Effects of negative equity crisis to be felt for over a decade
IRELAND is facing into a uniquely damaging negative equity crisis that could have profound ramifications for more than a decade, economist Constantin Gurdgiev said yesterday.
Negative equity strangles entrepreneurship, damages consumption and immobilises the workforce by rooting them to an area where there may be no jobs, Dr Gurdgiev said.
And he expects those effects to be particularly severe for Ireland because of the "high concentration" of negative equity among younger people living in certain parts of the country.
The economist also predicts the crisis will trigger a wave of defaults by buy-to-let investors who bought properties at the peak of the boom and opted to hand them back rather than spend years getting them back to break even.
"The effects of negative equity here for Ireland will be very deep and quite dramatic, compared to countries like the US and the UK," Dr Gurdgiev said.
One of the negative equity consequences most frequently ignored by commentators is the impact on entrepreneurship, according to Dr Gurdgiev.
"The Bank of Italy did a research paper that showed negative equity has a direct impact on entrepreneurial activity," Dr Gurdgiev said.
"That happens because negative equity lowers the collateral people can use to generate loans to start businesses."
Negative equity also prompts households to have "irrationally high savings", which are usually held in "demand deposit accounts" -- where the money cannot be invested anywhere else.
This, coupled with the higher mortgage interest rates paid by householders whose properties are in the red leads to lower consumption and lower take-up of credit, Dr Gurdgiev added.
The third impact cited by Dr Gurdgiev is negative equity's ability to restrict the mobility of a country's workforce. "In Ireland, there's a very high geographical and generational concentration of negative equity.
"It's focused on the young, who are also at higher risk of unemployment, and it's focused in areas like the midlands, the south and the west, where there may not be many jobs."
Ireland's final negative equity disadvantage is the buy-to-let love affair of the boom. These properties tended to be apartments bought "at the peak" and, therefore, would have fallen by the most in value, Dr Gurdiev said.