Offload versus Mothball? Includes an EXCLUSIVE calculator to help make your decision.

Ever since property prices started to fall in 2007, property owners (developers, banks, advisers) have faced a dilemma – sell now or wait for the market to be restored to previous price levels. And to remind ourselves of where we have been with national average house prices, this is the picture from 1999 to the end of March 2010, courtesy of the ESRI/Permanent TSB:

And what about the future? No-one can tell you with certainty so you are left with sources whose credibility, prejudices and methodologies are subjective. So what are commentators currently saying? Here’s a bouquet:

a1.On 1st June, 2010,  Standard and Poor, whilst predicting that prices will drop 10% from today until a bottom in 2011, say that prices are undervalued by 12%. Their workings have not been made available so it has not been possible to test their prediction.

a2. The OECD said on 27th May, 2010 that house prices had fallen by 57% “in real terms” from peak and prices were now at their long term average values in terms of household income. They observed that prices were still out of kilter with rental levels, commenting that there had been a distortion during the crash. Workings not made available.

1. DKM Consultants in association with the Education Building Society (EBS) produce a periodic affordability report which examines the % of wages required to service a mortgage on a property. Their most recent report this week also predicts a further fall in property values with Annette Hughes predicting a fall from €200,000 today to €140,000 at the bottom (another 30%). Her methodology is taking 3.5 times the average salary. DKM are a long established consulting group and regularly advise the government.
2. Moody’s last week predicted that prices will drop by 18% between now and the start of 2013. Their methodology is unclear. As a ratings agency, Moody’s are seriously regarded. Their predictions on property prices seem to be informed by present levels of arrears. Workings not made available.
3. David McWilliams, author and economist, in April 2010 was observing that property prices needed to drop by an average of 45%if they were to come into equilibrium with rental prices (roughly property prices should be annual rent multiplied by 14/15 years).
4. Trinity College Dublin, Professor of Finance, Brian Lucey wrote in his introduction to a DAFT.ie survey in April, 2010 “So the crash is slowing. However, it is not over. The Daft.ie index peaked in May 2007. To expect the trough to be reached less than three years later is to fly in the face of historical evidence. Referring back to Morgan Kelly’s prescient, eye-opening ESR article which for many of us represented the key moment when our critical faculties on property were rebooted, a fall of 50% is likely. Based on a straight line projection of average declines in value since the peak this would see another 18 months of declining prices. That would be 50 months of house price falls, or just over 4 years, towards the lower end of historical experience. It is probable that as we decline towards the trough, the speed at which house prices fall slows down. And this is what we are starting to see – in the last six months, the average decline has been lower than the previous six months, itself lower then the period before.”
5. The Minister for Finance, Brian Lenihan, said at the start of April 2010 that prices were now realistic and buyers could buy with confidence. His remarks were taken to mean that we are presently at the bottom. In September 2009, Mr Lenihan also seemed to be calling the bottom by reference to historically high yields. NAMA has recently started taking on €50bn or thereabouts of property-backed loans.
6. A basket of pundits in January 2010 were reported by the Irish Times as predicting a median fall in average prices of 9% in 2010 with a fall to the bottom in H1 followed by a recovery in H2 of the year.
7. Paddy Power (why not? At least when allotting odds they need to look at the profitability of their business so arguably they put as much thought and research into it as anyone else). In January 2010 they were offering odds-favourite to prices dropping by 9-12% by the end of 2010. I cannot see today’s odds but if Paddy Power provide them I will post them here. I understand they took a bath on the results of the British general election but as a betting company they are successful so I guess will be right more often than not.
8. Morgan Kelly, UCD academic turning media star, in November 2009 was seemingly predicting a further fall of 50% from price levels at that time. At the start of 2009 he was predicting a fall of 80% from peak values.
9. Rogoff and Reinhart undertook research into historical bubbles and reported that it took an average of 6 years from the peak for prices to start to recover (our peak was the start of 2007).

There may well be other commentaries that I have omitted but these are the most recent predictions I have noted.

So if you were a property seller today what considerations would you take into account in deciding to offload or to mothball.

1. When will the market reach its bottom? Of course the market can be segmented according to location and property type but as far as I can see most commentators appear to be pointing to a bottom at least one year away, possibly 2-3 years away.
2. How much further will property fall before reaching the bottom? If we say that we are 35% off the peak today (the Permanent TSB/ESRI) then on average the future predictions are that we lose another 20-30%.
3. What are the costs of mothballing property until the bottom? Interest on loans, insurance, maintenance and the opportunity cost of losing out on recovering property markets in the UK, Europe and beyond (and indeed there are even opportunities in Ireland)
4. When the bottom is reached, what will be the profile of any recovery? Now we appear to be getting into medium range forecasting which is even more precarious than the short term forecasts listed above. The ESRI were saying last year that it may take until 2020 for prices to recovery to 2007 levels. The ESRI were also producing population projections which ignored completely the POSSIBILITY that emigration would exceed immigration over the next 15 years.
5. Avoiding firesales or oversupply. Given that there is an overhang which has been estimated at between 35,000-300,000 dwellings and it seems to be the case that sellers have been holding back, they will want to avoid the property being flooded in a short period which may lead to a disorderly collapse in prices. Given that there are NAMA-banks, NAMA, non-NAMA Irish banks and foreign banks, it may be difficult to control the supply of property.

