Wednesday, 30 June 2010
Those with underwater mortgages may hope that new, negative equity mortgages could offer them a way out...
Are negative equity mortgages a way out for people trapped in properties that no longer suit their needs or just another minefield waiting to blow up?
COULD A SOLUTION to the negative equity nightmare currently facing hundreds of thousands of people finally be in sight? No, it’s not a rebounding property market, but rather a number of proposals aimed at lightening the load of those who bought during the boom, are now struggling to meet their monthly repayments and are stuck with properties they cannot sell.
For those with underwater mortgages, the difficulty in selling arises because the sale of the property will not generate enough to pay back the lender. For example, if you bought a property for €400,000 with a 95 per cent mortgage during the boom, regardless of the fact that the apartment will now only make €280,000 on the open market, you are still obliged to repay your lender the full €380,000. So, to be able to sell the property, you will need to pay off the outstanding €100,000 yourself – an unlikely proposition for most.
Now however, our banks are considering introducing negative equity mortgages – albeit on a limited basis and subject to strict regulatory oversight – thereby enabling borrowers to sell their properties and move on.
So, in the above example, if the homeowner wanted to purchase a new property for €400,000, using a negative equity mortgage they could do so by selling their own home for €280,000 and theoretically borrowing €500,000 (€100,000 of negative equity plus €400,000 purchase price). As such, the introduction of such products into the Irish market could free up people who are at present stuck where they are living.
However, negative equity mortgages are likely to have only limited applicability, given that so many people are already struggling with their existing mortgage payments, without taking on the burden of additional debt. Moreover, if property prices were to fall further, homeowners could actually exacerbate the extent of negative equity in which they find themselves by taking out a new mortgage.
For those looking to trade down however, a negative equity mortgage could be just the thing. If the person with the property valued at €280,000 wanted to buy a new apartment worth just €200,000, by taking out a mortgage of €300,000 to cover the new property plus their existing negative equity, they could benefit from a substantial decrease in their monthly repayments.
Another possible solution comes from a change to the legal structure of lending in Ireland.
In the US, it’s not an unusual scenario for homeowners to simply send the keys of their properties back to their lenders when they run into financial difficulties. Although the practice isn’t possible in all states, in those which allow non-judicial foreclosure, such as California, a lender can repossess a house without going through the courts and cannot impose a deficiency judgment on the borrower, requiring them to make up the short-fall on the sale of the house.
In Ireland however, the outlook for those running into difficulties with underwater mortgages is very different. Why? Because lenders only sell full recourse mortgages, which means that the homeowner is fully liable for the total debt due on the loan agreement. This may be significantly in excess of the actual market value of the property, thereby leaving a significant shortfall which must be covered by the borrower.
For the Irish Brokers Association (IBA), such a scenario is “unreasonable and anti-consumer”, and instead, it is calling for a ban on full recourse mortgage lending.
“The mortgage holder cannot simply short sell the house, repay the bank and move on, as is the case in the US. In fact, he/she has to carry the cross of that mortgage for the rest of their lives. This practice hugely undermines confidence for those affected, resulting in a curtailment of consumer spending and an extended recession,” says Ciaran Phelan, CEO of the IBA.
Instead, it is calling on the banks to take some of the hit for their “imprudent lending practices” through the introduction of non-recourse lending, where the lender only has a claim over the asset, rather than the individual. Going forward, according to the IBA, banks would then underwrite mortgages based on two key factors – the borrower’s ability to meet the monthly repayments and the security offered.
So it’s got to be a good thing for the beleaguered homeowner, right? Well, while it may have its merits in setting the indebted free, before you cross your fingers in the hope that non-recourse lending may be on the agenda of the Expert Group on Mortgage Arrears which is due to report shortly, you should first consider the implications of switching to a new system.
Karl Deeter, operations manager with the Irish Mortgage Corporation, doesn’t think it’s the all-encompassing solution as has been suggested. “It doesn’t solve everything, just part of it,” he says. First, it will put up the cost of borrowing, as banks re-adjust to cope with the increased riskiness of their transaction from their perspective – and this at a time when homeowners not on tracker mortgages are already bearing the brunt of high rates.
“Lending will become more risky if the only recourse is the asset not the individual,” says Deeter, adding that higher loan-to-values will also become a thing of the past. As a result, prospective homeowners will have to save up to 25 per cent of the purchase price of the property themselves. Most significant is the fact that however the loan is legally structured, it will not prevent a homeowner who has run into financial difficulties from being dispossessed.
“Non-judicial foreclosure is pretty aggressive, it happens within a month or two in some states in the US. If the court is taken out of the process then the lender can lean heavily on you,” says Deeter. So, while the current Irish court process may seem cumbersome, it does actually offer the consumer some protection.
So what of the banks? Are they likely in any case to agree to a system of lending which would offer them reduced protection in the case of default? Already there have been calls to better protect lenders’ interests by introducing mandatory mortgage indemnity insurance (MII) on all loans where the LTV is greater than 70 per cent.
Insurance company Genworth wants the Government to make this cover obligatory, to protect lenders against losses due to borrower defaults under high LTV mortgage loans, where sale proceeds are insufficient to pay off outstanding debt.
While many lending institutions already take out such policies, the practice of passing on the cost of these to mortgage-holders – at a one-off price of about €900-€1,500 – stopped as the property boom took off. Instead, banks typically apply a higher interest rate to higher LTV mortgages. However if it was to become mandatory, it is likely that prospective homeowners would once more be hit with the charge.
Before you think a €1,000 insurance policy as opposed to a €100,000 shortfall on your mortgage is by far the more preferable option, think again. The very clear distinction which should be made between MII policies and non-recourse lending is that a MII is designed to protect the interests of the lender – not the consumer. So even if the lender has a MII policy in place which will pay out in the event of a shortfall, the lender can still go after the borrower for the outstanding shortfall.
Late last week, the International Monetary Fund joined the debate and called for support measures to protect vulnerable homeowners burdened with mortgage arrears. It said new measures could limit the social and economic fallout of the current crisis, provided they were narrowly targeted.
Report by FIONA REDDAN - Irish Times.
Tuesday, 29 June 2010
TWO of the Celtic Tiger's highest fliers -- developer Bernard McNamara and banker Sean FitzPatrick -- face bankruptcy within weeks.
The Irish Independent has learned that Mr McNamara, once worth almost €240m, is facing a fresh attempt by a group of private investors to force him into bankruptcy.
The group is pursuing up to 40 properties owned by the Clare-born builder, records show.
Meanwhile, Anglo Irish Bank will veto any plans by FitzPatrick -- who owes the bank €110m -- to reach a private deal with his creditors.
Both men are now facing the real prospect of having all their assets, including their family homes, seized and sold off.
Bankruptcy in Ireland lasts for 12 years, with those declared bankrupt facing travel restrictions, curbs on their ability to borrow money and/or run a business.
Mr McNamara is already being pursued by investors arising from the disastrous Glass Bottle site investment.
But now a second group has emerged to force him finally into bankruptcy, even though it is only owed €2.24m.
Mr McNamara has already had art and other items taken from his home on leafy Ailesbury Road in Dublin 4.
The developer is now facing a war on two fronts as he tries to deal with debts coming to almost €1.5bn.
The High Court yesterday heard there was little chance Mr FitzPatrick could get the support of his creditors for a new arrangement where he would be given time to sort out his debts.
The High Court heard it was "absolutely unimpeachable" Mr FitzPatrick would secure the support of 40pc of his creditors, meaning his bankruptcy is now inevitable barring a change of heart by Anglo.
Ms Justice Elizabeth Dunne also heard an application on behalf of two businessmen, Gary Smith and Ivor Dougan, who are seeking to have Mr McNamara declared bankrupt on foot of a €2.24m judgment the pair obtained against him last February.
The petition was moved by the men after Dublin City Sheriff moved to seize goods from his home on May 18 last.
Mr McNamara's barrister, Bernard Dunleavy, said the developer -- who did not attend in court and was not formally identified during the brief hearing -- was seeking to have the bankruptcy petition dismissed.
The Clare-born builder, who owes some €1.5bn, claims the bankruptcy petition filed by two former shareholders in Novorostan, a property company which had hoped to develop a site close to Grafton Street in Dublin, is flawed.
He will also claim the men are not entitled to bring a bankruptcy petition on foot of an asset seizure by the sheriff and will also challenge the security held by the men in respect of the debt claimed.
Under Ireland's bankruptcy laws, a creditor's petition must state whether any security such as a mortgage or charge is held in respect of the debt.
However, Mr McNamara will claim that Mr Smith and Mr Dougan have other securities over the debt which have not been formally disclosed.
The bankruptcy move by Mr Smith and Mr Dougan has caught many by surprise as the biggest threat to Mr McNamara to date has been from private clients of Davy Stockbrokers, who backed the soured €412m purchase of the Irish Glass Bottle site in Ringsend in Dublin
The Davy private clients, who include Glen Dimplex owner Martin Naughton and former AIB chairman Lochlainn Quinn, obtained a €62.5m judgment against Mr McNamara last January.
