# Banks to offer mortgages to facilitate moving house where negative equity is present



## flattea2

Hi,

On this mornings Newstalk breakfast show, Charile Weston (of the Indo) was talking about a new product which some banks are on the verge of introducing.

The basic premise of it is that if you have negative equity but want to move house, then you can wrap up the amount you would owe to the bank from the old mortgage to the new mortgage. So I sell current house – I owe say 50k to the bank, but they will wrap it up in the new mortgage, so you still owe the bank but you get to move house.

On the one hand its very dangerous if it sinks people into further debt, however it may be beneficial to people who need to move house for whatever reason. Personally it would suit me as both my spouse and I are working but we need to move property now. However the negative equity on our property at the moment is ‘only’ about 10-20k. Our only other option is to rent out our current property and then rent another one for ourselves which we would rather not do.

Apparently the banks are doing it on the basis of ability to repay – though look where that principle got us. This may also be viewed as an attempt by the banks to get people off tracker mortgages and onto variable rate one.s

Link: http://www.independent.ie/opinion/columnists/charlie-weston/charlie-weston-mortgage-bid-to-unlock-market-could-backfire-2228556.html

This was done in the UK in the 90’s, it fuelled a bit of a rebound in the market – but I’m not sure what the long term consequences of it were.

I had a look at all of today’s posts, and it does not seem covered so apologies if I have missed it.

Thoughts?


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## Sunny

In theory it is not a bad idea as long as the banks stick to stringent underwriting criteria. One would hope they have learnt their lessons but I wouldn't bet on it.


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## aristotle

Surely those who want to move, and can afford it, can get a load to cover the difference in the mortgage and sale price of the property. This new offer should only apply to very few people but I worry that it will be given as an option to more and more people and thus get people in to additional long term debt.

Given that interest rates will eventually start to rise this could only make the ticking timebomb of private debt a bigger one.

The banks of course will love this if it means they can move people from trackers to variables.


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## mathepac

According to the Pat Kenny Show this morning two lenders already offer "negative equity loans" to existing customers who want to trade up. They are Ulster Bank and EBS. These loans are not advertised products per se, but facilities offered on a case-by-case basis.


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## Pat Bateman

This is a very positive move.

I know plenty of young couples who are stuck in apartments because they are in negative equity.

In some cases, this is preventing them from starting a family.

This may help them to purchase their own "home".


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## Neg Covenant

This is to be welcomed if it will be genuinely rolled out.   

It gives people a prospect of getting on with their lives while they service their debts.   

It also means they will be able to sell their houses at a loss allowing the market to hit the bottom and start moving.

It also allows banks to escape trackers (bad for the mortgage owner but good for the tax-payer who is subsidising the banks).

If the market does hit bottom then people who avail of this should not be materially worse off as their new loan will be secured on a more solidly valued asset (i.e., house bought in a depressed market).

This is as close as we are going to get to a NAMA for the people.   Next step, bankruptcy reform and more structured debt enforcement for those who won't be able to pay their debts.   We are making excruciatingly slow progress.


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## mathepac

Pat Bateman said:


> This is a very positive move. ...





Neg Covenant said:


> This is to be welcomed if it will be genuinely rolled out.   ...


I think "productisation" would be a very bad move. If UB and EBS do what they say, surely that is sufficient?  There is a way, for people who can demonstrably afford it, to trade up despite suffering negative equity in their current PPRs. I wonder how well stress-tested are the currently approved trade-ups? Interest-rate fluctuations, exchange-rate variations, property-value tumbles, and son on will effect them.

Jill Kerby Had a good counter-argument for negative equity mortgages in Yesterday's Sunday Times. 

My fear is that if it is productised, it will lead directly to the wholesale abuses that lead directly to the current set of circumstances and the evidence is that that greed and irresponsible behaviour have not disappeared from the financial / property development sectors


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## z107

I'm curious as to how living in an apartment stops people from starting a family?


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## Moral Ethos

> bankruptcy reform


Something the banks are against but is badly needed as the current legislation is in need of urgent reform to make bankruptcy an option for the little guy.


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## TheBlock

Having temporarily lived in a second floor two bed apartment with a toddler I have no difficulty understanding peoples reservations about wanting to raise kids in one.


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## Sunny

To be fair, unlike 100% mortgages and the old regulator, I think the new regulator will be monitoring it very closely. I can't see it being advertised on the sides of buses to every Tom, Dick and Harry.


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## Complainer

This may well create an artificial floor under property prices, particularly prices for units that were sold to first time buyers - apartments and small houses. Good (in the short term) for banks and others in negative equity, bad for the rest of this, particularly those who haven't yet purchased a property.


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## canicemcavoy

umop3p!sdn said:


> I'm curious as to how living in an apartment stops people from starting a family?


 
I'm curious too. Then again, even though I'm less than 40, I was brought up in an inner-city council flat that didn't have even a shower until I was in my late teens.


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## Sunny

Complainer said:


> This may well create an artificial floor under property prices, particularly prices for units that were sold to first time buyers - apartments and small houses. Good (in the short term) for banks and others in negative equity, bad for the rest of this, particularly those who haven't yet purchased a property.


 
How? If anything, the opposite is the case. If the product became widespread, it would lead to a large increase in the supply of apartments into the market and a large increase in the demand for larger houses so if a 'floor' was to created, it would be for the larger houses. It is actually negative for apartment prices. 

I can't see this product becoming so popular that it would effect property prices anyway.


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## DerKaiser

I'd like to see a focus on these being a trading down option rather than a trading up option.

Someone could have a €400k mortgage on a €300k house they don't necessarily need.

A €300k mortgage on a €200k house/apartment would leave them in the same position negative equity wise, but with 25% knocked off their monthly mortgage outgoings.

I'm sure there are many people for whom the reduction in mortgage would improve their lives immeasurably even when taking account of the fact they have traded down.


