How to avoid negative equity in the future

Slideshowbob

Ok so when the dust settles and the property market bottoms out, how can we avoid negitive equity for future generations?

Please no-one say let the market dictate.

The kings of the former "market" (developers) are being protected by the taxpayers as things stand at the moment!

babsybaby01

Buy a second hand house...Bought mine in 2005 and im still not in negative equity

howamidifferent

Tie the outstanding mortgage on a property to an downward movement in value thus forcing the financial institutions to properly value any property before assigning a mortgage to it. And change the system to allow the handback of keys to clear a mortgage with no outstanding liability on the part of the house purchaser.

bbbbb

Ban mortgages, if you don't borrow you can't be in negative equity.

patwicklow

Its even happened with sheds i bought a large shed in 2006 for 1600 euro
my uncle offered me 200 euro for it yesterday i told him were to go.:)

Slideshowbob

Can we keep the jokes out of the thread and just have considered proposals?!?

It's no joke for many in this country.

Sleepy

Legislate maximum Mortgage LTV and Loan to Salary rates. Only allow couples to use a single salary as the basis for these calculations.

Or, for individuals, impose this kind of restraint on yourself. Don't buy anything you can't afford. Don't look at a house purchase as something you expect to make capital gains on.

storker

1. Banks should stick to the traditional lending limits e.g. 3 x single income or 2.5 x joint income. If these limits had been stuck with to begin with, there would never have been a bubble, since not enough people could have afforded to buy at inflated prices.

2. The mortgage should be secured on the property and that's it. If the bank repossesses, then they cannot chase the borrower. This should make them more careful when approving mortgages.

3. No 100% mortgages and precious few mortgages above 80%. That allows for a 20% drop in value without the homeowner going into negative equity.

4. Make renting a more attractive option, like it is on the continent, and try to reduce the Irish obsession with home ownership.

Stork

PhoenixParker

howamidifferent wrote: »

Tie the outstanding mortgage on a property to an downward movement in value thus forcing the financial institutions to properly value any property before assigning a mortgage to it. And change the system to allow the handback of keys to clear a mortgage with no outstanding liability on the part of the house purchaser.

Definitely this for a start.
Doesn't have to be all of it, but some sort of pain sharing mechanism.
Property prices are directly proportional to what banks are willing to lend.

Also I'd like to see limitations on professional indemnity for those performing valuations.
During about 2000 - 2006, borrowers were required by their banks to submit a valuation from a professional valuer. They just wrote down whatever they were told to, often without visiting the property, and certified it. That is no way for a professional to behave, and in any other profession it would be considered negligence notwithstanding the legal caveats they stick in. You don't get to charge for a service, fail to perform it in good faith and then say the advice isn't worth anything.

There are ways to value property based on multiples of rent, based on land cost + build cost etc. Property valuers should be using those and actually looking at the property in order to perform their valuation.

ei.sdraob

You swear "negative equity" is the black death or something :rolleyes:

People enter into "negative equity" the moment they buy a car on credit, yet thousands of people still do it and the world moves on.
All the huff and puff about it lately is an artefact of the celtic tiger era view of houses as somehow being a "special/protected" asset (an asset class that is meant to defy laws of supply and demand)

When all property is yet another product (albeit large and expensive) that we use to make our lives better.


What needs to change is how people view and use property of the brick and mortar kind

Slideshowbob

ei.sdraob wrote: »

You swear "negative equity" is the black death or something :rolleyes:

People enter into "negative equity" the moment they buy a car on credit, yet thousands of people still do it and the world moves on.
All the huff and puff about it lately is an artefact of the celtic tiger era view of houses as somehow being a "special/protected" asset (an asset class that is meant to defy laws of supply and demand)

When all property is yet another product (albeit large and expensive) that we use to make our lives better.


What needs to change is how people view and use property of the brick and mortar kind

IMHO, your comments state the obvious and don't add to the debate. Negative equity happens to be a real issue for thousands of people in Ireland at the moment.

I am asking for opinions on real measures as to how this situation can be avoided in the future. Might involve more tangible acts than how people "view" and "use" property.

ei.sdraob

Slideshowbob wrote: »

IMHO, your comments state the obvious and don't add to the debate. Negative equity happens to be a real issue for thousands of people in Ireland at the moment.