Just weeks later Mr Smith and Mr Dougan also obtained judgment on foot of an earlier High Court settlement under which Mr McNamara was due to pay €5m by December 2008 and a further €2.5m plus interest by January 2009.
Mr McNamara has two weeks to outline his objection and the case has been listed for July 28.
A private hearing involving Mr FitzPatrick will proceed on July 12.
The former Anglo chief had secured temporary court protection earlier this year which prevented creditors from taking legal action against him as he tried to put in place an arrangement to settle his debts.
Anglo Irish Bank holds 40pc of Mr FitzPatrick's debt and, as he needs the support of three-fifths of his creditors to support his scheme, his bid to avoid bankruptcy is likely to fail.
Report by Emmet Oliver and Dearbhail McDonald - Irish Independent
Monday, 28 June 2010
Prices are still falling, the banks are continuing to enforce tougher lending criteria and discussion about the dreaded property tax has loomed its ugly head again instilling fear among most homeowners.
Bank sales of apartment blocks that have gone bust have gained interest from buyers as the banks try to recoup some of their loans. But what’s going to happen for the rest of the year?
Houses have started selling again, but are the volumes worth talking about and are bank sales going to become a common feature of the property market?
Some commentators consider successful sales of receivership properties a sign of a recovery starting, others view them as a negative influence on an already struggling market.
There has been considerable debate about a levelling-out of property prices or ‘‘a bottoming’’ of the market since the start of the year. Instead we’ve seen prices continue to fall.
The rate of decline in property prices has slowed, but prices are still falling. It has resulted in improved sales in the second-hand market.
Anecdotally, the seemingly unchangeable ‘‘for sale’’ boards outside houses are slowly beginning to turn into to ‘‘sale agreed’’ or ‘‘sold’’ signs, but only in well established areas in the capital. Estate agents concede that the market in the rest of the country remains dire and that the only interest being shown by buyers in the new homes sector is in receivership sales.
First-time buyers have snapped up properties at knockdown prices in the few ‘‘fire sales’’ that have taken place so far this year. Some investors have also been attracted by the dramatically low prices.
Although agents dislike the term, the banks don’t mind it if they bring in much needed publicity and sales - and it seems receivership sales are going to become an important part of the market for the foreseeable future.
This weekend the asking price of a Mulhuddart apartment block has been reduced from €3 million to €1.895 million.
The block of 30 apartments on Blakestown Road in west Dublin is located 500 metres from Mulhuddart village and convenient to Blanchardstown shopping centre.
The block comprises one, two, and three bedroom apartments and is being sold by Martin Ferris, receiver over some of the assets of developers Larry O’Mahony and Thomas McFeely.
Selling agent HT Meagher O’Reilly is seeking investors who are interested in purchasing the block in one lot rather than individual units.
The asking price equates to an average of €63,167 per apartment Earlier this month, Anglo Irish Bank sold almost 90 apartments in a receivership sale at Carrickmines Green, just off the M50 in Carrickmines, south Dublin.
Those who have been keeping a keen eye on the market pounced on the sale with crowds forming at the scheme to buy the units.
The one beds were priced at €135,000, the two-beds at €180,000, and three-beds were available from €300,000.These prices are dramatically less than similarly sized properties at other schemes in the area.
The purchasers were mainly first time buyers, accompanied in some cases by their parents who wrote the cheque for the deposit.
Some buyers have been chided by the public for capitalising on others’ misfortunes. The same properties were selling for between €299,950 and €740,000 in 2005; early buyers the scheme lost their deposits after Laragan Developments went into examinership.
Others argue the quicker the overhang of stock is sold, the quicker the chance of a recovery in the market. In Templeogue, south Dublin, Douglas Newman Good’s new homes division sold almost 25 units at discounted prices at the Cedar Grove scheme on Firhouse Road.
The two-bedroom apartments, which were originally priced at €525,000 were sold for between €275,000 and €325,000.
The three beds were discounted to starting prices of €340,000.
Gemma Lanigan, new homes manager at Douglas Newman Good, said receivership sales were now at the ‘‘forefront of every purchasers mind’’.
‘‘There’s a huge appetite for receivership sales. They are very good value whether in a development that needs to be finished or a scheme that is fully finished.
There’s an appetite for both. It just shows you that there are people willing to buy once the price is right.
‘’She said with Cedar Grove the units were so well finished and of such high specification that they attracted interest and sold immediately.
The new homes division also handled the sale of Butterfield in Rathfarnham, south Dublin earlier this year on behalf of receivers where four-bedroom semis were sold for between €600,000 and €640,000.
‘‘The prices are making people react." HT Meagher O’Reilly sales manager Andrew Long said interest has been growing in fire sales among first time buyers and investors and were likely to become amore frequent feature in the market.
‘‘Interest has been strong from investors in the [Mulhuddart] scheme because its complete vacant possession, the scheme doesn’t have problems with management companies or residents.
Long said the agency had also received offers against the Hampton Rise development in Navan, another bank sale of 31 apartments and four ground floor commercial units which has an asking price of €2 million.
‘‘We’re just waiting for proof of finance.
Five parties were interested in the development since the start of the year," he said.
Long described the market in the first six months of 2010 as ‘‘bad rather than awful’’ in comparison to last year. HT Meagher O’Reilly handled the successful sale at Carrickmines a fortnight ago.
Long anticipates further receivership sales in the autumn but only in small numbers. ‘‘There will be more sales but just in the volume of people think there will."
‘‘Carrickmines will give some confidence to the market.
Two months ago many people thought that you couldn’t sell an apartment at any price. But today, we now know where we are and that apartments will sell at the right price. There are buyers out there.
We’ve a 25-page cancellation list."
The purchasers were mainly first time buyers at Carrickmines, according to Long. ‘‘A lot of them were getting substantial help from their parents’’.
That help in some cases, Long said, was a financial gift in the region of €40,000 to €50,000 from parents to their children.
From autumn onwards receivership sales are likely to become more prevalent. Sources confirmed to the Sunday Business Post that Fleming Construction’s Rockford scheme in Sandyford, south Dublin will be sold by the banks in the autumn selling season.
So too will Liam Carroll’s scheme in Tallaght, Dublin 24. Between the two schemes it’s expected that a further 200 plus apartments are likely to come onto the market at knockdown prices.
Friends First economist Jim Power said the problem with receivership sales was that when houses are being sold off at incredibly big discounts, it sets the benchmark for house prices in that area.
‘‘Receivership sales certainly set a lower benchmark for prices and that affects the whole market negatively. But it is a process that has to be gone through, whether in a receivership sale, or not, those properties are going to have to be offloaded and there’s going to be an increase in supply over the next couple of years.
That will keep prices down.
‘‘We’ll definitely see receivership sales become a greater feature of the market."
Other developers have reacted to the prices on offer in these sales and have been quietly reducing prices over the last few months.
A further price reduction was made in the last few weeks at the Newcastle Lyons development in west Dublin. Onebeds are now priced from €119,950.
At the Mimosa development in Dublin 18 the asking prices were reduced to €180,000 for one-beds and two-beds are for sale from €230,000.
Ronan O’Driscoll, head of residential sales at Savills said Carrickmines was the first high profile fire sale. ‘‘We haven’t seen anything significant yet.
But it’s reasonable to assume that they are going to continue but it’s hard to gauge at what level."
‘‘I don’t see a tsunami of them coming to the market.
The ones associated with Nama aren’t likely to flood the market. But it will be a feature of the market over the coming years." O’Driscoll said Savills has sold 180 units at Clare Village in Dublin 17since the start of the year, purchased primarily by the first time buyers.
‘‘We sold 200 units in the first half of the year, which is way more than last year, but 90 per cent less than we sold in 2005," he said.
Sherry FitzGerald’s chief economist Marian Finnegan believes receivership sales are good for the overall market.
She said it was understandable that they were generating such interest and that they will ‘‘stimulate the market and create confidence’’.
‘‘There’s no doubt the market is still challenging but we are seeing some signs of emerging confidence in the secondhand market in Dublin," she said. ‘‘There has been an intensification of interest."
Sherry FitzGerald recorded 13,000 proper ty viewings through their offices in the first three months of this year, Finnegan said, compared to 8,000 viewings of property in the same period last year. ‘‘April was sluggish with the transfer of loans to Nama. In May and June, however, houses have been selling for over their asking prices [in some areas in Dublin] for the first time since 2006.
‘‘It’s a trend but a fragile trend in the second hand market. Prices are still correcting," she said.
An improvement in the market comes after 2009 being the worst year for the property market since the downturn began.
The Department of Finance’s exchequer figures show 2009 was the worst year for property sales since the downturn in the market began with just 1,958 first time buyers transactions exempted from stamp duty.
The figures are a good indicator of the marketplace, particularly one which is heavily dominated by first time buyers as it is currently.
