Falling property prices are encouraging investors to consider coming back into the market but buyers should look hard before they leap

WITH TWO-BED apartments now for sale in Dublin’s city centre for as little as €140,000, for those not languishing in negative equity or crippled by salary cuts, the possibility of property investing is once again coming to the fore.

Indeed a recent survey indicated that a third of people would now consider investing in property, although statistics show that while many people may be considering dipping their toes into the investment waters, few are actually doing so. In the second quarter of 2010 for example, investment property mortgages represented just 3.5 per cent of total mortgage lending according to IBF/PwC statistics, down from about 20 per cent in 2008, with just 284 investment mortgages drawn down.

While caution is obviously playing a part in the lack of investment decisions, the difficulties in obtaining finance in the current environment is also a factor. According to Karl Deeter, operations director with Irish Mortgage Brokers, it is now “incredibly difficult to get an investment mortgage”.

So what do you need to know before you make that leap?

1 DON’T COUNT ON CHEAP CREDIT

While interest rates in Europe are stuck for the time being at 1 per cent, new buy-to-let investors should not expect to get credit at anywhere near this rate, with banks having shifted rates upward repeatedly since the property bubble first burst. Back in the boom years, investors could expect to get tracker mortgages of about ECB +1.35 per cent, but the differential between residential lending rates and investment rates, has since widened considerably.

According to Frank Conway, a director with Irish Mortgage Corporation, in the past investors could expect a difference of about 30 basis points between residential and investment mortgages, but this is now as high as 150-200, with investment rates now well over 4 per cent. As Bank of Ireland’ recent 0.45 per cent increase in its investment rates demonstrated, these rates might continue to rise.

2 NOT EVERY BANK IS IN THE MARKET FOR MORTGAGES

If you have previously invested in property, you may recall the eagerness with which banks knocked on your door, delighted to lend you money. Much has changed since the boom years however and many lending institutions, such as Permanent TSB, are now simply excusing themselves from lending to property investors. Even those who are lending are extremely selective.

“Even when they have criteria, in practice they are finding ways not to lend,” says Deeter, highlighting the case of a recent client whose mortgage application was refused on the grounds that he had saved his deposit in a current account rather than a specific savings account.

3 DON’T BE IN A HURRY

The days of calling your bank manager to get a fast-track loan approval are long gone, and according to Deeter, approvals are now taking two weeks on average.

“It’s become harder over time to get the same thing done,” he says.

4 YOU’LL NEED A SIZEABLE DEPOSIT

With the days of 100 per cent mortgages long gone, investors are now required to come up with significant down-payments towards the cost of properties. In general, you should expect to have a deposit of at least 25 per cent of the overall price. So, for a €200,000 property, you will need a lump-sum of €37,500. However, according to Deeter, it is only the “very strong applicants” who are getting LTVs of 75 per cent.

“Someone who could afford the property even if it wasn’t rented – that’s the kind of person who is getting a mortgage at the moment,” he says. Otherwise, you will be looking at getting funding of only 50 per cent.

Banks have also gotten stricter with regards to valuations. Irish Nationwide for example, requires a new valuation report if the existing report is older than six months.

5 STRESS TESTS ARE ESSENTIAL

With interest rates “only going one way”, Deeter recommends that investors stress test their repayments at rates of up to 7 per cent. So for a €250,000 mortgage, you should have about €1,700 a month to hand.

6 PROPERTY MAY BE CHEAPER – BUT FINANCING IT ISN’T

While property prices may have fallen by as much as 50 per cent, the increase in the costs of financing means that a property purchase may not offer as much value as it first appears.

“Banks are essentially capturing any value in the market,” notes Deeter. For example, if you were to purchase a €400,000 property three years ago on a 2 per cent tracker rate over 30 years, you would have been looking at repayments of about €1,478 a month.

Now you may be able to buy that same property for €300,000 but on a 4.2 per cent rate, your repayments will be €1,467, so the property has actually only become €11 cheaper a month “You need to look at property from a cash flow, rather than capital appreciation, perspective,” advises Deeter.

7 RELEASING EQUITY MAY NO LONGER BE AN OPTION

With thousands of properties purchased all over the world, from the waterways of Leitrim to Dubai’s “World” project, on the back of equity which had been built up in residential properties in Ireland, refinancing your mortgage to facilitate the purchase of another property was once very much the done thing.

Not any more, however. With thousands of homeowners stuck in negative equity, many will find they have no value built up in their home which they can release to fund a new purchase. For those who can, the changed banking environment may mean that refinancing isn’t an option. “Banks mightn’t be too interested because you’re just borrowing the deposit,” notes Deeter.