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## Complainer

Sunny said:


> How? If anything, the opposite is the case. If the product became widespread, it would lead to a large increase in the supply of apartments into the market and a large increase in the demand for larger houses so if a 'floor' was to created, it would be for the larger houses. It is actually negative for apartment prices.


This product allows owners to sell at artifically increased prices. In the current situation, they can't bring their negative equity with them, so they are forced to sell at current market rates and take the hit on the equity. With these mortgages, they don't have to face up to their equity, so the they are selling at an artificial price.

I do take your point about possible increased numbers of apartments on the market.



Sunny said:


> I can't see this product becoming so popular that it would effect property prices anyway.


They said the same about 100% mortgages.


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## Sunny

Complainer said:


> This product allows owners to sell at artifically increased prices. In the current situation, they can't bring their negative equity with them, so they are forced to sell at current market rates and take the hit on the equity. With these mortgages, they don't have to face up to their equity, so the they are selling at an artificial price.
> 
> I do take your point about possible increased numbers of apartments on the market.
> 
> 
> They said the same about 100% mortgages.


 
Either way they are taking the hit because they are selling at market rates so the price isn't artificial. If I have a €250,000 mortgage on an apartment that is now worth €220,000, I am selling that apartment at the €220,000. The only difference is that I don't have to find the €30,000 upfront to repay the bank the difference. 

I presume (hope) that lessons were learnt but I guess you are right. That might be hoping for too much!


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## Complainer

Sunny said:


> The only difference is that I don't have to find the €30,000 upfront to repay the bank the difference.


That's my point - if you don't have to find the €30k, you are far more likely to proceed with this transaction, and allow the €220k sale to proceed.  

Without this product, the transaction would probably not take place at all - and this would result in prices being driven further down. Maybe it would have a bigger impact on artificially holding up prices in the trader-upper band than the FTB band.


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## Sunny

DerKaiser said:


> I'd like to see a focus on these being a trading down option rather than a trading up option.
> 
> Someone could have a €400k mortgage on a €300k house they don't necessarily need.
> 
> A €300k mortgage on a €200k house/apartment would leave them in the same position negative equity wise, but with 25% knocked off their monthly mortgage outgoings.
> 
> I'm sure there are many people for whom the reduction in mortgage would improve their lives immeasurably even when taking account of the fact they have traded down.


 
Interesting idea. 

If they are helping people trade up, they should help people trade down.


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## Moral Ethos

I agree with you there.


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## Pat Bateman

Complainer said:


> This product allows owners to sell at artifically increased prices. In the current situation, they can't bring their negative equity with them, so they are forced to sell at current market rates and take the hit on the equity. With these mortgages, they don't have to face up to their equity, so the they are selling at an artificial price.
> 
> I do take your point about possible increased numbers of apartments on the market.
> 
> 
> They said the same about 100% mortgages.


 
We need to remember that we're a society first rather than an economy. This move should give greater fluidity to younger people who might be otherwise trapped in properties they don't want to be in.

Once they can afford the new property, I fail to see any issue with this. Without such a mechanism, the seller might end up with an unsecured personal loan after they've sold their property. Now, the excess will be secured on the new property which should be better for the banks too. And with this mechanism, the entire loan is transferred to a more valuable property with a (presumably) healthy LTV. And, as others have mentiuoned, the banks can get people off tracker mortgages.

This is a win-win.


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## Neg Covenant

Complainer said:


> That's my point - if you don't have to find the €30k, you are far more likely to proceed with this transaction, and allow the €220k sale to proceed.
> 
> Without this product, the transaction would probably not take place at all - and this would result in prices being driven further down. Maybe it would have a bigger impact on artificially holding up prices in the trader-upper band than the FTB band.


 
You're getting it totally backwards there Complainer.   Currently the transaction cannot take place at the price people are willing to offer because of the seller's negative equity.   This means that the fact that people cannot take their negative equity with them is making it harder for people to buy property for their true (low) value.   Allowing the seller to drop their price to meet the purchaser (and the purchaser's bank) is not putting an artificial floor under the market.


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## z107

My main concern with this scheme would be that people end up in a worse situation, with even more negative equity. This could also put banks (taxpayers) in a worse position. I'm not allowed to mention house prices here, so I can't post any more than that.

With regards apartments not being suitable for raising children, well I too (like many million other people the world over) spent the first few years of my life in a one bedroom flat. Of course it's not as ideal as having a 3/4 bed semi with garden etc, but in the whole scheme of things even Irish 'shoe boxes' are far better than where the majority of the world's population live.

Anyone who delays starting a family just because of living in an apartment really needs to think things through a bit more. In my opinion.


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## Brendan Burgess

A few points here.

If someone can't afford to have children now, should they not delay having them until they can? 

What is to stop people letting their apartments and renting a house? Why do they have to buy a more expensive house? 

Brendan


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## z107

> If someone can't afford to have children now, should they not delay having them until they can?


This really is a personal decision, there is no right or wrong answer.
I would say that if people want to start a family, they shouldn't delay for financial reasons.
If they delay, there's the possibility they might never have children. Live with least regret.


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## Pat Bateman

Brendan Burgess said:


> If someone can't afford to have children now, should they not delay having them until they can?
> 
> What is to stop people letting their apartments and renting a house? Why do they have to buy a more expensive house?
> 
> Brendan


 
I take Umop3p!sdn's point.

However, I think it's responsible to wait until you can afford to have children before doing so.

Renting is certainly an option but most people (given the choice) seem to prefer the certainty of owning their own home.

For a certain section of society, this "portable negative equity" should be useful.

On reflection I think it may also help the economy and the Exchequer.


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## Brendan Burgess

Pat Bateman said:


> Renting is certainly an option but most people (given the choice) seem to prefer the certainty of owning their own home.



This has to be balanced against the uncertainty caused by overindebtedness and negative equity.

Brendan


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## Pat Bateman

Brendan Burgess said:


> This has to be balanced against the uncertainty caused by overindebtedness and negative equity.
> 
> Brendan


 
Of course, but this "product" seems to be for people who can manage the relevant repayments but don't have the necessary capital to clear the negative equity.