I am asking for opinions on real measures as to how this situation can be avoided in the future. Might involve more tangible acts than how people "view" and "use" property.

The real issues are

* under/unemployment leading to people not being able to service mortgage
* people not being able to cope with rising rates due to them lying when filling applications and/or banks being careless when lending
* no real bankruptcy laws

or a mixture of above for some

Address those issues going forward and it would not repeat again, in the meantime people who are dreaming of dumping their mistakes on others and still keeping their asset need to wake up. This whole mortgage forgiveness craic is getting rather annoying and diverts from the larger underlying issues.

Slideshowbob

Slideshowbob wrote: »

Ok so when the dust settles and the property market bottoms out, how can we avoid negitive equity for future generations?

Don't buy a house?

Dr Galen

Negative equity has been lumped in with inability to repay, with people thinking that they are one and the same thing practically.

NE is only really a problem if you need to sell. Obviously. Seeing as practically no-one is buying these days, then regardless of the NE on a property, you ain't likely to get anyone to buy it. A lot of the people complaining about NE are also the people who bought 1 bedroom cardboard box sized apartments the far side of Laois. I'm sorry people, but NE is something that these folk are going to have to live with for a very long time.

Inability to repay is a different issue, and of course for some people, the only option they've got left now is to try to sell. In that case they screwed on all fronts.

I'd have to echo whats been said above, we need proper and rigorous controls on mortgage lending, with a strong rental sector, that can provide some security for those who choose not to buy, or those who don't qualify for a mortgage

Mr.Micro

Avoid NE by getting rid of the greedy Estate agents who fueled the house price rises. NE is a risk that all people who buy a house can expect if a house is bought in a boom. Logic dictates that it is then an inflated price, and what goes up must come down. The value of everyones house has gone down not just the mortgage for free, I mean forgiveness people, yet they are getting all the press.

Godge

howamidifferent wrote: »

Tie the outstanding mortgage on a property to an downward movement in value thus forcing the financial institutions to properly value any property before assigning a mortgage to it. And change the system to allow the handback of keys to clear a mortgage with no outstanding liability on the part of the house purchaser.

So the bank has to take all the risk. Why should people who take risks and borrow too much get away scot free?

As banks are businesses, this will lead to two results:

(1) Banks will be reluctant to lend
(2) Interest rates will be higher as a bigger premium over the ECB inter-bank rate will be needed in order to cover the increased risk of default.

These two measures will artificially depress the market.

storker

Godge wrote: »

So the bank has to take all the risk. Why should people who take risks and borrow too much get away scot free?

What complete and utter tosh. You and other people who make this argument paint a picture of the borrower sauntering away whistling a happy tune. If you actually apply a bit of thought to the scenario, the picture looks a bit different. First, the borrower's credit rating would be banjaxed. No more mortgages, credit cards, personal loans. They would also lose their home, repeat, their home. Bear in mind that just moving house under normal circumstances is considered to be a particularly stressful life event, even in ideal circumstances. Add the trauma of forced eviction from a family home and you have a pretty nasty experience. If you call all that getting away scot-free, I can only wonder at your insouciance in the face of personal disaster. Oh wait, of course, it's other people's personal disaster.

(1) Banks will be reluctant to lend

If this means more reluctance than was evident in the feeding frenzy of the property bubble, then...good. If this means that they will properly scrutinise mortgage applications and valuations before lending, then again...good.

(2) Interest rates will be higher as a bigger premium over the ECB inter-bank rate will be needed in order to cover the increased risk of default.

If the banks are doing proper due diligence on their mortgage applications on the property which is to be the sole security for the loan, then the risk of default is more likely to decrease than increase.

These two measures will artificially depress the market.

Compared to the insanity of the property bubble? Good.

Stork

noxqs

I think you're overlooking some obvious flaws here.

The US has a 'hand keys back' system, but they still had a property bubble only surpassed by Ireland (maybe not all states). This would imply that the banks are not entirely rational during bubbles. Which, while giving protection against NE still has profound effects on the economy of the country as it requires bailouts and it leaves thousands in a position where they have defaulted with everything that goes with it.