In years gone by, a common technique to bring down the cost of financing used by property investors who no longer had outstanding mortgages on their own home, was to take out a new mortgage, at a cheaper residential rate, and use this cash to purchase an investment property. However, “no-one will do that now,” notes Deeter.

8 INTEREST ONLY IS FOR A LIMITED PERIOD

With only the most credit worthy of investors getting mortgages, interest only is “almost a no go area at the moment” notes Conway. “You have to be able to show you can pay off capital and interest,” he says.

If you do manage to secure an interest-only loan, remember that it is only designed to last for a specified time-scale, as investors with Permanent TSB are now discovering.

The bank is looking to move investors off interest only to full repayment loans, which is placing many investors under severe financial pressure as they are not making enough rent to cover the new repayments.

“Someone who could afford the property even if it wasn’t rented – that’s the kind of person who is getting a mortgage at the moment. Otherwise, you will be looking at getting funding of only 50 per cent.

The most comprehensive report on the Irish property market is out and it evidences the total destruction of wealth of a certain generation. According to the wonderfully detailed work done by Ronan Lyons at Daft.ie, asking prices countrywide fell by just over 4pc in the second three months of the year — a slightly larger fall than in the first quarter.

The average asking price nationally in the second quarter of 2010 was just over €224,000 — 36pc below its 2007 peak. The acceleration in price falls will come as little surprise, but the question now is how can a generation whose balance sheet has been so totally vaporised ever start spending again?

Back in 2007, I wrote a book called ‘The Generation Game’, which focused on how the generation between the ages of 30 and 40, who had got into the housing market via huge mortgages, would be financially eviscerated. This group was termed “the juggling generation” because they were trying to juggle being good parents and good workers, while still paying these huge mortgages.

The book focused on a generational gap between these commuter-workers and the older generation, many of whom had become accidental millionaires as a result of an unexpected windfall from the housing market.

Obviously, negative equity would swing against the jugglers in the predicted bust, much as positive equity had enriched the accidental millionaires in the boom. In the book and the related documentary, the housing boom was painted broadly as a massive transfer of wealth from one generation to another.

The figures from daft.ie show just how extreme the negative equity trap now is. Prices in Meath, for example, have fallen by 38.4pc from peak to trough.

The figure for Louth is over 40pc; Kildare’s is 36pc and Wicklow’s 36pc. These were the counties that were growing fastest during the boom.

The question is, where next for the property market?

Are we at the bottom or is there yet more negative news in the pipeline?

During the evolution of a housing crash, there comes a time when the fall in prices tells us less than other indicators, such as the time it takes to sell, the total stock of houses in the market or the amount of houses coming on to the market.

The time it takes to sell gives an indication of how realistic the asking prices actually are. All around the country, estate agents’ windows are full of houses — but if they are not selling, then the price asked is of limited value in determining the next phase of the market.

So, for example, the average time to sell is four months in Dublin, whereas it is up to a year in Connacht and 10 months in Munster.

The suggestion here is that prices in Dublin — having fallen by 50pc in the city centre since the peak — are not at the bottom yet but might be getting close.

In contrast, the rest of the country has a long way to fall.

The other concern, given what we know about unemployment and negative equity, is how many of the sales are forced sales, rather than voluntary sales? How much of the new stock reflects bankruptcy, rather than people thinking: “Okay, now I might put the house on the market because I think there is more activity”?

In terms of where prices go, it is now crucial to understand the change in mass psychology.

A property crash normally ushers in a period where people choose to rent over buying, particularly with so much choice out there and with so much uncertainty about job prospects.

Furthermore, to assess whether a house is good value or not, the prospective buyer has to do some basic maths to see why he should buy. And whether we like it or not, for a housing market like Ireland’s to clear, investors need to come back into the game.

Let’s look at it from the perspective of the investor, by looking at the return to buying houses now through the prism of yield. What percentage yield does an investor have to get to make it worthwhile investing in bricks and mortar for rent?

LET’S do the sums. With government bonds yielding more than 5pc, it’s fair to suggest that an investor would need to get a yield of at least 7pc from housing. So taking the average house price at €220,000 and the average rent at €863 per month, we see that the investor gets — with these prices and these rents — a gross yield of just over 4pc. This is before he takes into account his funding costs. Why would he bother getting into the market just yet?

In order to make a 7pc yield at the present average rent, the average price of houses would have to fall to €135,620. This suggests a huge further drop in average house prices here.

