None of these measures are earth-shattering or complicated but, implemented together, they are game-changers and can take Ireland from property disaster to world class, writes BILL NOWLAN
WHAT WENT so wrong in property in the noughties that the market succeeded in blowing up the entire economy?
The reality is that those who were supposed to be in control of the levers of power either did not receive the signals or they ignored them. From 2002, petrol was thrown on a roaring fire by government action, or lack of action.
But you cannot do away with the property market because it is wonderfully creative in providing homes, commercial premises and infrastructure at little or no cost to government and usually with significant tax spin-off to the Exchequer.
Basic government structures are required for any property market to exist: the rule of law; enforceable contracts; a land registration system. But in a modern urban society it goes further than basics because, in the interest of the common good, governments have to become involved in the way markets operate – and rightly so as markets are far from perfect.
Over the past 30 years, the degree of market intervention by Irish governments and in advanced societies has increased significantly. We have become a sophisticated society with sophisticated regulatory systems.
For example, our planning legislation exists to control and plan land use, we have construction regulations to impose quality control in new and existing buildings, and so on.
However, greater involvement in controlling anything – be it a car, airplane or an economy – requires the installing of feedback mechanisms and related response actions to give optimum performance. It requires informed and empowered people to interpret the information and fine-tune performance.
Such management systems in property were, are still are, missing in Ireland. The principal missing ingredient is, firstly, accurate and timely information systems and, secondly, structures to act on that information.
The reality is that no State department or agency has responsibility for the property industry and, even worse, no department has any real insight into what is happening on the strategic or month-to-month, or even year-to-year, basis in what is one of the biggest national employers and tax generators.
No State department employs a property economist or a property market researcher. There is only one part-time practising property economist in the ESRI. If one looks at the Department of Agriculture, which oversees a far smaller industry than property, it has a dedicated senior minister and nearly as many civil servants as full-time farmers.
There will always be property cycles and government must manage the economy having regard to these cycles. At the beginning of the cycle, usually coming out of a recession, it is acceptable (and often desirable) to pump-prime the market, both at the supply and at the demand side.
However, as the recovery progresses, the pump-priming incentives should be withdrawn and as supply starts to overtake demand, the brakes should be applied. This should all be done in a way that does not create scarcity or excessively drive up prices.
This would not be popular politically, but as the governor of the Central Bank Prof Patrick Honohan said recently: “Part of the role of government is to take away the punch bowl when the party begins to swing.”
The then government’s response up to about 2001/2002 was exemplary, firstly with the IFSC-type incentives and, secondly, the two reports by Peter Bacon which were fine pieces of work of analysing an overheating market and recommending actions of cutting back tax allowances and investing in infrastructure. But after initially implementing the Bacon recommendations, which cooled the market, the then government abandoned all attempts to apply the breaks and made the matter worse by introducing further tax allowances and permitting 100 per cent mortgages.
Politicians and policymakers try to defend themselves by pointing out the mistakes of other countries such as Iceland. This is a cover-up because, firstly, no other country had such a big bubble as Ireland, with a top-to-bottom collapse in value of 60 per cent-plus and, secondly, many other countries have had only minor adjustment to the worldwide banking collapse. Those countries with proper monitoring and control systems were least affected.
If we want to learn from our mistakes and from other economies, this is my formula of six steps to take Ireland from property disaster to a world-class property system (see panel).
None of these steps is earth-shattering or complicated but, implemented together, they are game-changers – they can take Ireland from property disaster to world class.
Do we go back to the same old formula that got us into trouble in the first place? The choice is with the Government.
There are little or no cash costs involved – only vision and commitment.
Bill Nowlan is managing partner of property asset management company WK Nowlan Associates. This article is based on an address he will deliver today at the 13th National Construction Conference on “The Government’s Role in the Property Market”. See wkn.ie
BUILDING BLOCKS FOR A BETTER FUTURE HOW TO FINE-TUNE THE PROPERTY MARKET
1 PROPERTY COUNCIL
Set up a property council of practising property experts with a small permanent secretariat to act as the State’s property advisory board reporting to government and key ministries, for example, the departments of environment and finance.Appointments to the council would follow a model such as An Bord Pleanála. Its role would be to:
(a) oversee the compilation of an annual state of the property industry assessment
(b) commission expert peer-reviewed research from bodies such as the ESRI
(c) advise government about policy and implementation on matters affecting the property industry.