So individual NE might not be a singular issue under such a scheme, the effects are felt in society for years and decades after.

I think the question is not so much how to avoid NE. That's simple; Don't buy a house during a bubble.

The question should be how to prevent bubbles in the future. I think regulation of the financial markets will have to be tightened and bubbles will have to be stopped before they can form. It's always easy to spot a bubble in hindsight but from economic models house prices are well understood with fundamental indicators which were clearly not matching the evolution in house prices in the US and Europe.

This clearly points back to the time they decided to cut interest rates in the FED/ECB during the early 2000s dot-com bust and further after 9/11 and the period following. If the interest rates had been increased earlier I think it would have killed this bubble from the beginning. We saw tremendous 'leveraged buyouts' simply because borrowing money was virtually free. This has to be controlled earlier and the financial regulators and central banks need to grow a pair and do their jobs.

Debtocracy

noxqs wrote: »

The question should be how to prevent bubbles in the future. I think regulation of the financial markets will have to be tightened and bubbles will have to be stopped before they can form. It's always easy to spot a bubble in hindsight but from economic models house prices are well understood with fundamental indicators which were clearly not matching the evolution in house prices in the US and Europe.

Regulation would not be enough. Need to prevent banks from expanding and contracting the money supply through fractional reserve lending (basically banks would have to be more conservative if they could only lend out money they had). Also need a situation where the money supply could be increased without a corresponding increase in the debt load (e.g. debt-free money). We are currently stuck in a Ponzi scheme scenario where the only way to pay off existing debt is with new debt.

thebman

People on average incomes getting bonuses up to double their wages a year and declaring this as their basic income during boom when going for 100% mortgages (also need to be banned) landed many people in a lot of trouble.

Bonuses aren't part of income when assessing for ability to repay as you can't depend on them. Banks should have been checking this out but weren't so there should either be penalties for lying on a mortgage application like this or the bank should have to check it out with the contract being void if they are found to not have made an effort to find this information out (i.e. the banks gets the keys and the borrower walks away losing whatever they paid off so far but not having further debt).

Nody

There is one way, and one way only to avoid NE on a house and that is to cap all loans at 50% of house value. That way you're hardpressed to ever enter negative value on the house for the loan as you've paid in so much cash in the first place.

Short of that though no, you can't prevent negative equity for the simple reason that house prices goes up AND down (the second part of that is what people like to forget about). Only way to stop NE would then be to legislate that house prices should always go up (so stupid I'll not even comment on it further), add in that if the house goes NE the bank has to pay the difference (see huge increases in deposit requirements locking out people from the market) or simply accept that NE is a fact of life for investments like everything else and that a house is not in any way special case that require special consideration.

RichardAnd

One can easily avoid negitive equity by not taking out a mortgage. The property market was only profitable to real buisness men who knew what they were doing, the majority of investors were drawn into something they didn't understand and as such, they couldn't see the risks, only the paper profits and those eventually blew away.

Now, that is exactly what happened with the stock market prior to the crash in 1929. It also also happened in the 18th century with the south sea bubble and again in the mid 1920s with Florida real estate. The point I'm making is that what happened here is nothing unique and we have not seen the end of it. In another 20-25 years, a whole new generation of suckers will be dupped into the next "sure thing" and the process will repeat.

For those of us here today, we must look around us and learn some poignant lessons. If large numbers of financially ignorant people start getting involved in another ponzi scheme, then the astute will remember the crash we're living through and will hopefully be amoung the few lemmings running away from the cliff. That is how some of the future generation might avoid negitive net worth.

username123

PhoenixParker wrote: »

Also I'd like to see limitations on professional indemnity for those performing valuations.
During about 2000 - 2006, borrowers were required by their banks to submit a valuation from a professional valuer. They just wrote down whatever they were told to, often without visiting the property, and certified it. That is no way for a professional to behave, and in any other profession it would be considered negligence notwithstanding the legal caveats they stick in. You don't get to charge for a service, fail to perform it in good faith and then say the advice isn't worth anything.

