Mortgage Stress and the Impact of the Irish Property Crash

Abstract

Starting in the mid-1990s, for almost a decade Ireland experienced one of the one of the most pronounced residential property booms in Europe. The price of an average house rose by over 400% over the decade and by 2006 housing supply was the highest per capita in the European Union. Driven, in large part, by Ireland’s neoliberal reforms in the sectors of housing, planning and banking, owner occupation was expanded to as great an extent as possible. Liberalisation within banking served to massively expand the mortgage market and extend mortgage credit into sectors of the population previously excluded from home ownership; namely lower income households with less secure employment statuses and weaker credit histories. Borrowers were allowed to borrow ever increasing multiples of their incomes on more highly leveraged terms. Banks and property developers profited enormously as Ireland’s economy became increasingly reliant on a speculative, bank-led property bubble, but the substantial increase of risk in the mortgage market was to have dramatic consequences for individuals, the banking sector and wider society.
As the international financial climate became increasingly turbulent from 2007, initially triggered by the US subprime crash which led to a wider financial ‘credit-crunch,’ the Irish property market entered a precipitous decline. House prices have fallen by an average of 50% between March 2007 and April 2013, with sectors such as the apartment market declining by over 60%. Substantial over-supply has kept prices depressed, while many mortgage lenders have left the market. The property market collapse has been the proximate cause of the more general economic collapse. Massive over lending by the Irish banks to the property sector led to a banking crisis and in late 2008 the Irish government guaranteed all bank deposits in an attempt to prevent a collapse in the banking system. By effectively moving the debts of the private banks to the government balance sheet, Ireland then faced a crisis of its public finances and in late 2010 needed a ‘bailout’ from the troika of the IMF, ECB and European Union.
While Ireland has been subject to what could be termed a combined economic, political and social crisis, this thesis examines in detail one of the most pronounced social consequences of the crash, namely the mortgage crisis. Unemployment increased from 3.8% to 13.7% between Q4 2000 and Q1 2013, while incomes have fallen by a fifth on average and mortgage arrears have increased dramatically as a consequence. The focus of this thesis is therefore to examine the impacts of the property crash on households, with a particular emphasis on mortgage related difficulties. Firstly, the thesis assesses the extent of mortgage stress by using national data as well as a new large scale survey of owner occupiers in suburban Dublin. Secondly, the drivers of mortgage difficulty, as well as the impacts and experiences of mortgage stress for households are examined. Thirdly, households responses to mortgage stress are explored, particularly the coping strategies that households
employ. Fourthly, the thesis examines the responses of successive Governments’ toward managing the crisis, with a particular emphasis on the policy of forbearance, and the likely effects of future government policy with respect to mortgage arrears. The thesis concludes by questioning the liberalised model of housing provision followed over the last two decades and questions how attitudes to ownership are changing in light of the crisis.