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The banks and the buyers are feeling the fear


Brendan Keenan

Brendan Keenan

Brendan Keenan

Whatever happened to all those desperate house-hunters? Who took away the property ladder on which we were so keen to mount the first step, or move to new heights?

In the first three months of the year, only 3,259 new mortgages were issued. The once teeming industry was processing on average, just 40 new home loans per day. One could do it out of a couple of offices. What really caught my eye in the data from the Irish Bankers Federation and PricewaterhouseCoopers was that the number of new loans was 53% down on last year. There was a slight upturn in the size of mortgages issued, which meant the value of loans was 42% less than in the first three months of 2010.

One might have thought that, with a property crash which began in 2007, one wouldn't still be seeing such giddy falls. But it is a slow business from build to sale or, these days, even from decision to buy to closing a deal. Only now are we nearing the bottom of this particular trough.

There were signs that we might have reached it in the results presented to distraught shareholders of Irish Life & Permanent. While existing customers falling behind in payments continues to rise, it is doing so at a slower pace. No doubt it will rise above the current 6% of homebuyers in arrears, but the number able to meet their repayment bills could remain above 90%.

There are connections between these figures and the stagnant market. Arrears are not helped by the fact Permanent felt obliged to increase its rates by 2.5 percentage points since the crash, which adds about €280 (£243) a month to a €200,000 (£174,000) mortgage - and the ECB has just made a total increase 2.75 points.

This uncertainty about interest rates also damages the market for new loans. It deters those who would like to buy for the first time, or move house.

The young population means plenty are of an age where they are ready for a place of their own. There's always a percentage of homeowners who want to move, or need to move. It too goes up and down, but it cannot be as low as the present 100 or so per week. These potential buyers are waiting, and watching. If it were only interest costs, a prospective buyer could do a cautious calculation; figure out what they could afford if mortgage rates went to 8%, and look for something suitably priced. What really frightens them is that this price itself might fall further as mortgage rates rise. They could meet the monthly payments but would be in negative equity.

All these factors weigh but it seems unlikely that all of the slump is down to nervous buyers. The lenders have reason to be nervous too. Mortgages are difficult to come by. The question is whether there are a lot of willing buyers unable to get a loan. It is a question which the raw statistics are unable to answer.

The Bankers Federation, which always stoutly denies banks are hoarding credit, did speak of the need for "prudent" lending. But whose jobs or incomes are so secure that a bank can feel safe giving out a 30-year loan?

There is another pressure on banks - the requirement to reduce their loan books, so that there's fewer loans financed by borrowings rather than deposits.With the markets unwilling to lend to Irish banks, these borrowings have to come from the ECB. It would like to see less of them, so the banks have been told to cut loans by around €70bn (£60.8bn).

This shrinkage is supposed to apply to "non-core" loans, such as those made abroad, or on products too fancy for banks which are meant to stick to basic stuff like providing small company finance.

That sounds fine except that, because there are precise targets, every euro issued for new loans, however "core" they may be, requires a euro reduction somewhere else. It would be no surprise if, while this great restructuring goes on, banks regard lending, not as an opportunity for profit, but as a source of trouble.

The slump is unlikely all down to nervous buyers - the lenders have reason to be nervous too