In 2005 my mortgage lender told me they required a professional valuation as part of the lending process. They told me they would only accept valuations from people 'they' trusted and handed me 3 business cards of people they accepted. I called one of the numbers. A guy showed up, looked at the partially built property. phoned the estate agent in front of me and asked 'If you were selling one of these apartments finished how much would you sell it for'. The estate agent of course quoted the price they were selling it to me for. He said 'thanks a lot' and handed me a sheet of headed paper with his 'valuation' on it and a bill for 150 euro for performing the valuation.

That was the caliber of professional valuations.

I think a more pertinent question for this thread is not 'how do we avoid negative equity in the future' but 'how do we avoid property bubbles in the future'.

Far more stringent lending criteria. None of this rubbish of 'Oh Ill be renting a room' or 'Ill get a big bonus from here on in'. Salary as shown on the P60 for the previous 3 years only.

Lower multiples of salaries to calculate lend amount. 2.5-3 of ONE salary when 2 presented, 1.5-2 if only 1 presented.

No 100% mortgages.

A publically viewable register of house selling prices.

Proper regulation of the rental market so that renting is a more feasible option.

bohsfan

I believe that it's misguided to think that we can 'avoid' negative equity when it comes to housing. When you buy a house you are buying a commodity. Its value can fall as well as rise. Now, for a long time constantly rising house prices made people forget that simple fact. People borrowed sums of money they could barely afford as 'the only way was up'.

In the future all we can do is apply more common sense to the market, from both the lenders and the borrowers end. Lenders need to perform due diligence on the borrowers to minimise the risk of being exposed. Borrowers on the other hand need to accept that buying property is risky and take steps to ensure they are not leaving themselves stretched.

All we can do is look to manage the occurrence of falls in value, as when dealing with commodities it can always happen.

Nody

RichardAnd wrote: »

For those of us here today, we must look around us and learn some poignant lessons. If large numbers of financially ignorant people start getting involved in another ponzi scheme, then the astute will remember the crash we're living through and will hopefully be amoung the few lemmings running away from the cliff. That is how some of the future generation might avoid negitive net worth.

Someone said in an interview a few years ago "When I was in London the last time and the cab driver was telling me how's going to become a millionaire by buying to rent in the new construction we were driving by I knew it was time to get out out the London real estate market".

It was true then, it is true now. The moment everyone tells you how you should spend your money to get rich you know there is a bubble; because there is no way everyone can spend the money and get rich (and you're far to late to the party now)...

RichardAnd

Nody wrote: »

Someone said in an interview a few years ago "When I was in London the last time and the cab driver was telling me how's going to become a millionaire by buying to rent in the new construction we were driving by I knew it was time to get out out the London real estate market".

It was true then, it is true now. The moment everyone tells you how you should spend your money to get rich you know there is a bubble; because there is no way everyone can spend the money and get rich (and you're far to late to the party now)...

There's a very similar quote fromt he great depression that I'll paraphrase:

The guy shining my shoes seemed to know as much about the stock matket as I did, that's when I knew it was time to get out...

Same logic and the same mistake that gets repeated time and time again. Fashion changes, people don't.

keithclancy

Rent.

Home ownership rates are way too high in Ireland.

RichardAnd

keithclancy wrote: »

Rent.

Home ownership rates are way too high in Ireland.

No they're not. People who own their home in the fullest sense of the word are probably not that common (I've no figures so that's just an assumption). People who live in a mortgaged house which is essentially the property of a bank, are common and yes, there are too many of them. WAY too many.

highgiant1985

would it be possible to impose a rule on banks that home owners can only borrow a maximum of 3 times their salary. Surely that would prevent people taking out mortgages that are to big. or would it simply lead to more people lying/creating accounting.

Mr.Micro

storker wrote: »

What complete and utter tosh. You and other people who make this argument paint a picture of the borrower sauntering away whistling a happy tune. If you actually apply a bit of thought to the scenario, the picture looks a bit different. First, the borrower's credit rating would be banjaxed. No more mortgages, credit cards, personal loans. They would also lose their home, repeat, their home. Bear in mind that just moving house under normal circumstances is considered to be a particularly stressful life event, even in ideal circumstances. Add the trauma of forced eviction from a family home and you have a pretty nasty experience. If you call all that getting away scot-free, I can only wonder at your insouciance in the face of personal disaster. Oh wait, of course, it's other people's personal disaster.







