New price promise to cover buyer anxieties
Moves are gathering momentum to take some of the uncertainty out of home buying. These meausres will help to address the concerns of those homebuyers who are reluctant to buy in case prices fall further. Some also fear that further price falls might see the value of their homes fall below the value of their mortgage, in other words, negative equity.
But this risk of negative equity appears to be on the wane and this is reflected in the recent moves to give home buyers peace of mind. For instance, financial services group IFG recently launched its Home Price Protection Plan, which is designed to protect home buyers from a fall in the price of the property they are buying.
NAMA has also promised to introduce some form of price guarantee for those buying some of the 2,000 houses it has on its books. But we have yet to see details of how or when this will work and where these homes are located.
Some developers have also launched rent-to-buy schemes, which can provide another form of assurance as buyers can effectively try out the home for a period of two years and walk away after that time if they are not happy.
The Government is also believed to be considering some form of assurance to buyers of non-NAMA homes. After all, the Government might be accused of distorting the market if a government scheme was not available for second-hand homes as well as those being sold by Government-owned banks such as AIB, EBS and Irish Nationwide.
Two concerned citizens have also devised a plan that they feel would be more equitable and would not need to last as long as NAMA's five-year proposals, and they are hoping the Government would introduce their plan for the wider market. The duo's Irish Residential Value Protection Scheme would make a payout to the buyer if the value of their home fell 15pc within three years of the purchase. For example, take a house that is bought for €250,000. In this case, a 15pc fall would represent a drop of €37,500 in the value of the property.
The Government would pay for 40pc of this risk or €15,000, the vendor/ developer 37pc or €13,875 towards the risk, the bank 13pc or €4,875, and the purchaser 10pc or €3,750.
The Government would be a winner because it would benefit in tax, stamp duty and other taxes generated from an active property market.
The vendor, who would pay from the date of the sale towards the scheme, would benefit by selling the property. The buyer would spread their payments over 36 months and would receive them back if prices didn't fall in that period.
If the value does fall, then the purchaser's payments would be diverted to the Government. The banks would benefit from having the use of the buyer's payments, interest free, for the 36 months, and would also benefit from getting the mortgage business. The scheme would also help to reduce the banks' exposure to negative equity.
Buyers could opt out of their monthly payments at any time during the three years and then the other parties would no longer carry the risk.
Some might see this as an attempt to stop the market reaching a 'true' bottom. On the other hand, the duo believe that prices are already close to the bottom at current levels. "The problem is that buyers are currently holding off and this may lead to an over correction as prices fall below a true bottom," one of them argues.
Their proposals differ from the IFG scheme where the seller carries the risk of a fall in price. With IFG, the seller will defer receipt of a portion of the purchase price until an agreed time period, between one and four years, has passed. The buyer's solicitor will place the amount protected into a trust account with IFG.
After the agreed time period has passed, the trustee will independently determine if the seller qualifies to receive the outstanding payment or if it should be reimbursed to the buyer. IFG will determine the distribution based on changes in an approved independent property price index.
The third option of rent-to-buy schemes have not proved popular up to now because buyers had walked away when prices fell below the agreed price. But now that prices have fallen by more than 60pc in some cases, there is a lower risk that these prices will suffer further sharp falls. Hence the buyers will be less likely to walk away from the thousands they spend on rent, which they can recoup when they buy.
These moves suggest some people believe that the market is close to bottom.