If this initiative facilitates their move from a smaller (and possibly unsuitable) property to what's going to be their "family home" (i.e. somewhere they expect to live for the long term), the significance of negative equity and indebtedness as considerations should decrease.


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## MelF

Brendan Burgess said:


> A few points here.
> 
> If someone can't afford to have children now, should they not delay having them until they can?
> 
> What is to stop people letting their apartments and renting a house? Why do they have to buy a more expensive house?
> 
> Brendan


 
Simple answer Brendan, unreliable tenants in the first instance and unreliable landlords in the second!!


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## Chris

Neg Covenant said:


> You're getting it totally backwards there Complainer.   Currently the transaction cannot take place at the price people are willing to offer because of the seller's negative equity.   This means that the fact that people cannot take their negative equity with them is making it harder for people to buy property for their true (low) value.   Allowing the seller to drop their price to meet the purchaser (and the purchaser's bank) is not putting an artificial floor under the market.



This would only be correct if there wasn't already a massive oversupply of houses that are not selling. The only reason houses are not selling is because those few potential buyers still think that prices are too high.



Brendan Burgess said:


> What is to stop people letting their apartments and renting a house? Why do they have to buy a more expensive house?



Couldn't agree more! Even after prices for houses plummeted, it is cheaper to rent most houses than to service a mortgage on them. I am currently renting a house for my family in an area where I still couldn't afford to buy, and my rent is lower than the cost of servicing mortgage debt in an area I could afford. It's a no-brainer for me, renting is great!!
And before people state the usual "renting is dead money", please take account of the fact that mortgage interest is "dead money" too.



Pat Bateman said:


> Of course, but this "product" seems to be for people who can manage the relevant repayments but don't have the necessary capital to clear the negative equity.


There is a reocurring theme in posts, that banks and the regulator will now get it right. This happens after every economic crisis; more regulations and a new regulator are introduced, and all of a sudden everything will be OK. It never is, and setting up negative equity mortgage products is just repeating past mistakes.


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## Sunny

People are getting their knickers in a twist over this. There is no suggestion that the banks are going to make this widely available. Even the regualtor said they would have a dim view of it so will more than likely make the banks hold more capital against these loans if they allow them at all. _Der Kaiser_ made a good point on the previous page. Something like this could help some people trade down and reduce their mortgage payments. However, I am not a fan of interfering with the housing market so will remain sceptical about it all. 

As I said before, I will only worry when I see the product being advertised on buses.


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## DerKaiser

Chris said:


> This would only be correct if there wasn't already a massive oversupply of houses that are not selling. The only reason houses are not selling is because those few potential buyers still think that prices are too high.


 
Either way, the albatross of high mortgages around the necks of homeowners is currently distorting the market.  Allowing people (with the means to do so) to trade despite being in negative equity would represent the removal of a distortion to the market, not the introduction of one


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## MelF

Chris said:


> Couldn't agree more! Even after prices for houses plummeted, it is cheaper to rent most houses than to service a mortgage on them. I am currently renting a house for my family in an area where I still couldn't afford to buy, and my rent is lower than the cost of servicing mortgage debt in an area I could afford. It's a no-brainer for me, renting is great!!
> And before people state the usual "renting is dead money", please take account of the fact that mortgage interest is "dead money" too.
> 
> 
> 
> .


 
But are you also renting out a house that you own? All fine and dandy if you're not but in renting out the house that you want to move from you have the hassle, the PRTB admin taxation etc, the potential for voids etc plus the uncertainty of finding/keeping tenants etc. That's before you factor in losing your PPR relief when you are able to sell. And there may be no long-term security in the property you rent for yourself, so for many people its a whole lot safer to trade up.


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## Complainer

Brendan Burgess said:


> If someone can't afford to have children now, should they not delay having them until they can?


Have you heard about biological clocks? Female fertility decreases dramatically in the late 30s and into the 40s. One in five couples attempting to have children have fertility problems. The longer you delay, the more likely you are to have problems.


Brendan Burgess said:


> What is to stop people letting their apartments and renting a house? Why do they have to buy a more expensive house?


Probably the fact that there are often no houses available at comparable prices, without moving way out of the cities, and taking on a long-distance commuting lifestyle.



umop3p!sdn said:


> My main concern with this scheme would be that people end up in a worse situation, with even more negative equity. This could also put banks (taxpayers) in a worse position.


It's not often we agree, but I'm with you on this one.


Neg Covenant said:


> You're getting it totally backwards there Complainer.   Currently the transaction cannot take place at the price people are willing to offer because of the seller's negative equity.   This means that the fact that people cannot take their negative equity with them is making it harder for people to buy property for their true (low) value.   Allowing the seller to drop their price to meet the purchaser (and the purchaser's bank) is not putting an artificial floor under the market.


Your position is based on the assumption that the current market price is the true low value. I don't believe that this is the case, and I believe that the market still has way to fall. These transactions will stop that fall.




Pat Bateman said:


> We need to remember that we're a society first rather than an economy. This move should give greater fluidity to younger people who might be otherwise trapped in properties they don't want to be in.
> 
> Once they can afford the new property, I fail to see any issue with this. Without such a mechanism, the seller might end up with an unsecured personal loan after they've sold their property. Now, the excess will be secured on the new property which should be better for the banks too. And with this mechanism, the entire loan is transferred to a more valuable property with a (presumably) healthy LTV. And, as others have mentiuoned, the banks can get people off tracker mortgages.
> 
> This is a win-win.


I agree with your first point - we are a society, and we need to take a long term view on what is good for society. This short-term rush to get people into properties that they can't afford is exactly what got us into our current mess and has caused huge damage for society as a whole. Your assumption about healthy LTVs is way off - they will most likely be continuing to be in negative equity in the new property, amd maybe even more negative than before.


