Where's my bailout? How to break chains of negative equity
Misgovernance has left one in 10 of this country's citizens trapped in their homes. Marc Coleman says it's time to free the innocent
Published 15/11/2009 | 05:00
THE next time you're walking down any footpath in Ireland with more than 10 people walking along it, I'd like you to conduct this simple exercise; visualise one of the people you see walking towards you with Guantanamo Bay-style orange jump suits, with hands, feet and neck chained together. That is roughly the share of people in this country suffering from negative equity at the moment. Actually, for those it affects, the financial coercion of negative equity has the same effect as chains -- the head hung low, feet shuffling forward in despair and that facial expression of permanent defeat.
And yet they are guiltless, more than guiltless. They are victims, made vulnerable only by their belief. Belief that their leaders were telling the truth when they warned them to buy properties in case prices rose further. Belief that the banks had their best interests at heart when they lent them many times their income. Belief that estate agents were telling the truth about the prices being bid.
They are victims of a vast network of misgovernance encompassing our land laws, our planning system, our spatial strategy, our system of financial regulation, and, yes, our banks. They are also victims of a State that plundered them for tax revenues. At its peak levels of 2006, the State took over €2bn off of these people in stamp duty. And it was those who bought their properties in 2006, the peak of the market, who are suffering the most. The policy-makers who are inflicting this misery on them have no reason to care. Most of them -- senior civil servants -- bought their houses in the 1980s or early 1990s, before stamp duty became an issue. Many of the ministers who support the retention of stamp duty also don't care. Why would they? In their constituencies, house prices are low enough for the tax not to be a problem.
Negative equity has a solution, and there are three parts to that solution, each strategically targeted at specific groups of home owners who are in negative equity for very different reasons.
ABOLISH RESIDENTIAL STAMP DUTY
The first group are those who bought their properties before the middle of this decade. All or most of their negative equity is caused by the most stupid and destructive tax known to man -- residential stamp duty. By increasing the price of houses but not the cost (the higher price would be offset for all but first-time buyers by not having to pay stamp duty), abolishing this tax would allow more houses to be bought and sold. Replace the component of house costs accounted for by stamp duty -- between 7 and 9 per cent -- with a step up in prices and those buyers would, at least, only have the deposit to fund. For most of those who bought their houses at or before 2004, negative equity would no longer be a bar to purchase.
Slowly at first, but with gathering momentum, the property market would see a return to the level of buying and selling prevailing in 2005. So, once the recession is over, would prices.
But this still leaves us with a huge problem of those who brought property since 2005. For these, we need fine-tuning instruments; too costly and dangerous to apply to all those in negative equity, but still critical to reach those parts of market that abolishing stamp duty cannot.
STATE HELP WITH REPAYMENTS
These instruments are united by one simple concept, a concept that justifies the creation of Nama. The idea is that while, normally, buyers are responsible for the prudence of their investment, this is only true if government is acting competently. While stamp duty is an act of macroeconomic incompetence (and its abolition is the cure for that), the further measures I propose are an undoing of an equal and opposite microeconomic form of incompetence.
First, the kind of madness that went on in Monaghan -- where a local authority gave planning permission for tens of thousands of houses -- is an example (in this instance, rescinded by the Minister for the Environment) of how many properties were created where there were no jobs to sustain the income of those buying them. We are not talking about ghost towns in the sense of areas where properties are empty (this case is addressed below). Rather, we are talking about situations where those in negative equity are now out of a job and in arrears on their mortgage as a result. Here, the first-time buyer scheme must be extended so that the Government and local authorities -- who were glad to indirectly rip these buyers off by charging stamp duty and levies on builders (the latter of which were passed on to buyers in the form of higher prices) -- must now face up to the consequences of what they did. They must introduce schemes whereby they help the mortgage-holder with repayments in return for part-ownership of the property. That part ownership must preclude any right to sell the property without the consent of the original owner.
Then come the basket cases of the residential property scene. In a minority of cases (though, sadly, still a significant number) banks, estate agents and local authorities created housings estates where a few buyers find themselves stuck in eerie New Orleans-style isolation. They have few neighbours and no shops or facilities. Here, it's a case of: "In space, no one can hear you scream."
As taxpayers, they financed a government which funded local authorities that failed to provide those facilities -- and gave planning permission for these real-estate Frankensteins. Here, the failure of policy is too blatant to deny or ignore. The consequences are too tragic to do nothing. Like the bankers whose loans are responsible for these ghost towns, the buyers must be included in Nama. After all, their taxes are paying for it.
Finally, unlike the measures above, extending the period over which mortgages can be taken out won't reduce the burden of negative equity on the housing market as such. But it will spread it out more equitably across generations.
In Japan, mortgages that are passed on to another generation are common. In Dublin, many of our grander buildings once had 99-year mortgages. Ours is the first generation in fiscal history to shoulder the burden of paying for our pension and our own homes through higher taxes and mortgage repayments. Today's thirtysomethings will pay for the mistakes of their parents' generation who steered our economy into crisis. As most property is inherited in some form or other, allowing coming generations to spread mortgage repayments over longer time periods would -- provided regulation of the mortgage market is strengthened-- give to those currently in negative equity a slice of what they have invested in for their children and grandchildren. It's an unusual idea, surely. But then we live in unusual, if not revolutionary, times.
Tomorrow at 10pm on Newstalk 106 to 108fm 'Coleman at Large' looks at negative equity and the emergence of Ireland's new poor.