The remit should include planning strategy; property taxation strategy, proposed legislation impacting on the property industry and property users; and the efficient use of State property.
The Central Bank should have access to the council in the same way as the Bank of England taps into a panel of property experts.
2 PROPERTY RESEARCH AND DATA ANALYSIS
Establish a special well-funded section of the ESRI focusing on property economics and urban issues. The brief would include reporting on supply/demand, price trends and bottlenecks; preparing ad-hoc reports commissioned by the property council and other government bodies including the planning authorities.3 PROPERTY SKILLS IN STATE DEPARTMENTS
Create property economic skill bases within the departments of the environment and finance to liaise with the property council and support the development of appropriate policy.4 COMPREHENSIVE PROPERTY DATABASE
Develop a full national property database with wall-to-wall information on property ownership including recent deals and availability – much more comprehensive than that currently introduced by our Property Services Regulatory Authority. Its data is a big improvement but far more specifics are required.The data should be similar to that in countries such as Singapore and the US.
The database should include planning and similar public sector information on a real-time basis.
This will move property decision-making to “evidence based” from “story based”.
5 DATABASE OF PROPERTY OWNED BY THE STATE
Progress the existing public sector reform plan commitment to develop a spatial (map-based) database of all State- and public sector-owned and leased property.Then amend the public sector reform plan to require that once the database is in place, a regularly updated business plan (to a pre-specified format) be drawn up for every State asset, with an obligation on the owning authority to dispose of all assets not required for service delivery within, say, five or seven years.
6 PROACTIVE APPROACH TO PLANNING PROCESS
Shift the emphasis in the planning process from being predominantly a regulatory “policing” process to an asset management process involving all property in their areas.Planning would have a proactive approach to the enhancement of the urban/rural environment, not only managing but influencing urban development and change. The mandate would include land acquisition ahead of new zoning and joint valuations with developers/landowners. There may also be a long-term role for Nama to morph into a national land authority with its huge land bank of development land.
Tuesday, October 30, 2012
Six easy steps to fix the property market - The Irish Times - Wed, Oct 24, 2012
Tuesday, October 16, 2012
First-time home buyers told to take €5,000 'deal of a lifetime' - Independent.ie
THE Government is warning young couples tempted to buy a house to act now -- or lose out on a €5,000-a-year "offer of a lifetime".
In last year's Budget, Finance Minister Michael Noonan announced a mortgage interest relief deal worth as much as €5,000 a year for first-time buyer couples.
However, the deal finishes at the end of this year, and a mortgage must be drawn down by December 31 for people to avail of the offer.
In an interview with the Irish Independent, junior finance minister Brian Hayes said the deal would not be extended in December's Budget, and buyers must act before the "train will have left the station".
"This is an offer of a lifetime, it won't come again," said Mr Hayes. "All our futures are based on getting the property market going again. People need to act fast to avail of it."
There have been calls to extend the scheme as the property market stabilises, but this is being firmly ruled out. The offer made little difference in the first half of the year, with only 2,858 properties sold to first-time buyers -- almost the exact same amount as the same period last year.
However, there may be an end-of-year spike, as those who were waiting for prices to drop are forced to move or lose out on the deal. But anyone tempted to buy only has weeks to go through the mortgage process, get approval and buy a house.
First-time buyers will get up to €5,000 a year for six years in mortgage interest relief if they buy this year and Mr Noonan said his scheme was aimed at breaking the "rainy-day" mentality among the under-35s.
Mr Hayes said there was evidence of increased mortgage transactions in recent months, and urged people who may already have mortgage approval to "transact" their mortgages in the coming months to avail of the offer.
"If they don't get on it now, the train will have left the station and it will be too late to act," the Dublin South West TD said. "People should be aware that it's coming to an end, and they should buy if they can."
