Negative equity to end next year


Negative equity to end next year

ESRI: New ‘wealth effect’ to lead to higher spending

Stock photo
Stock photo

Negative equity will finally end next year, sparking a new “wealth effect” and increasing consumer spending on luxury goods.

The surge in spending is expected to be fuelled by borrowers relieved of the burden of negative equity while making mortgage repayments.

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Negative equity occurs when the value of an asset used to secure a loan is less than the outstanding balance on the loan.

At the height of the economic crash, 230,000 homes were in negative equity. This dropped to 57,000 by late 2017, according to the latest figures available from the Central Bank

Kieran McQuinn of the ESRI. Photo: INMKieran McQuinn of the ESRI. Photo: INM

Kieran McQuinn of the ESRI. Photo: INM

Now three property experts, including the Economic and Social Research Institute (ESRI), have told the Sunday Independent they believe there will be no more homeowners in negative equity by the second half of next year.

And the ESRI, one of the State’s leading think-tanks, said the ending of negative equity would boost confidence in the economy and create a “wealth effect”.

ESRI research professor Kieran McQuinn said this would lead to families loosening the purse strings and create a feeling that they have more disposable income.

This would encourage families to splash out on luxury items such as cars and holidays, he said.

Property expert David Duffy, director of IBEC’s Property Industry Ireland, said homeowners should emerge out of negative equity by the end of next year: “This is due to a combination of rising house prices and households making their mortgage repayments, and so reducing their debt,” he said.

Mr Duffy managed the well-known Permanent TSB house price index for a number of years and carried out research for the ESRI. The prediction has also been supported by Trinity College economist Ronan Lyons.

“If people perceive that the value of their property is increasing, that leads them to increase their levels of consumption in the economy. That generates economic activity,” Mr McQuinn told the Sunday Independent.


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“If the value of your property is increasing, you perceive there to be a wealth effect and that leads to increasing your consumption of goods and services in the economy.”

As a result, some borrowers whose loans are in arrears will feel buoyed by the increased value of their property and work towards addressing their personal debt.

Negative equity is seen as a driver of mortgage arrears. Mr McQuinn said this wealth effect would therefore also have a positive impact on banks.

“If you perceive yourself to be in high levels of negative equity, you may not be as enthusiastic about paying your mortgage as somebody who is not in negative equity,” he said.

“Therefore, if the degree of negative equity is declining in the economy, it should help, considerably, the issue of mortgage arrears. We still have people in long-term mortgage arrears so it should help in that sense.

“It will help people address the arrears and have a knock-on effect on the banking sector in terms of getting the number of long-term loans down as it is still relatively high compared to other European countries.”

He said housing demand outstripping supply was boosting values for homeowners in negative equity.

“Most experts estimate structural demand to be in the region of 30,000 to 35,000 units per annum. This year, you are talking about housing supply in the region of 20,000 units [coming on stream].

“As long as you have that imbalance, you are going to have upward pressure in terms of housing demand and that will put pressure on prices,” Mr McQuinn said.

“People are paying down their mortgages but the value of their property is going up as well every day. Between those two factors, that should alleviate negative equity quite a bit,” he added.

In the midst of the recession in late 2011, about 230,000 homes were in negative equity. This had dropped to 57,000 by late 2017, according to the latest figures available from the Central Bank.

Experts say this is likely to be lower today, given the house price growth of 2018. There were 66,000 buy-to-let properties in negative equity in late 2011 and this has since fallen to fewer than 16,000.

The latest figures from property website show average national sale prices have increased from €181,924 at the end of 2011 to €253,925 by last December – a rise of 40pc.

Many homeowners in negative equity have been unable to sell their homes in recent years because the proceeds from any sale would not have cleared their mortgage. This forced many to stay in properties which they bought during the Celtic Tiger boom – even if their circumstances had changed and they wished to move house.

The number of loans in arrears has fallen steadily in recent years.

Central Bank figures show 63,402 loans were in arrears of more than 90 days in the first half of last year, down from 72,610 for the corresponding period a year earlier.

Mr McQuinn said these figures will be boosted further by households emerging from negative equity.

Housing economist Ronan Lyons warned it may take longer for owners of investment properties to emerge out of negative equity. Those who bought smaller units outside of the major cities when prices peaked may also take slightly longer to recover.

However, the owners of bigger units and traditional starter homes would see major gains next year, he said.

“Prices are 25pc to 30pc off their peak,” Mr Lyons said.

“The distinction worth making is that the average is not true for everyone. Also, in particular, the bigger the property, the less of a fall they will have seen relative to their peak.

“One beds are probably 50pc below, whereas five beds are probably 20pc below their peak [values].

“If you have been paying back your mortgage and you are 13 years in, even with a small deposit, you should be roughly breaking even.

“Somebody who bought a three-bed home at the height of the bubble with maybe only a 5pc deposit but paying back their mortgage, that person, the way things are going, by paying down their mortgage and [property] values going up, will emerge from negative equity.

“The person who bought a one-bedroom apartment outside of the main cities with a 100pc mortgage, I think they are nowhere near emerging yet.”

Sunday Independent


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