Recovery talk is great but negative equity will be a heavy weight on consumers
Published 18/03/2010 | 05:00
The recovery is coming to Ireland, economists tell us, later this year. But how ready will we be? Exporters may be starting to bulk out their order books for the second half, but for the consumer, who powers most of the economy, it may be more a case of a no-show.
This week gave us another example of how nobody in government seems remotely interested in the dire state of Irish households and Irish consumers.
Figures from the ESRI on negative equity, showing that almost 200,000 borrowers will have loans worth more than their homes by year end, were met with barely a shrug.
Conventional wisdom among Ireland's economists and the Department of Finance is that negative equity and property prices are not really that important.
The Central Bank recently told the press it doesn't even bother trying to forecast where house prices may go in the next two years.
In private, many observers dismiss the issue on the basis that once somebody is paying down their mortgage, the capital value of the asset is irrelevant.
The ESRI begs to differ. Researcher David Duffy, the foremost expert on housing and negative equity in the State, says the importance of negative equity is psychological.
Those householders in negative equity "feel'' less wealthy and, as a result, consume less.
With at least 200,000 borrowers "feeling'' less wealthy going into 2011, that is some weight for the consumer to be carrying on his or her back.
The other problem with negative equity is that it creates a type of negative feedback loop.
Anyone who has a loan which is worth more than their house is not going to sell or lower their asking price, thereby stifling the need for adjustment in the housing market.
There is also the added problem that the mortgage market will seize up as banks will not take on mortgage borrowers in negative equity, which means that switching between lenders becomes almost impossible.
Then there is the problem of labour mobility. Anyone under water on their mortgage is effectively trapped and cannot move to take up work elsewhere in the country or outside it. Again this tends to reinforce long-term structural unemployment.
While the days of dinner party conversations being dominated by the subject of house prices are over, the importance of the issue has not gone away.
The levels of negative equity alone are not going to stop an economic recovery, but they are going to slow it down considerably, despite the rather casual reaction to the problem from official sources.