the very least (even thats assuming a price increase somwhere down the line).

    2) The bit on mortgage arrears is cryptic to me. Do they mean outright debt forgiveness? Which would probably be very difficult politically.

    The bit about the banks "absorbing the initial losses" makes me think that is what they mean as opposed to say, interest only payments, extending the loan length and other "non-debt forgiveness" options.

    Of course, maybe they simpy mean that the banks could absorb giving mortgageholders interest only loans etc.


  • Registered Users, Registered Users 2 Posts: 3,834 ✭✭✭Welease


    From the RTE site



    What does this mean in English?

    I've have a few vino's :) and I'm not into economics but here's my translation ..

    "The IMF has also urged NAMA to begin selling off its portfolios quickly and aggressively, in order to return the property market to normal conditions in the shortest possible time."

    The hoarding of property distorts the free market value of property (like diamonds).. Start selling the properties to allow buyers choose from the full available market stock.. and real prices will follow.

    "The Washington-based fund has repeated its call for the Government to consider a narrowly targetted support mechanism for heavily indebted homeowners to limit the economic and social fallout from the financial crisis."

    Those who are in massive neg. equity will need some formal support... but it should not be widened to those suffer minor difficulties.

    "It says the banks, bolstered by State capital, could absorb the initial costs, and could use the social welfare system to identify eligible beneficiaries."

    As per plan above, the cost should be borne by the lenders with help from the government.

    "It says the process of reducing the economic stress on homeowners would be helped by having what it calls an overdue shift to a more efficient and balances personal insolvency regime. This could allow for a swifter and less costly"

    As was discussed earlier, the bankrupty laws in Ireland are draconian ... 12 years here (and it costs you money to be declared bankrupt) vs maybe 1 year in the UK etc..

    It does seem pretty self explanatory, but maybe my alcohol induced state made me misread you original post, apologies if so..


  • Moderators, Business & Finance Moderators, Science, Health & Environment Moderators, Society & Culture Moderators Posts: 51,685 Mod ✭✭✭✭Stheno


    From the RTE site



    What does this mean in English?

    Basically imo, the IMF is saying that if Nama firesales as much of the property on it's books as it can, then any inflationary bubble that is currently in the property market as a result of that property currently been held back from sale at vastly discounted prices, then the property market should reach some realistic level here more quickly than if not.

    As for the second bit, they are saying that the current bankruptcy laws for personal bankruptcy need to change.

    Edited to add: Essesntially what Welease said :)


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  • Closed Accounts Posts: 1,914 ✭✭✭danbohan


    Inquitus wrote: »
    How the fcuk can the property market return to "normal conditions" if the Gov dump property onto the market now, aggressively, and at record lows.......surely this would drive down prices further, putting more homeowners into negative equity, making it impossible for them to move house and further killing off what weak demand there is?
    nama the banks and govt are combining to keep the market from freefalling to where it should be , its unsubstainble , good to see imf start to point that out they should be a lot more forcefull in their inputs here .


  • Registered Users, Registered Users 2 Posts: 13,778 ✭✭✭✭Inquitus


    danbohan wrote: »
    nama the banks and govt are combining to keep the market from freefalling to where it should be , its unsubstainble , good to see imf start to point that out they should be a lot more forcefull in their inputs here .

    Indeed, but trapping the vast majority of homeowners in negative equity will also distort the market hugely by removing most of the demand.


  • Registered Users, Registered Users 2 Posts: 13,778 ✭✭✭✭Inquitus


    It would also crystalise for the State far larger losses than invisioned far sooner, which given the precarious state of our finances can't be a good thing.


  • Moderators, Business & Finance Moderators, Science, Health & Environment Moderators, Society & Culture Moderators Posts: 51,685 Mod ✭✭✭✭Stheno


    Inquitus wrote: »
    Indeed, but trapping the vast majority of homeowners in negative equity will also distort the market hugely by removing most of the demand.

    Are they possibly referring to this in the last paragraph of the OP's post, by intimating that while now one cannot "hand back the keys" a solution would be to change those laws?


  • Registered Users, Registered Users 2 Posts: 27,585 ✭✭✭✭noodler


    Inquitus wrote: »
    It would also crystalise for the State far larger losses than invisioned far sooner, which given the precarious state of our finances can't be a good thing.

    I worry this all leads to an increase in the timespan of the Nama plan in order to ensure the properties are "disposed of" over a decent spread of time.