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## Sunny

Complainer said:


> Your position is based on the assumption that the current market price is the true low value. I don't believe that this is the case, and I believe that the market still has way to fall. These transactions will stop that fall.
> 
> .


 
It doesn't matter what you or economists or anyone else thinks about the housing market. If I am selling an apartment with a mortage of €250,000 for €220,000 and I find a buyer willing to pay that price, then that is the market price or the true value. This product simply allows that transaction to take place. It doesn't put an artificial price on the property.


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## DerKaiser

Sunny said:


> It doesn't matter what you or economists or anyone else thinks about the housing market. If I am selling an apartment with a mortage of €250,000 for €220,000 and I find a buyer willing to pay that price, then that is the market price or the true value. This product simply allows that transaction to take place. It doesn't put an artificial price on the property.


 
That would be the logic I'd follow, removing distortions (such as people being trapped in negative equity) generally leads to a more efficienct, transparent and liquid market, circumstance more likely to yield a true value.

Complainer's point is that all the people currently engaged in property transactions, Let's call them "The Market", are deluded.  They are trading at values inflated well above the "True Value" as defined by complainer.

Anything that has the impact of preventing "The Market" from approaching Complainer's "True Value" could be seen as an artificial intrusion.

Sarcasm aside, complainer is probably as likely to be correct as the market!


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## gaius

I wonder what kind of rates banks would be charging for these "NE mortgages". Sub-prime rates perhaps?


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## flattea2

Sunny’s point, ‘I’ll be worried when we see them advertised on the side of buses’, I think really hits the crux of the issue. Straight away it makes me think of the 100% mortgages that were offered. 

I think they are suited though on a case by case basis to:


Households with income of say 100k+, preferably where there are 2 incomes, and where we can say the jobs are ‘relatively’ secure.
Where the current mortgage repayment is comfortably being paid, leading to point 3
Where the new repayment will still be well within borrower’s capacity, here the regulator may need to make the call on what percentage of disposable income is acceptable. Prices are currently low so over time there should be some ‘up-side’
Where there is evidence that it is a real need for the borrower to move eg change of job or other suitable circumstance
 
Taking a case where say we have two people earning 50k each. Their disposable income is approx 6k a month. If they borrowed 250k in 2005, their repayment is about 900-1000 a month (depending on term of loan). This suggests about 15-17% of disposable income is covering the mortgage. Certainly room there if they wanted to cut their losses (depending of course on current outstanding mortgage and what they could get on the market for their current property)


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## Chris

DerKaiser said:


> Either way, the albatross of high mortgages around the necks of homeowners is currently distorting the market.  Allowing people (with the means to do so) to trade despite being in negative equity would represent the removal of a distortion to the market, not the introduction of one


If people actually had the means they would be taking out loans to cover the negative equity when selling. As this is not happening, or at least not in any numbers that are significant enough to be reported on, I have to assume that most people in negative equity either cannot trade up/down, or do not want to.
Having people go into even more debt than they are are already in is not going to solve anything. If people in negative equity want to trade up they should do something to reduce the negative equity and not take on more debt.



MelF said:


> But are you also renting out a house that you own? All fine and dandy if you're not but in renting out the house that you want to move from you have the hassle, the PRTB admin taxation etc, the potential for voids etc plus the uncertainty of finding/keeping tenants etc. That's before you factor in losing your PPR relief when you are able to sell. And there may be no long-term security in the property you rent for yourself, so for many people its a whole lot safer to trade up.


No, we do not own a property any more, we sold and decided to rent. While there is hassle in letting out a property and then renting another to live in, the bottom line is that this is a very workable solution. But people are blinded by an obsession of having to live in a house they own.


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## Sunny

Chris said:


> If people actually had the means they would be taking out loans to cover the negative equity when selling. .


 
That's what this mortgage product is. A loan to cover the negative equity.
One of the reasons why people in negative equity cannot sell is that they need the banks permission if they can't pay off the entire outstanding mortgage.


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## Complainer

Sunny said:


> It doesn't matter what you or economists or anyone else thinks about the housing market. If I am selling an apartment with a mortage of €250,000 for €220,000 and I find a buyer willing to pay that price, then that is the market price or the true value. This product simply allows that transaction to take place. It doesn't put an artificial price on the property.


That's true on the day of the transaction - but that doesn't mean that the market price will hold. We have of course seen huge falls in property prices already, and some people have a legitimate view that the market will still fall further.

This kind of mortgage is further interference in the market, and will prop up prices by encouraging and supporting transactions that wouldn't otherwise happen at all, for a number of years.


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## Ash21

I phoned EBS in regard to this and they said are NOT offering such product and there have been many calls about it.

We have an apt, one child and would like another but will need a bigger place and the biological clock is not on our side.  We have paid off all loans and saving for the last few years but all equity has been wiped out and more.  We need 60K to cover deposit, stamp etc to buy a 3 bed semi in our area which is close to work and family.  But even though we are saving and saving this prospect feels like getting further and further away by the week.  Houses are retaining their value and some cases going up in our area but apts continue to drop so the gap is widening. We looked at the rent and rent (too expensive), sell and rent options but still would prefer to buy if at all possible.  A 400K mortgage over 20-25 is well within our means in terms of repayments. We will have to make a decision in about 6 months about what to do, so advice is welcome!


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## Sunny

Complainer said:


> That's true on the day of the transaction - but that doesn't mean that the market price will hold. We have of course seen huge falls in property prices already, and some people have a legitimate view that the market will still fall further.
> 
> This kind of mortgage is further interference in the market, and will prop up prices by encouraging and supporting transactions that wouldn't otherwise happen at all, for a number of years.


 
But so what if it falls further. (I am sure it will) I have sold the apartment so the person who has to worry is the one that paid €220,000. But even then he is buying an apartment at a level below the peak so the fall in equity is unlikely to be as servere than if I had stayed in the apartment after paying €250,000 for the apartment. 

