Irish borrowers are starting to feel the pain, as money becomes scarce and banks tighten lending criteria almost daily to take account of falling property prices, writes SIMON CARSWELL
PICTURE THE scene. You have been waiting several years for house prices to fall to a level you can afford. You don't have any savings but that doesn't matter - you have been approved for a 100 per cent mortgage from the last bank still offering no-deposit home loans to borrowers in general.
Then, out of the blue, your mortgage broker calls to say the offer is gone. Your bank has pulled its 100 per cent mortgage products with immediate effect. Your plans are in ruins and it will take you at least three years to raise the €30,000 you now need for a deposit.
This was the scenario faced by some prospective house buyers last week.
The credit crunch may have been sparked by US homeowners missing mortgage repayments, but now Irish borrowers are feeling the pain, and it is not just first-time buyers. Everyone will have to pay more for loans, be they buy-to-let investors or long-time homeowners looking to remortgage and cash in on their valuable properties.
Few predicted in August, when the global financial storm began, that it would have lasted as long. Not only is it still raging, it has spread. Already overcast Irish skies darkened noticeably last week.
Irish banks are hiking rates and tightening lending rules on an almost daily basis as they cope with falling property prices and the stubbornly high cost of money, which has been driven up by the global banking crisis. It is a far cry from the booming property and giveaway mortgage market of just over a year ago.
On Tuesday, Bank of Scotland (Ireland), which sells mortgages through brokers, pushed interest rates up by 0.55 per cent, scrapped 100 per cent home loans and cut broker commissions.
Yesterday, Permanent TSB, the State's top mortgage lender, raised its mortgage tracker rates in some cases above its standard variable rate, effectively pricing trackers - a low-cost if slightly riskier alternative in the good times - out of the market. This was the strongest indication yet of how much banks are paying for their money.
Tracker mortgages follow the European Central Bank (ECB) rate, with banks charging customers a margin over the rate. By raising its trackers, Permanent TSB signalled that the ECB rate was no longer a relevant index. The inter-bank lending market, which also uses the ECB rate as its gauge, has become so expensive that the ECB rate has moved far out of kilter with what money is costing banks.
Banks were offering rates of between 0.5 per cent and 0.8 per cent above the ECB base rate of 4 per cent last August, depending on the proportion of the house price borrowed. This has climbed to more than 1.25 per cent above the ECB rate for high-value mortgages, as the banks pass on their higher money costs.
Mark Duffy, chief executive of Bank of Scotland (Ireland), said: "There is a substantial adjustment to be made. There is a disconnect between what banks are paying for their money and what the customers are paying for their loans. It is finally coming home to roost. The whole market has been topsy-turvy since last August."
The changes couldn't have come at a worse time. The property market, on which the Irish economy so heavily depends, appeared to be showing signs of a rally in January and February. Builders realised there were people out there willing to buy if developers were willing to drop their prices by 15-20 per cent.
The builders blinked first, but both sides won - the builders got stock off their books in a rapidly slowing market and cash into their businesses, while the buyers secured properties in cut-price deals.
However, it's the staring contest among the world's bankers that is causing most damage. Sitting around the table, the bankers are refusing to lend to one another. They are fearful that the investment packages of mortgages that banks use as collateral for loans might contain dodgy debts or, worse still, assets that have exposure to the toxic US subprime debts over which banks have had to write off losses totalling hundreds of billions of dollars.
Central bankers have tried to end the contest and encourage some inter-bank lending by dropping vast amounts of cash into the middle of the table at discount rates. But instead, the bankers have each taken the cash they need and kept it without lending it on. As a result, funding costs have spiralled and the banks have been forced to tighten lending criteria.
"It is going to take more than central banks reducing their rates," says Alan McQuaid, chief economist with stockbroking firm Bloxham. "The banks have to start trusting each other and lending to each other. Banks are the heart of the economy and if they stop lending, nothing is going to happen. You are going to get stagnation and people will lose their jobs."
THE FACT THAT the world's leading economic think-tanks can't agree on a definitive figure for the size of the subprime losses is not inspiring confidence. This week the OECD, the Paris-based policy research institute, said subprime losses would run to between $350 billion and $420 billion, up from its previous estimate of $300 billion last September. This contrasts with the spine-tingling $945 billion estimate suggested by the International Monetary Fund, which watches over the global financial system.
With the bank money tap switched off, buyers and investors are having to pay more to borrow, and with house prices continuing to fall, borrowers will have to pay bigger deposits as lenders become even more cautious.
Bank of Scotland (Ireland) said this week it was no longer offering mortgages for more than 90 per cent of the value of houses and no more than 80 per cent for apartments, because apartment prices had fallen farther than house prices. Until last Tuesday, it had been offering 95 per cent mortgages in most categories and 100 per cent mortgages in certain circumstances.
"All our competitors will react. Why? Because they won't make money out of mortgages. If this continues, it will be very bad news for everyone in the circle," says Mark Duffy.
The loan-to-value (LTV) ratio - the percentage of a property's value you can borrow - still varies, depending on who you talk to. Brokers claim it is still possible to haggle with lenders for a better LTV mortgage deal, usually for 90-92 per cent of the property's price, and even 100 per cent in some cases.
Bankers, however, offer a more cautious view. One senior banker said that, with property prices still falling and less money available to the banks to lend, few buyers would be able to secure a mortgage of 80-90 per cent and even fewer would be able to get a mortgage of more than 90 per cent of the price. This means a deposit of at least €25,000 and possibly up to €50,000 on the average house price.
"The average house in Dublin costs between €380,000 and €390,000, so you are going to need €38,000 to €40,000 at a minimum," says Michael Dowling, spokesman for the Independent Mortgage Advisers Federation, whose members negotiate 65 per cent of the mortgages in the broker market.