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  • Registered Users, Registered Users 2 Posts: 3,834 ✭✭✭Welease


    noodler wrote: »
    I worry this all leads to an increase in the timespan of the Nama plan in order to ensure the properties are "disposed of" over a decent spread of time.

    Which kinda inflates the property prices, which is what they were complaining about


  • Registered Users, Registered Users 2 Posts: 27,585 ✭✭✭✭noodler


    Welease wrote: »
    Which kinda inflates the property prices, which is what they were complaining about

    I would argue less so in a 20 year plan than a 10 year plan.

    So the Government would be faced with selling off assets too soon if it completely followed the IMF advice.

    I think, possibly, if the Government is to start selling assets in the near to medium term they will opt for the 33% which are not located in ROI.

    Markets elsewhere obviously aren't as depressed and surely have a better prospect of return in the future. It wouldn't address the IMF's concerns at all though but I find it hard to see how the foreign assets won't be the first to go.


  • Registered Users, Registered Users 2 Posts: 3,834 ✭✭✭Welease


    noodler wrote: »
    I would argue less so in a 20 year plan than a 10 year plan.

    So the Government would be faced with selling off assets too soon if it completely followed the IMF advice.

    I think, possibly, if the Government is to start selling assets in the near to medium term they will opt for the 33% which are not located in ROI.

    Markets elsewhere obviously aren't as depressed and surely have a better prospect of return in the future. It wouldn't address the IMF's concerns at all though but I find it hard to see how the foreign assets won't be the first to go.

    It's a balance between what the IMF would like to see and what's best for the government, which in the case of NAMA means us :)

    Real market value of property will only come from releasing the properties.. which is great for the buyer (us) but it's a firesale which is bad for the government (err us).. holding onto to the properties is bad for the buyers (err umm us) but good for... you get the point :)

    They are kinda damned if they do, damned if they don't depending on your particular circumstance :)


  • Closed Accounts Posts: 334 ✭✭Nemi


    Inquitus wrote: »
    Indeed, but trapping the vast majority of homeowners in negative equity will also distort the market hugely by removing most of the demand.
    The vast majority of homeowners won't be trapped in negative equity. A large proportion of mortgage holders may be, but that's a different thing.

    In other words, most people who, in the normal course of events, are capable of buying a house won't be in negative equity. Some of them won't even own any property yet, and so are immune to changes in property values.

    But clearly the minority of people who have taken out large mortgages in recent years are stuffed, in any scenario.
    Inquitus wrote: »
    It would also crystalise for the State far larger losses than invisioned far sooner, which given the precarious state of our finances can't be a good thing.
    The counter argument is that attempting to hold property prices up frustrates economic recovery. Ultimately, property is only worth what people can pay for it. A sharp fall in property prices could be a necessary stimulant; people could work for less, and they'd need to pay less to be housed.


  • Registered Users, Registered Users 2 Posts: 3,834 ✭✭✭Welease


    Nemi wrote: »
    The vast majority of homeowners won't be trapped in negative equity. A large proportion of mortgage holders may be, but that's a different thing.

    In other words, most people who, in the normal course of events, are capable of buying a house won't be in negative equity. Some of them won't even own any property yet, and so are immune to changes in property values.

    Just to give some recent analysis... and it is alarming for those caught up in the problem..


    "HALF of the country’s homeowners will soon owe more on their mortgage than their house is worth."
    http://www.examiner.ie/ireland/300000-home-owners-facing-negative-equity-118289.html


  • Closed Accounts Posts: 334 ✭✭Nemi


    Welease wrote: »
    Just to give some recent analysis... and it is alarming for those caught up in the problem..


    "HALF of the country’s homeowners will soon owe more on their mortgage than their house is worth."
    http://www.examiner.ie/ireland/300000-home-owners-facing-negative-equity-118289.html
    Undoubtedly it is alarming for people caught up in the problem, although clearly they have no immediate difficulty if they can continue to service their mortgage. In other words, being in negative equity is not the same as being in arrears in a mortgage. A person in positive equity who is unable to get a job, and hence is unable to keep up debt repayments, is in a far worse situation. I've a fear that the two issues tend to be mangled up in people's minds.

    Thanks for linking the Examiner article. However, the headline of that article seems to be quite misleading.

    There are about 1.5 million households in Ireland. So if, as predicted, 300,000 or 350,000 fall into negative equity, then three quarters of households will actually not be in negative equity.

    Also, just messing with the figures in that article, it would look like most households have no mortgage at all. So they won't be in negative equity, even if houses start changing hands for the price of a pint.