Stork

If they get mortgage forgiveness then that is a huge bonus, is it not? The scenario you paint above plus all the mortgage still owing even if the house is taken back would be the normal situation. This happens the world over. Is the state supposed to bail out all people who get into financial trouble? Why not just have a nanny state then? I have no trouble with some package being made available for people to pay their debts more easily but I do not believe in this blanket mortgage forgiveness and just walk away. It may well happen ( political popularity and all that, just add to our debts like a massive credit card) despite what I think as here in Ireland we suspended the rules of economy some time ago.

SBWife

Pursue inflationary policies.

The rest of the economy'll be fecked and interest rates will be insane, but chances are the prices of houses will increase and there'll be no more negative equity.

Rabidlamb

Sleepy wrote: »

Legislate maximum Mortgage LTV and Loan to Salary rates. Only allow couples to use a single salary as the basis for these calculations.

Yes, agree completely, regulators have lost trust so legislation required.
No rent a room rubbish either, 3x or 4x salary max based on previous P60's.
Single salary only is a must as it's human nature to breed.

Makes you wonder what regulators were doing turning a blind eye to couples being given 8 times joint salary for 35 year mortgages.
Costing them 30% of their disposable income as long as they kept working.
Luckily nobody in Ireland has ever had a child so that could be ignored.

SBWife

Right, more legislation is definitely the answer...because everything works so much better once the government gets involved. :rolleyes:

astrofool

Sleepy wrote: »

Legislate maximum Mortgage LTV and Loan to Salary rates. Only allow couples to use a single salary as the basis for these calculations.

Or, for individuals, impose this kind of restraint on yourself. Don't buy anything you can't afford. Don't look at a house purchase as something you expect to make capital gains on.

Would couples that plan on having no children also be limited to a single salary?

Rabidlamb

astrofool wrote: »

Would couples that plan on having no children also be limited to a single salary?

Yes, no way to differentiate.
Even without kids breakup could occur & then who houses who, awful mess atm with NE.
Having 2 incomes before purchasing gives them a much better chance at saving a good deposit, that's their advantage.

RichardAnd

Rabidlamb wrote: »

Yes, no way to differentiate.
Even without kids breakup could occur & then who houses who, awful mess atm with NE.
Having 2 incomes before purchasing gives them a much better chance at saving a good deposit, that's their advantage.

Yes, I actually know of a former couple who broke up yet are stuck with a house in negitive equity. It's a dire situiation and stands as one of many great pieces of the evidence that a mortgages is a poisoned chalice.

Rented Mule

Slideshowbob wrote: »

Ok so when the dust settles and the property market bottoms out, how can we avoid negitive equity for future generations?

Common sense ?

People - don't take out a mortgage just because everyone else is buying over priced homes . Did a 40 year - 100% mortgage really sound like a good idea ?

Banks - don't give out mortgages to people who wouldn't qualify for one in normal conditions. The cash grab was going to end poorly from the beginning. It didn't take a genius to figure that out.

mari2222

RichardAnd wrote: »

No they're not. People who own their home in the fullest sense of the word are probably not that common (I've no figures so that's just an assumption). People who live in a mortgaged house which is essentially the property of a bank, are common and yes, there are too many of them. WAY too many.

1.8m houses
.8m mortgages
.035 not paying

howamidifferent

Godge wrote: »

So the bank has to take all the risk. Why should people who take risks and borrow too much get away scot free?

As banks are businesses, this will lead to two results:

(1) Banks will be reluctant to lend
(2) Interest rates will be higher as a bigger premium over the ECB inter-bank rate will be needed in order to cover the increased risk of default.

These two measures will artificially depress the market.