"No first-time buyer is going to save that kind of money in a short period of time. One way of getting it is to go back to the parents."
Lenders are also being put off by the state of the property market. Eugene Sheehy, chief executive of AIB, the State's biggest bank, has said prices fell 15 per cent last year and will drop another 5 per cent this year. So, peak to trough, house prices are expected to have fallen 20 per cent by the end of this year.
THOSE WHO BOUGHT with 100 per cent mortgages at the peak of the house price cycle, around February of last year, are facing the dreaded negative equity, where the mortgage is greater than the value of the property. Given how prices have fallen since then, these borrowers are sitting on paper losses of €27,000 nationally and €38,000 on a Dublin property, based on average house prices up to February in the Permanent TSB/ESRI house price index.
When trust returns to the inter-bank market, banks will eventually want to sell their mortgages on to investors in so-called securitisation deals, so no lender will want large amounts of negative equity on its mortgage books. You can see now why AIB's Eugene Sheehy, one of the few bankers to criticise no-deposit mortgages, described them as "a bad deal" for lenders and customers.
Bank of Scotland (Ireland) became the last lender to scrap 100 per cent mortgages to general borrowers last week, though many lenders still offer them to certain professionals and civil servants with guaranteed future earnings.
The trading-up market will also be affected, with fewer borrowers buying further down the property ladder. The switcher mortgage market, one of the busier lending areas in recent months, is facing tighter restrictions and lower LTV ratios as the banks seek out more secure lending generally.
As the supply of money continues to dry up, the prospect of the property market bouncing back in the second half of the year, widely predicted by bankers and economists, appears remote. Even the potential for two ECB rate cuts of 0.25 per cent this year, which has also been widely forecast, is looking less likely, as European inflation reaches its highest rate since measurements began in 1997.
"You might not want to shout about it, but the odds are long on there being any meaningful recovery this year," says one senior banker. Add to this the weak dollar and pound putting Irish businesses under some strain, and unemployment reaching its highest level since June 1999, and the omens are not good. The positive developments in January and February have been overshadowed by a torrent of bad news in March.
"All the data suggests the economy has slowed down very sharply. The banks are assuming it will be spring 2009 before demand bounces back," says analyst Scott Rankin at Davy Stockbrokers.
The economy remains heavily reliant on the house-building sector. For every 10,000 fewer houses built, 1 per cent is knocked off economic growth. However, less building this year, even lower than forecast, could be positive, according to some bankers. It would soak up some of the oversupply in the market so that when buyers return next year, property prices would rise, given a shortage in supply.
But the supply of money is a more unpredictable problem, and it will push property prices in the opposite direction. The global banking storm shows no signs of abating and bank customers are facing strong headwinds. Rising funding costs will lead to higher rates and less money available to borrowers.
"It will lead to a contraction in economic activity," says Mark Duffy, "and that is no good for anyone." The credit squeeze has well and truly arrived, and the vice is tightening.
Borrowed time: Views from different rungs of the property ladder
STUART WHITNEY, a 29-year-old engineer, has been looking for a property for about 18 months. He has no savings and managed to secure 100 per cent mortgage offers from Bank of Scotland (Ireland) and First Active. He eventually found a property for €400,000 and paid a booking deposit last week. An hour later his mortgage broker called to say Bank of Scotland (Ireland) had pulled all 100 per cent mortgage offers with immediate effect.
The 100 per cent mortgage offer from First Active stands because, as an engineer, Whitney (right) qualifies. Professionals and civil servants with guaranteed earnings still qualify for no-deposit mortgages.
Whitney says that without a 100 per cent mortgage he would be forced to wait almost three years, as he would need to save €1,000 a month for the required deposit of €32,000.
"This is after pushing people to either buy now or wait - if this doesn't go right, it means I have to wait a minimum of two to three years. It is putting a lot of pressure on people."
KEITH DYER (30), a manager with a local authority in Dublin, bought a two-bedroom house in Navan, Co Meath, in January 2007, when property prices were at their peak. He paid €275,000 with a 100 per cent mortgage. Two nearby houses have recently sold for between €265,000 and €268,000. Dyer had hoped to buy a little closer to his office, but prices were too high.
"Our long-term plan was to buy out here and then move in towards Dublin. We were hoping that prices would drop a little bit here and drop quite a bit in Dublin, and we could move in."
Dyer says he could lose about €10,000 if he tried to sell his home now. "We have to accept that there will be a loss. It is not great. The house is really the only capital we have. As long as my job and my partner's job keeps going, everything will be fine," he says.
DAVID WATERS (30) bought a house in Inchicore, Dublin, in April 2006, borrowing 90 per cent of the property's value. He was promised a further €50,000 by his lender to renovate the property. When planning permission for the renovations came through around 18 months later and he approached his lender for the additional money, he was told he no longer qualified for the €50,000.
"If I'd done it a week or two earlier, it would have been approved - it was that close. But they said I didn't qualify due to the change in the financial market."
Waters has had to find loans elsewhere to complete the job and is renting while his house is being renovated. "I've got a couple of smaller loans to cover it. I would have had the whole thing built and be living in there now, but because the finance is so hard to come by, the job is a lot slower."
NIAMH WILSON (30), a marketing manager in Dublin, bought a one-bedroom apartment off plans in East Wall, Dublin 3, for €365,000 two years ago. The apartment is ready now, but she is unhappy with how it has been fitted out and is trying to get her €20,000 deposit back.
"If I could get out at all, I would. If I lost my deposit, it would be the lesser of two evils because the apartment is worth about €60,000 less. I can get a two-bedroom house in the same area now for €330,000."
Case studies by Simon Carswelland Fiona McCann