That figure compares to 5,178 first time buyer transactions in 2008, and 3,093 transactions in 2007.
According to the latest permanent tsb/ESRI house price index, the national average house price fell by 4.8 per cent in the first three months of the year.
Economist Jim Power estimates prices will have fallen by about 7 per cent in the first six months.
‘‘A drop of another 5 per cent is likely in the second half of the year, so at the end of 2010, residential property prices will have fallen by around 12 per cent," he said.
‘‘I had predicted a fall of about 10 per cent, so it’s probably worse than I thought."
‘‘The rate of decline is going to gradually slow down. In established areas where there is a lack of supply properties are starting to turnover, albeit at low prices. There’s a bit of movement in the marketplace, reflecting the dramatic decline in prices.
‘‘Areas people might have desired three/four years ago, and couldn’t possibly contemplate affording, are becoming more affordable. But that’s the exception rather than the rule.
‘‘I think the market is still soft. Credit availability is still going to be a major issue [for the second half of the year].
Despite the palaver from the banking sector the moment, credit is just not available.
‘‘On the demand side, there is still a tremendous amount of uncertainty out there.
‘‘The labour market is still weak, economy is still very difficult, people will be facing into further spending cuts in the December Budget and wages are still under pressure."
Power believes it will be the end of 2011 before there is any significant change in the property market.
Report by Michelle Devane - Sunday Business Post.
Sunday, 27 June 2010
THE Dublin city sheriff has seized an art collection and other valuables from the Ailesbury Road home of fallen property developer Bernard McNamara. The collection will be sold to help pay his debts.
The sheriff, Brendan Walsh, is believed to have moved against the property developer within the past fortnight, calling to his salubrious Dublin 4 home acting on a court order to seize anything of value from his home to reimburse his creditors. The sheriff is believed to have taken paintings from the family home along with a small number of other items.
The development marks a new low for Mr McNamara, once one of Ireland's richest men but who now owes €1.5bn. The property developer and former county councillor from Clare turned the building firm founded by his father Michael into one of the biggest in Ireland.
He is the highest-profile former tycoon to date to be targeted by bailiffs, signalling just how far some of Ireland's billionaires have fallen now that the state sheriffs are being deployed to seize their assets.
Mr McNamara admitted earlier this year that he was facing personal ruin because he was unable to meet his debts and could possibly lose his family home.
He owes money to Anglo Irish Bank, AIB, Bank of Scotland (Ireland) and Ulster Bank. A group of business people -- known as the Davy investors -- who invested with him in the disastrous Irish Glass Bottle factory site in Ringsend secured a personal judgement against him for €62.5m in January. The judgement meant that his creditors could then seek an order to have the sheriff collect the debt on their behalf by going to his home and seizing valuables they could find to go towards repaying the debt.
Another judgement against Mr McNamara for €2.24m was registered in March.
The knock on his front door from the bailiffs a fortnight ago was not unexpected.
Mr McNamara told RTE in January that his "head was on a plate".
"Everything I have had since I was a young fella is being put on the line. I'm not running anywhere. I'll stand here and face whatever music there is," he said.
He claimed that he was "hit on the road by something that no one saw was coming".
"All I can do is my level best to behave with decency in the situation I am in," he said.
However, the Davy investors have been pressing Mr McNamara to disclose the full extent of his assets in the Commercial Court. During one court hearing earlier this year, Mr McNamara's barrister told the court that his client's finances were so complex that it would be impossible to outline the value of all of his assets and liabilities. Both sides eventually reached a deal that he would disclose his personal wealth in private.
Mr McNamara has lived in the family home on Ailesbury Road since 2000, when he bought the property for a reported €2.8m and carried out a massive redevelopment, turning it into one of the biggest mansions in the Embassy belt. He also has holiday homes in Marbella, Spain and Co Clare and an apartment in Manhatten, New York, in his wife Moira's name.
Mr McNamara recently denied newspaper reports that he had sold the Ailesbury Road mansion, which includes a cinema and an underground swimming pool.
Despite his financial difficulties in Ireland, Mr McNamara is reportedly trying to rebuild his empire abroad. He has been travelling regularly to the Middle East where his company, Arabian McNamara Contracting, is reportedly involved in a building project for a new terminal at Doha International Airport for Qatar Airways. He is believed to be acting as a consultant to the project. The Davy investors are seeking details of the contract, which is reportedly worth between $16m and $30m (€13m to €24m).
Mr McNamara could not be contacted for comment yesterday.
Mr Walsh said it was his policy not to comment.
Report by MAEVE SHEEHAN - Sunday Independent.
Saturday, 26 June 2010
Ireland has lost control of its financial fate and its future is now in the hands of the markets, one of Europe's leading sovereign bond commentators has said.
Luca Cazzulani, deputy head of fixed income at Italian-German bank UniCredit, said the Irish and Portuguese governments could do little to influence their fate because the markets had signaled them out from the so-called PIIGS - Portugal Ireland, Italy, Greece and Spain - for extreme scrutiny.
He forecast that key sovereign interest rates in Ireland and Portugal, which rose last week to more than 5.5%, were "unlikely" to fall back below 5% because markets were not anticipating good news from Europe.
"If anything, we are likely to get further bad news," Cazzulani warned.
Irish and Portuguese sovereign interest rates could stay "very high" for five or six months. "If so, then we are going to face a series of stresses because these levels are clearly unsustainable," Cazzulani said. "Investors will start to realise that it makes no sense to lend to those countries because they will not be able to pay back in the long run."
Following Spain's successful debt, Ireland and Portugal last week stood out in the eurozone for the high interest rates they face in refinancing and raising new debt.
Cazzulani said that Italy, one of the euro peripheral countries the markets perceived to be in trouble, was now best placed paying "quite low" interest rate on its debt of 4%. Spain is paying 4.6%.
Ireland and Portugal interest rates are "by no way a sustainable rate for either because neither of the two countries can meet a growth rate in line with that yield. For example Portugal is paying 5.6%, which is basically the highest yield ever and the picture for Ireland is fairly much unchanged," he said.
But Chris Pryce, the senior analyst who sets the credit ratings for Ireland at Fitch, told the Sunday Tribune that the agency's rating for Ireland had been stable "for most of this year and will continue to be stable." He added: "I do not think that Ireland is in danger of losing access to the markets. That has not been our experience these last few months."
He said Ireland was "very slowly" emerging from recession and the economy was "probably past the bottom".
Report by Eamon Quinn - Tribune Business.
Thursday, 24 June 2010
THE DEPARTMENT of Finance says it warned the Government from 2005 onwards about the dangers of a property bubble, internal official documents show.
Briefing material prepared for the department’s secretary general Kevin Cardiff last month states that the department warned over several years that the “over-emphasis on construction left the economy vulnerable to macroeconomic shocks”.
It also defends the department’s performance in failing to forecast the extent of the downturn, and points to similar failures by institutions such as the ESRI, Central Bank and the private sector to predict the magnitude of the slowdown.
The material was prepared for the secretary general ahead of his appearance before the Oireachtas Public Accounts Committee just over a month ago.
The contents of the documents have been released under the Freedom of Information Act in the same week Minister for Finance Brian Lenihan announced an external review of the department’s management of the financial crisis.
This review will “evaluate the systems, structures and procedures” used by the department in providing advice to the Minister and the Government.
While the department said that some commentators also warned about a property bubble, the documents state that “none of them predicted the magnitude of the slowdown, the speed of the impact or the impact on banks’ balance sheets”.
In the case of the ESRI, the department said that while the institute warned that the economy was over-dependent on construction, it concluded as recently as May 2008 of “the need for a large number of additional dwellings over the coming 15 years”.
It also points to the Central Bank’s performance, stating that while it warned that the share of residential investment was too large, its stress tests concluded that “Irish institutions were well-capitalised”.
Similarly, the department says that bank and stockbroker economists repeatedly concluded residential investment in Ireland was sustainable and prices were justified by fundamentals.
The department is also defensive about its record in economic forecasting. However, in 2008, for example, it forecast a deficit of €1.5 billion, while the actual deficit was some €13 billion. Its forecasts for 2009 were also overly optimistic.
The material states that economic forecasting is an “inherently uncertain process” and this uncertainty was heightened by the openness of the economy as well as structural changes in recent years.
The documents also state that the department’s forecasts were criticised for being overly cautious in the period leading up to 2007. It lists extracts from individual private sector commentators in NCB, Ulster Bank, AIB and Goodbody who felt its tax forecasts were too cautious.
Report by CARL O'BRIEN - Irish Times
Monday, 21 June 2010
NEGATIVE equity is the scourge of homeowners who bought their houses in the past few years.
By the end of this year, as many as one-in-three mortgage holders are expected to be in negative equity -- where the value of their home has collapsed to such an extent that they owe their lender more than it is worth.
Economic and Social Research Institute (ESRI) economist David Duffy made the estimate based on house prices having fallen by 30pc from the peak of the housing boom in 2007.