    And that's just looking at households. Many of those households will have adult members who are potential property buyers.

    So I think we can see that its actually very feasible to get a liquid property market moving again, once prices fall to a reasonable level.


  • Registered Users, Registered Users 2 Posts: 13,778 ✭✭✭✭Inquitus


    Nemi wrote: »
    So I think we can see that its actually very feasible to get a liquid property market moving again, once prices fall to a reasonable level.

    It's actually not, aside from the stock of poorly built and poorly located houses left over from the boom, very few people are going to sell their houses at the bottom of the market and crystalise negative equity, and people who have little or no mortgage are also not going to sell at the bottom of the market.


  • Registered Users, Registered Users 2 Posts: 802 ✭✭✭Scarab80


    Inquitus wrote: »
    It's actually not, aside from the stock of poorly built and poorly located houses left over from the boom, very few people are going to sell their houses at the bottom of the market and crystalise negative equity, and people who have little or no mortgage are also not going to sell at the bottom of the market.

    It depends on your reason for selling. If you are selling to move to another house it makes no difference as the price of the house you are buying will be reduced as well. That is if the banks increase the ability to transfer your negative equity to a new property, which I think they will have to do.

    If you've got an investment property or want to sell in order to rent then you might be more inclined to hold onto it.


  • Registered Users, Registered Users 2 Posts: 13,778 ✭✭✭✭Inquitus


    Scarab80 wrote: »
    It depends on your reason for selling. If you are selling to move to another house it makes no difference as the price of the house you are buying will be reduced as well. That is if the banks increase the ability to transfer your negative equity to a new property, which I think they will have to do.

    If you've got an investment property or want to sell in order to rent then you might be more inclined to hold onto it.

    At this time no mechanism in the state exists for people to trade up even if they can afford it while encumbered with negative equity. This may change, granted......


  • Registered Users, Registered Users 2 Posts: 3,834 ✭✭✭Welease


    Nemi wrote: »
    Undoubtedly it is alarming for people caught up in the problem, although clearly they have no immediate difficulty if they can continue to service their mortgage. In other words, being in negative equity is not the same as being in arrears in a mortgage. A person in positive equity who is unable to get a job, and hence is unable to keep up debt repayments, is in a far worse situation. I've a fear that the two issues tend to be mangled up in people's minds.

    Thanks for linking the Examiner article. However, the headline of that article seems to be quite misleading.

    There are about 1.5 million households in Ireland. So if, as predicted, 300,000 or 350,000 fall into negative equity, then three quarters of households will actually not be in negative equity.

    Also, just messing with the figures in that article, it would look like most households have no mortgage at all. So they won't be in negative equity, even if houses start changing hands for the price of a pint.

    And that's just looking at households. Many of those households will have adult members who are potential property buyers.

    So I think we can see that its actually very feasible to get a liquid property market moving again, once prices fall to a reasonable level.


    I think there is massaging for figures on both sides.. True (for me at least (and you)) those figures don't seem to add up, or at least the sensationalist headline doesn't), but on the other hand lets not dismiss the picture..

    imho (interested in your opinion btw!) the majority of those with paid off mortgages are people like my parents.. people who have lived in that house for 40 odd years and have no intention of moving..

    The market however involves the other people who are looking to move/first time buyers etc.. and a large (very large) percentage of the potentially active market is either dormant or forced dormant (by neg eqty)..

    That in itself is a worry...


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  • Registered Users, Registered Users 2 Posts: 802 ✭✭✭Scarab80


    Inquitus wrote: »
    At this time no mechanism in the state exists for people to trade up even if they can afford it while encumbered with negative equity. This may change, granted......

    Banks don't offer a specific negative equity product, however they can decide on a case by case basis to allow a transfer of negative equity. There needs to be a specific product created and available to all. It would help people who want to trade down to reduce their mortgage payments or to help people with the means to trade up to have a property which reflects their changing needs.


  • Closed Accounts Posts: 334 ✭✭Nemi


    Inquitus wrote: »
    It's actually not, aside from the stock of poorly built and poorly located houses left over from the boom, very few people are going to sell their houses at the bottom of the market and crystalise negative equity, and people who have little or no mortgage are also not going to sell at the bottom of the market.
    I agree that most people in serious negative equity are unlikely to sell. But, as I've pointed out, that's only predicted to impact on one quarter of present households, and doesn't impact on the formation of new households in any way.