I admit it is a problem if the house I buy plummets in price but at least this time hopefully I am in a family home that is big enough to support a family and not in a one bed apartment.


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## Complainer

Sunny said:


> I admit it is a problem if the house I buy plummets in price but at least this time hopefully I am in a family home that is big enough to support a family and not in a one bed apartment.


And that's my concern. The negative equity has moved, and may well have grown, depending on the size of the trade-up deal and the size of the market drop. And if everything else stays stable, they may not have huge issues. 

But what happens when one partner loses their job, or realises that working with two kids just isn't worth it, or the couple split up?

But it is not just about the impact on them. As we say from the last boom, giving too much money to people to buy houses is just unsustainable. This causes problems for everyone else who is seeking to buy or rent at that price too.


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## Sunny

Complainer said:


> And that's my concern. The negative equity has moved, and may well have grown, depending on the size of the trade-up deal and the size of the market drop. And if everything else stays stable, they may not have huge issues.
> 
> But what happens when one partner loses their job, or realises that working with two kids just isn't worth it, or the couple split up?
> 
> But it is not just about the impact on them. As we say from the last boom, giving too much money to people to buy houses is just unsustainable. This causes problems for everyone else who is seeking to buy or rent at that price too.


 
I agree and I assume that is why the banks were never advertising these deals. I didn't even know they exisited in this Country but apparently two banks were offering them. They are certainly not suitable for everyone. But if they are very carefully underwritten, I don't see the problem. 100% mortgages started out as a niche product but banks and the regulator soon decided they were suitable for everyone. If the same happens here, I agree it will end in tears but if people haven't learnt their lessons after the last few years, they never will.

But the product itself is not bad. It's the use of the product that causes problems.


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## Chris

Sunny said:


> That's what this mortgage product is. A loan to cover the negative equity.
> One of the reasons why people in negative equity cannot sell is that they need the banks permission if they can't pay off the entire outstanding mortgage.



If people were in a position to get unsecured debt to cover negative equity they would have been doing so already in order to move. Fact is that the vast majority of people are not in a financially secure enough situation in order to obtain such a loan.
Creating a 'Negative Equity Mortgage' product with some fancy justifications and underwritings is disaster waiting to happen. Are people really that short-sighted to understand that excessive debt levels caused this mess in the first place?!?!?!


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## Sunny

Chris said:


> If people were in a position to get unsecured debt to cover negative equity they would have been doing so already in order to move. Fact is that the vast majority of people are not in a financially secure enough situation in order to obtain such a loan.
> Creating a 'Negative Equity Mortgage' product with some fancy justifications and underwritings is disaster waiting to happen. Are people really that short-sighted to understand that excessive debt levels caused this mess in the first place?!?!?!


 
I don't understand your point. This product is basically a mixture of secured and unsecured credit. The bank is only secured to 100% of the value of the property. If they give out a 125% mortgage, they are effectively giving a 25% unsecured loan.


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## mathepac

Sunny said:


> ...  But the product itself is not bad. It's the  use of the product that causes problems.





Sunny said:


> ... This product is basically a mixture of secured and unsecured credit. ...


I think the thread is beginning to run away with itself and discuss something that does not exist - STB material?

Right now there is no "product", merely a facility sometimes made available on a case-by-case basis by two specific lenders, as detailed at the start of the thread.


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## Sunny

mathepac said:


> I think the thread is beginning to run away with itself and discuss something that does not exist - STB material?
> 
> Right now there is no "product", merely a facility sometimes made available on a case-by-case basis by two specific lenders, as detailed at the start of the thread.


 
I agree. Thats why I said earlier

_People are getting their knickers in a twist over this. There is no suggestion that the banks are going to make this widely available. Even the regualtor said they would have a dim view of it so will more than likely make the banks hold more capital against these loans if they allow them at all. Der Kaiser made a good point on the previous page. Something like this could help some people trade down and reduce their mortgage payments. However, I am not a fan of interfering with the housing market so will remain sceptical about it all. 

As I said before, I will only worry when I see the product being advertised on buses._ 
​


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## Pat Bateman

So, the consensus seems to be that:

This option shouldn't be packaged and marketed as a "product", but
There's nothing wrong with making this option available to certain people in certain circumstances (i.e. negative equity, low LTV on desired property, secure jobs and low repayment to net salary ratio).


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## Chris

Sunny said:


> I don't understand your point. This product is basically a mixture of secured and unsecured credit. The bank is only secured to 100% of the value of the property. If they give out a 125% mortgage, they are effectively giving a 25% unsecured loan.


My point being that it should not be a product. As I said earlier, if you want to trade up, but are in negative, reduce the negative equity first.



Pat Bateman said:


> So, the consensus seems to be that:
> 
> This option shouldn't be packaged and marketed as a "product", but
> There's nothing wrong with making this option available to certain people in certain circumstances (i.e. negative equity, low LTV on desired property, secure jobs and low repayment to net salary ratio).



How is someone in negative equity suddenly going to end up with a low LTV in the next property? 
Giving unsecured debt to purchase real estate is a terrible idea!


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## PaddyW

I think that this would be pure lunacy to offer a product like that. I went with KBC for my mortgage and even though it was only twice my salary, it took me an age to get it with all their checks etc. They seemed very careful about protecting themselves. I'm glad they were like that now.


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## NorfBank

PaddyW said:


> I think that this would be pure lunacy to offer a product like that. I went with KBC for my mortgage and even though it was only twice my salary, it took me an age to get it with all their checks etc. They seemed very careful about protecting themselves. I'm glad they were like that now.



You have sort of hit the nail on the head PaddyW, it is very difficult to get a mortgage with a low loan to value property even if the applicants have "steady" jobs and a good income.

Even if this "negative equity" mortgage is introduced it will be so strictly underwritten that only a handful of people will qualify and these will more than likely be professionals with prospects of an ever increasing income. I'm thinking along the lines of a couple of doctors who are in NE to the tune of 50k but also have decent savings that will be usedto cover the stamp duty involved in trading up. 

