It’s a debilitating condition that will soon affect one in four Irish households. Thousands of people suffering from the disorder don’t even realise it yet. But by the end of next year, up to 350,000 families could be stricken by the disease if property prices continue to plummet, the Economic and Social Research Institute (ESRI) calculated last week.
It is negative equity, which arises when the mortgage on a property exceeds its value. And it’s contagious: once one house on your street contracts it, the spread is unavoidable. Symptoms include stress and a loss of mobility.
But for Andy Kelly, a nurse originally from Co Wexford, the condition will manifest itself most fully in his young daughter’s Dublin accent.
Kelly always dreamed of moving to the countryside once he had children but, due to the decline in the value of his home in Dublin 16, he is now effectively stuck.
“We bought a three-bed a year-and-a-half ago just before prices collapsed,” he said. “Everyone advised us to buy and, with prices increasing all the time, we thought that if we didn’t get in, we never would. After all, rent was dead money.”
Three months ago, his partner, also a nurse, gave birth to a girl. “We can’t complain: we have a house and we can afford to pay the mortgage. But I’ve given up thoughts of moving out of Dublin,” he said.
Andrea Carroll, an environmental consultant who runs her own company, would like to move in the opposite direction, from Meath to Dublin. She and her boyfriend bought a house in Navan in 2007.
“We paid €317,000 for a four-bed. Work is getting more difficult to come by, so I would like to be in the city, but the house is €100,000 in negative equity. I like the house, but I don’t like the feeling of being trapped,” she said.
Kelly and Carroll have resigned themselves to staying put for the time being. But the situation is worse for a couple living in a one-bed apartment who want to start a family, says Derek Brawn, author of Ireland’s House Party. “The social consequences of negative equity will only become apparent over the next few years. There is a huge over-supply of one-bedroom apartments in Dublin and if you bought one to live in during the last four or five years, then get comfortable,” he advised.
Brawn should know. In September 1992, he bought a one-bedroom flat off Tower Bridge Road in London, thinking prices had bottomed out in the then stagnant UK property market. “Three months later, a neighbour in my block of 25 apartments panicked when interest rates started to rise and handed her keys back to the bank,” he said. “They sold the flat quickly, accepting a low bid, and overnight, prices in the development were effectively set at that price. Overnight my home was worth 35% less than I had paid for it three months earlier.”
Brawn estimates that one-in-four Irish households will experience this sinking feeling by the turn of 2011. The ESRI estimates that more than 150,000 households are already in negative equity, while Goodbody stockbrokers estimates that, given the range of property values, the average household owes €43,000 more than their homes are worth.
But as long as you’re happy where you are, so what? Right?
BRAWN finally sold his London flat six years after he bought it, securing the same price he had paid originally as he cashed in on an upswing in the property market. But he had grown to resent his home for “trapping him in limbo”.
“Negative equity has a pernicious psychological effect. At one point, the pump that controlled the water pressure in the shower in my flat broke, but for six months I refused to fix it. I couldn’t bring myself to pay €200 or €300 to a plumber,” he said. “I didn’t see the point of putting money into a property that had been devalued so much.”
This is a common response to the burden of owning a home that is worth less than their mortgage. David Duffy, a researcher with the ESRI, discovered a similar phenomenon in America, where research has shown that “owners with negative equity behave more like renters and re-invest less in their properties”.
The social consequences of negative equity are manifold, he points out. “It affects consumer spending as people feel less wealthy. Those in negative equity tend to increase precautionary saving, taking money out of the economy,” he said.
Negative equity can also adversely affect people’s ability to obtain credit. “In my experience, a lot of people only realise that negative equity is affecting them when they look for a loan to extend their house or for a car, and realise that their credit rating has been affected,” said Brawn.
Those in negative equity, typically first-time buyers in their 20s and 30s, are also unable to move location quickly to take advantage of job offers.
Leo Varadkar, 30, a TD, recently wrote to the National Asset Management Agency (Nama), a bank set up for bad loans, asking it to purchase his apartment. “I was only half-joking,” he said. “I bought it for €350,000 in 2004 and now I estimate that it’s not worth much more than €250,000. I had planned to move in four or five years but I’m going nowhere now.”
Varadkar said that his age group has been deeply affected by the slump because they took out 100% or interest-only mortgages, or stretched them over 35 years.
Brawn said: “On a standard 25-year mortgage, you don’t start paying off any capital until after about five years. On a 100% mortgage, or a 35-year one, it takes longer. If you have one of these, you’re likely to be in deep negative equity.”