This is quite stark reading, particularly when you consider that house prices overshoot, both on the upside and on the downside.

So even without the overshooting process, the investor would be crazy to get into the market at these prices. So too, therefore, would the renter be mad to buy the house that he is in at these prices.

Prices would have to fall by another 30pc for the renter in the commuter belt to choose buying over renting.

This is the central inconsistency which exacerbates the generation trap in Ireland. For the housing market to clear, prices have to fall much further; the basic maths can’t be fudged. But when this happens, the negative-equity trap will tighten on the recent home-buying generation, whose only crime is that they were born in the wrong decade.

So for Ireland to recover, there will have to be a ‘lost generation’ who will be largely shut out of whatever economic future this country experiences.

This generation trap is the poisonous legacy of the Ahern-Cowen years.

“A lot done, a lot more to do.”

At least one lender has begun to offer unsecured ‘negative equity’ loans to mortgage holders forced to sell their house in negative equity, a prominent mortgage broker has claimed.

Frank Conway, director of Irish Mortgage Corporation, said he was aware of one case of a couple who needed to sell their home and were offered an unsecured loan for the difference between the property’s selling price and the outstanding balance on the mortgage.

He said that the lender was prepared to offer a €140,000 personal loan at 1.1 per cent over the ECB rate, which was the tracker mortgage rate the couple were on for their mortgage.

‘‘The property owners owed about €380,000 on their mortgage but were unsure of the value of the property,” Conway said. ‘‘They were hopeful they could achieve €240,000 but fearful they would only get €210,000.The lender offered a €140,000 personal loan. Since the couple was only three years into their 35-year mortgage, the lender was prepared to offer the couple the same term of 32 years.”

No mortgage lender contacted by The Sunday Business Post said that they were offering negative equity loans. AIB, Bank of Ireland, National Irish Bank and EBS all said they would not issue loans in these circumstances.

A spokeswoman for Ulster Bank said that it would, in theory, lend any amount to customers, providing they can meet its conditions, but it has not yet issued a loan in these circumstances.

Conway said the only condition imposed by the bank was that the separating couple were asked to take on the negative equity loan jointly.

‘‘While not ideal, this appears to be the least bad of a bad lot for the couple,” Conway said. ‘‘Not only had their marriage broken down, the value of their home had also fallen significantly in the three years since they first purchased the property. Sharing a €140,000 negative equity loan jointly was tough medicine but in the words of the consumer, it was a ‘whole lot sweeter than sharing a house’”.

Average national house prices in Ireland fell by 1.7% in the 2nd Quarter of 2010 according to the permanent tsb / ESRI House Price Index Quarterly Review published today. This is the lowest quarterly reduction since the second Quarter of 2008 [April – June inclusive] and compares to a reduction in Quarter 1 this year of 4.8% and a reduction of 3.9% in Quarter 2 of last year [2009].

The reduction in average national house prices in the first six months of this year was 6.4%.  This compares to a fall of 8.1% in the first six months of last year [2009].  The year on year decline (Quarter 2, 2009 to Quarter 2, 2010) was 17.0% and compares to a reduction of 18.9% year on year to Quarter 1 2010.  The average price for a house nationally in Quarter 2, 2010 was €201,364, compared with €242,593 in Quarter 2 2009 and €311,078 at their peak.  National prices have fallen 35% since the price peak at the end of 2006.

Dublin V Rest of Country

Dublin house prices fell by 3.5% in the 2nd Quarter of 2010. This compares to a reduction in 1st Quarter 2010 of 10.3% and a reduction of 7.5% in Quarter 4 2009.

The reduction in the first six months of 2010 was 13.5%, and compares to -12.2% in the same period 2009.  The year on year decline in Dublin (Quarter 2 2009 to Quarter 2 2010) was 24.6% and compares to a reduction of 24.5% year on year to Quarter 1 2010.  The average price for a Dublin house in Quarter 2 2010 was €242,000, compared with €250,872 in Quarter 1 2010.

House prices Outside Dublin fell by 0.8% in the 2nd Quarter of 2010. This compares to a reduction in Quarter 1 2010 of 3.5% and a reduction of 6.2% in Quarter 4 2009.

The reduction in the first six months of 2010 was 4.3%, and compares to -6.0% in the same period 2009.  The year on year decline Outside Dublin (Quarter 2 2009 to Quarter 2 2010) was 14.0% and compares to a reduction of 16.2% year on year to Quarter 1 2010.  The average price for a house Outside Dublin in Quarter 2 2010 was €181,820, compared with €183,309 in Quarter 1 2010.