Personally, I feel in my waters that matters are beginning to come to a head. NAMA has taken on the first tranche and is examining the first developer business plans. The tranche transfers will be complete in the next 7 months. Despite banks having restructured an estimated 45,000 mortgages there are still over 30,000 in arrears for more than 90 days. Repossessions are still at a minimal level but will that change? Non-NAMA and foreign banks appear to be disposing of assets. Trade seems to be brisk at the Commercial Court where lenders are seeking judgements on loans and personal guarantees. The famed “Bottom” would not appear to be in immediate prospect and there appears to be an emerging concensus that double digit % falls are on the way. Credit availability is still restricted and NAMA appears not be having any immediate effect – the Financial Regulator is looking to banks recapitalising by the end of 2010. Interest rates are rising.

So offload versus mothball? There are plainly a lot of factors to consider and for your pleasure I provide a spreadsheet below where you can play around with various scenarios but to illustrate one scenario – with a present market value of €100k, a present cost of €75k, annual interest on the cost of 5%, 2 years to the bottom, a 20% fall to the bottom, 10% per annum property price inflation after the bottom, €1000 per annum starting annual maintenance/insurance costs and 2% inflation for adjusting profit and annual maintenance/insurance, it will take 9-10 years to get to the same position as today. This is what the profile looks like.

And here is your calculator. It’s a google docs spreadsheet. Only update the green shaded area.

UPDATE:  The Irish Times reports on 27th May, 2010 that until sellers clear their stock the perception will linger in buyers’ minds that we are still some way off the bottom. The article reports that foreign banks are bringing forward disposals and describes an overseas bank seeking a single buyer for  a €2m block of 35 flats.

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Mortgages arrears and repossessions up, but is the true situation still being disguised?

A couple of weeks ago here, I explored the curiosity of the burst in Ireland’s bubble not leaving a trail of mortgage defaults and repossessions. I compared Ireland’s experience with that of Nevada (US state with a population of 2.7m where property prices are 56% off peak and 70% of mortgages are in negative equity and unemployment is over 13%) and where there were 180,000 repossessions in the last 12 months compared with less than 500 in Ireland.

Today sees the publication of our still relatively-new Financial Regulator, Matthew Elderfield’s quarterly report on mortgages in which I think we are beginning to see that the cracks caused by the bursting of our property bubble together with GNP contracting by 17% from 2007 to late-2009 (with further falls forecast for 2010), “the deepest and swiftest contraction suffered by a western economy since the Great Depression”. However the figures are understood to hide the true scale of the stress facing mortgage holders because they exclude those mortgages where banks have restructured loans, for example, by allowing borrowers to take a payment holiday, pay interest only or extend the term of the mortgage. These have most recently been estimated in January 2010 at 30,000 with that figure increasing by 3,000 per month according to a report in the Independent in April 2010. Might it be reasonable therefore to assume that those over 180 days in arrears have already exhausted the restructuring option and are heading for default?

With respect to impaired mortgages, the table below shows the figures from the last three quarters. Incredibly until the present Financial Regulator was installed in January 2010 (appointment announced in October 2009), the State did not collect or publish comprehensive statistics on mortgage arrears so there are only three quarters available. The table shows that arrears continue to climb steadily in number. Again to what extent the figures are meaningful is debatable because restructured mortgages are not shown which might be disguising the underlying level of stress. Repossessions are up very slightly but still point to well below 500 per annum.

The Financial Regulator is reported to have raised two ancillary concerns

1. That banks may be exploiting the situation of those in arrears by forcing them to abandon tracker mortgages in favour of standard variable rates. “We do not believe that this practice complies with the code which requires firms to act in the best interests of their customers and to recommend suitable products only”. It is to be hoped that the Regulator will robustly deal with any cases where the weakened circumstances of the borrower are exploited to enhance the bank’s financial prospects. UPDATE: 30th June, 2010. The Irish Independent reports that the expert group set up to examine ways to help mortgage holders experiencing hardship has confirmed the practice of banks strongarming borrowers in distress to change from tracker mortgages to other products in return for help with restructuring the mortgage.
2. The challenges of managing arrears and repossession will not be easy, as there will be a tab to be picked up somewhere, possibly by taxpayers in general. He said “we need to recognise that the cost of any support will be borne by those neighbours who avoided excessive borrowing themselves or are gritting their teeth and meeting their obligations”

Quarter 3, 2009 statistics from the Financial Regulator are available here. Q4, 2009 is here and Q1, 2010 here.

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“IMF (Mr Seelig) do not believe that Nama will result in significant increase in bank lending in Ireland”

The Minister for Finance, Brian Lenihan, has today announced Steven Seelig’s appointment to the board of NAMA – see NAMA press release here. Mr Seelig was, according to minutes of a meeting between the IMF and government in April  2009, reported to have expressed the view that NAMA will not result in more credit reaching Irish households and businesses.

While no-one now believes that NAMA will directly result in a “wall of cash”  immediately washing over households and businesses, it was hoped that NAMA would be a vital part of the jigsaw of guarantee, balance sheet cleansing and recapitalisation that would restore lending to normal levels. Given NAMA’s disproportionate involvement with Anglo (€36bn of the €81bn loans are expected to be from Anglo) and the severe haircuts across all financial institutions, NAMA’s role may diminish in importance when compared alongside the recapitalisations.

Anyway, good luck to Steven Seelig – it won’t hurt to have an international-centric set of eyes contributing to  NAMA’s operation. Interesting protocol that it is the Minister for Finance, not the NAMA Chairman, t of the Board, that makes the announcement of an addition to the NAMA board.

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