Musings…

Disclosure.

I do not own a house. I do not own a house because between 2000 and 2006 the price of property rose significantly faster than my salary and I flatly refused to borrow money I couldn’t pay back to buy a house or an apartment. For this, I took quite a lot of criticism from people who informed me in 2004 that I had to get on my foot on the ladder. Despite the fact that the least expensive property within 20 minutes of where I worked was 10 times my then salary. Despite the fact that if I were to buy a house I could afford, I would be spending 2-3 hours in my car commuting every day, living in a town I’d never spent more than 5 minutes in before, where I knew no-one and offered me no facilities in terms of what it is I do with my spare time. Not that I’d have much spare time anyway given the amount of time I’d spend at work and the amount of time I would spend commuting.

In the meantime, lots of other people did by property. Lots of it. At 8-10 times their salary. In places they didn’t want to live. Under the impression that property always went up. Many of these people also bought investment properties. Not all, but many. Many of them bought property on 100-120% mortgages. A significant number of people in Ireland are in negative equity; a growing number of them in difficulties with their mortgages. Many of the investment mortgages were interest only for a fixed period. These mortgages are now about to reset. A lot of people in Ireland are insolvent. It used to be that they were asset rich and cash poor but now, their assets don’t cover their debts even if they could liquidate them.

Five years ago  forecast that the property market in Ireland would crash spectacularly. It did. And now, we are where we are.

Matt Cooper is the presenter of a radio show on Today FM, a national radio station, at evening drive time. Largely it covers news events, politics, business and economics. He also occasionally writes for the Irish Examiner, and has done some television work. Included in that television work was a piece for a series called Aftershock. In it, he called for a rescue package for homeowners in negative equity. The call for support for home owners in difficulty is getting louder.

Today he wrote this in the Irish Examiner. The title, if you are in negative equity, is clearly seductive.

We rescued the banks, now we must rescue the public from negative equity

I have problems with this. That we rescued the banks – and they are not out of the woods yet – is not a reason to rescue the public from negative equity. The problem is that anyone in negative equity walked in there. The banks have been stupid – this is true. But I advised many people not to buy property over the past few years, and yet I still know half a dozen people who bought in 2006; the very, very height of the market. Because they wanted to own their own place.

The country did an awful lot to enable people to own their own place because that’s what the population demanded at the time. Reduced stamp duty for first time buyers; mortgage interest relief. Affordable housing schemes that were valid if you were earning over 50KE.

This happened because people didn’t want to face the reality. Property in Ireland was – then – as now – too expensive. Instead of taking the obvious route to reducing the cost of property, they wanted the money to pay more.

Matt Cooper talks about an unfair millstone around the neck of a generation. It is true that they have a millstone; it is equally true that they willingly took that millstone on when they could convince themselves that “we’re in it in the long haul”. The long haul was always going to involve severe negative equity. People who didn’t take that route took their chances with the tenancy legislation.

I realise there are mortgages that will probably never, ever get paid back because it just isn’t feasible for the sums lent on property to be paid back over the lifestyle of the mortgage without severe inflation. People like me are about to be screwed wholesale if there is a bail out or if there is inflation.

Matt Cooper recognises that it is perhaps not fair that people who do not need support because they avoided the pitfall should be asked to pay for those who did; but that the social need makes it an imperative. I think he’s wrong. I think that there is scope for fixing things by improving bankruptcy legislation so that people can exit more easily than is now the case. However, there absolutely has to be a cost to the key beneficiary – the person being rescued. Without that cost, we are not talking about any sort of social justice.

He seems to think that it comes at some sort of a cost; but the cost is basically invisible to the beneficiary. Already they don’t have full control over their house because it is subject to a mortgage. This changes nothing very much other than perhaps reduce their repayments.

WHAT I’ve suggested – a swap of debt for equity – is common to rescuing companies that get into difficulty, to stop them going bust. It is not pain free for the borrower, as they would lose part ownership of their home but it would make their repayments more manageable.

This is viable for some companies because those companies may well turn out to be profitable. Houses/homes, in a normal market, are not. For this to work, we need houseprice inflation to come back. For the future of this country, and increase competitiveness in the face of a global labour market – and Ireland is a small open economy – we still need major reductions in the cost of housing. There are estimates that suggest that the Irish property market is still somewhat 40% overvalued in terms of asking prices. Matt’s solution is too simple and too damaging to be applied.

What is insulting is this.

But we cannot dismiss people, the citizens of this state, lightly because the public finances and the banks take precedence or because those who have are unwilling to share the pain with those who do not.

I am a citizen of this state. I am already sharing a lot of pain courtesy of this. I have increased taxes to pay with reduced public services. I never got much of the gains; I was never a paper millionaire because I never bought a house which is now the unfair millstone around the neck of many citizens of this state.

There are more citizens in this state than the ones who borrowed too much to buy houses that they claimed they were in for the long term but whose attraction has worn off as their value fell.

Negative equity is a problem. But if you can service your mortgage you are not really in the zone of demanding support and a bail out just because the banks did.

A more sensible approach would be to do the following:

1. Reform bankruptcy legislation and allow those in serious trouble to exit more easily than is now the case. This by definition includes the loss of whatever property was concerned, via a short sale.
2. Tighten up tenancy legislation so that those renting enjoy better protection than is now the case.

This is a more effective way of dealing with the required debt destruction. Matt Cooper’s solution will have no positive benefit for the economy as a whole other than to pile on the weight of repairing this mess on the shoulders of people who didn’t cause it in the first place.

There is no justice – absolutely none – in that.