A whiff of fear and terror emanates from housing loan statistics that tell of an imploding Buy-to-Let property investment market. Ireland’s once exuberant amateur landlord and property investment class are ruing the day they got sucked in by the “wealth management” marketing pumped at them by Ireland’s bankers. They became the final rung in a gigantic property ponzi scheme.
Does anyone care? Should amateur investors have been protected by consumer health warnings and would they have been heeded them anyway? A consumer is a person not acting in their professional capacity and most Buy-to-Let investors were consumers.
It’s likely no one would have heeded regulatory health warnings had the Financial Regulator had a mind to issue them.
But the banks may have heeded a stringent capital adequacy brake on their lending instead of the gentlest of tugs applied by the Financial Regulator. When it did finally move to rein in aggressive lending by requiring banks to allocate more capital it was far too little and too late. It had arrived at the scene of an accident but didn’t know it.
Banks relationship manager teams sold loans as investments promoting the upside of leverage where nobody it appeared could lose.
Accountants got in on the act flogging tax efficient schemes to their clients. Stories abound of people not buying one but many houses and apartments to manage their tax liability with little thought for risk. The myth of “safe as houses” lured many to turn a deaf ear to warnings.
Stockbroker and banks “private client” divisions promoted property investment schemes to busy “high net worth” professionals who bought into full risk schemes where not only the money they invested, frequently borrowed, was at risk but everything else they owned as well.
Exotic foreign property schemes popped up on every corner promising “guaranteed” returns. The regulator stood off saying it didn’t have a role to play. Yet the schemes were being marketed as guaranteed and low risk investments.
Everyone flogged the upside of leverage but none warned of the downside when prices would collapse exposing investors to negative equity on their highly leveraged interest only loans. Many are now suffering from the sting in the tail of all too enticing capital repayment holidays as hefty repayments kick in on their negative equity property investment portfolios.
In the space a few years many people went from owning none to owning many units, building huge debt mountains they have no hope of financing.
Should the regulator, with its consumer protection mandate, been concerned with the way property was being sold as a packaged investment scheme without any health warnings or requirement to provide proper advice? It spends vast resources ensuring that insurance, pensions, investments and home mortgage selling is regulated. Should it have been concerned as the already overheated housing market was amplified by an insatiable investor demand?
Developers and builders upped capacity joined by amateur local partnerships and overshot demand, producing tens of thousands of units no one wanted.
Ireland’s amateur investors increased their borrowings between March 04 and March 08 loan by €23.2bn. Total loans exploded by 232% contrasted with homeowner loans increasing by 89%. Since mid 2008 the Buy-to-Let market has imploded. In the first quarter of 2007 nearly 8000 loans of €1.9bn were issued. This year the market shrunk to 2200 loans of only €584m. Of greater concern is the declining loans total. It’s down just over 10% from peak volume.
The last thing needed is a glut of amateur investors selling property at any price to limit their losses. They may have started. For two consecutive quarters to March this year total loans outstanding have dropped. How many vacant housing units for sale are owned by investors is unknown. As no one is buying them, the empty ones are probably the investors dream-cum-nightmare.
The childhood nightmare of sitting in the classroom in your underwear hoping no one would notice is haunting Irish amateur investor households struggling under the weight of property investment debt.
Just like the nightmare, the amateur investor thinks they are the only one with no clothes on. But what they don’t know is others think they too are the only ones in their underwear. No one is breathing a word about their new-found poverty. With every passing month, losses mount as prices decline and loan costs increase while rents tumble.
Should the state arrange a “nightmare” bailout scheme? Most people would probably think not. Why should tax payer’s money go to financing amateur investors losses?
The professional landlord class with its huge loan exposures may buy some time with bankers and NAMA. But tens of thousands of others who don’t owe enough to matter will rue the day they listened to the young wealth managers convincing spiel and friends bar stool advice.
Yet so far there has been no talk of helping homeowners who property values have dropped partly because of amateur investor’s dreams overshot demand partly because of what seemed to be an insatiable demand for investment property.
Meanwhile there is little indication that lessons from the property bubble are being learned.
As Government plans to deliver on a new financial regulatory system has it considered how to prevent another property bubble? Free market unfettered forces including unsophisticated investors fuelled the bubble. As yet there doesn’t seem to be any move to enquire into what went wrong and how to prevent a housing bubble happening again.
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