But most commentators say that house prices have fallen by around 50pc from the peak. In that case, the ESRI estimates that some 350,000 homeowners will end up in negative equity this year.
Being in negative equity means you cannot sell your house to move somewhere else. This is because you will still owe the bank more than the sale price of the home. Banks will not normally allow you to sell up in that situation.
This is why Ulster Bank and EBS Building Society are already offering limited negative-equity mortgages to their existing customers.
Now Bank of Ireland, Irish Nationwide Building Society and Permanent TSB are working on introducing their own negative-equity mortgages.
The idea is that these mortgages will allow those who have to move house to take the negative equity portion of the original mortgage on to a new mortgage when they move.
For instance, if someone originally borrowed €300,000 but their house is now only worth €250,000, they would be €50,000 in negative equity.
If this person needed to move to another part of the country for a job, or simply wanted to move home, they might be able to buy a new house for €250,000.
Their overall borrowing would still be €300,000 -- with their €50,000 negative equity ported over to the new load.
But the lenders insist that such products will be limited to homeowners who genuinely need to move house and have the ability to repay the new mortgage.
However, the potential of negative-equity mortgages to blow up in our faces is huge. What happens if house prices keep falling? And who is to say that they won't?
Further property prices falls would mean that those availing of a negative-equity mortgage would end up even deeper in debt.
In such a situation, the borrower could be retired before they clear the new mortgage, assuming that they do not lose their jobs.
And any attempt by lenders to top up the existing mortgage would only add to heavily indebted homeowners' problems. That will have to be resisted.
That is why the introduction of negative-equity mortgages is being closely monitored by Financial Regulator Matthew Elderfield and his staff.
The last thing the regulator or the taxpayer, who has so generously bailed out our foolish lenders, wants is to re-heat the burnt-out embers of the housing market.
Especially when we still do not know the full cost of sorting out our building bonfire.
Report by Charlie Weston - Irish Independent
Saturday, 19 June 2010
Ghost estates, negative equity and soul-sapping commutes are the legacy of our planning-free property bubble. Cleaning up the zoning mess won't be easy...
THE MANTRA of the boom years might well have been “Build it and they will come.” And for 10 years or more it worked. But the frenzy of construction was bound to come to an end, leaving Ireland littered with incongruous developments – as well as tens of thousands of vacant houses in ghost estates.
In 2003, when we first took a long look at the commuter counties, it was evident that much of this unplanned growth had been fuelled by Dubliners fleeing exorbitant property prices. Getting their hands on relatively affordable houses, even in places they had barely heard of, seemed worth the commute.
The trend of Dublin leapfrogging into Leinster and even, with Cavan and Monaghan, into Ulster ran counter to all planning policies, but this was simply ignored. The complacent view at the time was that the growth of Commuterland would tail off when the houses “out there” lost their value, which they now have.
It was in many ways a plan-free zone. Sure, there were plans aplenty – at local, county, regional and national level. But none of them really meant anything, as council after council indulged in an orgy of rezoning so that landowners could cash in on development values and every county in Leinster and beyond could grab a share of Dublin’s growth.
Local area plans intended to provide orderly frameworks for development were often subverted by councillors and used as vehicles to satisfy the greed of farmers, speculators and developers. And regional planning guidelines that were meant to take a broader view turned out to be paper tigers that could safely be ignored locally.
In 2002 the independent Kildare councillor Tony McEvoy and Michael Smith, then chairman of An Taisce, sought a judicial review of the Meath county plan. The High Court upheld it despite evidence that it didn’t comply with the Greater Dublin strategic planning guidelines and that rezoning decisions were influenced by lobbying from landowners. This ruling by Mr Justice John Quirke exposed the guidelines as meaningless: all the councillors needed to do was to “have regard to” them, which could involve merely giving the document a sideways glance. There was no legal requirement on councillors in Meath, or anywhere else, to comply with regional planning guidelines.
The High Court decision opened the floodgates, with councillors rezoning land to beat the band – more often than not against all planning advice. Field after field on the edge of a town or village was turned into gold, and not a finger was lifted by successive ministers for the environment until Dick Roche quashed the Laois county plan in 2006.
Four years earlier Martin Cullen had declined to use the 2000 Planning Act to rein in councillors in Gorey after they zoned enough land for development to cater for up to 10 times its population.
Asked by The Irish Times in 2003 if this was not in complete defiance of public policy, Cullen said: “Yes it is, in the very narrow purist sense. But it’s not in the context of catering for what has happened in Ireland in the last few years. This massive bubble of young people came through, and where the hell were we going to put them?”
They were “making choices” to live “down the country a bit” and commute to Dublin. “The gamble is that as we develop further on, this will change.”
Of course, it didn’t change. A whole new Commuterland opened up, in some cases encouraged by tax incentives; much of the housing explosion in Longford, for example, happened because the whole county was covered by former finance minister Charlie McCreevy’s misguided Upper Shannon Rural Renewal Scheme.
“The real villain was McCreevy’s decision to go with it, giving strong incentives for investors,” one senior planner said. “All the damage is the result of that. An interdepartmental group was put together to look at the impacts of the scheme, just two years after it was introduced in 1999, and recommended that it should be stopped.”
Its unforeseen consequences were noted by Carl O’Brien of The Irish Times in December 2008 when he visited Battery Court, “Longford’s most prestigious address”, and found about half of the 100 or so houses built and work on the rest abandoned. With no signs of life, it was “eerily quiet, almost like a post-apocalyptic scene from a science-fiction movie”.
There are scenes like this almost everywhere now, as property prices collapse – particularly in Commuterland – and developers go bust, with their unsustainable bank loans going into Nama. Empty houses, shops, retail parks and shopping centres are all grim evidence of how the boom was so grotesquely mismanaged. Few brakes were applied. In some cases the Department of the Environment withheld funding for water and sewerage schemes where land was zoned against planning advice. In others An Bord Pleanála simply refused planning permission where the zoning went against sustainable development.
But these were exceptions in a rip-roaring era that left us with thousands of hectares of zoned land that’s not developed. In Commuterland Laois is tops, with 1,678 hectares, followed by Meath (1,652), Wexford (1,382), Cavan (1,161), Kildare (1,147), Offaly (1,044), Westmeath (977), Louth (948), Longford (910), Wicklow (714) and Carlow (408). “Meath has six or seven times what it needs,” one planning source said. “But it’s a much deeper problem in the BMW [Border, Midlands and West] region, particularly in Longford, Roscommon, Leitrim and Sligo.”
The Department of the Environment is surveying every county, trying to “profile the status” of unfinished estates in terms of the number of houses completed, still vacant or at various stages of construction before the builders walked away. Based on this, the department will formulate a policy response. It is also planning a manual for local authorities on how to deal with unfinished estates.
“This relates very much to Nama, because it will be the owner of a lot of these properties,” the source said. “Its main function is to get the best value for taxpayers, but it will have to make choices. If it finds that there are 100 houses approved, of which only 20 are occupied, 40 vacant and the rest unfinished, including roads, public-safety problems arise. If Nama wants to extract a saleable asset out of that, it will have to resolve issues with the local authority and may have to abandon those parts of an estate that are no longer viable.”
A great deal of putative development land will have to be dezoned, whatever about the distress this causes to its owners and their bankers. This process has already got under way in Co Kerry, where councillors have started to unravel decisions that led to 2,529 hectares of land being zoned – enough to house six times its population. Nationally, for the foreseeable future, planning policy will seek to consolidate Dublin and other cities.
“In the Dublin area, where the ‘completed but not sold’ overhang would meet less than a year’s demand, we’ll be prioritising Adamstown and Clonburris, where the State has put in €500 million in public investment,” the source said. “We have to make sure that we corral whatever emerges from the ashes into locations like that.”
The new Planning Bill should help, given its emphasis on the need for councils to demonstrate that their development plans comply with regional planning guidelines, the National Spatial Strategy and sustainable-development principles. Given that new guidelines are due to be finalised later this year, it is seen as essential that the Planning Bill is enacted before the Dáil breaks for its long summer recess. Only then would county managers and planning officials be able to say that inappropriate zoning proposals can’t be adopted – because now they’re against the law.
Report by FRANK McDONALD - Irish Times
Sunday, 13 June 2010
Judging by the number of comments on the property page of the Sunday Tribune online, nothing gets readers reaching for the keyboard quite like that most contentious of topics – house prices. Then, to really get their goat, along came last week's headline in the Irish Times referring to a report on the European housing market by Standard and Poor claiming 'Irish property' may be undervalued'. Sellers would have been momentarily uplifted, others aghast, at the news that our ongoing market correction "seems overdone". That would have been until they read further and discovered that the agency didn't rule out a further decline in prices.
In analysis quoted on Daft.ie back in April, Brian Lucey, professor of finance at TCD School of Business, echoed UCD's Morgan Kelly's prediction that a fall of 50% from the peak of mid-2006 was necessary before any sign of an upturn. Lucey established that the market therefore faces another 18 months of falling prices.
