When it comes to negative equity, investors have taken a big hit as many bought apartments rather than conventional starter homes
MENTION of negative equity invariably brings forth sympathy for young couples who availed of 100 per cent mortgages during the boom to buy their first homes. Although it is seldom that anyone commiserates with investors who also availed of high loan-to-value ratios to pick up rental properties, they are in much the same dilemma as the owner occupiers.
In both instances these purchasers can owe anything from €150,000 to €250,000 more than the house or apartment is actually worth. Not a pleasant situation.
Everyone knows the market has been in freefall for several years. Dublin house prices have in fact dropped by 53 per cent since the peak in 2006, according to the Sherry FitzGerald Index.
Unfortunately, investors have probably taken an even greater hit because as a general rule they bought apartments rather than conventional starter homes – three bed semis. Not only have apartment values fallen by a greater margin than semis but it is generally accepted that they will take considerably longer to recover because of the high volume of unsold apartments overhanging the market.
Just as property values have dropped significantly, rents have also taken a tumble and are now back at levels last seen in 2000. The CSO puts the fall in rents at 25.5 per cent since the start of 2008 but a quick check around a handful of Dublin letting agents this week suggests that rates may have finally stabilised.
Claire Hughes, of the Lansdowne Partnership, which is handling lettings in a string of Dublin apartment developments in receivership, says that not only have rents stabilised over the past two to three months but they are beginning to move up, in some cases by small amount such as €50 per month.
The agency is getting €1,350 per month for two-bedroom units in the circular Alliance building in the Gasworks on Barrow Street. Apartments on the top floor are making €1,450 per month.
Unsettling and all as it is to be in negative equity, most investors have managed to keep their heads above water as a direct result of the unusually long run of low mortgage rates. However, that situation may well change in the coming weeks as several mortgage providers and banks, under pressure to stay in business, look like increasing the standard variable rate even before the ECB gets around to bumping up its base rate.
A rate increase of over 1 per cent on standard variable mortgages would obviously make it much more difficult for some investors to meet their repayment schedule. The answer may be to offload the property, even at a loss, rather than allow debts to mount up .
This has already been happening. Sherry FitzGerald recently reported that 25 per cent of their entire sales in 2010 were investment properties.
At the height of the boom investors were not unduly concerned about fluctuating rents and mortgages because with capital appreciation on an upward spiral they seemed assured of ending up with a valuable property portfolio.
The events of the past three years have changed all that, and with mortgage providers continuing to focus their attention on first-
time buyers and couples trading up, we might well see more investors exiting rather than entering the residential market in the next few years.
For those who want to get out, there is apparently a continuing demand for well located apartments, particularly in the city centre.
Typically the buyers are young professionals employed by Google, Facebook or other high-tech companies. Unlike many of the investors who bought in 2006, they have a good grasp of market values and what they should be paying for their new home. They also know that prices could fall further.
