Thursday, 10 March 2011

The Storm Is On Its Way...

I’M WAITING for the implosion. I feel it in my gut and over many years I’ve learnt to trust gut instinct. Something just doesn’t add up.

Why are so few houses on the market these days? You might be fooled into believing there is a glut of properties for sale, until you actually go out to look, whereupon you soon realise the turnover of property is so slow that you are looking at the same selection each week.

Indeed, so few houses are coming on the market, particularly at the upper end, that the few potential buyers out there are now frustrated, as the choice is so limited.

Why are people not selling? It makes no logical sense given what we now know about the vast numbers of mortgages in arrears.

Estate agents say that homeowners at the middle to upper level are not selling because property has lost so much value of late they would prefer to hang on until the market improves.

Which is all very logical and reasonable assuming these owners can hang on – but are we talking about casually hanging on until the time is right or hanging on by their fingertips?

Unfortunately, I suspect it is very much the latter. Sure, I can believe hanging on is not a problem for a certain number of older people, who’ve owned their respectable redbrick semi-detached family home for 30 years or so and have long since paid off their mortgage and who never made the mistake of remortgaging their home in order to release equity or buy a retirement property in the sun.

I can even believe it might be true of some middle-aged people, who, despite having paid top dollar for their dream home at some stage over the last 10 years, have an income level that has miraculously remained high enough to sustain their mortgage repayments and who were among the very few who resisted the temptation to purchase an investment property or a frontline villa on a Portuguese golf course.

And no doubt there are a number of people who are lucky enough to be involved in businesses which are still successful and who are riding out this recession virtually unscathed.

But what I find difficult to understand is how, after a decade or more of volatile property sales, which included a vast number of investment properties as well as those purchased as primary residences, there are not more distressed properties on the market. Well, not yet, but soon – I strongly suspect we are experiencing the calm before the storm.

And it may be one hell of a thunderstorm, as the word on the street is that our financial institutions, having dealt with the big builders and property developers, are now turning to those on the lower rungs of the property ladder – the smaller players, with a few investment properties.

And I’m not just talking about professional landlords with a string of rental units but the average Paddy and Mary who bought an apartment as part of a long-term pension plan or a small house in the city for their children to live in while they attend university.

Lenders are currently dispatching letters in their thousands, to all those whose loan facilities are due to expire this year. And, as the typical interest-only loan arrangements were for a maximum of five years, the numbers due for renewal are now high, as so many bought properties in the last few years of the boom.

Lending institutions are putting an end to tracker deals because they themselves can’t borrow funds from the ECB at the low rates they’ve been charging their tracker-deal customers. And as ECB borrowing rates are so high, Irish lenders are attempting to recapitalise their institutions the cheaper way, by forcing customers to repay capital as well as interest on their loans.

Unfortunately, while it sounds logical in principle, the reality is that for many borrowers capital-and-interest repayments would prove impossible to service and the move would force them into defaulting on their loans.

Some lenders are now reported to be offering alternative arrangements to their customers, including new interest-only loans that are based on standard variable rates.

But be warned, these rates can be adjusted upwards by the lender at any time over the duration of the loan facility. So, whilst initially it may appear an attractive option, it could prove to be far more expensive in the long-term than starting to pay off capital now.

That is, of course, if the unfortunate borrower can afford to hand over one cent more than they are already paying, which many just can’t. Unless lenders wake up and recognise that many people are now in the “can’t” rather than “won’t” category, and negotiate a sensible deal, the numbers defaulting on their loans will escalate to unsustainable levels. Invest in earplugs and earmuffs – it will be a big bang.

Report by Isabel Morton - Irish Times.

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