IT IS all of half a decade ago since residential property prices began to fall. The price of the average home nationally now stands a whisker away from half that of the 2007 peak when the property bubble was at its most extended. On recent trends, average prices will fall below that threshold in the coming few months, and there is no end in sight.
While it seemed in 2010 that the market was bottoming out, over the past year the rate of decline has accelerated again. If, during the bubble era, it once appeared that prices would rise inexorably, some could be forgiven for fearing now that they will fall without end.
The consequences of the property crash have been society-changing, and they have manifested in many ways. One manifestation is the large number of people who are able to continue servicing their mortgages, but doing so while moving ever more deeply into negative equity. Though this group may not be as desperate as some others, it is large and growing. Many are trapped, unable to relocate because to sell a property in negative equity is to crystallise the loss suffered between the price paid and the current value.
It is against that backdrop that Matthew Elderfield, the chief regulator of the financial services industry, announced last week that his organisation would permit banks to issue “negative equity mortgages”. Such mortgages facilitate those who can afford to service mortgages to move from one negative equity property to another without crystallising the losses. Having supervised two banks issuing such negative equity mortgages on a pilot basis over more than a year, the regulator is satisfied that the case for doing so on a wider scale is justified. It is, if it happens in the tightly regulated manner he proposes.
There can be many painful consequences of being trapped in a negative equity mortgage. Expanding a family in a too-small home and preventing those whose relationships have failed go their separate ways are two. If these effects can be the cause of individuals being unable to move on, another effect is to hinder the economy moving out of recession. Negative equity reduces mobility and can prevent people availing of employment opportunities in locations distant from their homes. Although Ireland is enduring a chronic employment crisis, it should be remembered that tens of thousands of jobs come into existence and disappear in any given month. A properly functioning housing market helps maximise job creation, which is, in turn, a central part of any wider recovery.
This is not to say that government action to bolster the property market – either directly or via a loosening in regulatory constraints on financial institutions, as in this case – should be treated lightly. The national obsession with property was a factor, if not the main factor, in the frenzied credit expansion that ultimately led to this State’s worst ever recession. But a stable, well- functioning property market is essential. Tightly controlled negative equity mortgages can be a small but significant part of achieving that objective.