Tuesday 12 December 2017

McWilliams is right on home loan holidays - but let's go further

Celebrity economist and author David McWilliams is now suggesting lenders be forced to give hard-pressed homeowners a two-year break on mortgage repayments. McWilliams says this would release about an extra €4.5bn of extra spending power into the economy every year.

While his proposal is superficially attractive, it almost certainly suffers from one key problem: it doesn't go far enough.

Since peaking in February 2007, house prices have fallen by at least a third. In fact, the published house price statistics, which reflect completed transactions, understate the true level of collapse.

This is because, with the pace of transactions in the housing market having slowed to a crawl, the statistics reflect the condition of the housing market six or even nine months ago.


The true level of price falls is almost certainly closer to 50pc. And prices are still falling. Many analysts reckon they could fall 50pc more from their current depressed levels, a fall from peak to trough of 75pc.

With homeowners having borrowed almost €150bn against the value of "their" homes, this collapse has had a devastating effect on consumer confidence.

Not without reason. An ERSI survey calculated that almost 350,000 homeowners, almost 45pc of all homeowners with a mortgage, could be in negative equity, with the amount outstanding on their mortgages exceeding the value of "their" homes.

And, with the housing market now plagued by chronic over-supply, prices aren't going to recover any time soon.

Two surveys published earlier this year put the number of unoccupied houses and apartments at somewhere between 300,000 and 340,000 -- that's between one-seventh and one-sixth of all the houses and apartments in the country.

Eye-catching as it is, McWilliams' proposed two-year mortgage moratorium doesn't address this fundamental issue. At the end of the two-year period, house prices wouldn't have recovered and homeowners would still be stuck with their mega-mortgages.

Even worse, the McWilliams plan almost certainly wouldn't deliver the short-term boost to consumer spending that he expects. Instead of rushing out to the shops and spending the money that had previously gone on their mortgage repayments, most homeowners would almost certainly save the money instead and use it to pay down the amount which they owe on their mortgages.

Depending on the interest rate and the repayment period of the mortgage, a two-year repayment holiday would allow homeowners to repay about 10pc-12pc of the amount they owe.

However, while the McWilliams' proposal may be flawed, doing nothing isn't an option. With the exception of the loans being purchased from Bank of Ireland, Nama will end up imposing an average discount of well over 50pc on the bad loans to builders and property developers it purchases from the Irish-owned banks.

But homeowners, who had no option but to purchase shoebox apartments in Ballybackwards from those same builders and property developers if they wanted to have a roof over their heads, are expected to repay mortgages in full. Give us a break!


If we are to get consumers spending again, it is vital that home loans are written down to reflect the collapse in prices.

We need to get real here. Somewhere between one-quarter and one-half of the €150bn which has been lent to purchase Irish houses and apartments is never going to be repaid. This money is gone.

The sooner this reality is recognised and homeowners are freed from the burden of crushing home loans they can never hope to repay, the quicker consumer confidence, and with it the economy, will begin to recover.

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