Commenting on the figures Niall O’ Grady, General Manager with permanent tsb said “While prices continue to fall at different levels in Dublin versus the rest of the country, this reduction in Quarter 2 is the lowest recorded quarterly fall in almost two years.  This may indicate that prices are starting to find a more sustainable level after almost three and a half years of decline”.

KBC BANK Ireland has become the latest lending institution to push up mortgage rates for homeowners, adding 0.20 per cent to its standard variable rate to bring it up to 3.85 per cent.

The move, which will hit 27,000 borrowers, means that a homeowner with a €300,000 mortgage over 30 years will now see their monthly repayments increase by €34, up to € 1,406. The bank previously raised its variable rate by 0.41 per cent in April.

KBC’s decision, which is effective as of September 1st, follows similar rate rises from Permanent TSB, ESB, Bank of Ireland and AIB over recent weeks.

According to John Delaney, director of the homeloans division at the bank, it is the cost of the bank’s funding which is driving up interest rates for homeowners.

“The decision to increase our standard variable rate reflects the continuing high cost of attracting funds to support the mortgage market in Ireland.”

Last week KBC reported an increase in arrears in the second quarter of the year and the latest rate rise might push more homeowners on to dangerous ground.

NEW PROPOSALS to strengthen the rights of mortgage-holders in arrears have been widely welcomed.

Legal rights organisation Flac gave the proposals from the Financial Regulator a cautious welcome, saying they would give borrowers a structured process for dealing with banks and building societies when in difficulty.

Director general Noeline Blackwell criticised the lack of independent oversight of the revised code of conduct.

“It is still very much an internal process which allows the lender to determine what is a suitable mortgage repayment package. The only external recourse will be a complaint to the Financial Services Ombudsman.”

Flac also called for a wider, holistic approach to indebtedness. “Callers to our legal information line and to our network of centres are telling us that they are under pressure from many different creditors, and unable to deal with them all,” Ms Blackwell said.

The Irish Banking Federation (IBF) said its members were committed to working with customers in difficulty.

It pointed to a number of initiatives already in place in addition to the existing statutory Code of Conduct on Mortgage Arrears, including the IBF pledge on home repossession and a joint protocol on debt management.

“The forbearance policies and practices adopted by mainstream institutions are helping tens of thousands of consumers to work with their lenders in managing their mortgage and other debt repayments,” it said in a statement.

Insurance brokers association PIBA said there were some issues it would address, including a definition of arrears and an adjustment in what constitutes a family home

“We would like to see that arrears would begin to be counted only after the first 30 days from the missed payment has elapsed,” PIBA mortgage services director Rachel Doyle.

Green Party enterprise spokesman Senator Mark Dearey said the proposals would come as a relief to struggling homeowners.

“The Irish people stood by the banks in their hour of need for the good of the wider economy. Now it’s time for the banks to step up to the plate and assist those in need,” he said.

Fine Gael’s housing spokesman Terence Flanagan said the extension of the one-year moratorium on home repossessions was “fair” to honest homeowners who entered the mortgage arrears resolution process with their lender.

“We are facing an unprecedented repossession crisis unless action is taken by the Financial Regulator and the Government,” Mr Flanagan said.

“That is why I welcome the publication of new mortgage arrears resolution proposals which will see a continuing one-year moratorium on repossessions once home-owners are meeting commitments agreed with their lender.”

When the European Central Bank this week kept its key interest rate at one per cent, worried mortgage holders who are struggling to meet their repayments breathed a collective sigh of relief across euro land. Except in Ireland, that is. In Fair Eire, allegedly the land of a thousand welcomes, mortgage interest rates are actually going up.

Economists say the main message from the ECB monthly press conference last Thursday was that the first hike in official rates is a relatively comfortable amount of time away — probably no earlier than late 2011. That gives most people space to put bread on the table, squirrel away some extra cash and pay off their credit cards.

Not so here, however, where public sector workers have seen their wages slashed and, as unemployment rises in the private sector, the public has watched helplessly as billions of euro of taxpayers’ money has been used to prop up the banks.

Billions more of unpaid property developer loans are being transferred to the nation’s bad bank, Nama.

There is good reason why the leprechaun is the national symbol here. He is a chancer that will fleece you as soon as your back is turned. He hops about, telling yarns about economic booms and pots of gold at the end of rainbows.

Speaking of which, there’s been quite a few showers here of late, while Europe enjoys sunshine. No wonder Irish eyes are frowning.

