• AM Financial

"Is it washing its face?" The mortgage market now and how it was before the crash.

Updated: Jul 29, 2021

So before the crash - you mean before 2007/2008 ?

Yes that's right. It feels like a different world. Take, for example, the size of the market. It is hard to believe this but, according to the BPFI, the amount of mortgages drawn down during the calendar year 2006 was € 40 billion. In 2007/2008, the mortgage market in Ireland began coming down from its peak as markets and economies around the world were in free fall. In 2011, the mortgage market in Ireland hit a low of € 2.5 billion drawn down during the year. An incredibly tiny portion of what was being done in 2006.

But we have come back now ?

We have come back from 2011 lows but total mortgages drawn down in 2019 was € 9.5 billion. 2020 with COVID saw numbers fall slightly to €8.4 billion. We are running at a rate of less than one quarter of what the level was in 2006.

Undoubtedly, Central Bank rules brought in since the crisis are slowing borrowing. Although banks have a bucket for exemptions, borrowing is restricted to 3.5 * annual income. Arguably this makes it hard for first time buyers and switchers to purchase their dream home. There were no rules like this back in 2006. It was left to the banks to engage in prudent borrowing. This was celebrated as a business friendly, laissez-faire, "light-touch regulation" approach. Banks lent far beyond this 3.5 times income limit. This may have been partly justified by low interest rates. However, in reality banks were competing aggressively and the only game in town was to grow the size of the mortgage book. Risk management was secondary.

It is generally true of financial crises that rules and oversight are too lax going into it and too restrictive afterwards. There is an argument now that 3.5 * income is too low for a borrowing limit with interest rates so low again. But regulations will be slow to change while memories of the crisis are fresh.

What else is different between now and 2006 ?

In 2020 less than 1% (the paltry amount of € 90 million) of mortgages was drawn down by investors. This compares to a whopping € 8.0 billion of mortgages drawn down by investors in 2006, 20% of total mortgage drawdowns. This huge investment in 2006 ended in tears as the following year was the beginning of a 55% fall in Irish residential prices. But how were so many people so wrong ? There was a general acceptance that property was overvalued. But what was going to stop it going up ? There was a FOMO as the people who got in earliest seemed the biggest winners. And even for the pessimistic, there was the belief that if prices stopped going up so fast, we would see a soft landing. And that would not harm anybody.

I still can't believe € 8.0 billion pumped into investment mortgages though.

It was a huge amount. There is a famous story about the U.S. stock market which enjoyed a roaring ride in the 1920's. As the market goes up and makes fortunes for some, it dominates the press and tv. It becomes the topic of discussion over drinks and dinner. The 1920's was no different. JFK's father Joe Kennedy, a long-standing investor, was getting his shoes cleaned and the shoe shine boy began giving him stock market tips. That was his cue to sell and save the fortune that would decades later help launch a U.S. president.

Where was the shoe shine boy back in 2006 ?

In retrospect, it was everywhere. For some it was taxi drivers. Or property shows in hotels advertising apartments in Bulgaria. Or long queues outside of new towns in the outskirts of Dublin to buy property off the plans.

The expression that sticks out for me was about investment property. How will it add to my overall debt load ? Will this impact my future ability to borrow ? How exposed am I in general to a property fall in Ireland ? What is the exit strategy for the investment ? A lot of questions about investment property that should have been asked weren't asked.

But the one question that was asked about investment property : "is it washing its face ?" It meant was your rent covering your mortgage payment. That could be an interest only mortgage payment. But the details didn't matter.

"Is it washing its face?"

"Yes, it is."

Well then, no other question really mattered. No need to talk more on it. It was a great investment !

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