    The only think that will impact on the formation of new households is if we keep property prices and other costs too high, to the extent that it prevents new entrants to the labour market from finding work.

    I disagree that people with little or no mortgage won't sell. Once price expectations are realistic, and people accept that bubble prices will not be repeated, they will most certainly trade up and down, according to their needs.

    Also, the existing housing stock will most certainly move, once it is priced realistically. I mean, I'd regard €70,000 as too much for an apartment in Mullingar. Yet, there is movement in the market at that price.


  • Registered Users, Registered Users 2 Posts: 13,778 ✭✭✭✭Inquitus


    The housing market is fecked in many ways:

    People who may wish to buy a property are put off by what they perceive, probably correctly, as prices that are too high.

    People who wish/need to sell have a bottom line price at what they require to clear their mortgage and/or require to move to their new property.

    The Banks don't wish to lend money given the state of their balance sheets, and have set more realistic requirements on mortgages....though one could argue after the years of excess they have perhaps gone slightly too far the other way, this is restricting demand as many people who could perhaps buy a house are refused mortgages.

    Continuing economic and job uncertainty puts people off putting their feet on the property ladder, and for good reason.

    Negative Equity makes it impossible to trade up unless banks introduce the mechanisms to do so.

    NAMA is, as people rightly point out above, artificially holding prices above their true market value, though I would argue only anyone with absolutely no choice would sell a house right now at the actual market value.

    It's almost a perfect property storm, and there is certainly no end in sight.


  • Closed Accounts Posts: 334 ✭✭Nemi


    Welease wrote: »
    I think there is massaging for figures on both sides.. True (for me at least (and you)) those figures don't seem to add up, or at least the sensationalist headline doesn't), but on the other hand lets not dismiss the picture..
    Well, I'd prefer if we let the facts speak to us. What they seem to say is that a significant minority will experience negative equity.
    Welease wrote: »
    imho (interested in your opinion btw!) the majority of those with paid off mortgages are people like my parents.. people who have lived in that house for 40 odd years and have no intention of moving..
    I'd expect some of them are people with no intention of moving. Yet, also consider that in the past the typical term of a mortgage was twenty years. So if you bought in your twenties in the 1980s, you'd be in your forties now with a house and no mortgage. And, I'd suggest, you'd be right in the frame to move if the price was right. So I wouldn't dismiss this as a source of demand.

    On the supply side, about 30,000 people shuffle off this mortal coil every year. Clearly, they are not all single occupants of their own home. But I take it you agree that every year a block of housing inevitably becomes vacant, and available for sale. Negative equity is not going to be a barrier to the sale of granny's house. And that's not to mention the overhang of vacant property.
    Welease wrote: »
    The market however involves the other people who are looking to move/first time buyers etc.. and a large (very large) percentage of the potentially active market is either dormant or forced dormant (by neg eqty)..

    That in itself is a worry...
    Lets assume the bulk of new builds (aka the overhang) are aimed at first time buyers. How is a first time buyer held back by negative equity?


  • Registered Users, Registered Users 2 Posts: 9,351 ✭✭✭ninty9er


    Welease wrote: »
    Just to give some recent analysis... and it is alarming for those caught up in the problem..


    "HALF of the country’s homeowners will soon owe more on their mortgage than their house is worth."
    http://www.examiner.ie/ireland/300000-home-owners-facing-negative-equity-118289.html
    Didn't the most recent statistics show that there are only mortgages out on 40% of homes. That is that 60% of homes are owned outright. So that would mean that the majority of homes would have to be worth less than nothing for that article header to stand up.
    Inquitus wrote: »
    It's actually not, aside from the stock of poorly built and poorly located houses left over from the boom, very few people are going to sell their houses at the bottom of the market and crystalise negative equity, and people who have little or no mortgage are also not going to sell at the bottom of the market.
    Problem there is that the bottom of the market is about 60% away if the IMF plan is implemented. You'd be looking at a 3 bed apartment in South County Dublin for €140k if there was an asset firesale. It might cost €450k at the top and may be asking €250k at the moment.

    Figures not exact or anything, but more of a representation.


  • Registered Users, Registered Users 2 Posts: 13,778 ✭✭✭✭Inquitus


    ninty9er wrote: »
    Problem there is that the bottom of the market is about 60% away if the IMF plan is implemented. You'd be looking at a 3 bed apartment in South County Dublin for €140k if there was an asset firesale. It might cost €450k at the top and may be asking €250k at the moment.

    Figures not exact or anything, but more of a representation.

