Irish mortgage borrowers have lost €17.6 billion of their combined “wealth” since the property market crashed, new research has found.

In a report which said the housing and mortgage markets are struggling even as economic growth accelerates, credit rating agency Standard & Poor’s found that more than 40 per cent of borrowers remain in negative equity.

S&P said home loans originated in 2007, just before the crash, have the highest degree of negative equity, at 59 per cent.

Buy-to-let borrowers were more likely to be in negative equity than owner-occupiers, it added. Homes in the Border and western regions are more likely than other parts of the State to be in negative equity.

“We found that the depth of negative equity in Ireland is severe, averaging €53,900 per property,” said S&P analyst Arnaud Checconi.

“We also observed that loans in arrears were more likely to be in negative equity: 59 per cent of mortgage borrowers are both in negative equity and arrears, compared with only 40 per cent who are current on their loan payments and in negative equity.”

Such findings are based on an assessment of 100,000 loans underpinning a form of debt known as mortgage-backed securities, representing some 18 per cent of outstanding Irish home loans by volume.

Proxy

The estimate for the overall loss of wealth since the crash represented the sum of the differences between each property’s indexed valuation and its original valuation when the loan was issued across the entire universe of loans.

“We view this as a proxy for mortgage borrowers’ perceived change in their own wealth at different points in time,” Mr Checconi said.

“Overall, this measure was €13.1 billion as of December 2015. If measured against peak property values (rather than values at the time of loan origination), the wealth loss would be €17.6 billion.”

S&P said the “negative equity” situation has improve in recent years due to the price rebound in Dublin since 2012 and the rebound in other regions since 2013. Citing the Central Statistics Office, however, S&P said house prices still represent only 66 per cent of peak values.

“Based on our analysis, we estimate that 43 per cent of Irish mortgage borrowers were in negative equity at the end of 2015,” said the report.

“Over half of borrowers were in negative equity between the end of 2011 and the end of 2013, although the proportion has been slowly declining. We expect the proportion in negative equity to decline further in the next two years - to about one-third of all borrowers, based on our house price forecasts and estimates of mortgage loan amortisation.”

Loans granted between 2006 and 2008 were deepest in negative equity as they were granted at higher original loan-to-value ratios and the initial loan was bigger.

Weaker credit histories

Loans in those years were issued to borrowers with weaker credit histories, as underwriting standards become more relaxed as mortgage lending increases. Only 38.7 per cent of loans had a loan-to-value ratio greater than 90 per cent in 2005 but the proportion rose to with 43.4 per cent in 2007.

“Borrowers with loans from 2007 show an average negative equity of €66,300, representing 3.5 years of average disposable income, compared with 2.9 years across all loan vintages.

“There is a correlation between negative equity position and loans in arrears, according to the Central Bank of Ireland. Both tend to arise when a recession sets in as property prices will decline and borrowers will fall into arrears as they become unemployed.

“Indeed, we observed that loans in arrears were more likely to be in negative equity: 59 per cent of mortgage borrowers are both in negative equity and arrears, compared with only 40 per cent who are current on their loan payments and in negative equity.”

More than 50 per cent of home loans in the Border and western regions were in negative equity, S&P added. “ While the greater Dublin region is in full recovery mode and now has a housing supply shortage, some more rural areas still bear the brunt of the property bust and are ‘ghost estates’ with no need of further property development.”