Archive for September, 2014

Borrowing binge to fund property investments has led to tsunami of debt Independent Columnist Says…

he country’s respected, middle-class professionals are in trouble. Big financial trouble.

They went on a borrowing binge during the property bubble and these investments have gone sour.

The upshot now is a tsunami of debt defaults.

Up to now the problem has been managed.

Banks were less aggressive, maybe fearing that aura around professionals.

Interest-only deals still had some time to go, and it had been hoped the debtors could have traded out of their difficulties.

But banks have changed tack and are now insisting on contractual terms being observed to end temporary deals.

Repossession is being threatened.

All this means that GPs, vets and accountants are staring bankruptcy in the face. Others are contemplating a Personal Insolvency Arrangement (PIA) under the Personal Insolvency Service.

However, most professionals are precluded from practising if they are declared bankrupt.

The situation with a PIA is less clear, as this came about through relatively new legislation.

That is why so many of their professional bodies and regulatory authorities are now eager to change the rules to allow members to continue to practise while going through what could be up to five years of bankruptcy.

Many of those who have ended up seeking the help of the Irish Mortgage Holders Organisation would have three investment properties.

These were taken out on interest-only payment terms. Typical rents of €850 a month are covering the interest-only payment of €700 a month.

But these deals are coming to an end, and newly aggressive banks are demanding their pound of flesh.

Bankruptcy and personal insolvency now beckon for thousands of the country’s most-respected professionals.

Irish Independent
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Bank stress tests set to be delayed until late October

The results of a wide-ranging review of Europe’s banks are likely to be published later than the Oct. 17 date pencilled in with the banks but will still be released before a formal deadline of end-October, people familiar with the matter told Reuters.

The European Central Bank (ECB) is looking at how 130 of the eurozone’s largest banks value their assets.

Those banks will also undergo EU-wide tests on whether they have enough capital to weather future crises.

The ECB had informally pencilled in Friday, October 17, as the date for publication of the results of the combined exercise and had given this date to some banks. The sources told Reuters that this date was now very unlikely to be met.

Two sources told Reuters they had been told that Friday, October 24, was now the most likely date.

A third source said a decision on the publication date on had not yet been taken, but that it could also be Friday, October 31.

Results of this nature are traditionally released after financial markets close on Fridays to give investors time to digest them before trading resumes on Monday morning.

The ECB takes over as the euro zone’s banking supervisor on November 4 and has said it will have the assessment completed by the end of October.

“We will make public the exact date in the next couple of weeks,” the ECB said. “We’ve always said the second half of October.”

The London-based European Banking Authority (EBA), which is responsible for the EU-wide tests, said no final decision on the date had been made.

“As soon as the publication date is approved (and this will be done in the coming weeks and jointly with the ECB), we will be announcing it,” the EBA said.

Banks will get “partial preliminary results” about a month before the final announcement so they can make plans for how to deal with any major shortfalls, Reuters reported on Sept 1.

They will only be given about 48 hours notice of their actual results, to minimise the chance of information leaking out to investors who could trade on it.

A survey by Goldman Sachs last week found that investors expect banks to be asked to raise an additional €51bn as a result of the exercise.

Royal Bank of Scotland Plc, Britain’s biggest state-owned lender, and Lloyds Banking Group are among the seven banks set to fail the tests, Mediobanca forecast yesterday.

Mediobanca said it also expects Banco Popular Espanol, Commerzbank, Danske Bank, Banca Monte dei Paschi di Siena and Skandinaviska Enskilda Banken to fail.

Mediobanca added that another three banks – Caixa Bank, Nordea Bank and Alpha Bank – may “quasi fail.”

“We see the UK accounting for 71pc of the capital needs,” followed by Spain, Scandinavia, Germany and Italy, the analysts wrote.

Moody’s cut the outlook for the UK banks to negative from stable last month.

Irish Independent
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Prices not inflating a property bubble – hot air, chatter and speculation are….