Mr Hayes also said the banks had a role to play in ensuring that as many people as possible get their mortgages before the deadline is up.
Mr Noonan's proposals were designed at breathing some life into the property market, targeting those who were holding off buying a house.
Mortgage interest relief will not be available for anyone who buys a house from next year, and it will be fully abolished by 2018. But for those buying their first property this year, Mr Noonan increased the amount from 15pc to 25pc.
Psychological
The offer applies not just to the purchase of a house, but the "repair, development or improvement of a claimant's principal private residence".
"Even when they have a very good family income, I think the psychological effect is to save rather than invest," Mr Noonan when he unveiled the offer.
"Everybody has a rainy day mentality and I'm trying to break that."
Replying to Fianna Fail's Michael McGrath in the Dail recently, Mr Noonan also said the relief was "not confined to first-time buyers".
People who already own a property can also avail of a 15pc rate, up from 10pc, until the end of the year.
- Fiach Kelly Political Correspondent
Reforms will stop councillors overturning planning decisions - The Irish Times - Mon, Oct 15, 2012
STEPHEN COLLINS
THE POWER of councillors to overturn the decisions of planning officials will be abolished in a massive overhaul of local government to be announced tomorrow.
The biggest reform of local government since the current system was instituted in 1898 is due to be unveiled by the Minister for the Environment, Phil Hogan.
The decision to curtail the planning powers of local councillors has been taken in the light of evidence given to the Mahon tribunal regarding corruption in the planning process.
As part of the reform package, section 140 of the Local Government Act will be abolished so that councillors will no longer be allowed to direct officials in respect of planning functions.
The planning system has been bedevilled for decades by the ability of councillors to override planning decisions made by the professional planners in local authorities.
The practice has been more common in some counties than in others and has been the source of continuing controversy.
The Mahon tribunal, which investigated planning corruption in Dublin during the early 1990s, uncovered an elaborate system of payments and political donations made to councillors during the planning process.
It is believed the reforms to be announced tomorrow will take account of the tribunal recommendations and are designed to ensure that similar problems do not arise in the future.
It is also expected that the reform package will involve the abandonment of plans to have a directly elected mayor for the greater Dublin area similar to the office of London mayor.
The plan was the brainchild of the former minister for the environment and Green Party leader, John Gormley.
However, the Government parties have maintained since before taking office that the creation of a Dublin mayor would cost €8 million a year and was not justified in current economic circumstances.
The nub of the reform plan, which has already been flagged by Mr Hogan, will be a substantial cut in the number of councillors and a reduction in the number of local authorities.
It is expected that some local authorities will be merged, but it is not yet clear if smaller town councils will be abolished as originally planned.
The household charge introduced by Mr Hogan at the beginning of the year will be replaced by a fully fledged property tax next year but the Government remains committed to the principle that the money will be ring-fenced for use by local authorities.
Despite the controversy and the slow start to the collection process, the Department of the Environment now believes that the compliance rate will be close to 75 per cent by the end of the year.
Responsibility for collecting the property tax has been passed to the Revenue Commissioners, who will also be responsible for collecting the household charge arrears.
Speaking at the MacGill summer school in Glenties last July, the Minister said that he had been mandated by a “reforming Government to drag the system of local government into the 21st century” so that it delivered more to the community and put people first.
Cash buyers move in for kill as property going cheap - Independent.ie
CASH buyers are snapping up the majority of properties at auction, as they sell at prices 65pc lower than the peak of the housing market, a new study shows.
Experts said that distressed auction prices tend to be lower than those in the rest of the market because buyers are using cash and taking more risk.
Auctioned properties are going for prices 65pc lower than the peak of 2007, compared with a 50pc fall for the rest of the market, the Central Bank found.
And bargain-hunting buyers are generally paying with cash instead of relying on mortgages from banks.
The analysis of the Allsop Space auctions showed that Dublin properties achieved auction prices closer to market asking prices. However, houses and apartments outside of Dublin sold for less than the sellers were asking for, according to the study by economist Eoin O'Brien. Houses achieved relatively better prices than apartments.
