Hell’s anteaters, but I am tired today. I’ve gotten out of practice at the art of staying out late and expressing emotions.
But I wanted to talk about NAMA‘s new mortgage incentive scheme, and why it’s nuts. For the interested overseas reader I’ll briefly recap: NAMA is a body set up to manage assets, mainly property, of lenders and investors who were bailed out by the State. Put bluntly, it owns a great number of houses that nobody ever needed, or ever will need.
Among them there are some decent saleable properties, they’re just not moving because the property market is moribund. Actually, moribund is a euphemism. The property market is as dead as a dodo with a doornail in it. So NAMA’s idea is to incentivise purchasers with a special mortgage bargain.
They reason that people aren’t buying because they fear house prices have further to fall, trapping them in negative equity. The scheme, which they’ve hammered out with some of our (rescued) lending institutions, is that your repayments will be reduced if the market value of your new house drops. Well, until it drops to 80% of your purchase price; below that the loss is all yours. So it’s sort of an insurance policy against the market falling. A financial derivative, if you will.
But why is NAMA doing this? If the idea is to get the property off state hands because we badly need the money, it’s just robbing Peter to pay Paul. There will be a further drop in house prices – zero doubt about that – and under this scheme the loss is going to be taken by the taxpayer. Again.¹ They say they’re doing it to “kick start” the market, as if the scheme was a sort of financial defibrillator. The image that comes to my mind though is of early electrical experimenters trying to bring corpses back to life.
There is one simple reason why the house market is moribund: The people who need houses can’t afford them. So it’s a market, why don’t prices just come down? Because those who have them, generally speaking, paid far more than they can now get. They’re naturally reluctant to sell at a loss and so hold on to their property in the hope that the market will soon bottom out, maybe even begin rising again.
They are only fooling themselves of course. Prices are still very much higher than pre-boom norms and must come down significantly. The trouble with NAMA’s scheme is that it will only help them fool themselves. If they believe that prices are now only about 20% away from bottoming out, they’re going to sit tight and wait for the rise. That would be the exact opposite of the intended effect.
I think NAMA hope that they’ll fool the buyer more than the seller, encouraging them to believe that we are close to the bottom of the market. That could raise demand to meet prices as they are now, so becoming a self-fulfilling prophecy.
And a hugely counterproductive one, because we need to get house prices down to realistic levels before we can (a) actually afford them, and (b) rebuild a stable, reliable economy. Propping them up at or near their current levels is defying the market, trapping a bubble of false value in the economy – one that will threaten to collapse like an old mineshaft running right beneath our feet. We can’t rebuild on such foundations.
- Well I say the taxpayer. As taxes probably aren’t going to go up much, it’s public services and those who depend on them that will actually take the brunt of it.
- NAMA negative equity mortgage – gimmick or game-changer (namawinelake.wordpress.com)
- Ireland’s Bad Bank Transforms Debtors Into Landlords: Mortgages (teddyoshea.wordpress.com)
- NAMA formally launches negative equity mortgages today (namawinelake.wordpress.com)
6 replies on “Stimulating The Housing Market Is Economic Madness”
I have a friend in Minneapolis, Minnesota, USA that is house searching and is falling victim to people thinking that the housing market will turn around. This last Sunday she put an offer on a house for 155,000USD, with the seller paying 7,000USD in closing costs. The house was valued at 151,000USD last year and 144,000USD this year, so the offer was above the valued price of the home, and she was the first person to make an offer in the (more than a) year the house has been on the market. Her offer was declined because they owe over 170,000USD on the house. People don’t seem to understand that housing is not a guaranteed gain investment (of course people have been told time and time again it is by mortgage brokers and realtors).
Dunno about the bottoming thing – It depends on the individual property. At some point it becomes cheaper to buy than rent. Stuff in auctions seems to be going for about 7-8% rental yield which is probably more than you’d pay on the mortgage eg http://www.auction.co.uk/irish/LotDetails.asp?A=780&MP=84&ID=780000002&S=L&O=A
All depends how much you pay and if there is actually rental demand there
Buying may be cheaper than renting, but the vast majority of people can’t afford to buy right now. Even if they think they can they’re not getting much faith from lending institutions, who clearly believe property is still a bad investment. So while there is some speculative interest from brave (I would say reckless), mainly overseas investors who have cash or easier access to finance and think property in the eurozone might be worth a punt, there’s a long way to go before ordinary housebuyers can afford ordinary houses again.
Which should of course drive rents up… It’s easy to envisage a scenario here where residential property in Ireland will cease to be owner-occupied (we had one of the highest rates of owner-occupation in Europe), but largely (a) rented and (b) foreign-owned. Which sounds worryingly familiar.
Subject for another day perhaps!
“So it’s a market, why don’t prices just come down? Because those who have them, generally speaking, paid far more than they can now get. They’re naturally reluctant to sell at a loss and so hold on to their property in the hope that the market will soon bottom out, maybe even begin rising again.”
It gets worse. They’re not merely reluctant to sell at a loss. They often can’t actually _take_ the loss. As long as they don’t have to move, it’s just a paper loss. A debt to a bank. As soon as they actually sell the house, it becomes an actual loss. They’ll have to repay the bank and find (in cash!) that vast difference between sale price and loan they took out from somewhere. The alternative is to sit tight and keep paying installments.
I don’t know if you had this is in Ireland, but over here the biggest problem is with the “interest-only loan”. Basically, people took out a large mortgage loan, and never intended to repay it, just pay interest. This was fiscally attractive, because the mortgage interest is deductible from your taxes. A gargantuan (regressive) subsidy for home-owners. They’re still working on capping this nonsense and/or only allowing interest to be deductible on annuity mortgages.
I digress though. The problem with interest-only loans, is that for these people, paying installment is just as much a dead end. Those with annuity mortgages at least will be taking their loss in small installments over a long time, and at the end of it, end up with an actual, 100% debt-free asset. Those with interest-only loans that can’t take their loss are forced into playing a game of chicken with the housing market. (They better start saving to make up for the loss right _now_)
Yes, it’s worth emphasising that negative equity sometimes means that people literally cannot afford to sell their own houses.
The interest-only mortgage was never that big here I think, but was in the news recently because lenders want to cancel the arrangement and mortgage holders are fighting that in court. It’s an interesting arrangement – in a way, it’s rent subsidy for middle class people. In fact if the entire interest is deductible from tax it’s a better deal than the rent subsidy the poor get.
An interesting question is whether interest-only mortgage repayments are a mortgage at all. I would say they obviously aren’t, they’re clearly just a disguised rental, and I wonder how they were ever accepted as such by taxing authorities.
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