First published in Dublin’s Metro Herald, 22nd March 2012
NAMA Makes Apartments Available to First-Time Buyers
The initiative, previously referred to as a negative equity mortgage (not to be confused with a different product under a similar name, offered to struggling homeowners to facilitate trading up) was due to be launched this time last year, when NAMA promised 750 properties, suitable for first-time buyers. While a reduced number of apartments are available at this time, the scheme will be extended if successful.
While this is a move to motivate buyers, who are currently sitting on the proverbial fence, more questions will need to be answered before buyers take the leap. As with all initiatives, the devil will be in the detail. A lot will depend upon the valuation of the units; protecting 20% over five years will not help if the valuation is too high initially. Furthermore, the quality of the units and the suitability of their locations must be looked at in the context of first-time buyers. Will there be a market to sell on these apartments (remember that 80% of NAMA’s residential stock is apartments or duplexes) in five years time?
In the absence of full details, it is useful to similar schemes in other jurisdictions. Basic operation will be that NAMA will not actually grant the mortgage, this will be done through the existing pillar banks. What NAMA is offering is a 20% cushion or protection against future negative equity i.e. 100% of the asking price is agreed and the buyer must be loan approved to this amount; however, only 80% will be drawn down. It appears likely that the full 100% will need to be serviced by the buyer – this is where the details are all important and NAMA is yet to release these.
There are two big problems for buyers: Firstly, this scheme is only to be offered to first time buyers in respect of particular NAMA properties, most likely apartments in Dublin (the scheme may be extended); secondly, the cushion of 20% calculated using NAMA existing values, which are inflated – particularly for apartments. In fact, it is likely that these will drop further in value for a further period of time. Looking at current market conditions and trends, the protection against negative equity is insufficient; furthermore, offering apartments only will simply delay the problem. These buyers are unlikely to be in a position to live in these apartments indefinitely.
The main criticism with this type of facility is that NAMA is breeding the next generation of negative equity home-owners, particularly if the scheme is only extended to first-time buyers buying apartments. This is a problem for prospective buyers for many reasons, not least of all because NAMA has over-valued its present stock but also because of the perception that they are using inexperienced and over-eager buyers to off-load poor quality units. Would more experienced buyers or investors be interested in these properties? What happens in five years time when the buyers wish to move on, start a family etc… how will they sell on? The simple answer is that they may not be able to do so. The 20% cushion, which may be less than 7 – 10% based on real market values, will be well gone and there will be no future buyers for the apartments.
One solution might be a buy-back scheme. Certainly, it is not a perfect solution but we are not operating in a perfect market. How the scheme might conceivably work is that buyers of these apartments might use the negative equity mortgage to purchase but they would have an out clause i.e. NAMA (yes, the State) would buy back the apartments at the price of the mortgage within a restricted period of, perhaps, five years. The catch here is that the price paid will be no greater than the mortgage balance and two very important conditions – firstly, there must be no incidence of monthly default, and secondly, there must be no element of re-mortgage or top up. If the market improves as NAMA forecasts, then the scheme should not be necessary. But if NAMA is wrong, and in five years time Irish buyers still don’t want apartments, then the first-time buyer of today will not be stuck in a box overlooking the Dublin docks indefinitely. This is the only way that buyers can consider these NAMA apartments without buying into a life sentence.
Carol Tallon, Author of the Irish Property Buyers Handbook 2012/2013 and managing director of Buyers Broker Ltd, www.buyersbroker.ie , Tel: +353 (0)1 4428 035