Negative equity affects 10,000 homeowners

Up to 10,000 first-time buyers who bought homes over the past year are experiencing negative equity - meaning they now owe more than their home is worth.

The number of borrowers buying first homes with 100 per cent mortgages stood at 36 per cent last year and 24 per cent in the first half of this year, according to separate figures released by the government and a group representing mortgage brokers last week.

This means that up to 10,000 borrowers have taken out 100 per cent mortgages since the property market began to peak last summer, based on data provided by the Irish Banking Federation (IBF), the group representing banks and other mortgage lenders.

The Permanent TSB/ESRI house price index showed average homes bought by first-time buyers were worth less last month than at any time since last summer. So borrowers who took out 100 per cent mortgages since then now own properties worth less than they owe on their mortgages. The average price paid by a first-time buyer at the end of May stood at €272,000, according to the Permanent TSB/ESRI index.

This represented a drop of 1.8 per cent on the previous month, but also meant properties aimed at the first-time buyer market were now worth less, on average, than those bought at any stage in the previous 12 months.

Fears that the house price index has yet to reflect the full extent of house price falls were exacerbated recently when one of the country’s top mortgage lenders, Permanent TSB, said it would lend 20 per cent less to new borrowers this year than last. Among the reasons for this, cited by analysts, were rising interest rates and increasingly negative sentiment towards the housing market.

In addition, some property developers and estate agents are offering incentives to buyers worth thousands of euro, such as cashback deals, or free furniture and household equipment, which could distort the index by recording a sale at a higher price than the buyer has effectively paid.

AIB chief economist John Beggs said recently that house prices were likely to fall further over the remainder of this year.

This would increase the gap between the amount owed by individual first-time buyers and the value of their property.

Sunday Business Post