The research, entitled 'Residential Property Auctions: What Do They Tell Us?' found that auction prices are also just over 20pc below current asking prices as compiled by the website Daft.ie.
The study took in 411 residential properties sold at seven Allsop Space auctions for a total of €52.6m.
Some 183 (45pc) were in Dublin. The majority (260) were sold on behalf of a receiver or liquidator.
Challenging
The most recent Allsop Space auction was held in Dublin's Shelbourne Hotel a week ago and made €17.8m, with 110 properties successfully sold.
Meanwhile, Taoiseach Enda Kenny said AIB's move to hike its variable mortgage rate by 0.5pc for a second time in months was necessary to avoid the State having to put more money into the bank.
He acknowledged that the 0.5pc rise, announced last week, would be "difficult and challenging for people". But he said the return of the bank to a sound independent footing was of greater need.
Speaking in the Dail, Mr Kenny said although the increase would be difficult for the 70,000 affected mortgage holders, unless the bank was profitable it would ultimately result in 2.1 million taxpayers having to give it further support.
"This is a commercial decision by a bank that the Government considers to be a pillar bank," Mr Kenny said.
- Charlie Weston Personal Finance Editor
€50m new town given the green light despite downturn - Independent.ie
AN IRISH council is to defy the recession and go ahead with developing a €50m new town.
Cork County Council has decided the development of the new town -- Monard -- is a long-term necessity.
Monard -- which will be located between Blackpool and Blarney -- will ultimately cost €50m, will house 12,500 people and have 5,000 new-build homes.
The scheme will also involve the new town getting its own railway station, a secondary school and four national schools and creches.
However, planning for the new town won't commence until 2015/2016 -- and council plans envisage development at Monard will not be completed until 2045.
The move came after the Government agreed in June 2010 to designate 1,000 acres at Monard to be a strategic development zone (SDZ).
Monard will be the first new town built in Cork -- and also the first SDZ outside greater Dublin.
Cork planning previously focused on developing major 'satellite' towns out of existing villages such as Douglas, Carrigaline and Ballincollig.
Cork County manager Martin Riordan said the Monard plan is part of a long-term strategic blueprint to focus population growth on areas of maximum public transport availability.
However, councillors have expressed concerns that the development will funnel vital resources from existing villages and towns.
- Ralph Riegel
Tuesday, October 9, 2012
The price register is a mixed blessing - Independent.ie
Vendors will now have to be more realistic about their asking prices for their homes following publication this week of the property price register. That applies not alone to those who ask much more than market value but also to those whose guide prices are too low.
Understandably most vendors usually want to get the best price possible for their home and traditionally most guide prices advertised for properties were pitched well above the likely selling price.
In the first few years of the market downturn, however, vendors were still in a mindset that had not acknowledged the pace at which prices were falling. Consequently those over-priced properties which were well above the new reality were left unsold for months if not years.
Then along came the Allsopspace auctions last year and the new reality began to sink home with vendors. Soon afterwards other agents began to learn from the Allsop experience and advised those vendors who wanted a relatively fast sale that they needed to slash their asking prices.
Not alone did these moves pay off in attracting viewers to the realistically priced homes but they also sparked increased competitive bidding so that properties in sought after areas have been selling for over their guide prices and recent surveys show Dublin price rises.
Furthermore in this week's Allsopspace auction a number of regional homes sold for well over their guide prices such as the three-bedroom terraced house at Tarmonbarry, Co Roscommon which sold for €141,000 or as much as 156pc over its €55,000 guide.
Just as future prospective buyers of adjoining properties will be able to use auction results to gauge their offers, the property price register too will provide prices from private treaty sales to guide prospective bids.
However, the property register comes with a health warning. Already the National Property Services Registration Authority (NPSRA) which compiles the register has acknowledged that it has made mistakes such as the instance of the two Limerick properties which the register indicated had been sold for millions when in fact they sold for only a fraction of that.
Nevertheless Tom Lynch, chief executive of the NPSRA, said that the mistakes applied to only about 20 of the thousands of prices shown.
