Purchasing now proving as cheap as renting
Decisions to buy and sell property are as much emotional as they are logical
Something unusual happened on Thursday, May 23. The Central Bank released a report entitled: 'Economic Letter – Vol. 2013, No 2. Do households with debt problems spend less?'
Now that of itself is not unusual. What is atypical however is that the report appears to have gone largely unreported. On the day the Governor of the Central Bank, Patrick Honohan, delivered a speech to a banking conference. He was quoted liberally the following day saying that mortgage lenders need to address non-performing debt "more energetically."
Okay, fair enough, but what did the Central Bank report say? It concluded that factors other than "just income and debt burden play a role" in why people spend less. It identified the issue of "housing wealth effect (negative equity) on consumption" and concluded that the solution to the mortgage arrears problem "will not only deliver financial stability benefits, but will also have a significant positive impact on the macroeconomy."
The study highlights "the risk of unemployment and negative equity has a much larger effect on aggregate consumption than actual negative equity." It also quotes findings that the primary impact of negative equity on the economy is through consumption, and that a rise in house prices would help.
What this is saying to us is that anxiety about the possible risks to our livelihood and the value of our assets as reflected in the economic situation has a far wider economic impact than the understandable distress of those in mortgage arrears. It has a psychological impact engendering fear about the future. We are not simply rational beings making rational and logical choices on the basis of known facts. Decisions to buy and sell are as much emotional as they are logical.
Let's look at the figures and see what is really happening in terms of house prices, affordability and demand. The daft.ie house price report for the first quarter of this year showed a 6.6pc annual fall in prices, the slowest rate of decline since the second quarter of 2008. A year ago prices were declining at a rate of 17.7pc per year. Asking prices in Dublin in the first quarter were actually 0.5pc higher than a year previously, the first time since early 2007 that this has happened.
With almost 900 member firms throughout Ireland, PIBA regularly pulses members for their views on the state of play in the property market. Our members have been reporting for some considerable time an unmet need for mortgages with one in every two brokers experiencing an increase in demand.
This they say is being driven primarily by consumers believing that property prices are close to or at the bottom of the market and the fact that it is as cheap to buy as rent. Using house prices and rental figures from recent daft.ie reports, a three-bed semi in Terenure, Dublin 6 could cost over €500 less a month by repaying a mortgage instead of paying rent.
Our latest survey for the first quarter of 2013 reported a surge in demand for mortgages of 13pc.
Financial brokers have long been reporting a serious unwillingness to lend as one of the primary impediments to people taking out mortgages, although there has been a slight easing in the situation of late.
On Tuesday of this week the Irish Banking Federation Housing Market Monitor reported a 14pc increase in the number of property transactions in the first quarter of 2013. Economist Dermot O'Leary is quoted thus in the IBF release: "In contrast to the fall in mortgages drawn down, the number of property transactions increased by 14pc in Q 1. While one interpretation of this may be that credit is not available in the banking system, another is that buyers are using cash to invest in the Irish property market given the superior returns relative to ever-shrinking deposit rates in the Irish banks."
More likely I think that both interpretations are correct. Let's be frank, despite the slight easing in mortgage lending and the demand in certain sectors the situation is still in crisis territory.
And consumers, battered by negative equity and fears of further austerity measures, are in lock down mode. The nebulous but all-important concept of confidence remains elusive.
The Central Bank and the Government must ensure that the banks deal with the arrears and debt crisis far more urgently than heretofore. Unless action is taken to sort out the banks, recapitalising, and writing down debt where appropriate, Ireland could be facing a Japanese style crash lasting a decade or longer.
Rachel Doyle is chief operations officer, Professional Insurance Brokers Association