The housing market in Northern Ireland is suffering the pain of an inevitable correction. For some stakeholders, there is pain, big pain, before there will be gain! Most owners of houses purchased in 2006-7 are, theoretically, living with negative equity. More importantly, builders and developers who were assembling land for development in 2008-10 are facing a total capital loss possibly in excess of £300m.
These developers and builders face an uncomfortable choice. Either sit tight and wait for the housing market to return to the economics of 2007, which is unrealistic in the foreseeable future, or keep going with new building when house sales will cover building costs but make a minimum contribution to the sunk cost of site assembly.
Should anyone have believed that average house prices in Northern Ireland would be sustainable after they had increased from about 80% of the UK average to over 105%?
In 2008, housing transactions will be less than half what might, on a long-term trend, have been expected. Potential buyers have been deterred by high prices and reduced mortgage affordability. Builders have stopped building because existing stocks are not selling with acceptable (but lower) profits.
This stand-off is in no-one's interest. If the housing market does not quickly adjust to more realistic prices, the danger is that recovery will be delayed or when recovery comes it will risk the excesses of unrealistic prices as in 2006-7.
Special pleading for Government action is understandable, not easy to design, but should gain support provided there are fundamental market adjustments. House prices must fall enough to attract realistic offers. As a linked effect, land prices and related site prices must fall. The Planning Service needs to be more helpful.
Understandably, property owners and builders do not willingly concede that large write-offs on development land must be accepted. Large write-offs will be, eventually, posted to annual accounts. Bank loans will accumulate rolled-up interest. Builders and banks will be forced to accept the new reality. There is a potential for casualties which lenders need to minimise. Off-setting capital write-off on land purchases is not a practical Government action.
The financial institutions and estate agents have a key role. Mortgage lenders should avoid ‘sub-prime' lending by restraining excessive borrowing. This should be linked to minimum deposits and income related limits on loans. Loans of 100% and loans of five times income now seem irresponsible.
There is scope for ministerial action by Social Development Margaret Ritchie on social and affordable housing, but any such special measures, however helpful, will still leave the main adjustments to the normal owner-occupier market.
John Armstrong, managing director of the Construction Employers Federation, is seeking indirect Government intervention to increase the funds available for mortgage lending (which is essentially a plea to the Chancellor).
The plea to the Executive asks for extra capital funding to allow an expansion of the co-ownership house purchase scheme, funding for a wider house purchase scheme drawing on shared equity, and a special scheme for Government agencies (or housing associations) to have funds to buy up unsold suitable units for social housing.
The newly set-up Construction and Property Group, representing over 50 diverse businesses has lobbied key personnel in the Executive and Assembly. Brendan Cunnane, the secretary, shares the worry of jobs being lost.
Interestingly, his agenda for action largely coincides with the CEF and he adds “it is critical that everyone involved pulls together to seek a way out of this crisis”. An analysis of where the blame for the crisis lies is tempting.
However, the question now is not to allocate blame but to signpost a route to recovery. This calls for a shared (but not exclusive) Executive response.
Are ministers listening?