The Mortgage Crisis in Ireland: Negative Equity, Mortgage Arrears and Policy Responses

Ireland experienced a sustained period of economic growth from 1997 to 2007, a decade which saw large scale job creation, increases in disposable incomes and an unparalleled residential property boom. Over the course of the housing boom, new housing supply was one of the highest per capita in the European Union and house prices increased by over 300%. However, since 2007 there has been a severe economic recession, in large part caused by excessive and irresponsible property lending by banks and other financial institutions. Many of Ireland’s leading banks were seriously exposed to high risk lending to the property industry and to mortgage holders. Many banks were undercapitalised, which led the Irish government to guarantee all bank deposits in 2008. Since then a number of banks have either gone bankrupt, been fully or partially nationalised or recapitalised by public money. Saving the banks has, in conjunction with a sharp fall in revenues from property taxes, led to a consequent collapse in government finances and there have been severe public spending cutbacks. Indeed, given the gap between government spending and revenues, and the need to recapitalise the banks, the country has been subject to a ‘bailout’ by the troika of the International Monetary Fund, the European Commission and the European Central Bank. The economy has contracted, joblessness has increased from 3% to 14% and incomes have fallen significantly.
Given this context it is unsurprising that the residential property market has contracted severely. House prices have fallen by an average of 56% since 2007, with prices of apartments declining by 63% in the same period. Some analysts are suggesting that at the bottom of the cycle prices will have fallen by 70% from their peak. New house building has practically ceased. Clearly, one of the main consequences of such dramatic and steep falls in house prices is that many households are in negative equity, with attendant consequences on residential mobility. The second consequence is that, as unemployment has increased and incomes have reduced, there has been a sharp rise in the level of mortgage arrears. By June 2012 there were 83,251 mortgages in arrears greater than 90 days, representing 10.9% of outstanding mortgages by number and 15% of mortgages by value. The average value of arrears on these mortgages is approximately €17,000. These figures are likely to worsen. This paper, combining nationally available data with a large scale survey of households in an area of Dublin which experienced rapid expansion during the property boom, examines, firstly, the profile of negative equity among the surveyed households. Second, the paper assesses the extent to which households are under mortgage stress, in particular the level and impact of mortgage arrears. In late 2011, President Bill Clinton, on a visit to Ireland, identified the mortgage crisis as Ireland’s number one economic challenge. The third aim of the paper, therefore, is to critically examine government responses to the mortgage crisis. The Irish housing system could be characterised as one where financial institutions were lightly regulated and homeownership privileged through generous tax treatment. The paper thus concludes by considering the implications of the mortgage crisis for the sustainability of the homeownership model that Ireland had followed for the past two decades.