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The Economic and Social Research Institute (ESRI), the publicly-funded think-tank, says in a recently published paper that by 2010, 196,000 Irish households, 1 in 3 with mortgages on their homes, may be in negative equity.
ESRI economist David Duffy says the fall in house prices in 2007 resulted in a small number of borrowers in negative equity at the end of the year - - 19,525. These are mostly FTBs (first time homebuyers) with high loan-to-value ratios. House price falls in 2008, following declines in 2007, means the number of mortgage borrowers with mortgage debt levels higher than their house price at end 2008 is estimated at over 57,000.
The paper says house prices have continued to fall in 2009. It is assumed that the decline is in line with those forecast in the Summer 2009 Quarterly Economic Commentary. If these forecasts prove to be correct then by end 2009 house prices will be around 30 per cent lower than peak in nominal terms. Allowing for the repayment of mortgage debt since drawdown the fall in house prices by end 2009 means that the number of mortgage borrowers with mortgage debt levels higher than the price of their house increases to over 116,000, up by 58,000 compared with the end-2008 figure.
Of those estimated to be in negative equity at the end of 2009, 76.8 per cent are FTBs.
By end-2010, as house prices continue to fall, 29.6 per cent of households with a mortgage, nearly 1 in 3, will be in negative equity. In the case of FTBs, the number in negative equity would rise to over 125,000 by end 2010
More than half the borrowers in negative equity by the end of 2010 - - more than 100,000 - - will have loans which are more than 10 per cent higher than the value of their home. The majority of these will be FTBs.
The banks have agreed not to begin legal proceedings against any borrower in default for a minimum of six months, or 12 months in the case of the two main banks.
Duffy says US research has shown that negative equity does not cause default or foreclosure but rather is a condition of default. He cited 2998 research, which found that around 10 per cent of US households that fall into negative equity default. Duffy says the research suggests that policies that lower mortgage repayments, thereby making default less attractive, are preferable. Policies should only allow borrowers to delay rather than avoid repaying their mortgage in full, to avoid the moral hazard problem of assisting those who do not need it.