The thing is these type of applicants would usually have a strong enough income to get a personal loan to clear the NE and trade up anyway.

These negative equity loans will more than likely go the way of the Home Choice loan with a few approved every year if they are given the green light by the Regulator - doubtful.


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## Chris

NorfBank said:


> Even if this "negative equity" mortgage is introduced it will be so strictly underwritten that only a handful of people will qualify and these will more than likely be professionals with prospects of an ever increasing income. I'm thinking along the lines of a couple of doctors who are in NE to the tune of 50k but also have decent savings that will be usedto cover the stamp duty involved in trading up.



You're very optimistic there and assuming that banks have learnt anything at all. This is exactly the same way that 100% mortgages were introduced. First aimed at the highly paid or public sector employees, but it didn't take long for it to become a common product.


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## Neg Covenant

If I have €20K saved, a tracker mortgage, negative equity of €60K and I want to trade up then there is no way I am going to pay down my negative equity with the €20K if I cannot use it to trade up. €20K on a tracker is the cheapest finance in Ireland. However, if I can move my reduced Negative Equity to a new house on a 20 year mortgage on a house which I don't intend selling then I will probably do it. The bank ends us with less negative equity in the loan in absolute terms and relative to the value of the bigger property. They also get rid of a tracker. The market becomes more liquid as I sell and buy a house and so is more likely to reach its nadir. Also, a liquid market allows banks to liquidate and resolve problem mortgages.

Anyone who thinks a mortgage product like this could inspire bubble behaviour is a tad out of touch with the national psyche. As Galbraith pointed out in his book on the crash of 1929, memory of loss is the greatest protection against bubble behaviour.    Anyone who thinks these products would create an artificial floor by lowering the value at which houses are sold is seriously confused. In 2007 people were stuck in 2005. Now it's 2010 and people are stuck in 2008. The market has not reached the bottom but it still makes sense for a lot of people to buy and sell their homes.


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## Complainer

Chris said:


> You're very optimistic there and assuming that banks have learnt anything at all. This is exactly the same way that 100% mortgages were introduced. First aimed at the highly paid or public sector employees, but it didn't take long for it to become a common product.



I agree with the point you're making, but public sector employees - really? The way I remember it, they were first aimed at a select group of professions (medical, legal). I don't recall 100% mortgages being ever targeted at public sector staff.




Neg Covenant said:


> If I have €20K saved, a tracker mortgage, negative equity of €60K and I want to trade up then there is no way I am going to pay down my negative equity with the €20K if I cannot use it to trade up. €20K on a tracker is the cheapest finance in Ireland. However, if I can move my reduced Negative Equity to a new house on a 20 year mortgage on a house which I don't intend selling then I will probably do it. The bank ends us with less negative equity in the loan in absolute terms and relative to the value of the bigger property. They also get rid of a tracker. The market becomes more liquid as I sell and buy a house and so is more likely to reach its nadir. Also, a liquid market allows banks to liquidate and resolve problem mortgages.
> 
> Anyone who thinks a mortgage product like this could inspire bubble behaviour is a tad out of touch with the national psyche. As Galbraith pointed out in his book on the crash of 1929, memory of loss is the greatest protection against bubble behaviour.    Anyone who thinks these products would create an artificial floor by lowering the value at which houses are sold is seriously confused. In 2007 people were stuck in 2005. Now it's 2010 and people are stuck in 2008. The market has not reached the bottom but it still makes sense for a lot of people to buy and sell their homes.


There is a bit of spinning going on here. There is no absolute drop in the negative equity. In the example you give, you are rolling in savings into the equation, but the savings are there all along. In fact, any savings will probably go on the stamp duty and will not help reduce the negative position at all. There may be a relative drop in the negative equity, but the risk of increased negative equity is real, if the market continues to fall.

What you describe as 'more liquid', I describe as 'people borrowing too much to buy houses they can't afford'. Your 'house that I don't intend selling' may well suddently need to be sold, when more kids arrive, or the job moves, or the job is lost, or the couple split etc.


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## mathepac

Neg Covenant said:


> ... Anyone who thinks a mortgage product like this could inspire bubble behaviour is a tad out of touch with the national psyche.  ...


Anyone who thinks it won't inspire bubble behaviour is deluded or has failed to learn the lessons of recent history.


Neg Covenant said:


> ...  As Galbraith pointed out in his book on the crash of  1929, memory of loss is the greatest protection against bubble  behaviour. ...


Galbraith's hypothesis was false when his book was published (South Sea Bubble 1720, Dutch Tulip Bulb Market Bubble 1637, etc, etc,) and nothing that has happened since has succeeded in validating it.


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## Neg Covenant

Complainer said:


> ....There is no absolute drop in the negative equity. In the example you give, you are rolling in savings into the equation, but the savings are there all along. In fact, any savings will probably go on the stamp duty and will not help reduce the negative position at all. There may be a relative drop in the negative equity, but the risk of increased negative equity is real, if the market continues to fall....


Of course paying down the debt will reduce negative equity.
Negative Equity = Value of House - Balance of Mortgage
A house has to be worth €410K to cost €20K in stamp duty. People can buy cheaper houses or save more than the example. Either way, the idea is to let people move negative equity, not to increase it.



Complainer said:


> What you describe as 'more liquid', I describe as 'people borrowing too much to buy houses they can't afford'. Your 'house that I don't intend selling' may well suddently need to be sold, when more kids arrive, or the job moves, or the job is lost, or the couple split etc.


 
The credit worthiness of the applicant will be assessed in the same way. The risks you mention are factored into that. This is not about letting people buy houses they can't afford but rather letting them buy houses they can afford. This is about making people pay off their negative equity over time but letting them move house in the meantime.