With an expectation that there is still some way to go, what is actually selling? In the absence of facts on actual prices, Daft.ie is tracking activity on sales. And according to economist Ronan Lyons, those figures are pretty good. "We looked at how many properties were posted for January, and then tracked how many were 'sale agreed' or were taken off the site by April. About one in three within that period were 'sale agreed'."
As to the suggestion that we face another 18 months of falling prices, Lyons says Brian Lucey is using that statistic as a rule of thumb based on property crashes elsewhere. "Prices fall quickly at the start of a downturn, but then the pace of the fall gradually slows. I'm certainly not saying we are anywhere near the end that decline yet, but if you look at certain areas of Dublin, prices have already fallen back by 50% from the peak – particularly if you bear in mind that selling prices are invariably lower than asking prices."
Paul O'Connor of Myhat.ie, a property site that can summarise trends of sales and price listings in certain areas, says those hoping to sell should get used to the fact that the falling market will continue for some time. "Rather than focusing on how long the decline will last, they should decide whether or not to sell."
So far, prices are down an average of 6%, while we are heading for a total drop this year of over 14% (compared to about 18% in 2009). The average asking price for a three-bed semi in Dublin is now close to €342,000, says O'Connor.
"We are still seeing a 1% to 2% fall monthly, and while unemployment increases, the number of buyers decreases. But if you look at certain areas, you may see that prices have stabilised to a degree – actually our survey of four-bed semis in south Dublin shows a slight increase in prices. And that's because there is a steady demand for those properties. During the boom, there was almost a desperation to get on the ladder, so first-time buyers bought in the outlying suburbs and commuter belt. The fact that there are so many of these properties now for sale will keep drawing that average price statistic down, but the average for Dublin won't accurately reflect every area."
"We had almost 25 instructions in May. It all comes down to price of course. We would have multiple bidding now on one property, and what is selling is property in the €200,000-€300,000 bracket. One of the nicest homes we sold recently, off the New Cabra Road, had eight bidders chasing it. The property was on the market for €295,000. There was a lot of interest because it was in walk-in condition and realistically priced. It sold for €300,000."
Doherty estimates that the drop from peak in the area is now around 40%. He has also sold a couple of properties over €400,000 to first-time buyers – surprising, surely, as they must have needed huge mortgages at a time when banks are holding tight on financing? "These would be couples who held back during the boom and have been renting over five years or so. They now have the opportunity to buy the house they want at the right price."
But there was bad news for first-time buyers last week with the announcement from EBS that it has restricted mortgage approval even further. The lender also says it will no longer provide mortgages for apartments in rural towns. On the other hand, granting loans to those who would struggle to make repayments is unfair in the long run – and it's one of the reasons the market crashed in the first place.
Elsewhere, there has been a ripple of activity in the auction market, with two results for properties in south Co Dublin and Wicklow achieving in excess of the guide. In the case of the second property, a large bungalow in The Burnaby which fetched €910,000, the AMV of €650,000 might have brought about a degree of feverish bidding not seen for some time.
Back at the lower end, Doherty says the panic of old is no longer there among the buyers he deals with. "People do a lot of research now before they buy. They are very clued-in to asking prices in the same area, what is selling and what is not. Inevitably, that means it's taking much longer to sell a property."
Which is as it should be for what is still the most expensive (falling prices or not) purchase anyone makes in a lifetime.
Report by Valerie Shanley - Tribune Property.
Thursday, 10 June 2010
THE banking meltdown that cost taxpayers billions of euro was a result of "homemade" decisions and a government that thought "the party could last forever", two official reports revealed yesterday.
In hugely damning findings, one report by two international banking experts pointed the finger of blame squarely at Taoiseach Brian Cowen for economic policies when he was Finance Minister.
The reports will now be used by a commission of inquiry and an Oireachtas committee to look at what triggered the crash.
But the inquiry will not be looking at a string of calamitous government budgetary policies to which Mr Cowen was central and it is not clear if the Taoiseach will be called before the committee.
Former International Monetary Fund officials Klaus Regling and Max Watson said alarm bells should have sounded when the property boom and lending trends in the banking sector expanded -- as far back as 2003.
They added that vote-winning economic policies during the boom "heightened the vulnerability of the economy" as the then Finance Minister -- Mr Cowen -- began spending money while taxes were cut.
And in a separate report, Central Bank governor Patrick Honohan blew a large hole in Mr Cowen's claims, which mirrored those of former Taoiseach Bertie Ahern, that Ireland's collapse began with the fall of US financial giant Lehman Brothers.
"The collapse of Lehman Brothers did not cause the Irish banking crisis," he said.
Professor Honohan also said the popularity of Anglo Irish Bank bosses, such as Sean FitzPatrick, who were "well-liked in political circles", may have contributed to them being left in their positions after the September 2008 bank guarantee.
The clear-out of Anglo management only began in December 2008 -- three months after the bank's woes almost caused the collapse of the entire system.
Mr Cowen attended a private dinner with the Anglo board earlier that same year when he was Finance Minister.
Prof Honohan found that economic and budgetary policies contributed significantly to the economic overheating, relying to a clearly unsustainable extent on the construction sector and other unreliable sources of taxes and encouraging the property boom via incentives geared at the construction sector.
"This helped create a climate of public opinion which was led to believe that the party could last forever," he said.
In his report, Prof Honohan says the system of regulation was characterised by excessive deference to the banks and timid responses when problems were found.
He said inspections discovered numerous problems with the banks, but the Financial Regulator did not follow up with rigorous actions that could have headed off the banking crisis.
In their report, Mr Regling and Mr Watson found:
*The Government's budgets during the boom years with lots of giveaway spending left the country vulnerable.
*Careful management and supervision of the public finances and banking sector could have helped steer the country towards a "soft landing" when the recession came.
*But rather than keeping a tight control on the boom, the Government spent the money -- from taxes on property and consumer spending.
Mr Cowen's 2007 budget is singled out in both reports. Mr Regling and Mr Watson concluded that overall fiscal policies encouraging the boom, particularly 2007, added "markedly to the overheating of the economy".
His spending splurges before and after the 2007 General Election were pointed to by Prof Honohan, who described them as "an unfortunate late burst of spending which boosted the underlying deficit at almost the worst possible time".
Among the most damning findings of Mr Honohan's report were:
*Excessive deference was shown to the banks by the regulators, whose responses were timid when problems were found.
*Inspections found numerous problems, but the regulator did not follow up with rigorous actions that could have headed off the crisis.
*Bad lending choices and falling property values meant that at least two banks were going to go bust anyway and two more might just have traded through, if there was no international crisis.
*The September 2008 bank guarantee was justified, but should probably not have included subordinate bonds.
Mr Cowen expressed "regret" at what happened to the country -- but he said he accepted responsibility for his decisions.
"The outcome we now face is a very challenging one for all our people and I deeply regret that. There's no Taoiseach or no politician who would have responsibility during that time who wouldn't be reflecting that reality and that fact," he said.
The opposition parties were scathing of Mr Cowen's record.
Fine Gael finance spokesman Richard Bruton said the independent experts had passed their verdict and the Taoiseach was "guilty of spectacular and catastrophic policy failures".
The former financial regulator Patrick Neary refused to comment on the contents of the report last night.
Report - Irish Independent.
Wednesday, 9 June 2010
TAOISEACH Brian Cowen's overheating of the economy and failure to deflate the property bubble when he was Finance Minister will be identified today as contributing to the banking crisis.
The damning findings will be contained in two reports into the banking crisis, which senior coalition sources last night said were "devastating".
Contrary to the Taoiseach's version of events a fortnight ago, where he sought to absolve himself of blame in a major speech on the economy, Mr Cowen's budgetary policies are singled out for criticism.
The reports also:
* Attack bank directors for allowing the financial crisis to develop.
* Criticise the Financial Regulator for being too lax.
* Find the Central Bank failed to take responsibility in the overall stability of the banking system.
* Point out economic projections made by a number of organisations were wrong.
The report by Central Bank governor Prof Patrick Honohan focuses on the failures of the regulatory system operated by the Financial Regulator, Central Bank and Department of Finance.
The impact of banking, fiscal and economic policies on the banking crisis is covered in reports by international banking experts Klaus Regling and Max Watson.
The Cabinet discussed the reports at a special meeting last night, ahead of the expected publication of the findings this afternoon.
The report by Mr Regling and Mr Watson will point to lax fiscal policies in the years prior to the banking crisis -- when Mr Cowen was Finance Minister.
It will also outline how Ireland's loss of competitiveness in the run up to the crisis added to the financial collapse.
Their report will also draw attention to government spending, concluding that the expenditure plans were based on temporary revenues.
However, the Government appeared to believe they were permanent income.
The reports severely criticises bank boards. The authors are highly critical of bank directors and queries how bank boards allowed a financial crisis of this scale to occur at their banks.
The reports also question why no internal red flag was raised by individual board directors.