    I totally agree, a fire sale of the NAMA portfolio would bring about massive further drops in property value.


  • Registered Users, Registered Users 2 Posts: 3,834 ✭✭✭Welease


    Nemi wrote: »
    Well, I'd prefer if we let the facts speak to us. What they seem to say is that a significant minority will experience negative equity.I'd expect some of them are people with no intention of moving. Yet, also consider that in the past the typical term of a mortgage was twenty years. So if you bought in your twenties in the 1980s, you'd be in your forties now with a house and no mortgage. And, I'd suggest, you'd be right in the frame to move if the price was right. So I wouldn't dismiss this as a source of demand.

    On the supply side, about 30,000 people shuffle off this mortal coil every year. Clearly, they are not all single occupants of their own home. But I take it you agree that every year a block of housing inevitably becomes vacant, and available for sale. Negative equity is not going to be a barrier to the sale of granny's house. And that's not to mention the overhang of vacant property.Lets assume the bulk of new builds (aka the overhang) are aimed at first time buyers. How is a first time buyer held back by negative equity?

    You seem to be focussed on neg equity being the single source of the problem/discussion.. noone has said it was..

    It's a problem for those who have it.. because at present they cannot move easily in order to revert to a free market price..
    In conjunction the hoarding of property distorts the normal market value of property hence their comment on NAMA..

    The tread was about the IMF's opinion, and neg eqty was one part which they mentioned but not the sole part...

    And the Op asked for clarification on what they meant.. nothing more :)


  • Closed Accounts Posts: 334 ✭✭Nemi


    Inquitus wrote: »
    People who wish/need to sell have a bottom line price at what they require to clear their mortgage and/or require to move to their new property.
    But you seem to be leaving out of the equation the large amount of vacant property. Much of that may be poorly located - I'm not sure that anyone has really identified where the vacant stuff is (and the work done by NUIM and UCD on this is contradictory). Yet, certainly, that stuff will shift at some (low) price. I think that's all the IMF are really saying - get it over with, so that we can get back to normal. There's absolutely no point in kidding ourselves that a one bed apartment in Offaly is worth €110k. So just get it over with.
    Inquitus wrote: »
    one could argue after the years of excess they have perhaps gone slightly too far the other way, this is restricting demand as many people who could perhaps buy a house are refused mortgages.
    Well, presumably this reflects the expectation of banks that property prices still have a way to fall.
    Inquitus wrote: »
    NAMA is, as people rightly point out above, artificially holding prices above their true market value, though I would argue only anyone with absolutely no choice would sell a house right now at the actual market value.
    Although, logically, people should sell right now, as the only reasonable expectation is that prices will fall by even more in the future.

    That said, clearly moving house involves disruption, particular for families, so its not just a financial decision.


  • Registered Users, Registered Users 2 Posts: 13,778 ✭✭✭✭Inquitus


    Nemi,

    The banks lending is artificially crippled by the fact they themselves are crippled.

    If you have a 300k mortgage on a house worth 200k now, even if it's going to fall a further 50k in the next couple of years, you are better off hanging on to it than selling it, crystalising the loss and paying a mortgage on nothing once you sell it imo.

    Sure, sell off the ****ty NAMA portfolio at rock bottom prices, but that won't return the property market to a normal state, far from it, for all the reasons mentioned above, it will just crystalise massive losses for the state and exacerbate our issues in that regard.


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  • Closed Accounts Posts: 334 ✭✭Nemi


    Welease wrote: »
    You seem to be focussed on neg equity being the single source of the problem/discussion.. noone has said it was..
    Just being fair to myself, I think that comments like this
    Inquitus wrote: »
    Indeed, but trapping the vast majority of homeowners in negative equity will also distort the market hugely by removing most of the demand.
    most certainly were suggesting that negative equity was key to the issue. So I see myself as mostly reacting to that, and demonstrating that this is not the case.

    While, at the same time, accepting that a significant number of people will be excluded from the market because of negative equity.
    Welease wrote: »
    The tread was about the IMF's opinion, and neg eqty was one part which they mentioned but not the sole part...

    And the Op asked for clarification on what they meant.. nothing more :)
    Absolutely, and clearly the IMF are of the view that the sooner we drop prices to move the overhang, the better. Their concern about negative equity seems limited to situations where people are both in negative equity and unable to repay their mortgage. The issue there, as I understand it, is that Irish insolvency law puts your life on hold for a much longer period than is normal in other European countries.


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