Irish Banking Crisis; a legacy

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My daughter often attacks me as a banker for the legacy my generation has left behind due to the property crisis in Ireland and elsewhere.  She focuses on the levels of debt to GDP that Ireland has and the uses that that money could have been put to.  She has a point but thankfully she has not yet worked out the real legacies of the crisis; the ones that will endure and hurt for many years.  I can think of two of which the long term mortgage arrears is one, which I will cover in a separate article.

The second and the one I believe will endure the longest is the tightening of credit to young people wanting to own a home.

Cost of mortgages

There has been much discussion in the media on the cost of mortgages and banks’ attempting to recover their losses with respect to trackers that they priced with tiny margins and could not hedge.  You often hear them state that ECB rates are not an integral part of their funding costs: so why did they write so many ECB linked mortgages (trackers) when their borrowing was not linked nor could be linked to the ECB rate.

Too much protection

However, this is not the reason that bankers have tightened their lending criteria to the residential mortgage market.  The main reason is that due to the crisis the Central Bank and Government brought in many restrictions to protect families that had been allowed to borrow too much.  Those restrictions or the granting of protection over the family home are now driving current appetite levels for lending in that sector.  Because an individual can default on his home repayments and remain in the house for years and years, the bankers are looking at the sector as (a little bit like) unsecured lending and why would you lend depositors’ money at 3% on an unsecured loan.  Even a car loan gets the banker 8/9% and they can easily get the car back!

So the banker faced with low returns on residential mortgages and an inability to get the house back, if the borrower defaults, behaves very sensibly and only lends to the safest of safe borrowers – people that will never default.

So by protecting the family home beyond normal international levels (for whatever reasons) has and may result in future generations struggling to raise sufficient finance to buy a home.

Our rental market

While this is not a problem in Germany or most continental cities, it is a major problem in this country where there is no Government or professional residential rental market. I believe that in Dublin over 40% of property is delivered by the Buy to Let landlord.  We also build and want to live in houses that make the rental model very expensive and while you will see a Kennedy Wilson type buy and rent a significant block in its entirety, you will not see them buying individual 3 ups 3 downs in Lucan.  Why?  Too expensive to operate.

We have created another crisis

Meanwhile we have Government policy that is forcing the small amateur landlord out of the business due to tax, costs and improvement of tenant rights.

We have created another crisis by not looking at the housing market and its funding in a holistic manner. No one person or body views it or looks at it in a holistic manner and each player tries to fix their part; bankers are looking after their depositors and property guys are, well just property guys.  We occasionally get the odd brilliant economist who gets close to a solution but like all economist they lack practical solutions.

Government agencies

I also have to say that every time I engage with the powers that be, I find them looking for the issues to prevent action.  It might be driven by distrust or fear of making a mistake or just fear of the unknown or something new but it is there.  The suggestions of a Housing Minister might be appropriate but politicians’ horizons are short that a solution will never emanate from here.

Solution

We need a strategy that looks at home seekers needs, tiers them and comes up with a solution to meet each of there housing needs; the bedsit (for googlers) to family 3 ups/3 downs.  A REIT CEO recently called for at least 12 housing unit types to be recognised (I think we are at 3).  More importantly, we need to ensure that the this property can be delivered in such a way as to meet earning capacity of the tiers, i.e. that institutions are lending sufficient amounts at well priced levels for our community; so there is no upward wage demands and our economy remains competitive.

Advantages

Back to one of my daughters; as a nurse she may like to stay in Ireland. As a parent – do you want that over-qualified free lance journalist in the back bedroom in their 30s when you’re in your 70s?