Carroll, who is in her 20s, said friends who bought in the past few years recently came out of fixed-rate mortgages onto high interest rates. “They can’t change lender because they owe more than the value of their house. They’re effectively trapped in one house and with one lender,” she said.
Is there any escape? Renting out the property and moving in with friends or family is one option. But the decline in rents has cut off this escape route for many. Anne Cunningham, an education worker from Galway, and her husband, a paramedic, became accidental landlords when they built a new house in rural Galway but couldn’t sell their house in the city. “The combined mortgages on both properties is €750,000,” she said. “But we wouldn’t get much more than €600,000 if we sold both.”
Cunningham loves her new home, a contemporary, eco-friendly property on 0.75 acres, but the four-bedroom semi in Knocknacarra has become a burden. “We are on a tracker mortgage [linked to the European Central Bank rate] on both homes. But if there are more public-sector wage cuts and if interest rates go up, we could be having a long chat with the bank manager,” she said.
Even emigration does not shake off the ball and chain of negative equity. Sean Kearns, of the Irish Peoples Union, an organisation that campaigned against recent interest-rate hikes by Permanent TSB, cites a man who moved to Australia to get a job. “He rented out his house in Ireland but the money doesn’t cover the mortgage, so he’s supplementing it from Australia,” Kearns said.
Brawn said that this option could become even less affordable as rents fall and interest rates creep up.
Based on international evidence, however, only one in 10 householders in negative equity typically defaults on their mortgage. “Those who default usually experience sudden cash-flow problems,” said Duffy. “It’s usually accompanied by one or more partners losing a job, getting sick or divorcing.”
Recent analysis of those divorcing suggests that negative equity is driving a wedge between couples.
Roisin O’Shea, a family-law researcher, discovered that most separating couples are “up to €100,000” in negative equity. “Family-court judges are being asked, in essence, to apportion debt rather than assets,” she said.
On a recent visit to Ireland, the Nobel prize-winning economist Joseph Stiglitz suggested that the government could force banks to write down the size of the debts owed by those in negative equity — a type of Nama for mortgage-holders.
The Green party is said to be looking at this option, plus others, including the government subsidising lower interest rates.
In the absence of intervention by the government, the best option for most households in negative equity is to sit it out, says Brawn. “A house works for you in an upturn, but against you in a downturn. You just have to outgrow the negative equity. Many people think they can just hand back the keys but that isn’t an option either,” he said.
On Friday, the Irish Brokers Association noted how lenders are pursuing borrowers who hand back keys for their other assets, turning a mortgage into “a life sentence”.
Conor Halpin, a Dubliner teaching in Meath, discovered how difficult it is to walk away from a mortgage. If negative equity is akin to a disease, he did the equivalent of hacking off the offending limb.
“I bought for €238,500 in Navan in September 2005 and decided to sell last year. My estate agent, Sherry FitzGerald, valued the house at €260,000 but after a few months of it not selling, they suggested I lower the price,” Halpin said.
“At the time it was clear that prices were tumbling, so I agreed to reduce it to €200,000, even though my mortgage was for €225,000.”
Halpin sold for €185,000. “Prices were tumbling, so I decided to cut my losses and get out. But when I approached IIB, my lender, they said I would have to pay off the entire loan on the day of the sale or they wouldn’t allow it go ahead,” he said.
Halpin took out a €40,000 loan from the credit union, discharged the mortgage and moved out.
“I’m paying off more now than I was when I had a mortgage, but it’s a weight off my mind. I think I’m lucky I got out when I did,” he said.
Home truths
There are 1.6m households in Ireland, 40% of which have a mortgage, according to the 2006 census, so there are about 645,000 mortgages.
Total mortgage debt in December 2008 was €148 billion.
The percentage of mortgages in negative equity is expected to rise from 9% in December 2008 to 30% in December 2010.
76% of those in negative equity are first-time buyers.
House prices will fall 30% between 2007 and the end of 2009.
If prices fall by 50%, 350,000 owners will be in negative equity.
The situation is worsened by the prevalence of top-up mortgages, refinancings, interest-only, 100% and lengthy mortgages.
In 2007 and 2008, 25% of loans to first-time buyers were 100% mortgages.
In 2008, 82% of first-time buyers had mortgage terms longer than 25 years, with 54% on between 31 and 35 years.
The Irish Banking Federation says that top-ups, refinancings and interest-only were respectively 30%, 16% and 15% of loans in 2007.
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