People who could afford a €300K house without negative equity may have to settle for a €250K house because of their negative equity. Whether people can afford a mortgage is generally dictated by job security, salary, disposable income and interest rates. Your suggestion that negative equity affects affordability ignores the factors that determine how affordable something is. It also ignores the fact that the product is aimed at people who already have negative equity and so it shouldn't make their position materially worse.

By your logic, the negative equity on the existing property will increase if the market drops in any event. Therefore any increase in negative equity on the new house should only be marginally greater, if at all, than it would have been on the existing house.


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## canicemcavoy

Chris said:


> You're very optimistic there and assuming that banks have learnt anything at all. This is exactly the same way that 100% mortgages were introduced. First aimed at the highly paid or public sector employees, but it didn't take long for it to become a common product.


 
Can anyone please explain what government mechanisms have been put in place to avoid banks getting into a bubble scenario again where they require bailing out?


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## Neg Covenant

mathepac said:


> Anyone who thinks it won't inspire bubble behaviour is deluded or has failed to learn the lessons of recent history.
> Galbraith's hypothesis was false when his book was published (South Sea Bubble 1720, Dutch Tulip Bulb Market Bubble 1637, etc, etc,) and nothing that has happened since has succeeded in validating it.


 
I take it you are not familiar with Galbraith's book?

The reason he wrote it was so those who did not remember the crash would still learn the lessons. Unfortunately, 78 years later which is uncannily close to the length of a human life, we have fallen into the same trap.

Please provide an example of any property bubble in history which crashed by more than 50% which was followed by another property bubble within the next 10 years?


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## Neg Covenant

canicemcavoy said:


> Can anyone please explain what government mechanisms have been put in place to avoid banks getting into a bubble scenario again where they require bailing out?


 
Tougher more intusive regulation, Unification of Financial Regulator and Central Bank, increased capital requirements. Apart from that, there is massive debate going on about co-ordinated international and EU-level banking reform.


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## canicemcavoy

Neg Covenant said:


> Tougher more intusive regulation


 
What legal guarantees are in place?

[broken link removed]

I can only find references here to the merging of FinReg and the Central Bank. It alludes to "legislation" - does anyone have a link to the text of any proposed bills, or is this just vapourware?

I'm actually not sure why a merger a good thing; I would have thought that four eyes were better than two, and rather than two fail points as before, we now only have one.


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## Complainer

Neg Covenant said:


> Of course paying down the debt will reduce negative equity.
> Negative Equity = Value of House - Balance of Mortgage


Paying down the debt doesn't change their overall financial position. They had €20k in savings before hand, so whether this is a positive balance in their savings account or a lower negative balance in their mortgage account doesn't change their equity position. It is just moving money around.



Neg Covenant said:


> By your logic, the negative equity on the existing property will increase if the market drops in any event. Therefore any increase in negative equity on the new house should only be marginally greater, if at all, than it would have been on the existing house.


Nope - the risk is greater on the new house because of the higher value of the new house. A 10% fall on a €400k house will hurt more than a 10% fall on a €250k house.


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## Moral Ethos

It will all end in tears. The banks have learned nothing.


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## Sunny

Complainer said:


> Nope - the risk is greater on the new house because of the higher value of the new house. A 10% fall on a €400k house will hurt more than a 10% fall on a €250k house.


 
Not necessarily. You are assuming they are both in the same economic situation. It could be equally painful for both as it is more likely the person living in the €400k house has higher earnings. Therefore a 10% fall is a 10% fall. As a matter of fact, I probably have more problems with a 10% fall on my €250k property than the guy in a €1.5m house.


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## Chris

Complainer said:


> I agree with the point you're making, but public sector employees - really? The way I remember it, they were first aimed at a select group of professions (medical, legal). I don't recall 100% mortgages being ever targeted at public sector staff.


Permanent public sector employees, like guards, nurses, civil servants were some of the few professions that initially were given 100% mortgages, but this quickly trickled down to other private sector professions. High income professionals (medical, legal) usually don't have the same difficulty in coming up with at least some sort of deposit.



Neg Covenant said:


> I take it you are not familiar with Galbraith's book?
> 
> The reason he wrote it was so those who did not remember the crash would still learn the lessons. Unfortunately, 78 years later which is uncannily close to the length of a human life, we have fallen into the same trap.
> 
> Please provide an example of any property bubble in history which crashed by more than 50% which was followed by another property bubble within the next 10 years?



As Galbraith was a Keynesian people should always be very suspect of any of his writings. Claiming that all we need to do in order to protect against bubbles is remember them is typical Keynesianism in that it believes the boom/bust cycle is random and not a result of government policy.

There was a massive equity bubble in the late 90s (dotcom) which was fuelled by cheap credit. When this burst in 2000 massive money printing went on and credit was made even cheaper, which ultimately fuelled another bubble. This next bubble was real estate which burst in 2007. That's a mere 7 years from one bubble to the next.


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## Complainer

Chris said:


> Permanent public sector employees, like guards, nurses, civil servants were some of the few professions that initially were given 100% mortgages, but this quickly trickled down to other private sector professions. High income professionals (medical, legal) usually don't have the same difficulty in coming up with at least some sort of deposit.


Nope, you're rewriting history, Chris. The first 100% mortgage was from Ulster Bank in 2003 and was specifically targeted at a select group of professions, including the medical/legal guys that you reckon wouldn't have needed it. See http://www.askaboutmoney.com/showthread.php?t=5014

In fact, the medical & legal professions are first on the list! No mention of civil/public servants being covered here at all.



Sunny said:


> Not necessarily. You are assuming they are both in the same economic situation. It could be equally painful for both as it is more likely the person living in the €400k house has higher earnings. Therefore a 10% fall is a 10% fall. As a matter of fact, I probably have more problems with a 10% fall on my €250k property than the guy in a €1.5m house.


I'm talking about the same person here, so they are in the same economic situation. The person is currently in a €250k apartment, and will be using this new dubious loan to move to a €400k house. The impact of a 10% fall in the market will be greater after the move, than before the move.


