Morgan Kelly predicts further unforseen losses for banks
Kelly warns billions owed by small number of big developers
Published 26/08/2011 | 05:00
UCD economist Morgan Kelly has predicted that bad debts of a small number of wealthy buy-to-let property investors could lead to previously unforeseen losses for the banks.
Professor Kelly claims this group could cause major problems, even if the overall number of people not repaying home loans does not rise drastically.
However, Prof Kelly, who is renowned for his doom-laden analysis of the housing market, admitted he had no idea how big the resulting losses could be if these 'super-investors' cannot repay their loans.
Prof Kelly, who forecast the original property bust, says in a new academic paper that many wealthy buy-to-let property investors have multiple loans and if they get into trouble that losses will be magnified.
In the paper, published on the UCD website, the economist said there could be as few as 2,000 mortgages of more than €1m taken out by property speculators at the height of the boom, with a combined value of €3bn.
However, Prof Kelly said the biggest 10,000 buy-to-let property investors may owe in the region of €10bn between them.
The analysis is based on Department of the Environment figures that show bigger mortgages taken on during the boom tend to have been interest only, and Prof Kelly said they were more likely to have been used to buy investment properties than to buy homes.
He said around 10,000 investors, often accountants, lawyers and other professionals, spent between €1m and €2m each buying property between 2006 and 2008. These tended to be bought with interest-only mortgages worth around 80pc of the value of the house, he said.
"The extent of losses on these large investor loans are, of course, unknowable at this stage," he said.
Prof Kelly admits the findings remain tentative but, if true, they suggest that losses for the banks could rise sharply -- even if the total number of defaults does not -- if the bigger borrowers get into trouble.
The data don't show how many people had more than one mortgage but suggest a small concentration of big debts.
The findings, however, do fit with recent comments from Prof Kelly when he said debt forgiveness for struggling home owners could cost between €5bn and €6bn -- less than previous estimates. That relatively low figure is also based on Prof Kelly's view that home buyers typically have smaller mortgages than property investors.
Last week at an economics seminar, he used that point to argue in favour of a debt forgiveness scheme for home owners unable to cope with their debts -- saying it could be done at a relatively small financial cost.