But it is not just mistakes of which the site's users need to be wary. There can also be deals done by family members engaged in sales between each other at substantial discounts to the market values of adjoining properties.
In addition, the prices shown may reflect the much different condition of the properties.
For instance take Brookwood Crescent area in Artane, Dublin 5. Since the start of the year four houses sold on the crescent. One of these, Number 12 sold for €90,000 in January and another, Number 31, sold for €80,000 in August which on face value appears to be a price drop.
However a local agent also sold two other houses in August, and the register shows that these three bedroom houses sold for more than treble. Number 35 sold for €262,000 and number 36 sold for €285,000. The agent says that the register's prices for numbers 12 and 31 do not reflect the market reality for houses on the crescent.
So while the new price register is widely welcomed as helping to make market prices much more transparent, buyers still need to compare more than just prices when they are shopping around.
- Donal Buckley
Dublin property agent faces strike-off - The Irish Times - Fri, Oct 05, 2012
ASSURED PROPERTY Management Ltd, a prominent Dublin property management agent, has been listed for strike-off by the Companies Registration Office.
The Irish Times has learned that a number of apartment management companies have terminated their contracts with Assured in the last few weeks.
Property agents like Assured are appointed by apartment owners, through their management companies, to manage the communal areas of apartment complexes, including the organisation of refuse collection, gardening and general maintenance.
Winton Asset Management Company, the management company for Fitzwilliam Court apartment block in Ranelagh, wrote to the owners of the apartments in August seeking an immediate levy of €750 to allow the company to continue managing the property.
“The company is in a desperate financial situation,” the letter states, and payment is imperative “otherwise the electricity supply will stop, the block insurance will cease and the refuse collection will stop”.
The most recent accounts for Winton Asset Management Company, for the year ended March 2012, show that the company was owed €56,408 by Assured Property Management Ltd at the end of March 2012.
Winton made a provision of €46,522 for the sum in its 2011 accounts, and a further €9,886 in its 2012 year. It is continuing to “endeavour to recover the amount owed”, the accounts state.
Similarly, latest accounts for St Helens Wood Management Company, which runs St Helen’s Wood apartment complex on Booterstown Avenue, shows that the company was owed €70,224 by Assured Property Management at the end of March 2011.
The accounts for St Helens state that service charges from some property owners were paid directly into Assured Property Management’s accounts, rather than St Helens Wood Management Company and the “payments by the company to APM Ltd are in excess of the value of invoices”.
Assured Property Management was established in 2001, and is believed to have managed more than 40 apartment complexes and other multi-unit developments on behalf of management companies at its peak, though most of its clients have terminated their contract with the company, with the fall-off accelerating in the last six weeks.
The directors of Assured Property Management are Ben Haskins and Orla Fitzpatrick. A spokeswoman for the company said yesterday that “any allegations of overpayment are being dealt with by our solicitors and accountants”.
Most apartment owners are shareholders in their mangement company.
While historically developers maintained control of these management companies, the multi-unit development act introduced last year required developers to hand over ownership of all common areas of apartment complexes to owners by September 2011.
Other apartment complexes that have recently terminated their contracts with Assured Property management are the Smithfield Gate complex in Dublin 7 and Dorset Square apartments in Dublin 1.
World comes crashing down on Irish developers' global empire - The Irish Times - Sat, Oct 06, 2012
SIMON CARSWELL and MARY CAROLAN
TWO OF the State’s most ambitious developers, Johnny Ronan and Richard Barrett, will see the end of their globe-spanning company, Treasury Holdings, next week after conceding defeat in litigation taken by one of its banks.
Liquidators are expected to be appointed on Tuesday to the insolvent property business by the High Court after the company said it was no longer resisting an application by KBC Bank to have the company wound up over a debt of about €55 million. The rejection of a last-minute offer by US bank Morgan Stanley to buy the company’s debts from the State’s National Asset Management Agency (Nama), which supported KBC’s action, has led to the imminent failure of the group, sources close to the company said.
One of Nama’s top 10 debtors, Treasury has total debts of €2.7 billion, including more than €1 billion with the State loans agency.
