House Trap 2

It’s a debilitating condition that will soon affect one in four Irish households. Thousands of people suffering from the disorder don’t even realise it yet. But by the end of next year, up to 350,000 families could be stricken by the disease if property prices continue to plummet, the Economic and Social Research Institute (ESRI) calculated last week.
It is negative equity, which arises when the mortgage on a property exceeds its value. And it’s contagious: once one house on your street contracts it, the spread is unavoidable. Symptoms include stress and a loss of mobility.But the situation is worse for a couple living in a one-bed apartment who want to start a family, says Derek Brawn, author of Ireland’s House Party. “The social consequences of negative equity will only become apparent over the next few years. There is a huge over-supply of one-bedroom apartments in Dublin and if you bought one to live in during the last four or five years, then get comfortable,” he advised.
Brawn should know. In September 1992, he bought a one-bedroom flat off Tower Bridge Road in London, thinking prices had bottomed out in the then stagnant UK property market. “Three months later, a neighbour in my block of 25 apartments panicked when interest rates started to rise and handed her keys back to the bank,” he said. “They sold the flat quickly, accepting a low bid, and overnight, prices in the development were effectively set at that price. Overnight my home was worth 35% less than I had paid for it three months earlier.”
Brawn estimates that one-in-four Irish households will experience this sinking feeling by the turn of 2011. The ESRI estimates that more than 150,000 households are already in negative equity, while Goodbody stockbrokers estimates that, given the range of property values, the average household owes €43,000 more than their homes are worth.

But as long as you’re happy where you are, so what? Right?


BRAWN finally sold his London flat six years after he bought it, securing the same price he had paid originally as he cashed in on an upswing in the property market. But he had grown to resent his home for “trapping him in limbo”.
“Negative equity has a pernicious psychological effect. At one point, the pump that controlled the water pressure in the shower in my flat broke, but for six months I refused to fix it. I couldn’t bring myself to pay €200 or €300 to a plumber,” he said. “I didn’t see the point of putting money into a property that had been devalued so much.”
This is a common response to the burden of owning a home that is worth less than their mortgage. David Duffy, a researcher with the ESRI, discovered a similar phenomenon in America, where research has shown that “owners with negative equity behave more like renters and re-invest less in their properties”.
The social consequences of negative equity are manifold, he points out. “It affects consumer spending as people feel less wealthy. Those in negative equity tend to increase precautionary saving, taking money out of the economy,” he said.
Negative equity can also adversely affect people’s ability to obtain credit. “In my experience, a lot of people only realise that negative equity is affecting them when they look for a loan to extend their house or for a car, and realise that their credit rating has been affected,” said Brawn.
Those in negative equity, typically first-time buyers in their 20s and 30s, are also unable to move location quickly to take advantage of job offers.
Leo Varadkar, 30, a TD, recently wrote to the National Asset Management Agency (Nama), a bank set up for bad loans, asking it to purchase his apartment. “I was only half-joking,” he said. “I bought it for €350,000 in 2004 and now I estimate that it’s not worth much more than €250,000. I had planned to move in four or five years but I’m going nowhere now.”
Varadkar said that his age group has been deeply affected by the slump because they took out 100% or interest-only mortgages, or stretched them over 35 years.
Brawn said: “On a standard 25-year mortgage, you don’t start paying off any capital until after about five years. On a 100% mortgage, or a 35-year one, it takes longer. If you have one of these, you’re likely to be in deep negative equity.”

The Sunday Times