Nov 18th, 2008 by Conor McCabe
That’s how much Ireland Inc. owes in mortgages.
That’s how much Ireland Inc. has ‘invested’ in buy-to-rent properties, around €23 billion of that taken out in the past five years.
Thing is, this figure contains mortgages that were taken out on vastly-overpriced properties, and as such, any move to re-capitalize the banks must go with a parallel move to re-negotiate this mortgage debt.
Traditionally, the national average price for a family home (three-bed) moved between two-and-a-half and four times the annual average industrial wage.
Thanks in no small part to the vast amounts of credit floating around the system over the past fifteen years, we have seen that relationship completely smashed - to such an extent that, even today, the average price for a three-bed house is eight to ten times the annual average industrial wage.
The cheap credit is gone, and is gone for the foreseeable future, which means that we have to go back to prices based on what banks can loan from their deposits, which is based on what people earn, and which is based on what people can afford.
some figures, and let’s be generous. The annual average industrial wage for a man is €32,000, for a woman it’s €28,000, but let’s say the average is €32,000. That means, based on pre-cheap credit rules, we’re looking at an average house price of between €82,000-€128,000. Now, there’ll be houses worth €40,000, and there’ll be houses worth €400,000, but the average price should be around those figures.
That means that, at the moment, the majority of people who bought a house in the past seven years, have paid over the top for their house.
The idea that we can re-capitalize the banks and not tackle the mortgage debt - based as it is on fantasy prices - is insane. In effect, a re-capitalization without a re-negotiation of the national mortgage debt would lead to a situation where we would have a devalued banking system claiming premium rates off unreconstructed loans. Sheer brass neck folly.
We have to introduce a mortgage readjustment agency, where people can apply to have their mortgage reduced to an acceptable level.
It means that, in a lot of cases, the cost of a mortgage will be reduced by anything up to 50%, taking huge pressure off the business sector with regard to wage demands as the reduction in mortgage debt is, effectively, a reduction in the cost of living.
Such a move would mean that the Irish banking industry is left with sustainable mortgage loans - loans that they can use as collateral - of around €70-80 billion.
Such a move would be in itself a form of recapitalization, as it sends out the message that Ireland’s mortgage debt is sustainable - that it is “bankable”.
Coupled with a government move to recapitalize, and thereby taking a shareholder role in the banks, we would be laying the basis for a recovery.
It will not lead to a recovery in itself, but it puts Ireland Inc. in a more secure, and realistic, position, instead of the one now where fantasy is running riot. The twin moves of re-capitalization and re-negotiation of mortgage debt are merely aspects of a wider stimulus package - but essential aspects, nonetheless.
Just in case anyone thinks that what I’m proposing is fantasy, it should be pointed out that Irish banks are doing EXACTLY the same thing for their property developer customers as we speak - but not, it needs to be pointed out, for their mortgage customers.
We have to have a re-capitalization plan which deals with the €132 billion mortgage fantasy value as well - to bring it down to a more realistic figure of around €70-80 billion. Once that happens, rent control and land reform has to be introduced to ensure we do not have this problem, on this scale, again. €32 billion spent on property rent business schemes, €23 billion of this in the past five years. Picture if that money had been invested in real businesses instead of passing over into the collective hands of property developers, estate agents, banks, and solicitors. House price speculation has to killed, once and for all, before it’s allowed to kill us.
Then, and only then, can we even think about talking about a recovery for the Irish economy.