As widely expected, the report will be highly critical of the Financial Regulator; saying that it was far too lax in exercising its functions, failed on occasion to follow through on directives given to the banks, and moved too late to try to impose new rules to ensure the banks held more capital.
But Mr Honohan's report is also widely critical of the Central Bank for its lack of responsibility in overall stability of the banking system.
The reports will say that ministers and bankers genuinely did not know the scale of the risks they were running but that they should have been more cautious and that the Government should have taken more pre-emptive action.
An inadequate new system of banking regulation, brought in by the Fianna Fail-led Government in 2003, also played a major role in the banking crisis.
In his report, Mr Regling says: "The twin-headed bank regulatory framework in Ireland from 2003 onwards was a hybrid, by global standards.
"The new regulatory structure had emerged from a policy compromise, and this genesis did not help its credibility, or indeed encourage a focus on macroprudential risks ... . There were also some questions, in this (regulatory) framework, about ultimate responsibility and about lines of command."
The Government will point out it has already moved to deal with the regulation problem with a restructured Central Bank of Ireland.
The law to set up the reformed body is currently going through the Houses of the Oireachtas.
In his defence, Mr Cowen will point to the reports also being critical of the economic projections made by a number of organisations.
Mr Honohan says: "At no point throughout the period did the Central Bank and Financial Services Authority of Ireland staff believe that any of the (banking) institutions were facing any underlying difficulties, let alone potential insolvency problems -- even at a late stage as the crisis neared."
Mr Regling and Mr Watson say "external surveillance sources such as the IMF faired little better".
Both reports highlight that as late as May 2008, all the main forecasting bodies -- the OECD, IMF, and ESRI -- were predicting a soft landing for the Irish economy.
Report - Irish Independent.
Saturday, 5 June 2010
Ireland was hailed during the boom years as a 'celtic tiger'. But now the government has had to introduce huge cuts to deal with its budget deficit. How is it affecting ordinary people?
When Ann Moore returned to have breakfast with her family after a 12-hour night shift at a nursing home, she found riot police and bailiffs outside her home of 16 years. She and her husband, Christy, and their three children were being evicted. Despite climbing a ladder to the top of the house for six hours in a desperate attempt to thwart the bailiffs, the distressed care worker was eventually coaxed down and taken to hospital. Her home in the southern suburbs of Dublin was promptly boarded up.
The Moores were badly in arrears, owing the council €10,000. For eight months, Ann had been paying back €50 on top of her €100 weekly rent. But in a country where 300,000 homes lie empty, the authorities decided to make the Moores homeless and punish them for their perceived fecklessness. Yet it is the politicians, bankers and developers of Ireland who have been rather more feckless.
Ireland is, per capita, the most indebted country in the EU. Its budget deficit of 14.3% is higher even than in Greece. For a decade, the "celtic tiger" economy was the poster child of free-market globalisation. Now, this bedraggled alley cat of an economy is neo-liberalism's favourite example of how to cut your way to recovery. Ireland's government has slashed public sector spending by 7.5% of gross domestic product with a series of drastic cuts this year: public sector pay by 15%, child benefit by 10%, unemployment benefit by 4.1%. Another €3bn will be removed next year, a total of 10% of GDP over three years: these measures are equivalent to the British government slashing its budget not by the £6.25bn planned by George Osborne in 2010, but by an incomprehensibly gigantic £150bn.
Yet despite the cuts, dubbed "masochistic" by the Financial Times, Ireland's debt is still growing, thanks to the desperate bailing out of its banks. Irish critics fear this economic death-spiral could lead to a decade of grinding austerity, a generation lost to unemployment and, worse, the return of a spectre that has haunted Ireland for two centuries: mass emigration.
At first glance, the Irish appear to be tackling their plight with a wit that is self-deprecating and ever so slightly proud. "We never really believed the boom. During the celtic-tiger period we were like, jeez, look at us, this will never last," says Lorcan, a father-of-two from Limerick, where Dell closed its Irish operations last year with the loss of more than 5,000 related jobs. "Irish people were used to s**t homes, s**t education, s**t hospitals. In England, there is a cultural memory of things working. There is no cultural memory in Ireland of things working. The self-flagellation gene in Ireland is very strong – 'cut us to f**k because we're used to being the downtrodden victim'. We almost feel better for it."
Pat Ingoldsby, a Dublin street poet, says he can cope without what is now a decimated welfare system. "Daily, I wander through my city with a trolley and a cardboard box full of dreams, and I hear the crashing of other people's jobs all around me. My most treasured possession is that I've got nothing to lose." But Ireland's economic crisis cuts deep for almost everyone else. While ghost estates of new, unsaleable flats stand empty across the land, 170,000 people are struggling with negative equity. Ireland has the fourth highest unemployment in the EU (13.4%), with 432,500 people on the dole; one in three of the working population under 30 is unemployed. And unemployment would be even worse were it not for the return of emigration.
Ireland is scarred by memories of the half-a-million who fled in the 1950s, and the hundreds of thousands – many highly educated – who left in the 1980s. The loss of dynamic young people helped ensure Ireland's economy stagnated for decades. But critics say it has also been a useful tool for governments, keeping unemployment down and exporting opposition to the Irish establishment. Nearly 20,000 Irish nationals emigrated in the year between April 2008 and April 2009, and research suggests a further 100,000 will leave this year and next.
'We turned into one big Surrey'
With its tourist bikes for hire under newly planted lime trees and its glass-and-steel docklands, Dublin still glossily echoes recent prosperity. In bookshops, too, there is a mini-boom in non-fiction with excoriating titles: Celtic Tiger In Collapse; The Bankers – How the Banks Brought Ireland to Its Knees; Banksters – How a Powerful Elite Squandered Ireland's Wealth. "In its rise and fall, Ireland made Icarus look boringly stable," writes Fintan O'Toole in his recent book, Ship of Fools.
In the 1990s, a stagnant agricultural economy was transformed into a highly skilled post-industrial playground. Computing and pharmaceutical jobs were garnished by a turbo-charged property sector. In 1986, Irish GDP per head of population was two-thirds of the EU average; by 1999 it was 111% of the average, and significantly higher than in the UK. Between 1985 and 2006, Irish house prices rose by almost 250%, far higher than in Britain. Emigration became immigration, as Poles and others rushed to share the Irish dream of a self-confident Euro-Atlantic nation, emancipated from the shackles of Catholicism and colonialism. Or as economist David McWilliams puts it: "We turned into a big, superannuated version of Surrey."
While the boom-time billionaires enjoyed an unfettered freedom to build and borrow, O'Toole argues that Ireland's prosperity in the 90s was not simply the triumph of the free market. For most of the 20th century, no other European nation recorded such sluggish national growth; a spurt in the 1990s was Ireland finally catching up. And the global boom of that time saw an unprecedented growth in US investment abroad: much came to Ireland, given the shared language and Irish roots of many American investors as well as alluringly low tax rates. European socialism helped too: Ireland pocketed IR£8.6bn from EU structural funds between 1987 and 1998.
What went wrong? Almost everyone in Ireland points their fingers at an unholy trinity of politicians, bankers and developers for turning this boom to bust. The government blew up a demented property bubble by offering huge tax breaks on new buildings. Construction swelled to account for one fifth of Ireland's economy. Prices, mortgages, wages and costs soared. Unregulated banks went on a lending spree. By the time of the global banking crash, Ireland's banks held a terrifying amount of debt (by 2008 the Anglo Irish Bank held €73bn of loans, half of Ireland's GDP) and the country was the first in the eurozone to enter recession.
People "are pinning blame on one or two bankers but they didn't do it alone," says McWilliams. "We've got to look at a whole professional class – estate agents, lawyers, auditors, investors, crony politicians – who became intoxicated with greed. They didn't hear the warning signs because their ears were stuffed with cash."
According to O'Toole, nothing and no one in Ireland said "enough". Voters did not tell politicians to stop, and politicians did not set limits for developers or the banks. Now, he writes, the question is whether the Irish "have enough constructive anger to kick away a system that has failed them and make a new one for themselves".
Ever since independence early last century, Ireland has been dominated by two rightwing political parties, Fianna Fáil and Fine Gael. Fianna Fáil has governed for the last 13 years (now in an improbable coalition with the Greens), and everyone I meet is furious with a government they cannot vote out for another two years. But as Ireland's ruling classes remark with complacent pride, the Irish are not like the Greeks and the French, nor even the people of Iceland, where popular protests encouraged its government to resign. There has been no rioting on the streets of Dublin.
Two weeks ago, a tiny scuffle broke out by the gates of the Dáil, Ireland's parliament. Last week, in heavy rain, 1,000 people gathered there again for the rather politely titled "right to work" march. The Greeks, says organiser James O'Toole, are much more rebellious. "The Irish are the good children of Europe. They take the rod, they don't complain and they all will get sweets at the end." Why so few protests? "Anger is a private thing in our country; it's there, but we don't express it in public," reckons Ben O'Neill, a protester wearing a badge that says "F**k Nama". (Nama is the "bad bank" created by the government to remove toxic loans from the economy. It is costing the taxpayer, and generations to come, a fortune: €73bn of public money has gone to the banks so far.)
