Banks exiting the property market

[cyberianpan]

RTE

Bank of Ireland has raised €2 billion in funding, subject to final documentation and completion, through its third covered bond issued under the 2001 Asset Covered Securities Act.

The issue is part of an established fundraising programme from which the bank plans to raise up to €10 billion over the next four to five years. Over €6.3 billion has been raised through ACS bonds from international investors over the last three years.

BOI is still selling on its mortgage book risk. So by abnegating risk it is in effect exiting the property market. Strangely the bonds are still attracting AAA status, so the investors aren't scared.

Why are bansk running scared on the Irish property market ?

cYp

[Catalpa]

Because sooner or later the bubble will burst and a lot of chumps will be hung out to dry.

[The Conservative Dubliner]

Selling bonds isn't selling the risk but quite the opposite. Bonds come with specified interest which the bond issuer has to pay regardless so that means BOI thinks the market will be stable.

[meriwether]

Because sooner or later the bubble will burst and a lot of chumps will be hung out to dry.

Will it? Ive seen very little analysis of this result with an explaination other than 'well it has to, doesn't it. Fooks sake like'. It may, or it may not. Im starting to fear it wont.

[The Conservative Dubliner]

Well, out of 49 proerty booms throughout the economic history not a single one has ever ended in soft landing. That supports 'it has to' argument to an extent. The good news (or the bad news depending on the perspective) is that on the long run most of the markets bounced up to the previous price levels.

Maybe Ireland will defy the economic history and undeed go through minor adjustments and levelling of prices. There are arguments to support this too (demographic trends, economy, etc.).

The economy holds the key. The prognosis for the upcoming years is bullish, but I am personally worried about the mid-term outlook. The economy has been growing but the productivity and the exports have more or less levelled. This means that the growth is achieved through consumption which expands the bottom layers (primary services) of the economy. This brings short term gains in GDP growth but ends up either with a fall in real incomes (and standard of living) or with a growing trade deficit financed by foreign credits to sustain the income levels. In other words (words of Moore McDowell) we can't sustain our economy by taking in our own loundry. We have to export and to do that we have to raise productivity to make our exports more attractive and we also have to beef up the high-value end of the economy (note none of this is addressed by the Holy Social Partnership Deal which was concerned with job security of overpaid waiters on a ferry).

If the current trends are continued, the property bust will come for sure.

[zakalwe]

cyberianpan,

its called securitisation. its carried out so the bank can lend more money.

under the basel rules the banks must hold a proportion of the loan book as cash (under the capital adequacy requirements). if the bank securitises its loan book it can issue new mortgages with funds received and bypass the basel rules on its old portfolio. its good for the bank and indifferent for the mortgagees (their mortgages remain the same, serviced by BOI but owned by the SPV (Special purpose vehicle)).

i'll write a comprehensive post on this at a later stage.

[WyldeOne]

I recently read, I think in the Washington Post, that two of Ireland's top realtors have sold their companies in order to completely separate themselves from the property market. Doesn't that sound like the bubble is going to burst if the top two are getting out? Also, does a burst market mean that prices will stop going up at such a high rater or that they will completely fall?

[Skin]

It means prices will fall.
Heres my tuppence worth. Prices to start falling by Sept06- Jan 07.
1. Increasing interest rates.
2. More prudent lending by banks (the 100% mortgage will be highly restricted or halted altogether)
3. Rents have begun to fall in parts of Dublin, indicating a surplus of rented accommodation leading to less investment purchases and increasing the availability for first time buyers.
4. SSIA's - too much being read into this. The average 'pay out' is estimated at €13800. Indicates that despite our government telling us how rich we are the average punter couldnt afford to save €254 a month. Also, speaking for myself only, half of my SSIA (roughly €14000) is already spent on a car loan. Throw in a decent holiday and there is not much left. I suspect a lot of other people are in the same boat.
5. Over reliance on immigrant population to prop up house prices.

[cyberianpan]

cyberianpan,

its called securitisation. its carried out so the bank can lend more money.

under the basel rules the banks must hold a proportion of the loan book as cash (under the capital adequacy requirements). if the bank securitises its loan book it can issue new mortgages with funds received and bypass the basel rules on its old portfolio. its good for the bank and indifferent for the mortgagees (their mortgages remain the same, serviced by BOI but owned by the SPV (Special purpose vehicle)).

i'll write a comprehensive post on this at a later stage.

Yes I'm well aware of Basel & the CAD. The operational effort for banks just to be able to represent/prove compliance with these (& local Central Bank guidelines(rem that they altered these upwards recently)) is what had them put their books in such good order as to be abstracted & securitised into classes of bonds.

The reason for others to invest in these bonds is the coupon. The underlying bond nominal is based on the actual loan principal & is at risk if many of the underlying loans default. So it is the investors in the MBS/ACS who take the hit (on the nominal) if there is a slump.

The critical issue here is that Irish banks are unwilling to underwrite their own mortgage books any longer. They are free to do so by diverting capital from other purposes. Problem is that they don't like the distorted effect that mortgages are causing on their capital usage as a whole & are choosing to seek capital from others. This simply translates as that it is not efficient for the Irish Market at all to supply capital to underwrite mortage lending. In effect we are borrowing in money to pay for mortgages.

cYp

[PS]

It means prices will fall.
Heres my tuppence worth. Prices to start falling by Sept06- Jan 07.
1. Increasing interest rates.
2. More prudent lending by banks (the 100% mortgage will be highly restricted or halted altogether)
3. Rents have begun to fall in parts of Dublin, indicating a surplus of rented accommodation leading to less investment purchases and increasing the availability for first time buyers.
4. SSIA's - too much being read into this. The average 'pay out' is estimated at €13800. Indicates that despite our government telling us how rich we are the average punter couldnt afford to save €254 a month. Also, speaking for myself only, half of my SSIA (roughly €14000) is already spent on a car loan. Throw in a decent holiday and there is not much left. I suspect a lot of other people are in the same boat.
5. Over reliance on immigrant population to prop up house prices.

With ECB rate currently at 2.75%, I can't see the Sept-Jan window producing ECB rate of more than 3.5%.

€14,000 would equate to half or just under half a deposit depending on where you're buying. That aint bad esp for a couple as prospective buyers.

If prices do come down, it would be surplus avail homes in commuter towns that will be affected....good location home prices will surely remain steady at the very least. Owners in good locations would do well to ride the storm and wait for markets to rebound to previous price levels, if any drop is experienced.