Some 20 years ago a college friend gave me a lift to a party in south Dublin – via the most circuitous route I’ve ever taken to a social event.

Whenever we approached a side road, she turned down it. We must have trundled the length of a dozen of them: me with pen and paper in hand, my friend with her neck swivelling every few seconds.

She was on the hunt for that pot of gold at the end of the rainbow: a ‘For Sale’ sign outside a suburban semi-detached. Pregnant with her second child, she and her husband were keen to leave their starter home – but a supply scarcity was anchoring them to a house too small for their needs.

And so to the present day, where property supply in south Dublin remains inadequate to meet demand. Some things never change. That’s why blood-chilling predictions about being back in property bubble land are surfacing. But in south Dublin, too many buyers have always chased too few properties. It’s close to jobs, schools, hospitals and leisure amenities. Ireland has more scenic and soulful areas, but they lack that winning combination.

I visited relatives in rural Co Limerick in June, who asked: “What’s all this we hear about a recovery? There’s no recovery here.” Nor is there in rural areas. But recovery is undeniably in the air in Dublin. House prices are rising in the capital faster than anywhere else – in the year to July, they were 23pc higher than the previous year, according to recent Central Statistic Office figures. This compares with just under 5pc higher in the rest of Ireland.

Is a property bubble inflating? First, another sort of bubble is needed – a credit bubble. That’s why Bertie’s boom got boomier: banks were cajoling customers to avail of cheap money. Fortunately, there is no current danger of another credit bubble as bank lending remains knuckle-draggingly low.

However, statistics are muddying the waters. Price rises are originating from such a low base that any increase appears to be stratospheric. If the value of a house halved to €200,000 and has now climbed to €240,000, it is still €160,000 down on boom-time prices. However, the jump is 20pc. Measured from a collapsed base, the increase appears to be breathtaking.

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Roughly speaking, in a normally-functioning property market, 5-6pc of the total housing stock is sold at any one time. Currently sales are running at just 0.5pc or so. That’s because a swathe of home-owners can’t or won’t sell. These include people on tracker mortgages – who wants to surrender that plum?; people whose earnings are cramped by higher taxes and lower wages; and people in negative equity (more than 200,000 properties occupied that stressful zone at peak collapse).

The pressure is led by demand for family homes in the gold-fields of south Dublin, where supply is tight. Why would owners with a choice in the matter sell now, with prices still down by more than 42pc nationally since peak? Meanwhile, young couples with mortgage approval can’t compete with cash buyers in the market waving their ready funds.

Last month, Dr Kieran McQuinn of the Economic and Social Research Institute (ESRI) said house prices were undervalued – reaching the conclusion by assessing various market fundamentals. He said the collapse had led to a necessary price correction. And nobody disputes they were at an unsustainable high, creating a swathe of paper millionaires. “Almost inevitably, prices have over-corrected,” he added.

Clearly, prices are set to continue rising. And while some correction is helpful, disproportionate correction is harmful.

“We’re at the start of the signs of a classic cycle. Whether it becomes a bubble depends on policy actions over the next few years,” Goodbody chief economist Dermot O’Leary told Morning Ireland on RTE Radio 1 yesterday. “The issue we have here is totally different to the boom years. That was too much demand, this is too little supply.”

The answer, then, is to create more supply. The number of green field sites in Dublin is limited, which drives up prices. Let’s incentivise developers to release them. As for ongoing tax breaks for property investors – I’m obliged to go Stateside to register my reaction. Puh-leese. As it stands, if an investor buys before the end of the year and holds the property for seven years, he or she is excused from capital gains tax. The break was introduced to kick-start the market for investors at the peak of the crisis. But enough already.

Keeping the property market healthy requires sensible agreement about the appropriate price-tag for a house. To that end, economists can consult spreadsheets, input fundamentals and print out some answers – useful, of course. But in the midst of the discussion about property correction, some mindset correction would also be helpful: remembering a house is first and foremost a home, and not an investment.

Martina Devlin

Irish Independent
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