A demonstrator dressed as Marie Antoinette throws cakes into the crowd. "Fianna Fáil mafia out!" reads one banner. "That's an awful sleight on the mafia," remarks someone. There are the usual students and hooded socialist workers here, but also people who are not the demonstrating type, such as Ray and Phyllis Carroll from Shankill. "The cuts have affected everybody," says Phyllis quietly, as a (costly) Garda helicopter thuds above. "The poor. The disabled. The blind. The home-helpers. The most vulnerable in society." She stabs a finger at the Dáil. "They are the only ones who are not feeling the pain."
The Carrolls are living off their savings, supporting their youngest through university. Ray's disability allowance does not cover their basic living costs. "There's nothing left in the kitty. The savings we've taken years to put together have gone. They've made clowns of us," says Ray. "You hit rock-bottom in this country now and you're left in the road to die."
Despite 100,000 people protesting after the budget cuts in December, there has been no winter or spring of discontent. Richard Boyd Barrett, a councillor for People Before Profit, is furious with union leaders. "They've spent most of the last 20 years sharing steak sandwiches with government officials," he says. "They've developed a lifestyle that is akin to the employers they spend their time talking to."
Now the unions are out in the cold. David Begg, leader of the Irish Congress of Trade Unions, has become a vocal critic of the government in recent months. "The access and influence we had isn't there any more," he says heavily. "The reason it collapsed is because the government wouldn't retain the terms of 22 years of social partnership, which was abandoned by government and employers at the first sign of trouble."
In this land of mass unemployment, workers are struggling to protect their jobs. An employee of Quinn Insurance, a boom-time success story recently taken into administration, is too scared to give his name because he has joined a union. He has been told his company is looking for 900 redundancies, more than a third of its workforce. "You go crazy thinking about the economic situation," he says. "My job is at risk, and I feel I've been intimidated over not joining a union. It's very frustrating. I'd expect a lot more anger right now." He has tried to encourage his depressed, stoical peers to join the union, but can't get the numbers. "Some are scared, and others think they can't do anything," he says.
There are also a few people who actually agree with the government's masochistic strategy. "Money became our god during the celtic-tiger years," says a taxi driver, now having to work seven days a week to pay his mortgage, for which he is three months in arrears. "Every one of us is guilty to a small degree." He accepts the cuts. "Most sensible people know the last thing we wanted in this country was the [the intervention of the] International Monetary Fund. Then you don't have a government – the IMF run the country."
Within government itself, advisers privately admit Fianna Fáil will be "eviscerated" at the next election. "The government is very unpopular at this stage. They have to do what's right," says one source, who views this as a liberated government with nothing to lose taking genuinely tough decisions. On an international stage, the Irish are attracting applause from the right: British Treasury officials have discussed how best to effect cuts with their Irish counterparts in recent days, and Ireland's finance minister, Brian Lenihan (who is also having to cope with pancreatic cancer), has been praised in the financial press. Lenihan has called Irish bankers' behaviour "truly shocking" but his government remains slavishly loyal to the global free market. The boom was created by neo-liberalism and will be recreated by neo-liberalism. "We saw what worked 20 years ago. Let's see if it will work again," as one government economist puts it.
Despite sitting at a desk surrounded by thousands of square metres of vacant office space in Dublin's docklands, John FitzGerald, an economist at the Economic and Social Research Institute, an independent think-tank, is far more optimistic than the EU about Ireland's prospects. A studious man who does not mention that his father was once Ireland's prime minister, he forecasts annual growth zooming up to as much as 5% between 2012 and 2015, before falling back to what he calls "boring, European" levels.
Ireland has had to re-price its economy to become globally competitive again, FitzGerald argues. Rents and private sector wages have fallen following the drastic public sector wage cuts. The country's strength, and weakness, is that more than half its employment and well over half its manufacturing comes from foreign-owned firms. As the global economy recovers, so will Ireland's, with IT services, software and healthcare making up a new, "smart" economy. FitzGerald believes the government "did a lousy job on banking", but has now got the cuts spot on. "They are wise because they have psyched the people of Ireland up to absorb huge pain. If we are right, they will surprise the people of Ireland in 2013 by saying the cuts are all over."
More surprisingly, he says the popular view that ordinary people are paying for the mistakes of an untouchable elite is wrong, and the masochistic budget has been "probably the most redistributive budget of the last 20 years" – he pauses, drily – "by accident". According to the institute's research, the budget has hit the top 20% of household incomes by 6%, while the bottom 40% have seen rises of up to 2%. "The rich have paid a much higher price than the poor. But everybody is worse off," FitzGerald acknowledges.
Time to leave the euro?
"You got it right, didn't you?" nods the conductor on the Limerick train to David McWilliams. It is hard to imagine another country where an economist would be recognised by passing members of the public, but everyone in Ireland is an economist now. McWilliams, a maverick who presciently warned of Ireland's impending economic conflagration, next month brings "economic stand-up" to Ireland's national theatre. Tonight he is hosting a night of "polemedy" in Limerick: this mix of satire, comedy and earnest debate about Ireland's future, which continues until well after midnight.
"There were very few of us in the boom who suggested what was going on was nonsense. If you're against consensus in Ireland, the first phase is ridicule, then it's violent opposition, and the third phase is universal truth – where everyone pretends they agreed with you all along," McWilliams says, with a smile.
He has two radical, populist solutions: let the banks go bust, and leave the euro. Individuals' deposits could be guaranteed while corporate bondholders would lose out, but the markets would not panic, he believes – rather, they would regard the Irish economy with renewed interest, because money once earmarked to bail out the banks could be invested in the recovery. Saving Anglo Irish Bank "is the economics of Stalingrad", he says. "Throwing all your resources at a symbolic entity signals to the rest of the world that you are a fanatic."
McWilliams also argues that Ireland's attachment to the euro, and the EU, is born of the establishment's traditional desire to eschew the British, who are still Ireland's biggest trading partner. If Ireland left the euro and returned to the Irish pound, its currency would take a hammering. Let it, says McWilliams: if it fell by 40%, suddenly Ireland's wages would be 40% less than its rivals. Investment would flood into Ireland; exports would be super-competitive.
More orthodox voices on the right and left will not countenance either letting Irish banks die or leaving the euro. "You can't let a bank that is half your GDP collapse in the middle of your economy. It pulls the entire economy down with it," says a government economist. FitzGerald adds: "If the Irish central bank had to go out and borrow tens of billions to replace the euros in the banking system, there is no way they could raise it. There would be a dramatic fall in the currency, a dramatic rise in interest rates, and a complete collapse in the economy. Leaving the euro would be lunatic."
Of FitzGerald's predictions that the Irish economy will return to business as usual next year, McWilliams says: "That's horseshit. The establishment view is what we need is more of the same. The most important thing about crises is it gives you permission to change."
The Irish have not yet identified plausible alternatives to the Fianna Fáil/Fine Gael duopoly – although the Irish Labour party is at an historic high in the polls – but McWilliams believes many people are looking beyond the discredited establishment, and seeking revival through grassroots debates like the night he comperes in Limerick. Perhaps this crisis could spark something similar to the creativity unleashed a century ago by the struggle for independence. "Economics is like anything else," says McWilliams. "The innovator wins."
However, rather than crisis heralding opportunity, it is fear and a grim lack of political alternatives that weighs on the newly homeless Ann and Christy Moore, who are turning to the courts in an attempt to get their home back. Christy worked on building sites during the construction boom, but is now on social welfare. Two of their three children are unemployed; the third has just found work on a 12-week contract.
Christy is left battling with the shame of losing his home: "You should be strong but you feel so low – just finish me off, shoot me, put a bullet in my head," he says. "And all the time you hear you have to tighten your belts, which is an insult to people's intelligence. It's fear – that's why people aren't rising up. But we mustn't fear the corrupt politicians and bankers and developers, because that's what they want."
Report by Patrick Barkham - The Guardian.
Friday, 4 June 2010
The Government coalition parties did not want a comprehensive public inquiry into the reasons for the banking and economic crash. Instead, they have ended up reluctantly endorsing no less than three mini-inquiries into aspects of the banks here that will, of course, be conducted largely in private.
In January, Taoiseach Brian Cowen endorsed setting up two inquiries - one into the evident failures of the financial regulator in recent years and the reckless amounts of money advanced by the banks. The new broom at the central bank, the TCD academic Patrick Honohan, said he favoured a banking inquiry. Governor Honohan then set out to report on the huge failings of the reformed organisation he now leads.
