15/6/2012: IMF Review : Mortgages Arrears & Household Wealth

In the previous post I promised a closer look at the IMF analysis of the household wealth and mortgages in Ireland. Per Article IV consultation paper:

Mortgage arrears continued to rise as some households struggle with high indebtedness. 

• Household’s net wealth peaked in mid-2007, but has since declined by 37 percent largely due to the collapse in housing prices. 
• By 2011, households’ deleveraging efforts have reduced debt by 13 percent from its end 2008 peak. 
• Declining incomes have, however, meant the overall household debt burden has eased by only 3 percentage points to 208 percent of disposable income in 2011, although there has been some relief from lower interest rates. 
• Income declines, especially on account of the rise in unemployment, have also driven the increase in the rate of mortgage arrears on principal private residences to 10.2 percent of mortgage accounts and 13.7 percent of mortgage balances at end March 2012. 
• The share of mortgages that have been restructured—predominantly through payments of only the interest due or somewhat more—rose to 12.6 percent at end March 2012, but more than half of restructured loans are in arrears, indicating that deeper loan modifications are needed in some cases.

 More charts from the IMF:

In IMF news, rental yields are now closer to stabilization levels, but house prices are averaging 10 times average disposable per capita income, implying ca 4 times average disposable per-family income. In my view, prices will need to reach 3-3.5 times before the property market becomes affordable in the current conditions. This, however, is a longer-term target, with intermediate target being most likely even lower at 2.5 times (given credit conditions and general economic conditions). Also note, the above do not account for upcoming property taxes and for future reductions in disposable income due to tax increases.

Meanwhile credit condition remain horrible:

Chart above clearly shows that although interest costs and interest rates have declined, deleveraging did not take place. This stands in sharp contrast to the US and UK, where deleveraging of the households was more aggressively underpinned by bankruptcies and repossessions. Another issue is that declines in interest rate burden apply primarily to tracker mortgages.

Charts below highlight rapidly accelerating problems with mortgages defaults:

Chart above shows the decomposition of restructured mortgages, highlighting the extent of significant changes in the overall mortgages burden under restructuring (interest only 35%, below interest-only payments at 14%, payment moratorium at 4% and hybrid at 5%, implying that at the very least well over 50% of all restructured mortgages are not delivering on capital repayments).