Mr Barrett and Mr Ronan have given personal guarantees on a small amount of Treasury’s debts, while Mr Ronan has his own property portfolio and related debts with Nama.
Mr Barrett and Mr Ronan turned Treasury from one of the State’s biggest developers into an international business with projects in Britain, France, Sweden, Russia and China.
Treasury was behind landmark projects, including the five-star Westin and Ritz-Carlton hotels in Dublin and Wicklow, the Convention Centre in Dublin’s docklands, and the Central Park and Spencer Dock office complexes in Dublin.
The hotels and offices will remain open as they are solvent despite the pending liquidation of the parent company. The Convention Centre is owned by the State.
The High Court was told yesterday that, given Treasury’s decision not to fight the winding-up application by KBC, the bank will seek to appoint Paul McCann and Michael McAteer of accountants Grant Thornton as joint liquidators of the company and 16 related companies next week.
Lawyers for the Belgian-owned bank said the winding up of 17 companies was necessary given the scope of Treasury’s property interests.
Nama rejected an offer by Morgan Stanley to buy the group’s debts and an alternative proposal that Mr Ronan and Mr Barrett step aside to allow Treasury be sold by public tender, sources said.
The company felt it had no option but to accept the liquidation of the business as it believed Nama was unwilling to accept any scenario where Mr Ronan and Mr Barrett would remain as owners.
A spokesman for Nama said it had no comment to make.
Relations between Treasury and Nama fell apart earlier this year in a dispute over the agency’s rejection of offers to buy the group’s debts and the decision to seize properties within the group.
Treasury lost a court case in August aimed at stopping Nama.
The court was told yesterday that KBC did not accept an explanation for a transaction in which assets of a subsidiary of Treasury had been transferred to a company in the Channel Islands beneficially owned by Mr Barrett.
Negative equity loans -- the rise of the 175% mortgage - Independent.ie
Many homeowners in negative equity are so desperate they'll clutch at any straws. Buyer beware.
With the collapse of the property market people don't have the option of selling and moving on -- the sale proceeds would never clear their mortgage.
However new mortgage products (now being offered by four lenders) seem at first glance to offer homeowners in negative equity a chance to move on. But maybe these products shouldn't be clutched at too eagerly -- if at all.
Negative equity mortgages let you sell your home and carry over whatever debt is left on a previous mortgage onto a new loan.
Recently AIB and the EBS became the latest lenders to offer negative equity mortgages. Up until then, Bank of Ireland and its subsidiary ICS Building Society were the only lenders offering the loans.
KBC Bank doesn't yet offer negative equity mortgages. However, "the bank is examining the possibility of introducing a mortgage which would be aimed at customers in negative equity," as part of its plan for dealing with those in mortgage arrears, according to a spokesman. Ulster Bank doesn't offer the mortgages either but "is keeping this under review". Although National Irish Bank doesn't offer negative equity mortgages, it intends to by the end of the year.
Permanent TSB only offers negative equity mortgages "in exceptional circumstances", according to a spokeswoman. "Permanent TSB has advanced a small handful of negative equity mortgages to customers who are considering trading down," added the spokeswoman. "The bank is considering whether to make a negative equity mortgage available to other customers."
With Bank of Ireland, ICS, AIB and EBS, you can borrow up to 175 per cent of what your new home is worth -- but a good chunk of that is the negative equity you'll carry over. You can't borrow more than 90 per cent of the price of the new property with BoI and ICS, and the most you can borrow, including the negative equity carried over, is €550,000. You must have a mortgage with BoI for at least two years "with a satisfactory track record" to qualify.
With AIB and EBS, you can borrow up to 92 per cent of the value of the new property -- and the most you can borrow, including negative equity, is €700,000. If the mortgage for your new property is more than €400,000, you can only borrow up to 85 per cent of the property price -- if the mortgage is for a one-bed apartment, you can only borrow three-quarters of the property price.
Such mortgages might be music to the ears of an owner who bought an apartment during the boom -- and who has had children since.