Separately, two outsiders, the German Klaus Regling and Englishman Max Watson, were appointed to investigate the reckless lending by the bankers. Messrs Regling and Watson reportedly talked to a clutch of Ireland's formers chief bankers. It is not clear whether they approached the large group of bankers who continue to sit on the boards of the taxpayer-supported lenders. We will never know because both inquiries were held in private, in camera or in secret - depending on one's faith in inquiries commissioned by the Government which set the terms of reference.
Last week, almost by accident, the Irish public was given a third banking inquiry when Environment Minister John Gormley released the leaked reports he commissioned into the scandal-ridden Dublin Docklands Development Authority (DDDA) in recent years. The minister decided to appoint the public-spending watchdog, the Comptroller & Auditor General, which will report to the Oireachtas Public Accounts Committee. This report is a banking inquiry by proxy because two banks were involved in financing a developer and the DDDA of the 25-acre plot of contaminated land known as the Irish Glass Bottle site.
The DDDA had decided to mix and match its roles as planning regulator and developer in late 2006 just as the economic bubble was about to burst. Two Anglo Irish Bank board members sat on the DDDA board at the time. In a bit or reverse alchemy, the publicly-owned body turned an initial small investment into a loss of at least €400m for the taxpayer.
Commercially, valuable buildings can probably never be built on the 25-acres because parts of the site continue to emit methane, a legacy of its use as a major tip-head for Dublin waste for many years. Residents of the Poolbeg peninsula may in time be bequeathed the most expensive parkland in Europe.
I have argued here before that the public needs some sort of banking inquiry that would investigate the docklands. Instead, we have ended up with not one inquiry but three disconnected inquiries whose investigations will be held in mostly in private. Significantly, the controversial political decision taken by the Minister for Finance, Brian Lenihan, and Taoiseach, Brian Cowen, on 30th September 2008 will not be investigated by any inquiry.
In a late night meeting, the Government, after consulting with the then two top bosses at AIB and the then top two at Bank of Ireland, extended a State guarantee to cover all the liabilities - the bond debt and deposits - of the Irish banks, including Anglo Irish. An economy worth €170bn a year would guarantee the balance sheets of banks worth over €400bn.
Taxpayers would then be asked to pump many billions of euro into Anglo Irish at a time when the amount of taxes the Government collected from taxpayers was sliding. The fragile nature of the guarantee was quickly tested. Within months, the strains very quickly showed and spilled over onto the sovereign bond markets. The interest rate the Republic had to pay to service its sovereign debt late last year soared to over six per cent before falling back again. But the crisis continues this week because Irish sovereign interest rates, already the second most expensive in the eurozone after Greece, continue to creep higher.
A public inquiry into the reasons for the banking and economic bust remains the only inquiry that is worth conducting. Governor Honohan's private inquiry, when it is published, will likely tell us what we already know: his predecessors did not do their job. The first Regling and Watson report into the banks will also tell us what we already know: reckless bankers loaned huge sums of money on a scale not seen anywhere else in the world to a small group of property borrowers.
As the economic crisis worsens, the public will put up with nothing less than a proper inquiry, conducted in public.
Report - The Meath Chronicle.
Wednesday, 2 June 2010
Let's go over to Rome to hear the vote of the Italian jury. "€26bn in cuts over two years, including savage reductions in health spending and road building." And now it is over to Spain. "Good evening, Madrid. €15bn in spending cuts over two years? Thank you Madrid." Paris? "€5bn in cuts over two years." Athens? A punishing €30bn over three years, on top of previous cuts. Good evening to London, where a new coalition jury has just gathered. "£6.2bn of cuts in the present tax year with much, much more to come."
The sound of screaming and howling that can be heard all over Europe resembles a European Cuts Contest.
In the last two weeks, almost all EU governments have been slashing their budget deficits in order to prop up stockmarkets, blunt attacks on the euro and the pound and discourage the kind of speculation on sovereign, or national, debt which almost drove Greece to the wall. The cuts are supposed to reassure the financial markets that European governments take their whacking deficits and gargantuan accumulated debts seriously.
The EU's 27 governments have a total accumulated debt of nearly 80% of the union's annual economy – about €9.5 trillion. Their projected total budget shortfall this year is 5.6% of GDP – or about €600bn.
Some countries are much naughtier than others. Greece, after three rounds of cuts, has reduced its projected deficit this year to 4% of GDP, but its accumulated deficit is 125% of its annual income. France has a projected deficit of 8% of GDP this year and a total debt of just over 80% of its national income. Britain, before last week's cuts, had a projected deficit of over 12% and a total debt of just under 80% of GDP. Even virtuous Germany has a deficit of 5% and accumulated debts of almost 80%.
It is important to remember how some of those figures came to be so alarmingly high. In 2008-09, national governments bailed out banks and opened public-spending taps to prevent the world from sinking into depression. The figures given above for accumulated debts are, broadly speaking, the fruit of the combined sins of many years. The annual deficits have been, in many cases, doubled by the recent efforts to rescue the world economy.
There are many voices – including Dominique Strauss-Kahn, president of the IMF – who fear that the race to appease the markets by making severe public spending and deficit cuts may plunge Europe, and the world, back into a second recessionary dip. But governments fear they will be damned if they do cut and damned if they don't.
A Europe-wide sovereign debt crisis would threaten to destroy several large European banks which hold thousands of billions of euros of national debt. There would be no money to bail out these banks a second time around. The ironies do not end there. The 2008 crisis was largely caused by similar speculation by banks and other market players on other forms of debt. Broadly speaking the same people are now complaining (or trying to profit from the fact) that the money spent to rescue them last time has left national governments dangerously indebted. Having speculated on a possible Greek default, they have switched to Spain, and may turn their sights in the near future on France and Britain.
German chancellor Angela Merkel and French president Nicolas Sarkozy, have been ranting about the destructive actions of market speculators. At one level, it could be argued that the markets have performed a useful function in forcing the EU to tighten weak rules and structures sustaining the euro and in forcing European capitals to face up to the consequences of permanent deficit financing.
But Merkel and Sarkozy have a point. There has been something more than usually perverse about the trading departments of banks and other institutions speculating (again) in a way that threatens (again) to bring down the world banking system and the world economy.
France has promised to cut its 8% GDP deficit to 4.6% by 2012.
● Paris has promised €5bn in spending cuts over two years, partly by squeezing grants to local government.
● Another €90bn in cuts or tax rises are needed over 30 months but the government has given no clues to its plans.
● To rescue the bankruptcy-threatened state pensions scheme, President Sarkozy is expected to announce next month that men and women will have to work after 60.
Two weeks ago, the socialist government of Jose Socrates announced its second round of austerity measures in as many months – a mix of tax hikes and €1bn in spending cuts that it hopes will cut the 2010 deficit to 7.3%.
● VAT will be increased by a percentage point.
● Crisis one-off taxes on individual pay packets and corporate profits will be imposed.
● Top earners in the public sector will take 5% pay cut.
● Big projects such as a new international airport for Lisbon and high-speed rail lines are likely to be postponed.
Prime minister George Papandreou has crafted five austerity packages in as many months. The latest (at the beginning of May) paved the way for a bailout from the EU/IMF, but sparked mass demonstrations.
● Public sector pay has been frozen until 2014.
● Main VAT rate has increased to 23% from 19%.
● Retirement age expected to rise, and retiring under 60 will eventually be banned.
● Excise duty on fuel, cigarettes and alcohol rise by extra 10%.
Prime minister Jose Luis Rodriguez earlier this month announced another €15bn of savings and cuts to try and bring the Spanish deficit in at 9.3% this year.
● Ministers will take a 15% pay cut, while civil servants will have 5% docked.
● Regional and local governments will be expected to deliver €1.2bn in savings. There will be no pension increase in 2011.
● The €2,500 baby bonus given to mothers will be axed in 2011.
Silvio Berlusconi's cabinet last night signed off on a budget including €13bn in cuts for 2011 to bring deficit down to 3.9%.
● There will be a freeze on public-sector hiring and pay rises.
● Politicians and senior civil servants will take pay cuts – to the tune of €5bn.
● There will be a crackdown on tax invasion, illegal building and fraudulent benefit claims which government hopes will bring in €1bn.
● Those nearing retirement age will be blocked from taking their pension for a few months.
Government is to meet in a fortnight's time to discuss a major austerity programme expected to amount to cuts of at least €10bn a year from next year until 2016.
● The axe is expected to fall mainly on state subsidies.
● Tax cuts that Chancellor Angela Merkel's coalition partners had previously insisted upon are also likely to be shelved.
● There are also hints that the government will cut unemployment and social benefits, although Merkel has personally intervened to reject calls for cuts in education, research and social services.
Last week, David Cameron's government announced plans to cut £6.2bn (€7.3m) from government spending.
● The axe will fall most viciously on the Department for Business, Innovation and Skills which must find savings of £836m (€983m).
● Ministers will ditch their personal drivers and use public transport to help cut £1.2bn (€1.4m) from discretionary areas.
● Immediate recruitment freeze across the civil service until end of 2011.
● Higher education spending to be cut by £200m.
Report by John Lichfield - Tribune Buisness.