Bank of Ireland will raise its standard variable mortgage rate by 45 basis points to 3.49 per cent on Tuesday. It will impact around 44,000 residential mortgage customers. The bank has already been recapitalised by the State to the tune of €3.5bn and is transferring billions of euros in loans to Nama.

The bank’s latest rate hikes for its standard variable rate and other products are the second round of rate increases this year, but management says it won’t increase mortgage rates again this year unless the European Central Bank increases its key rates.

This hasn’t stopped it in the past — but it’s a small mercy for householders nevertheless.

“We’re paying more to customers for deposits than we are receiving for mortgages,” the bank’s director of consumer lending Brendan Nevin said. He added: “While any increase is regrettable, we have no choice but to make this move to ensure we remain open for business and continue to support our customers and the Irish economy.”

Regrets, they’ve had a few. The notion that Irish banks are all about supporting the Irish economy is a bit like saying that icebergs are all about supporting the Titanic.

Over-lending by banks here fuelled a dangerously overheating construction sector during the Celtic Tiger years that helped to effectively sink this once-booming economy.

Ciaran Lynch, spokesman on housing for the Labour Party, was not amused. He said: “These increases are unjustifiable when the underlying ECB rate has remained static. Banks are hell-bent on improving their revenue streams and are gouging ordinary families.”

Finance Minister Brian Lenihan said he couldn’t interfere with bank rate policies.

The hikes don’t end there. Last Tuesday, mortgage lender and life insurer Irish Life and Permanent raised its standard variable mortgage interest rate by 50 basis points to 4.19 per cent–its third hike in 12 months. Its interest rate hikes affect about 80,000 mortgage customers. Again, higher funding costs, rather than bad management, were to blame.

And it’s not over yet. Allied Irish Banks’ managing director Colm Doherty said last week, when he announced the bank’s first-half results — a net loss of €1.73bn — that AIB will also likely raise its variable mortgage rate by 50 basis points. AIB also received €3.5bn from the Government and the taxpayer gets it in the kisser. Again.

“I think, reluctantly, we’re going to follow all the other banks in increasing interest rates,” Doherty said.

He added: “The price we have to pay for deposits means we are losing money on mortgages. It’s unsustainable and if we don’t do something, we won’t be able to continue to lend to the mortgage market.”

And whose fault is that?

The EBS Building Society — which also received State support — increased its standard variable interest rate by 60 basis points on August 1, the third time this year it has hiked rates.

The EBS said: “Unfortunately, as there has been no relief in the cost of funds to EBS, this further increase is required.” And no relief for customers either …

The Government is setting up a five-year plan to help mortgage holders in trouble to agree new repayment terms with banks and building societies, a situation that can only be exacerbated by an environment with rising interest rates and a country whose unemployment that is creeping closer to 14 per cent.

It would be hard to find a worse time to hike rates.

Making the situation worse, more than 85 per cent of mortgages here are variable, according to the European Mortgage Federation, although others point out that this figure includes mortgages that track ECB rates. The Irish Mortgage Corporation says that makes Ireland one of the more “sensitive” mortgage markets in Europe.

Fine Gael TD Bernard Allen said: “It’s vital that action is taken now to force the banks to make repossession the absolute last resort.

“If this does not happen, we could be facing a repossession disaster in this country, which could have major implications for any fragile economic recovery.”

Or it could lead to headlines like: “Dermo fights for dis digs.” Dermot Ivers last week threatened to use his own digger to bulldoze his house if sheriffs tried to repossess it. He boarded up the downstairs windows and barricaded himself upstairs.

Neighbours in the Co Wicklow town of Arklow cheered him on.

The banks lent aggressively to developers during the good times. The property market went belly up and the banks were bailed out by the State … by taxpayers like Mr Ivers. Now, the same banks are hiking interest rates when the ECB doesn’t.

For many homeowners already steeped in negative equity, pay cuts and job losses, it’s the final insult.

A survey carried out by the Central Bank has found that banks tightened up on lending for mortgages in the second quarter of this year, while lending standards for businesses remained unchanged from the first quarter.

Tighter credit standards usually mean higher interest rates, or more restrictive terms and conditions for loans.

According to the Central Bank, the five Irish banks which took part in the survey reported that demand for credit from firms and households weakened in all categories during the three months.

In contrast to previous surveys, banks found it more difficult to gain access to funds on international markets.

The Central Bank said Irish banks saw little change in the situation in the third quarter of this year.

The Irish survey feeds into a eurozone survey compiled by the European Central Bank, which also showed that more banks tightened their lending rules in the second quarter, though mortgage lending showed a strong increase in June.