THE DRAWBACKS
Taking on a mortgage equivalent to 175 per cent of what your property is worth however could be one hell of a noose around your neck -- unless property prices explode over the next few years.
"If people think 100 per cent mortgages were a bad idea, I can't grasp how a 175 per cent one is a good idea," says Karl Deeter, compliance manager with Irish Mortgage Brokers.
Negative equity mortgages allow banks to avoid taking any hit from a property they have financed the purchase of which has since collapsed in value, according to Michael Dowling, of the Independent Mortgage Advisers' Federation.
"When you take on a negative equity mortgage, you are paying for the loss the bank has on its own books," says Dowling. "Is it right that people should take on the negative equity that has built up on their home? Negative equity mortgages mean the bank gets its money back for a property. Some argue that the banks should take some kind of a hit."
Another drawback of negative equity mortgages is that you will lose any tracker mortgage you had on your previous home. This means that you will not only be taking on a larger debt, but a more expensive one. The mortgage interest rates available today could be as much as three times as expensive as a tracker rate.
Dowling believes that only a tiny portion of homeowners will qualify for negative equity mortgages. The high level of debt carried over means anyone applying will need a high income to qualify. Banks are also stress testing mortgages to ensure you could afford the repayments were interest rates to hit 6 or 6.5 per cent.
If you are in mortgage arrears or having difficulty meeting the repayments on your current mortgage, you're unlikely to get a negative equity mortgage.
THE ALTERNATIVES
Even if you do qualify, you might be better off financially if you pursued a different path.
Dowling believes it could make more sense for a homeowner in negative equity to sell their home -- and rent, rather than buy.
"If you sell your home and the sale doesn't clear your mortgage, you may be able to come to an arrangement with your bank to write down the outstanding debt," says Dowling. "Homeowners in negative equity need to do their numbers before taking on a negative equity mortgage. Instead of buying a new home with a negative equity mortgage, they may be better off selling their home, dealing with any negative equity left over from a house sale as an unsecured loan -- and renting another property as the family home."
If you are in negative equity and likely to be left with a substantial balance on your mortgage after selling your home, your bank may not allow you to sell it, particularly if you're planning to rent another home rather than take up a negative equity mortgage.
However, if you're having difficulties repaying your mortgage, and the bank allows you to sell your home, you may be able to come to a personal insolvency arrangement with your bank for any loan left outstanding. Under the Personal Insolvency Bill you can cut a deal with your bank to repay unsecured debt of up to €3m over six years.
Another option is to rent out your home to tenants rather than sell it -- and then rent another property as the family home.
- Louise McBride
Wednesday, October 3, 2012
Who will buy distressed properties? - The Irish Times - Wed, Sep 26, 2012
The volume of properties now coming up for sale could push down prices even further and frighten off potential buyers unless decisive action is taken to set a floor to the market, writes BILL NOWLAN
LOOKING THROUGH the long and growing list of secondary and tertiary commercial property coming on the market from banks and their receivers, I wonder to myself who is going to end up owning such buildings and if the volumes now emerging will impact negatively on current delicate property values. Values have been stabilising of late, but the absence of bank credit to support purchases makes the situation even more dangerous.
The traditional investors in such properties, before the madness set in the early 2000s, were of three types as follows:
Firstly, the professional investor with significant holdings of secondary assets and usually with their own property management office because, believe me, such assets are management intensive and usually require lots of TLC. Such professional investors work mainly below the radar and have a policy of investing in properties such as shopping centres, older office buildings and small industrial estates many with weaker tenants. These portfolios would generally be high yielding at 10 per cent-plus and borrowings would be limited.
Secondly, you have the location-specific investors. This type of operator tends to be confined to their “home” town. Often it is the local pharmacist or butcher who quietly builds up ownership of the buildings on his street or town – sometimes over several generations. They tended to use the profits from business, surplus rent and their pension funds to put together what becomes a type of informal family trust. Such property investors are everywhere in Ireland – in every town and village – but as to their ability to buy, currently many will be suffering economically and have limited funds to purchase new stock, no matter how cheap.
