Reasons to be cheerful - house prices are on the rise
More than 20,000 households have come out of negative equity in the past year as the property market improves
Published 08/06/2014 | 02:30
DO YOU own a house in Bray? Good news. A three-bed semi-detached home on the seaside town's Connawood Drive sold for €370,000 in March – up 31 per cent on the price it went for in July 2013.
How about Cabinteely? There's even better news. A property on the town's Monaloe Avenue went for €602,000 in January – up 58 per cent on the €382,999 it sold for just months before, in August of last year.
But it's not just investors and seasoned property flippers who are benefiting from Dublin's rapidly heating property prices.
New research commissioned by the Sunday Independent reveals that one of the biggest beneficiaries is a very big but overlooked demographic – those in negative equity.
There is scant data available on negative equity. A smattering of studies by the Central Bank and ESRI provides a fractured picture of the market, with data not fully updated since 2010. But one thing is clear – the problem is vast and deep.
House prices in the capital fell by around 59 per cent from peak in 2007 to bottom in August 2012, according to the Central Statistics Office, bringing about half of all mortgages in the State into negative equity – about 90,000 in Dublin and around 300,000 outside of the capital.
With little help from the Government and even less from lenders, those people were simply left to stew. Thousands were chained to their homes, unable to move because the sale price no longer cleared their mortgage.
But the rapid recovery of Dublin house prices is reversing this trend for mortgages holders in the capital. Dublin house prices have risen 20.9 per cent since the market bottomed in August 2012.
Other house price gauges suggest this gain could be even more extreme, since the Central Statistics Office's figures only account for mortgaged purchases and exclude cash buys.
Now for the very first time, we know just how many people are benefiting. Some 24,000 Dublin mortgages have moved into positive equity thanks to these price rises, an exclusive study for this newspaper by economist Jim Power has established. And another 20,000 to 30,000 could move from negative to positive equity by 2016 if the price rises continue, the numbers reveal.
"The rise of house prices in the capital shows no signs of abating," says Power. "There's significant pent-up demand in Dublin still, and a clear supply problem. The recovery of supply will be slow, since there's a long lead time involved in residential construction – at least 12 months to completion once planning is approved. If over the next two years we see another 20 per cent rise in prices, another 20,000 to 30,000 mortgages should escape negative equity."
The phenomenon is for now confined to Dublin, with the rest of the country still waiting for any real material rise in property prices.
There are another 300,000 mortgages in negative equity, Power calculates, which remain in broadly the same situation as they did in 2012 because house prices have yet to recover nationally.
Other housing experts have pointed out that some parts of Dublin have not enjoyed the same price rises seen in suburbs south of the city.
"The gains in house prices seen in the last year are incredibly location-specific," says Dublin Institute of Technology housing and economics lecturer Lorcan Sirr. "Homes in Donnybrook and Ranelagh may be coming out of negative equity in their hundreds, but other parts of the same county – Cabra and Kilbarrack, for example – are seeing none of this. Homes in those areas may be stuck in negative equity for a long, long time."
But those in negative equity outside the capital may not have long to wait. Douglas Newman Good recently predicted that house prices in major urban centres outside Dublin will rise by five per cent this year. Shortages of quality family homes will begin to revive the market in towns and cities countrywide including Cork, Galway, Kilkenny, Ennis and Sligo, the estate agent said.
The most obvious beneficiaries of a move into positive equity are those who want to sell their property, but have until recently been unable to do so because of the sale price. Many who bought starter homes and apartments just before the property bubble collapsed are desperate to trade up because of growing families and new job opportunities.
"Negative equity is an impediment to mobility," says Power. "The existence of negative equity makes it very difficult if not impossible for a home owner to sell and trade up or down in the market, or just move to a similar house elsewhere.
"As property prices rise and as negative equity is eradicated, movement becomes possible again. This facilitates greater mobility, which is good for the labour market and the economy."
Recent efforts by lenders to address this problem, by introducing special mortgages which allow borrowers to carry negative equity on to new properties, have admittedly helped to boost mobility among this group. Those deals carry strict conditions, however, and are limited to borrowers with good earning capacity who are not in arrears.
But an escape en masse from negative equity also has darker ramifications. For distressed mortgages, a return to positive equity makes it more likely that lenders will repossess, FLAC director general Noeline Blackwell warns.
"We are hearing anecdotally that the clients in mortgage arrears who are under the most pressure from lenders are the ones in positive equity," she told the Sunday Independent. "The value added to properties by rising prices is definitely affecting repossessions ... the distressed borrowers who are most at risk of losing their homes are always the ones where the lender can get the most value from the property."
This is particularly true given the rake of legal changes recently introduced that make repossession easier, she said, including changes to the Code of Conduct on Mortgage Arrears and the Land and Conveyancing Reform Act as well as a rule which allows repossessions to be pursued through the low-cost Circuit Court.
Consumer champion and founder of personal finance forum Askaboutmoney.com Brendan Burgess, meanwhile, describes the trend as "a mixed bag". It could mean banks are less likely to do deals with distressed borrowers, he says.
"If you are having difficulty paying your mortgage, and walk into your bank with €100,000 in negative equity, there's a good chance your bank will do a deal – it might warehouse that €100,000 portion and let it sit there interest-free for several years, for example.
"But if you have a house in positive equity, there's an obvious solution from the bank's perspective – sell it, and pay off all your debt. This is particularly true for people who have tracker mortgages, which are really costly for the banks."
It's only natural for lenders to consider whether a house is in negative or positive equity when deciding to push for repossession, Mr Burgess adds.
"The banks have gone before the Oireachtas Finance Committee and publicly denied that they look at anything other than whether a borrower can afford their mortgage – but of course they look at equity, it just makes sense."
"The Central Bank has for the last 18 months been putting pressure on the banks to repossess, particularly buy-to-lets," Lorcan Sirr points out. "But they're much less inclined to get involved in properties that are in negative equity."
The overall mortgages arrears picture, however, may improve.
Several economists who spoke to the Sunday Independent said arrears should decline as mortgages move out of negative equity, since borrowers see more value in holding on to their property and fight to hold on to it. But this has yet to materialise, Burgess points out. "You'd think that would be the case. But the latest figures on mortgages arrears figures just don't indicate that trend."
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