My answer was not to have the bank take all the risk and allow the buyer walk away scot-free. I was attempting to show that if the lender had a real interest in the actual correct value of the property then they would not loan mad multiples of that unwisely. It was because they had nothing to lose that the banks gambled. History had already shown that the government/taxpayer would bail them out if things went wrong. Also, they were the people who were "supposed" to be the experts and along with the "valuers" whom they dictated you chose from to perform a valuation prior to purchase, the borrower was presuming these people knew their jobs. I'm not for one second saying the borrower has no responsibility here, he does, and he accepts that if he has to walk away empty handed after several years of paying a mortgage with nothing to show for it only a ruined credit rating. But the experts going forward need to be held accountable for their decisions and if a bank decides to loan 500k for a house purchase then the bank needs to be damn sure its worth 500k or else suffer that loss.

Godge

howamidifferent wrote: »

My answer was not to have the bank take all the risk and allow the buyer walk away scot-free. I was attempting to show that if the lender had a real interest in the actual correct value of the property then they would not loan mad multiples of that unwisely. It was because they had nothing to lose that the banks gambled. History had already shown that the government/taxpayer would bail them out if things went wrong. Also, they were the people who were "supposed" to be the experts and along with the "valuers" whom they dictated you chose from to perform a valuation prior to purchase, the borrower was presuming these people knew their jobs. I'm not for one second saying the borrower has no responsibility here, he does, and he accepts that if he has to walk away empty handed after several years of paying a mortgage with nothing to show for it only a ruined credit rating. But the experts going forward need to be held accountable for their decisions and if a bank decides to loan 500k for a house purchase then the bank needs to be damn sure its worth 500k or else suffer that loss.

Sounds good on paper but that is not how a bank will operate the risk, rather it will price the risk. Already, new mortgage holders are paying the price of the recklessness of the last ten years in seeing their variable rates being priced significantly above the ECB inter-bank rate in comparison to the tracker mortgages that were available some years ago.

If your idea is followed, the bank won't be taking a greater interest in every property, that would be too much work. Instead they will calculate that instead of 1% of mortgages failing and not getting the money back, say 5% of mortgages will fail. That means the bank will need to build an extra margin into the interest rates of everyone it is lending to in order to ensure it is covered. So all the rest of us good borrowers will pay for the fool who bought a house that decreased in price.

jester77

This is the wrong question to be asking. Negative equity shouldn't matter to anyone, you win some, you lose some. The question you should be asking is "how to avoid taking out a loan I may not be able to pay back in the future?"

howamidifferent

Godge wrote: »

Sounds good on paper but that is not how a bank will operate the risk, rather it will price the risk. Already, new mortgage holders are paying the price of the recklessness of the last ten years in seeing their variable rates being priced significantly above the ECB inter-bank rate in comparison to the tracker mortgages that were available some years ago.

If your idea is followed, the bank won't be taking a greater interest in every property, that would be too much work. Instead they will calculate that instead of 1% of mortgages failing and not getting the money back, say 5% of mortgages will fail. That means the bank will need to build an extra margin into the interest rates of everyone it is lending to in order to ensure it is covered. So all the rest of us good borrowers will pay for the fool who bought a house that decreased in price.

I agree somewhat. Banks will price the risk and that was where the subprime lender came into play. Those with a high risk of default pay more. But those accepted by the highstreet banks should be accepted purely on the basis of ability to pay, ie. 3 x salary and no rent a room rubbish. Limits bad lending and keeps prices real.

Rabidlamb

It's all well & good but the bank has to be removed from being poacher & gamekeeper.
They loan the money to the developer & then realise that they must be sold for a set amount otherwise they wont get paid back.
Hey presto, anyone who shows an interest will get approval.

ronan45

babsybaby01 wrote: »

Buy a second hand house...Bought mine in 2005 and im still not in negative equity

Huh? Am i missing something here?

Rabidlamb

ronan45 wrote: »

Huh? Am i missing something here?

Another one here, bought in early 2005 & still not in NE.
Bought a bargain, relatively speaking, good deposit.
People never factor in that there 6 years + into a mortgage & starting to eat into the capital.
http://www.drcalculator.com/mortgage/ie/

ronan45

Rabidlamb wrote: »

Another one here, bought in early 2005 & still not in NE.
Bought a bargain, relatively speaking, good deposit.
People never factor in that there 6 years + into a mortgage & starting to eat into the capital.
http://www.drcalculator.com/mortgage/ie/

ah ok CHeers rabidlamb i bought same year. Wonder how much i have actually paid off by now must check it out