I just got back from a trip to Ireland. During my trip I was surprised by the amount of real estate for sale throughout the country. One of my friends, Frank Hanna, met my wife and I once in Belfast and then in Port Erin on the Isle of Man to show us around. Everywhere we went we saw real estate signs. In fact there were six real estate signs on his street alone in Belfast. We felt like we were in our own neighborhood back in Scottsdale, Arizona.
Ireland and European Housing Markets Lag The US
With so many homes for sale, I began to speculate that perhaps Ireland was suffering a similar downturn in their real estate market as the U.S. I have to admit, I haven't thought that much about whether or not other countries around the world have or are currently experiencing downturns in their housing markets like the U.S. But, seeing For Sale signs all over the place during my trip woke me up. I got curious, and decided that I would do some looking around to see what was happening.
According to an Estate Agent at Sherry Fitzgerald, "trends that start in the United States tend to hit the European market about six months later." Given this, it makes sense that the real estate market in Ireland is heading in the same downward direction with their property values as with the U.S. market. But what is the cause? In the next few sections of this article, I present some research I did when I got home to paint a clearer picture of what is going on with respect to the Irish housing and mortgage markets. Then I'll get back to my trip to complete my story.
Similar Result - Similar Cause - Not Quite
U.S. newswires for at least 18 months have reported - with no end in sight - endless stories of families who have lost their homes to foreclosure. The scenario is basically the same: the family bought the home on an adjustable rate mortgage, that they got from overly aggressive liberal subprime mortgage lender, that adjusted to a higher payment that they no longer could afford. Several months later, the family was out on the street and their home was now for sale by the bank.
In early 2007, with increasing numbers of foreclosures, subprime mortgage companies began to literally shut their doors overnight. This immediately put a halt to the adjustable rate mortgage products that allowed so many people to purchase homes. The result, less people could buy homes, which translated into increased inventory of homes for sale.
Meanwhile home builders, in some parts of the U.S., continued to build like crazy which added even more homes to the for sale market. With all of these homes hitting the market so quickly, the market could not absorb them and as such property values began to drop as homeowners who needed to sell began to drop their prices . And then there were more homes for sale and values dropped more and more in desperation. And this is where we are in 2008, caught in a viscous viral downward spiral indeed.
Unlike the U.S., Irish homeowners were not given quite the access to the aggressive subprime adjustable rate mortgages. As such, the Irish housing market has not suffered nearly the amount of foreclosures as the U.S. market. Rather, the Irish housing and mortgage markets are seeing its homes for sale inventory go up for other reasons.
European Banks Got Hurt
As the U.S. mortgage credit crunch got more severe, European banks, which were heavily invested in the U.S. housing markets, began to see losses on their home turf. European banks reacted by cutting their mortgage approvals in Ireland and other European countries for that matter. With less people able to buy homes, inventories for homes for sale began to increase. But this isn't the complete story.
Home Contruction in Ireland Continued - But Has Slowed
Similar to the U.S., Ireland and other European countries have also been enjoying a rather robust housing market. The market got its construction workers from immigrant workers who, coincidently, were a chief constituent in buying the very homes they were building for both owner residences and investment properties. And those who couldn't buy, rented.
Until recently, the rental market minimized the amount of foreclosures in the Irish market which has kept homeowners and investors alive with rent for their mortgages. But, as the housing market has slowed with less mortgage product availability, the construction market has also slowed. With a slower construction market, there are less construction jobs. With less jobs, people leave. Ultimately this means no more rental market. No renters, no rent, foreclosures begin. Although this hasn't started in earnest, Ireland could be in for a very long ride down the tunnel. Remember earlier when I wrote about the European trend being 6 months behind that of the U.S.?
Mortgage Industry Is Slow Too
Okay, enough with the research that I did and back to my story.
Given my mortgage background, I was curious to see how the mortgage industry had been affected in Ireland. Along the way, in between the various castle tours and pints, I took the opportunity to speak with a couple of mortgage brokers.
Kindly, brokers and loan officers at Mortgage Company of Ireland, Mortgage Plus, Ulster Bank, AccuBank, Bank of Scotland and Irish Mortgage Brokers took time out of their schedules to discuss the happenings of the Irish mortgage environment. Everyone one of them told me that their business was way down from what it was a few years ago.
This sounded all too familiar to what has happened in the states. They were not surprised when I told them that there had been a mass migration of loan officers out of the business due to lack of new mortgage applications. It seems as though the Irish mortgage industry is seeing a similar out migration of its loan officers. This suggested to me that Ireland was suffering from the U.S. credit crunch.
You Can Still Get 100% Financing In Ireland
I was surprised to see that 100% financing was still being offered. I had been in hope that the rest of the world would have learned from the mistakes that we made in the US. But, apparently not. If the same thing happens in Ireland in terms of declining property values, as I suspect they might be with all the properties up for sale that I saw, they are in for a bumpy ride.
Property Valuations For Mortgages By Estate Agents - Wow
Can you hear this scandal brewing? I had heard a news story while I was there to told about Estate Agents over inflating property values by as much as 20%. This too sounds familiar to some of the real estate sales and financing schemes as of late in the U.S. Incidently, Estate Agents are Real Estate Agents in Ireland.
What’s also interesting, and somewhat suspect in my opinion, is that Ireland does not have real estate appraisers like they do in the United States. Instead Estate Agents do the property evaluation – appraisal as it is called in the U.S. - for a mortgage. This little quirk seems to be giving the Irish real estate market its own unique problem; there is no third party to confirm the value of a property to make sure that it supports the sales price of a particular property.
From my perspective this seems like a conflict of interest and would tend to play into a scenario where property values would be artificially high as indicated by the news story I heard. Falsely high property values in turn limit the purchasing power of Ireland’s citizenry, which would lead to a declining property value market; that being similar to what is happening in the U.S.
Global Credit Crunch?
For me, this trip was a firsthand experience of how global the credit crunch really is. The news stories touted layoffs and the slowing Irish economy. I remember one story in particular about Dell Computers. The company announced that they were laying off over 250 employees from their facility in Limerick Ireland. Sound familiar to the U.S. readers of this article?
We’ll see how it plays out in Ireland and the European housing markets. As it looks now, globally we will be dealing with this credit crunch for some time to come. Eventually it should work itself out – hopefully without any serious spilt milk er bloodshed. In the mean time, if you have money, now may be a great time to pick up your dream home over seas in Ireland or the Isle of Man as there are lots of choices.
Dave Mason has been in the mortgage and consumer finance business for over 10 years. He has a Finance and Real Estate degree from the University of Arizona.
This Article is designed to be of general interest and should not be considered legal advice. The specific information discussed may not apply to you. Before acting on any matter contained herein, you should consult with your personal legal adviser.