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## Neg Covenant

Chris said:


> As Galbraith was a Keynesian people should always be very suspect of any of his writings. Claiming that all we need to do in order to protect against bubbles is remember them is typical Keynesianism in that it believes the boom/bust cycle is random and not a result of government policy.


 
Have you read J.K. Galbraith's "The Great Crash, 1929"??   I am guessing you haven't considering the warnings he gave to politicians when called to give testimony in later years.

BTW - I strongly recommend J.K. Galbraith's "The Great Crash, 1929" to everybody.   It is a short page-turner that the lay reader can finish in few days.   You will laugh out loud at the stupidity of those involved and you'll be amazed at the parallels with our own crash.



Chris said:


> There was a massive equity bubble in the late 90s (dotcom) which was fuelled by cheap credit. When this burst in 2000 massive money printing went on and credit was made even cheaper, which ultimately fuelled another bubble. This next bubble was real estate which burst in 2007. That's a mere 7 years from one bubble to the next.


 
You have missed the point.

The questions was:  "Please provide an example of any property bubble in history which crashed by more than 50% which was followed by another property bubble within the next 10 years?"

The crash we just has was not a dot com crash.   The crash we had was a property crash.   People on this thread are warning against creating another property bubble.


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## breathnach1

In negative equity of about 50k, have planning permission to build a house which i need as family getting bigger.

I think I can build the house for 30k less than current value of house in neg equity. Surely this would be a good qualifying factor for a neg equity mortgage ??


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## Pat Bateman

This is the common scenario where the "negative equity mortgage product" would be perfectly acceptable and appropriate:

Young couple purchase apartment for €400,000 3 years ago with a mortgage of €360,000 and €40,000 savings. 

The plan was to trade up to a house in 3-5 years.

The apartment is now worth €290,000 and the outstanding mortgage is €350,000.

The couple have savings amounting to €50,000.

They have joint income of €140,000 per annum.

They want purchase a house for €440,000 and start a family because they're of the view that an apartment isn't suitable for raising a child.

They see themselves in the new property for the rest of their lives.

Why shouldn't this "product" be made available to this couple?

The €60,000 negative equity is effectively unsecured. By transferring it to the new property it becomes secured.

The above is a winner for everyone - The couple and the bank.


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## Chris

Neg Covenant said:


> Have you read J.K. Galbraith's "The Great Crash, 1929"??   I am guessing you haven't considering the warnings he gave to politicians when called to give testimony in later years.
> 
> BTW - I strongly recommend J.K. Galbraith's "The Great Crash, 1929" to everybody.   It is a short page-turner that the lay reader can finish in few days.   You will laugh out loud at the stupidity of those involved and you'll be amazed at the parallels with our own crash.


Yes I have read it and I also endured reading some chapters of "The Good Society", which is even worse in its conclusions. Keynesian economics has failed to adequately explain any bubble in history, always dismissing government intervention through fiscal and monetary policies as irrelevant. If you want to know what really caused the 1929 crash and subsequent great depression read Rothbard's "The Great Depression".



Neg Covenant said:


> You have missed the point.
> 
> The questions was:  "Please provide an example of any property bubble in history which crashed by more than 50% which was followed by another property bubble within the next 10 years?"
> 
> The crash we just has was not a dot com crash.   The crash we had was a property crash.   People on this thread are warning against creating another property bubble.


No I have not, the point Galbraith makes is that we only need to keep or memories fresh on past bubbles and this will somehow lead to less "speculation", which he blames for the bubble, dismissing monetary inflation and credit expansion. What part of the economy turns into a bubble is irrelevant.

On it's own negative equity mortgages will not re-inflate a bubble, but it is an attempt at interfering with market conditions.


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## Bob Nellies

i am in my early thirties and 5 years into my mortage. 

the property is in negative equity. i can't rent it out as the shortfall on the mortgage is too high (40%). Also, there is a huge surplus of new houses in my area now selling at vastly reduced prices. So the chance that i would even attract a buyer for my property is remote.

if i rent closer to work, my own rent will exceed my current mortgage repayments and i will also have to make up the shortfall on the mortgage.

My commute is almost 3 hours every day. 


It is for similar reasons that people who bought apartments in the last 5 years cannot rent out the property and move elsewhere. 

We are trapped. For years.


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## Neg Covenant

Chris said:


> Yes I have read it and I also endured reading some chapters of "The Good Society", which is even worse in its conclusions. Keynesian economics has failed to adequately explain any bubble in history, always dismissing government intervention through fiscal and monetary policies as irrelevant. If you want to know what really caused the 1929 crash and subsequent great depression read Rothbard's "The Great Depression".


 
Fair play to you if you have read it.   I think you have a wider beef with Galbraith and Keynes.   That anti-Keynes/pro-Keynes stuff does not interest me.   I think the risk of us having a property bubble starting now is remote to say the least.



Chris said:


> No I have not, the point Galbraith makes is that we only need to keep or memories fresh on past bubbles and this will somehow lead to less "speculation", which he blames for the bubble, dismissing monetary inflation and credit expansion. What part of the economy turns into a bubble is irrelevant.
> 
> On it's own negative equity mortgages will not re-inflate a bubble, but it is an attempt at interfering with market conditions.


 
It is not an attempt to interfere with market conditions.   It is a market solution proposed by players in the market acting from commercial self interest with a view to allowing the market to function more freely.   Maybe it was my mention of Galbraith that annoyed you rather than anything to do with Negative Equity Mortgages?   That is the danger with partisan views of the social sciences.   People miss the point because they are too busy fignting for their "side" of a spurious argument.


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## liger79

I see this as being an option for couple who bought 04 onwards that are in a situation where they have split up and need to sell the house. I am in such a situation. i went into UB this week and the Advisor never made reference to such a product. Instead of advising me that i could look for a house with a lower value if i was able to sell my current place and tranfer my part of the debt to a new mort he advised that i could stretch my funds and apply to take over a mortgage and the full debt.

I'm very annoyed right now.


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