The third type of investor was and is the individual or family either setting up a new portfolio or maybe in an inherited situation. Usually such portfolios have no real coherence but are put together more or less by osmosis. For example, if there are some surplus funds from profits or inheritance they go into buying whatever is then on the market. This type of portfolio would be different from the two types mentioned earlier in that it would be random and unstructured and rarely focused or well managed. Its unspoken strategy would be wealth accumulation in bricks and mortar, and possibly tax management.
The overriding characteristic of all these investors would be low borrowings, high cash yield and, of course, vacant space – the current rate of vacant space probably being high.
Look across most developed economies worldwide and you will see the same three classifications of property investors. I am deliberately omitting the institutional investor as they require prime property and I am also omitting the quoted property companies and REITs who do hold considerable amounts of secondary properties. Ireland has no quoted property sector mainly for the taxation reason of income being double taxed. I have dealt with this in greater detail below.
So this was the situation up to the year 2000. After that date a new type of investor arrived into this market with a bucket of borrowed cash, greedy advisers, bank managers with no or poor judgment, a belief that the property boom would go on forever and often unrealistic expectations. Property in secondary streets or towns became classified as “prime”, and pub chat, gullible bankers, greed and a cycle that lasted too long all induced this “new” investor to believe that such properties were great long-term opportunities.
The enthusiasm to own property and the limited supply pushed yields down from 10 per cent-plus to less than 5 per cent over the space of a few short years. Rents also rose in response to the real activity in the economy. Values often more than quadrupled as yields went down and rents went up. A property that sold for €50,000 in 1996 and was changing hands at €300,000 by 2007, is now worth €100,000 or less if it sells at all.
Of course, it was all an illusion because secondary or tertiary property does not, or rarely, changes its location or its structure. The new “value” was in the intoxicated minds of the buyers. Trees don’t grow to heaven. Many of the vendors of such properties were from one of the old groups of investors who were delighted to sell poor property at thrice its cash flow related value. As one old investor said to me in 2004, “It’s a great time to get the junk out of my portfolio”.
But it has all come crashing down and while some of the traditional investors may have caught the stardust bug, most did not and are sitting more or less as they were in the year 2000– but with rents back and income back to 2000 levels or lower – and still going on sun holidays and not generally in serious trouble with banks.
But back to my original question of who is going to end up owning such buildings and whether the volume now emerging will impact on current delicate values?
It will almost certainly be the same old group that was there before the madness, but where is the cash going to come from for the large volume now emerging on the market? Looking at the results of the Allsops auctions I see only one new category of investor emerging which is the overseas investor, usually an expat buyer with equity, who sees value in such properties in Ireland. The reality is a new form of category one, two or three described above.
The big question is can the large supply match the demand or will a growing supply and limited buyers drive prices down?
Nama appears to be withholding big volumes both of prime and secondary commercial property from the markets and the banks should be considering the same approach. In my view, the banks should be thinking about setting up their own holding funds or vehicles to take such properties into their own “warehouse” and then release them later, as and when the market can take them. Forcing down values now even further will achieve nothing and will frighten off what buyers are there. Such action would set a floor to the market. One big British bank, RBS, has already set up such a fund called West Register and is acquiring properties in Ireland that don’t meet the reserve prices. RBS owns Ulster Bank here.
Such properties generally give a much higher yield than their cost of funds and by moving from the distressed side of the banks’ balance sheet to the normal loan category, it releases working capital.
While if REITs had been introduced some time ago, we would by now have a sophisticated quoted property market which could take up some of this property. This is what happens in the rest of Europe and the US. Such REITs give a high yield to investors and if they were now operating in Ireland would be quite capable of buying some of the bigger secondary properties that may be outside the capacity of individuals to digest. Enabling REITs now in Ireland won’t create a quick fix today but may enable bank vehicles such as Ulster’s West Register to have a vehicle for emptying their “warehouses” in the medium term. An announcement about introducing REITs in the forthcoming budget would be most welcome news.
Bill Nowlan is a chartered surveyor and town planner. He is managing partner of property asset management company W K Nowlan Associates